Corporate And Other Laws Archives

CORPORATE LAW CORNER

14. Maharashtra
Seamless Ltd. vs. Padmanabhan Venkatesh [2020] 113
taxmann.com 421 (SC) Civil Appeal Nos.
4242, 4967, 4968 of 2019 Date of order: 22^nd
January, 2020

Insolvency
and Bankruptcy Code, 2016 – There is no provision in the Code which stipulates
that amount approved in the resolution plan should match the liquidation value
– Once approved, resolution plan cannot be withdrawn under provisions of
section 12A of the Code

FACTS

U
Co, the corporate debtor, had a total debt of Rs. 1,897 crores out of which Rs.
1,652 crores comprised of term loans from two entities of Deutsche Bank. There
was also debt on account of working capital borrowing of Rs. 245 crores from Indian
Bank. Indian Bank initiated the Corporate Insolvency Resolution Process (CIRP)
against U Co by filing an application u/s 7 of the Insolvency and Bankruptcy
Code, 2016 (the Code).

The
National Company Law Tribunal (NCLT), by an order passed on 21^st January,
2019, approved the resolution plan submitted by M Co in an application filed by
the Resolution Professional (RP). The resolution plan included an upfront
payment of Rs. 477 crores. Ancillary directions were issued by the NCLT while
giving approval to the said resolution plan with the finding that the said plan
met all the requirements of section 30(2) of the Code.

P,
who was one of the promoters of U Co, and Indian Bank filed an appeal with the
National Company Law Appellate Tribunal (NCLAT). M Co also filed an appeal
before NCLAT seeking directions upon U Co, as also the police and
administrative authorities, for effective implementation of the resolution
plan. The grievance of M Co in that proceeding was that they were not being
given access to the assets of U Co.

The
complaint of P, one of the original promoters, and the bank before the NCLAT
was primarily that the approval of the resolution plan amounting to Rs. 477
crores was giving the resolution applicant a windfall as they would get assets valued
at Rs. 597.54 crores at a much lower amount. The other ground urged by the bank
was that Area Projects Consultants Private Limited, one of the resolution
applicants, had made a revised offer of Rs. 490 crores which was more than the
amount offered by M Co.

The
application was disposed of with a direction to extend co-operation to M Co. In
the course of hearing, M Co agreed to pay operational creditors at the same
rate (25%) as financial creditors. NCLAT also ordered that the upfront payment
agreed to by M Co be increased from Rs. 477 crores to Rs. 597.54 crores (being
the average liquidation value) by paying an additional Rs. 120.54 crores.
Failure to make the payment would set aside the order of NCLT approving the
resolution plan. The plan could be implemented only when M Co made the revised
payment.

Aggrieved, M Co filed an appeal before the Supreme Court
seeking withdrawal of the resolution plan and a refund of the sum deposited in
terms of the resolution plan along with interest. M Co argued that in order to
take over the corporate debtor, they had availed of substantial term loan
facility and deposited the sum of Rs. 477 crores for resolution of U Co, but
because of delay in implementation of the resolution plan, they were compelled
to bear the interest burden. Further, the export orders that they had accepted
in anticipation of successful implementation of the resolution plan were
cancelled, as a result of which the takeover of U CO had become unworkable. It
was also argued that NCLAT had exceeded its jurisdiction in directing matching
of liquidation value in the resolution plan.

On
the other hand, the banks, while supporting the main appeal of M Co, resisted
the plea for withdrawal of the resolution plan and refund of the sum already
remitted by M Co. It was argued that the only route through which a resolution
applicant can travel back after admission of the resolution plan was under the
auspices of section 12A of the Code.

HELD

The
Supreme Court heard the arguments put forth by both the sides. The primary
issues before it were two-fold. The first one was whether or not the scheme of
the Code contemplates that the sum forming part of the resolution plan should
match the liquidation value. The second issue was whether section 12A is the
applicable route through which a successful resolution applicant can retreat.

The
Supreme Court observed that M Co in the appeal sought to sustain the resolution
plan but its prayer in the interlocutory application was refund of the amount
remitted, coupled with the plea for withdrawal of the resolution plan. Its main
case in the appeal was that the final decision on the resolution plan should be
left to the commercial wisdom of the Committee of Creditors and there was no
requirement that the resolution plan should match the maximised asset value of
the corporate debtors.

The
Court observed that substantial arguments were advanced before the NCLT over
its failure to maintain parity between the financial creditors and the
operational creditors on the aspect of clearing dues. It was also observed that
section 30(2)(b) of the Code specified the manner in which a resolution plan
shall provide for payment to the operational creditors. The Court relied on its
own decision in the case of Committee of Creditors of Essar Steel India
Limited vs. Satish Kumar Gupta [Civil Appeal Nos. 8766-8767 of 2019]
wherein it was concluded that section 30(2)(b) of the Code referred to section
53 not in the context of priority of payment of creditors, but only to provide
for a minimum payment to operational creditors. However, that did not in any
manner limit the Committee of Creditors (CoC) from classifying creditors as
financial or operational and as secured or unsecured. Since M Co had agreed
before NCLAT to clear the dues of operational creditors in percentage at par
with the financial creditors, the controversy on there being no provision in
the resolution plan for operational creditors was rendered only academic.

It
was observed that NCLT relied on section 31 of the Code in approving the
resolution plan. Indian Bank and P relied on Clause 35 of The Insolvency and
Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons)
Regulations, 2016. The law did not prescribe any provision which stipulates
that the bid of a resolution applicant had to match the liquidation value
arrived at in the manner provided in clause 35. The object behind prescribing
the valuation process was to assist the CoC in taking a decision on a
resolution plan properly. Once a resolution plan was approved by the CoC, the
statutory mandate on the NCLT u/s 31(1) of the Code was to ascertain that the
resolution plan met the requirements of sections 30(3) and 30(4). The Supreme
Court held that it did not find any breach of the said provisions in the order
of the NCLT in approving the resolution plan.

The
Court held that NCLAT had proceeded on an equitable perception rather than
commercial wisdom. It ought to cede ground to the commercial wisdom of the
creditors rather than assess the resolution plan on the basis of quantitative
analysis. The case of M Co in their appeal was that they wanted to run the
company and infuse more funds. In such circumstances, the Court held that NCLAT
ought not to have interfered with the order of the NCLT and direct the successful
resolution applicant to enhance their fund inflow upfront.

As
regards withdrawal of plan by M Co, it was observed that the manner
contemplated by approaching the Supreme Court was incorrect. The exit route
prescribed in section 12A is not applicable to a resolution applicant. The
procedure envisaged in the said provision only applies to applicants invoking
sections 7, 9 and 10 of the Code. Having appealed against the NCLAT order with
the object of implementing the resolution plan, M Co could not be permitted to
take a contrary stand in an application filed in connection with the very same
appeal. The Supreme Court did not engage in the judicial exercise to determine
the question as to whether, after having been successful in a CIRP, an
applicant altogether forfeits its right to withdraw from such process.

The
appeal filed by M Co was allowed and the order passed by the NCLT on 21^st
January, 2019 was upheld. The Resolution Professional was directed to take
physical possession of the assets of the corporate debtor and hand these over
to M Co within a period of four weeks.

15. Icchapurti Global
Buildcon (P) Ltd. vs. Registrar of Companies, Mumbai [2020] 113
taxmann.com 481 (NCLT, Mum.) Date of order: 11^th
December, 2019

ROC struck off the name of petitioner company from
Register of Companies on account of its failure to furnish financial statements
– In view of fact that petitioner company was in operation, it had assets and
current liabilities and, moreover, in case relief sought was not granted, grave
hardship and irreparable loss and damage would be caused to it, application
filed by petitioner seeking to restore its name in Register of Companies is to
be allowed

FACTS

I
Pvt. Ltd. (the Company) was incorporated on 27^th September, 2012
under the Companies Act, 1956 as a private company limited by shares with the
Registrar of Companies, Mumbai. The name of the Company was struck off from the
Register of Companies maintained by the Registrar of Companies (ROC) due to
defaults in statutory compliances, namely, failure to file financial statements
and annual returns for three years from the financial year ended 31^st
March, 2015 to 31^stMarch, 2017.

The
Company filed an application before the Bench to restore its name in the
Register of Companies.

It
was brought to the notice of the Bench (by the Company) that:

(i) the Company has failed to file its financial statements and annual
returns for three years 2014-15 to 2016-2017;

(ii) the Company is a closely-held company and is a going concern and in
continuous operation;

(iii) it is evident from the audited financials for the defaulting
period that the Company was a going concern at the time when its name was
struck off by the ROC and that it was generating income. The Company had
current assets and liabilities.

The
Company also submitted copies of audited accounts for the financial years from
31^st March, 2015 to 31^stMarch, 2017, copies of
acknowledgement of Income-tax Returns filed for the assessment years 2015-16 to
2017-18, copies of bank statements to show that it is a going concern, actively
involved in business and is in continuous operation. The Company further
submitted that if its name was restored, it undertakes to file all the pending
statutory documents from the financial years 2014-15 till date along with the
filing fees and the additional fees, as applicable on the date of actual
filing.

From
the response filed by the ROC, the Bench gathered that the name of the company
was struck off for its failure to file statutory documents since 31^st
March, 2015, as mandatorily required under the statute.

The
Bench perused the financials filed during the course of the proceedings and
noted that the Company is in operation and has its assets and current
liabilities.

HELD

The
Bench came to the conclusion that unless the relief sought is granted to the
Company, grave hardship and irreparable loss and damage shall be caused to it.
Given the above set of facts, the Bench was satisfied that the prayer sought by
the Company deserves to be allowed.

The
Bench allowed the appeal of the Company on the following terms:

(a) The ROC was directed to restore the name of the
Company in the Register of Companies subject to payment of a sum of Rs. 1,00,000
as cost payable in the account of the ‘Prime Minister’s National Relief Fund’;
and

(b) The Company shall file all its pending financial statements and
annual returns with all the applicable fees and late fees with the ROC within
30 days from the date of receipt of a copy of the order, failing which the
order will stand vacated automatically.

BCAJ Admin

ALLIED LAWS

14. Covid-19 – Lockdown – Banks cannot
classify firms as NPAs – RBI guidelines

Anant Raj Ltd.
vs. Yes Bank Ltd.; W.P.(C) Urgent 5/2020; Date of order: 6^th April,
2020 (Delhi)(HC)(UR)

The petitioner had approached the Court
seeking a direction against Yes Bank from taking coercive / adverse steps
against it, including but not limited to declaring its account as a
Non-Performing Asset (NPA). The petitioner contended that it failed to pay the
instalment which fell due on 1^st January, 2020 (the subject matter
of the present petition) because of adverse economic conditions brought about
by the effects of the Covid-19 pandemic.

The High Court
held that classification of the account of the petitioner as an NPA cannot be
done in view of the RBI Circular related to moratorium of loan repayments. It
held that a prima facie reading of the Statement on Development and
Regulatory Policies issued by the RBI on 27^th March, 2020 along with
the Regulatory Package indicates the intention of RBI to maintain the status
quo as on 1^st March, 2020 for all accounts. The Court further
observed that before classification as NPA, an account has to be classified as
SMA-2 and any account which is classified as SMA-2 on 1^st March,
2020 cannot be further downgraded to an NPA after the issuance of the
Notification. The status has to be maintained as it was on 1^st
March, 2020.

Thus, the Court granted interim protection
from the account being declared as an NPA. However, it was clarified that the
stipulated interest and penal charges shall continue to accrue on the
outstanding payment even during the moratorium period.

15. Covid-19 –
Lockdown – Period of the moratorium – Will not include period of lockdown

Transcon Skycity Pvt. Ltd. and Ors. vs.
ICICI & Ors.; W.P. LD VC No. 28 of 2020; Date of order: 11^th
April, 2020 (SC)(UR)

A petition was filed before the Supreme
Court as to whether the moratorium period is excluded in the computation of the
90-day period for determining NPA for amounts that fell due prior to 1^stMarch,
2020 and which remain unpaid or in default. The Court at the outset observed
that its scope for adjudication, at that particular juncture, was restricted
only to the aspect of urgent ad interim relief and issues like
maintainability were kept open for adjudication at an appropriate time.

The Hon’ble Court held that the period
during which there is a lockdown will not be reckoned by ICICI Bank for the
purposes of computation of the 90-day NPA declaration period. If the lockdown
is lifted at an earlier date than 31^st May, 2020, then this
protection will cease on the date of lifting of the lockdown and the computing
and reckoning of the remainder of the 90-day period will start from that
earlier lifting of the lockdown-ending date. The moratorium period of 1^st
March, 2020 to 31^st May, 2020 under the RBI Covid-19 regulatory
package does not per se give the petitioners any additional benefits in
regard to the prior defaults, i.e. those that occurred before 1^st
March, 2020. Thus, the relief to the petitioners is co-terminus with the
lockdown period.

The Court also
opined that this order will not serve as a precedent for any other case in
regard to any other borrower who is in default or any other bank. Each of these
cases will have to be assessed on its own merits. The question as to whether
the petitioners are entitled to the benefit of the entire moratorium period in
respect of the prior defaults of January and February, 2020 was left open.

16. Employment – Ministry of Home Affairs Order – Payment of wages
during lockdown – Negotiable [Disaster Management Act, 2005, S.10; Constitution
of India, 1949, Art. 14, Art. 19, Art. 300A]

Ficus Pax Pvt. Ltd. vs. UOI; W.P.(C) Diary
No. 10983 of 2020; Date of order: 12^th June, 2020 (SC)(UR)

A petition was filed by an association of
employers and a private limited company challenging the validity of the Order
of the Ministry of Home Affairs dated 29^th March, 2020 stating that
all the employers, be they in the industry or in the shops and commercial
establishments, shall make payment of wages of their workers at their work
places on the due date, without any deduction for the period their
establishments are under closure during the lockdown.

The Hon’ble Supreme Court held that no
industry can survive without the workers. Thus, employers and employees need to
negotiate and settle among themselves. If they are not able to do so, they need
to approach the labour authorities concerned to sort out the issues.

17. Family Law –
Maintenance on divorce – Wife entitled to maintenance – Even if she runs a
business and earns income [Hindu Marriage Act, 1955, S.12, S.13; Code of
Criminal Procedure, 1973, S.125]

Sanjay Damodar Kale vs. Kalyani Sanjay Kale
(Ms); RA No. 164 of 2019; Date of order: 26^th May, 2020
(Bom)(HC)(UR)

The couple got
married on 12^th November, 1997 in accordance with Hindu religious
rites and ceremonies. According to the applicant, the wife, since the inception
of marital life the respondent husband treated her with extreme cruelty. She
was dropped at her parental home at Satara in the month of January, 1999 by her
husband. Despite repeated assurances, the respondent did not come to fetch her
back to her marital home. In April, 2007 the respondent expressed his desire to
obtain divorce from the applicant. Although the applicant claimed to have
resisted in the beginning, she signed the documents for a divorce petition by
mutual consent as the respondent assured the applicant that he would continue
to maintain the marital relationship with her despite a paper decree of
divorce.

Despite the decree of dissolution of
marriage, the respondent continued to visit the applicant at her apartment and
had marital relations as well. But from September, 2012 the respondent-husband
stopped visiting the applicant’s house. The applicant-wife claimed the
respondent made no provision for her maintenance and livelihood as she had no
source of income. Hence, the applicant filed an application u/s 125 of the
Criminal Procedure Code for award of maintenance at the rate of Rs. 50,000 per
month. The Family Court allowed the application holding that the respondent has
refused or neglected to maintain the applicant who is unable to maintain
herself, despite the respondent having sufficient means to maintain her.

The Bombay High Court held that the claim of
the applicant that she had no source of income ought to have been accepted by
the learned Judge, Family Court with a pinch of salt. The tenor of the evidence
and the material on the record suggests that the applicant was carrying on the
business of Kalyani Beauty Parlour and Training Institute to sustain her
livelihood. Further, in this inflationary economy, where the prices of
commodities and services are increasing day by day, the income from the
business of beauty parlour, which has an element of seasonality, may not be
sufficient to support the livelihood of the applicant and afford her to
maintain the same standard of living to which she was accustomed before the
decree of divorce. Thus, the Court concluded that Rs. 12,000 per month would be
a reasonable amount to support the applicant wife instead of Rs. 15,000 awarded
by the Family Court (against the original claim / prayer for Rs. 50,000) as the applicant’s source of income was not
adequately considered by the Family Court Judge.

18. Interpretation of terms and conditions
of document(s) – Constitutes substantial question of law – High Court required
to exercise power – Matter remanded to the High Court [Code of Civil Procedure,
1908, S.100]

Rajendra Lalit Kumar Agrawal vs. Ratna
Ashok Muranjan; (2019) 3 Supreme Court Cases 378

The appellant is the plaintiff whereas the
respondents are the defendants. The appellant filed a civil suit against the
respondents for specific performance of the contract in relation to the suit
property. The suit was based on an agreement dated 8^thAugust, 1984.
The trial Court passed an order dated 5^th July, 2004 favouring the
appellant and passed a decree for specific performance of the contract against
the respondents. On appeal by the respondents, the District Court vide
order dated 10^th November, 2016 allowed the prayer of the
respondents, thereby dismissing the suit. The appellant filed a second appeal
before the High Court. The High Court dismissed the second appeal, too, holding
that it did not involve any substantial question of law as is required to be
made out u/s 100 of the Code of Civil Procedure, 1908 (Code).

On an appeal before the Supreme Court, it
was held that interpretation of terms and conditions of document(s) constitutes
a substantial question of law within the meaning of section 100 of the Code,
especially when both parties admit to the document. The Apex Court also held
the High Court could have framed questions on the issues, which were material
for grant or refusal of specific performance keeping in view the requirements
of section 16 of the Specific Relief Act. Therefore, the order of the High
Court was set aside and the matter was remanded back to the High Court.

19. Will – Mutual Will – Effect from – Death
of either testator – The beneficiaries do not have to wait till the death of
both the executants to enforce their rights [Hindu Succession Act, 1956]

Vickram Bahl & Anr. vs. Siddhartha
Bahl; CS(OS) 78/2016 & IAs Nos. 2362/2016, 12095/2016, 15767/2018 and
15768/2018; Date of order: 25^th April, 2020 (Delhi)(HC)

Late Wing
Commander N.N. Bahl and his wife Mrs. Sundri Bahl executed a Joint Will dated
31^st March, 2006. As per the Will, after the demise of one spouse
the entire property will ‘rest’ in the other spouse and no one else shall have
any right or interest until the demise of both the testators. Further, as per
the Will after the demise of both the testators their eldest son,
grand-daughter (daughter of the eldest son) and younger son will have ownership
rights as per their respective shares. The eldest son along with his daughter
filed a suit seeking permanent injunction against his mother and brother from
dispossessing them from their respective share of the property under the Will.

The Court held that Mrs. Sundri N. Bahl
having accepted the said Will, is bound by it. Since the rights in favour of
the ultimate beneficiary under the mutual Will are crystallised on the demise
of either of the executants and during the lifetime of the executant of the
Will, i.e. Mrs. Sundri Bahl, the beneficiaries do not have to wait till the
death of both the executants to enforce their rights.

BCAJ Admin

CORPORATE LAW CORNER

8. Foseco India Limited vs. Om Boseco Rail Products Limited C.P. (IB) No. 1735/KB/ 2019 Date of order: 20^th May, 2020

Section 9 read with Notification dated 24^th
March, 2020 – The Notification raises the pecuniary limit of the Tribunal for
initiating CIRP from Rs. 1 lakh to Rs. 1 crore – The said Notification is
prospective in nature and does not apply to applications which have been filed
but are yet to be admitted

FACTS

F Co (the ‘Operational Creditor’) was a
company engaged in the business of manufacturing and supply of chemical and
allied products related to foundry and steel industries. OB Co (the ‘Corporate
Debtor’) regularly purchased foundry and other chemicals from F Co on credit
basis wherein the credit period was 30 days and which was relaxed for a further
15 days beyond the usual credit period mentioned in the invoices.

The corporate debtor failed to make payments
of several invoices raised by the operational creditor from 3^rd December, 2018 to 11^th July, 2019 for supply of
materials. The total outstanding debt receivable from the corporate debtor was
Rs. 90,00,919.10 (principal amount of Rs. 78,52,663 + interest Rs.
11,48,256.10) on the basis of which a demand notice was issued on 1^st
August, 2019. But the corporate debtor did not reply to the said notice. The
operational creditor therefore filed an application for initiating Corporate
Insolvency Resolution Process (CIRP) against the corporate debtor.

On two consecutive events (17^th
January, 2020 and 3^rdFebruary, 2020), the corporate debtor chose
not to file a reply without assigning any valid reason. The matter was then
posted for hearing on 13^th March, 2020. The corporate debtor then
requested for a period of seven days for settlement of the matter with the
operating creditor. The time was granted and the order was reserved. But owing
to the onset of the coronavirus pandemic, there was a delay in pronouncement of
an order.

The corporate debtor, citing the
Notification dated 24^th March, 2020 which introduced the proviso
to section 4 of the Insolvency and Bankruptcy Code, 2016, filed a submission
before the NCLT on 13^th May, 2020. The proviso enhanced the
minimum amount of default from Rs. 1 lakh to Rs. 1 crore for initiating CIRP
against corporate debtors from small and medium-scale industries. The issue
before the National Company Law Tribunal (NCLT) was whether the Notification
u/s 4 of the Code would apply to applications pending for admission.

HELD

NCLT heard both the parties. It observed
that the corporate debtor had always accepted and agreed to make payment of
outstanding debt without raising any dispute. The Tribunal observed that it was
a well-settled law that a statute is presumed to be prospective unless it is
held to be retrospective either expressly or by necessary implication. Further,
the Notification did not mention that its application would be retrospective.
The amendment was, therefore, held to be prospective.

It was submitted that the invoices did not
mention any terms stipulating the payment of interest. Accordingly, NCLT held
that since there was no objection raised by the corporate debtor, a sum for
supply of materials less any interest was due. The claim of the operational
creditor was found due and sustainable in law. The Tribunal passed an order
admitting the application and laid down necessary directions, including
declaration of moratorium and appointment of a resolution professional.

9. DLF Ltd. vs. Satya Bhushan Kaura [2020] 113 taxmann.com 363 (NCLAT) Date of order: 13^th January, 2020

It was found that company in their
correspondence with legal heirs had accepted to issue shares to them as per
their entitlement on production of court orders, affidavit and indemnity bond
and on payment of Rs. 1.20 lakhs being consideration amount of 60,000 shares –
Where Letter of Administration for succession was submitted by legal heirs,
insisting on affidavit and indemnity bond again and again was harassing poor
investors and therefore, penalty was imposed on company and they were directed
to register transfer of 60,000 shares to legal heirs which were due to them on
rights basis by appellant company

FACTS

The Late DNK, a deceased shareholder of ‘D
Ltd’, held 150 equity shares of Rs. 10 each of the company. The said 150 equity
shares of Rs. 10 each were subsequently converted into 6,000 equity shares of
Rs. 2 each after giving effect to split and bonus issues. DNK had expired on 27^th
August, 1987.

On 29^th December, 2005, D Ltd
came out with a Rights issue which remained open till 18^th January,
2006. The offer was available to all the existing shareholders as on 18^th
November, 2005.

The legal heirs of DNK did not approach D
Ltd for transmission / transfer of the original 150 shares (being 6,000 shares
of Rs. 2 each) held by DNK in their favour; neither did they claim to be his
legal heirs nor did they inform D Ltd about his demise for about 20 years. On
25^th May, 2007, for the first time the legal heirs informed that DNK
had expired on 27^th August, 1987. Thereafter, by their letter dated
1^st June, 2007, the legal heirs requested for transfer of 66,000
equity shares. In response to the said letter, D Ltd requested the legal heirs
to submit the requisite documents, including the succession certificate and
demand draft of Rs. 1.20 lakhs on or before 26^th September, 2007 in
order to be eligible for allotment of shares on Rights basis.

The legal heirs after the cut-off date (26^th
September, 2007) for the first time vide their letter dated 16^th
October, 2007 applied for Letter of Administration in respect of the will of
DNK and after the lapse of five years, vide their letter dated 1^st
June, 2012, enclosed the Letter of Administration granted by the District Court
(North) in respect of the Will of DNK.

On appeal, the NCLT vide its order
directed D Ltd to register the transfer and the legal heirs were directed to make payment for 60,000 shares at Rs. 2 per share to the promoters.
The legal heirs were also directed that on transfer of 60,000 shares in their name, they will execute the
transfer deed to the extent of entitlement of the legal heirs in accordance
with the terms of the Letter of Administration issued by the District judge.

The matter went in appeal before the
Appellate Tribunal.

HELD

D Ltd in its
correspondence with the legal heirs has already accepted to issue shares to the
legal heirs as per their entitlement on production of court orders, affidavit
and indemnity bond and on payment of Rs. 1.20 lakhs being the consideration
amount of 60,000 shares. During the course of arguments, D Ltd was asked why,
when the Letter of Administration had been submitted by the legal heirs, did it
insist on affidavit and indemnity bond? When the Letter of Administration has
been issued, it means that the legal heirs are discharged from their liability.
On this, D Ltd offered its apologies.

It is to be
noted that D Ltd is a listed company in real estate and is well aware of legal
formalities. By insisting on affidavit and indemnity bond again and again in
spite of the Letter of Administration, it was clear that D Ltd is harassing the
poor investors. The act of D Ltd deserves some penal action. It is also noted
that the legal heirs are entitled to 60,000 shares as per entitlement on
payment of consideration.

In view of the
foregoing discussions and observations, the following directions were issued:

The legal
heirs will make payment of consideration to D Ltd within 15 days from the date
of receipt of the order and they will be entitled to the benefit of the
membership from the date of payment.

D Ltd will
transfer / arrange for transfer of 60,000 shares to the legal heirs within 30
days from the date of receipt of payment.

A sum of Rs.
5 lakhs as costs is imposed on D Ltd to be deposited with the National Defence
Fund within 15 days from the date of the order. Proof of depositing the same
will be submitted to the Registrar of the Appellate Tribunal within a week
thereafter.

BCAJ Admin

ALLIED LAWS

11.
Arbitration – Challenging order passed by the arbitrator pending arbitration
proceedings ruling on its own jurisdiction – Not by writ petition – Arbitration
Act is a Code by itself [Arbitration and Conciliation Act, 1996; Code of Civil
Procedure, 1908; Constitution of India, 1949, Art. 226, Art. 227]

GTPL Hathway Ltd. vs. Strategic Marketing Pvt. Ltd.;
R/SCA No. 4524 of 2019; Date of order: 20^th April, 2020 (Guj.)(HC)

On a petition filed u/s 11 of the Arbitration and
Conciliation Act, 1996 (the Act), the High Court vide an order dated 9^th
February, 2018 appointed a sole arbitrator. Thereafter, the arbitral Tribunal vide
order dated 14^th February, 2019 dismissed the preliminary objection
application filed by the petitioner (of this writ petition) and held that it
has jurisdiction over the dispute between the parties. The petitioner filed a
writ petition before the Hon’ble High Court.

The Court held that section 16 of the Act empowers an
arbitral Tribunal to rule on its jurisdiction, section 34 of the Act pertains
to setting aside of an arbitral award and section 37 of the Act provides for an
appeal if the arbitral Tribunal declines jurisdiction. Therefore, these provisions
provide for a complete code for alternative dispute resolution as against the
Civil Procedure Code, 1908. Further, considering the policy, object and
provisions of the Act, the same appear to be a special act and a self-contained
code. Therefore, during pendency of arbitration proceedings, the impugned order
dismissing the preliminary objections cannot be challenged under Article
226/227 of the Constitution.

12.
Employment – Covid-19 – Deferral of payment of salary – Denial of property
[Constitution of India, 1949, Art. 300A]

Meena Sharma vs. Nand Lal W.P(C) TMP No.182 of 2020; Date
of order: 28^th April, 2020 (Ker.)(HC)

On financial difficulties arising out of the lockdown,
the Kerala government had issued an order dated 23^rd April, 2020
stating that the salaries of all government employees who are in receipt of a
gross salary of above Rs. 20,000 would be deferred to the extent of six days
every month from April to August. Individuals of different departments filed a
petition before the Hon’ble High Court challenging the order for being
unconstitutional and violative of Article 300A of the Constitution of India.

The Court held that payment of salary to an employee is
certainly not a matter of bounty. It is a right vested in every individual to
receive the salary. It is also a statutory right as it flows from the Service
Rules. The right to receive salary every month is part of the service
conditions emanating from Article 309 of the Constitution of India. Further,
neither the Epidemic Diseases Act, 1897 nor the Disaster Management Act, 2005
justify such an order and deferment of salary for whatever reason amounts to
denial of property.

13.
Labour law – Payment of wages – Covid-19 – Principle of ‘No work – No wages’
not applicable [Industrial Disputes Act, 1947]

Rashtriya Shramik Aghadi vs. The State of Maharashtra and
Others; WP No. 4013 of 2020; Date of order: 12^th May, 2020
(Bom.)(HC)(Aur.)

A workers’ union made a grievance before the Bombay High
Court that a lockdown has been effected but though the members of the Union are
willing to offer their services as security guards and health workers, they are
precluded from performing their duties on account of the clamping of the
lockdown for containment of the Covid-19 pandemic. Further, the payments made
by the contractors for the month of March, 2020 are slightly less than the
gross salary; and for the month of April, 2020 a paltry amount has been paid.

The Court held that these employees are unable to work
since the temples and places of worship in the entire nation have been closed
for securing the containment of the Covid-19 pandemic. Even the principal
employer is unable to allot the work to such employees. In such an
extraordinary situation, the principle of ‘No work — No wages’ cannot
be made applicable.

BCAJ Admin

CORPORATE LAW CORNER

2. Rajendra K. Bhutta vs. Maharashtra Housing and Area
Development Authority

[2020] 114 taxmann.com 655 (SC)

Civil Appeal No. 12248 of 2018

Date of order: 19^th February, 2020

Section 14(1)(d) of the Insolvency and Bankruptcy Code, 2016
– The word ‘occupied’ used in the section refers to actual physically occupied
property and not the rights or interest created in the property – Any
occupation handed to the developer (corporate debtor) in terms of a Joint
Development Agreement would stand ‘statutorily freezed’ in terms of section
14(1)(d)

FACTS

A joint development agreement (‘JDA’) was entered into
between a society representing persons occupying 672 tenements, the Maharashtra
Housing and Area Development Authority (‘MHADA’) and G Co (being the corporate
debtor) on 10^thApril, 2008.
G Co entered into a loan agreement with Union Bank of India on 25^th
March, 2011 for a sum of Rs. 200 crores. G Co defaulted on payment of the said
loan and consequently Union Bank of India filed an insolvency resolution
application u/s 7 of the Insolvency and Bankruptcy Code, 2016 (‘the Code’) on
15^th May, 2017 which was admitted on 24^th July, 2017. A
moratorium in terms of section 14 was also declared by this order.

On 12^th January, 2018, after the imposition of the
moratorium period u/s 14 of the Code, MHADA issued a termination notice to G Co
stating that upon expiry of 30 days from the date of receipt of the notice, the
JDA would stand terminated. It was further stated that G Co would have to hand
over possession to MHADA, which would then enter upon the plot and take
possession of the land, including all structures thereon.

One hundred and eighty days from the start of the Corporate
Insolvency Resolution Process (‘the CIRP’) ended on 19^th January,
2018. The NCLT, by its order dated 24^th January, 2018, extended the
CIRP period by 90 days as permissible under the Code. On 1^st
February, 2018, an application was filed before the NCLT to restrain MHADA from
taking over possession of the land till completion of the CIRP, contending that
such a recovery of possession was in derogation of the moratorium imposed u/s
14 of the Code. The NCLT, by an order dated 2^nd April, 2018,
dismissed the aforesaid application, stating that section 14(1)(d) of the Code
does not cover licenses to enter upon land in pursuance of JDAs and that such
licenses would only be ‘personal’ and not interests created in property. An
appeal against this order was preferred to the NCLAT.

Meanwhile, in a parallel proceeding the quantum of time being
taken by NCLT was sought to be omitted from the total number of days allowable
under the Code. While NCLT granted part relief, an appeal filed before NCLAT
proved successful. Pursuant to an order dated 9^th May, 2018 issued
by the NCLAT, the entire 55 days taken before the NCLT were excluded.

On 3^rd July, 2018, G Co filed a Resolution Plan
which was approved by 86.16% of the Committee of Creditors (‘COC’) before the
NCLT. Ultimately, the NCLAT, by the impugned order dated 14^th
December, 2018 (after omitting to refer to the order dated 9^th May,
2018), stated that 270 days had passed by, as a result of which the entire
discussion of section 14(1)(d) would now become academic. It also decided that
with the exception of ‘development work’, G Co did not have any right on the
land in question. The land belonged to MHADA and in the absence of any formal
transfer in favour of G Co, it could not be treated as an asset of G Co for
application of the provisions of section 14(1)(d).

An appeal against the aforesaid matter was filed before the
Supreme Court.

HELD

The Supreme Court heard the arguments put forth by all the
sides. It examined the provisions of sections 3(27), 14, 18, 31 and 36(4) of
the Code. It was observed that in terms of the JDA, a license was granted to
the developer (i.e. the Corporate Debtor / G Co) to enter upon the land,
demolish the existing structures and to construct and erect new structures and
allot tenements. At the very least a license has been granted in favour of the
developer to enter upon the land to demolish existing structures, construct and
erect new structures and allot to erstwhile tenants tenements in such
constructed structures in three categories, (1) the earlier tenants / licensees
of structures that were demolished; (2) tenements to be allotted free of cost
to MHADA; and (3) what is referred to as ‘free sale component’ which the
developers then sell and exploit to recover or recoup their cost and make profit.
It was observed that it was not necessary for the purpose of this case to state
as to whether an interest in the property is or is not created by the said JDA.

It was observed by the Supreme Court that section 14(1)(d)
did not deal with any of the assets or legal rights or beneficial interest in
such assets of the corporate debtor. Reference to sections 18 and 36 which was
made by the NCLT was, thus, wholly unnecessary to decide the scope of section
14(1)(d).

For the sake of reference, section 14(1)(d) reads as follows:

Subject to provisions of sub-sections (2) and (3), on the
insolvency commencement date, the Adjudicating Authority shall by order declare
moratorium for prohibiting all of the following, namely:

…

(d) the recovery of any property by an owner or lessor
where such property is occupied by or in the possession of the corporate
debtor.

The Supreme Court observed
that as per section 14(1)(d) what is referred to is the ‘recovery of any
property’. The ‘property’ in this case consists of land admeasuring 47 acres
together with structures thereon that had to be demolished. ‘Recovery’ would
necessarily go with what was parted by the corporate debtor, and for this one
has to go to the next expression contained in the said sub-section.

Referring to the cases of The Member, Board of Revenue
vs. Arthur Paul Benthall [1955] 2 SCR 842; Koteswar Vittal Kamath vs. K.
Rangappa Baliga & Co. [1969] 1 SCC 255; and Kailash Nath
Agarwal and others vs. Pradeshiya Industrial & Investment Corporation of
U.P. Ltd. and another [2003] 4 SCC 305, the Supreme Court
held that when recovery of property is to be made by an owner u/s 14(1)(d),
such recovery would be of property that is ‘occupied by’ a corporate debtor.

Further, referring to the cases of Industrial Supplies
Pvt. Ltd. and another vs. Union of India and others [1980] 4 SCC 341; Dunlop
India Limited vs. A.A. Rahna and another [2011] 5 SCC 778; and
Ude Bhan and others vs. Kapoor Chand and others AIR 1967 P&H 53 (FB),
the Supreme Court held that the expression ‘occupied by’ would mean or be
synonymous with being in actual physical possession of, or being actually used
by, in contra-distinction to the expression ‘possession’, which would connote
possession being either constructive or actual and which, in turn, would
include legally being in possession, though factually not being in physical
possession. The JDA granted a license to the developer (Corporate Debtor) to
enter upon the property with a view to do all the things that are mentioned in
it. After such entry, the property would be ‘occupied by’ the developer /
corporate debtor.

In the context of the MHADA Act, it was held that when it
comes to any clash between the MHADA Act and the Insolvency Code, on the plain
terms of section 238 of the Insolvency Code, the Code must prevail. Further,
the Supreme Court in the context of a moratorium u/s 14 of the Code, observed
that the intention was to alleviate corporate sickness and, therefore, a
statutory status quo has been pronounced u/s 14 the moment a petition is
admitted u/s 7 of the Code, so that the insolvency resolution process may
proceed unhindered by any of the obstacles that would otherwise be caused and
that are dealt with by section 14. The statutory freeze that has thus been made
is, unlike its predecessor in the SICA, 1985 only a limited one, which is
expressly limited by section 31(3) of the Code, to the date of admission of an
insolvency petition up to the date that the adjudicating authority either
allows a resolution plan to come into effect or states that the corporate
debtor must go into liquidation. For this temporary period, at least, all the
things referred to u/s 14 must be strictly observed so that the corporate
debtor may finally be put back on its feet, albeit with a new
management.

In the facts of the case, the resolution plan had been
approved by the NCLT and the limited question before the Supreme Court was
whether section 14(1)(d) of the Code will apply to statutorily freeze
‘occupation’ that may have been handed over under a JDA. Section 14(1)(d) of
the Code speaks about recovery of property ‘occupied’. It does not refer to
rights or interests created in property but only actual physical occupation of
the property. Thus, the section would stand to cover the occupation which has
been so granted under the JDA.

The order passed by the NCLAT was thus set aside and the
appeal was allowed. NCLT was directed to dispose of the application of the
resolution professional within six weeks.

3. Vikramjit Singh Oberoi vs. Registrar of
Companies

[2020] 114 taxmann.com 512

(Madras High Court)

Date of order: 13^th January, 2020

Where company allotted shares on rights basis to its
existing shareholders, merely because many of them renounced their entitlement
in favour of more than 50 third parties it could not be said that rights issue
was converted into public issue

It is not necessary to register a pledge in respect of
fixed deposits as charge either under 1956 Act or under 2013 Act; once rights
issue-related expenditure is adjusted against security premium account, i.e.,
by way of adjustment in liability side of a balance sheet, same do not pass
through to assets side of balance sheet

Payment of royalty did not qualify as contract related to
sale, purchase or supply of goods, materials or services, thus not covered by
section 297 of 1956 Act

Where company had availed services such as car rentals,
laundry services, etc., from related party and it had not disclosed same in
Board of directors’ report, since these transactions were in ordinary course of
business on an arm’s length basis, section 134 would not apply

FACTS 1

A show cause notice was issued by the ROC in respect of the
alleged violation of sections 56 and 81(1A) of the Companies Act, 1956 (CA
1956). The company had allotted shares on rights basis to its existing
shareholders and many of the existing shareholders renounced their entitlement
in favour of others who were not shareholders. On that basis, the ROC alleged
that section 67 of CA 1956 is attracted because the renunciation is in favour
of more than 50 persons. In other words, the case of the ROC is that the
renunciation converts the rights issue into a public issue and, therefore,
section 56 of CA 1956 should have been adhered to.

Upon receipt of the show cause notice, it was explained that
section 81(1)(c) of CA 1956 mandates that the company should grant the right of
renunciation to all its existing shareholders while issuing the letter of offer
to such shareholders. Thereafter, such existing shareholders are statutorily
entitled to renounce their rights in favour of any person. It is to be noted
that in such cases the company does not have any control over the aforesaid
process and, consequently, cannot insist that such renunciation should be in
favour of existing shareholders of the company. Therefore, it cannot be said
that the company or its directors violated the relevant provisions of CA 1956.
In this connection, a letter bearing No. 8/81/56-PR dated 4^th
November, 1957 from the Ministry of Company Affairs was placed before the Court.
The said letter opined that the issue of further shares by a company to its own
members with the consequential statutory right to renounce their entitlement in
favour of a third party does not require the issuance of a prospectus.

HELD 1

The alleged offence is in
respect of non-compliance of public issue-related requirements. It is the
settled legal position that any public company should make a further issue of
shares only to existing shareholders, in the same proportion, unless a special
resolution is passed authorising the company concerned to issue shares to
others. Such an issue is referred to as a rights issue. It is also the settled
position that when a rights issue is made, the letter of offer is issued to all
existing shareholders and it is mandatory that each shareholder is given the
right to renounce such shares to any person. The relevant provision in this
regard is section 81(1) (a), (b) and (c) of CA 1956. Therefore, the company
does not have any control in respect of such renunciation which may be in
favour of any person, including third parties.

A letter dated 4^th November, 1957 from the
Ministry of Company Affairs has settled the issue beyond any doubt.
Consequently, it cannot be said that the rights issue was converted into or was
in fact a public issue merely because renunciations were made in favour of more
than 50 third parties. Therefore, it was held that the company and the
directors did not commit the alleged offence of violating sections 56 and 67 of
CA 1956. Consequently, relief u/s 463(2) of CA 2013 was granted.

FACTS 2

The alleged violation of section 129 read with schedule III
of CA 2013 is the subject matter. The ROC has alleged that the company had
deposits of Rs. 0.04 million with Axis Bank, Jaipur Branch and a further sum of
Rs. 0.07 million with Canara Bank, Chennai aggregating to Rs. 0.11 million. As
regards the aforesaid fixed deposits, Note 15 to the balance sheet for the
financial year ended 31^st March, 2015 reflected that the said fixed
deposits were pledged with the Sales Tax Department. However, no charge was
registered under the relevant provisions of CA 1956 or CA 2013 in respect of
the pledged fixed deposits. Therefore, a show cause notice was issued alleging
that section 211 of CA 1956 was violated.

In reply, it was explained that the original fixed deposit
receipts (F.D. Receipts) in respect of the aforesaid deposits with Axis Bank
and Canara Bank were pledged with the Sales Tax Department by handing over the
said F.D. Receipts and that such a pledge is not required to be registered as a
charge either under CA 1956 or CA 2013. It was also explained that CA 1956 and,
in particular, section 211 thereof, does not apply because it relates to the
financial year 2014-15 when CA 2013 was in force. In any event, it was submitted
that a pledge of movable assets is not required to be registered under CA 2013
by filing Form CHG-1, as would be evident on perusal of Form CHG-1. In spite of
this reply, another show cause notice was issued.

HELD 2

The Court observed that under both section 125 of CA 1956 and
section 77 of CA 2013, it is not necessary to register a pledge over movable
assets as a charge. This position became abundantly clear upon perusal of Form
CHG-1 under CA 2013 which excludes a pledge over movable assets. Therefore, it
is not necessary to register a pledge in respect of the fixed deposits as a
charge under the applicable provisions of either CA 1956 or CA 2013.
Consequently, the relief u/s 463(2) of CA 2013 was granted.

FACTS 3

The alleged violation of section 78(2)(c) of CA 1956 with
regard to the manner in which the rights issue-related expenses of Rs. 28.33
million were adjusted against the securities premium account of the company is
the subject matter. According to the ROC, such adjustment should have been
reflected in the Profit and Loss Account and, therefore, a show cause notice
was issued.

In reply it was explained that section 78(2)(c) permits the
utilisation of the securities premium account to write off expenses of any
issue of shares or debentures of the company. It was further submitted that the
company explained in the Note to the accounts of the balance sheet for the
financial year ended on 31^stMarch, 2013 that a sum of Rs. 979.34
million was received towards premium on rights issue of shares and a sum of Rs.
28.33 million was deducted as share issue expenses in connection with the said
rights issue. It was further submitted that the said expenditure is a capital
expenditure which was adjusted on the liability side of the balance sheet and,
therefore, was not carried into the asset side of the balance sheet.
Consequently, there was no question of reflecting it in the P&L account for
that year. It was further pointed out that AS 26 does not have any application
because it relates to intangible assets and has no connection whatsoever with
the issuance of shares on rights basis. In spite of this reply, a show cause
notice was issued by the ROC.

HELD 3

The alleged offence in this case is not reflecting the rights
issue expenses in the P&L account for the relevant financial year. The case
of the company was that the rights issue expenditure constituted capital
expenditure and that the company is entitled to adjust such expenditure against
the security premium account as per section 78(2)(c) of CA 1956. The said
contention is well founded based on section 78(2)(c) of CA 1956. Once the
rights issue-related expenditure is adjusted against the security premium
account, i.e., by way of an adjustment on the liability side of the balance
sheet, the amounts in question do not pass through to the assets side of the
balance sheet. Consequently, such amount cannot be reflected in the P&L
account and it would be an accounting impossibility to do so.

Therefore, it was concluded that the company was entitled to
treat the rights issue expenditure as a capital expenditure and set it off
against the security premium account in accordance with section 78(2)(c) of CA
1956. As a corollary, such expenditure could not have been reflected in the
P&L account for the relevant financial year. Notwithstanding the above
legal position and the explanation provided in that regard, the ROC continued
to allege that there is a violation of law. Consequently, the relief u/s 463(2)
of CA 2013 was granted.

FACTS 4

The payment of royalty during the financial years ended 31^st
March, 2013, 31^st March, 2014 and 31^st March, 2015 is the
subject matter. It was pointed out in this connection that a show cause notice
was issued to the company and a reply had been sent. With regard to the alleged
violation, it was pointed out that section 297 of CA 1956 only applies to
contracts for the sale, purchase or supply of goods, materials or services. In
this case, royalty was paid in connection with the license to use the brand /
trade name. Consequently, it is not a contract for the sale, purchase or supply
of goods, materials or services. It was further pointed out that this position
continues to remain the same u/s 188 of CA 2013 and that none of the
sub-clauses of section 188 relate to licensing of a brand / trade name. It was
further submitted that licensing does not entail sale or disposal or lease of
property and is merely the right to use the brand name.

HELD 4

It is alleged that section
297 of CA 1956 was violated in respect of the payment of royalty to a related
party. The Court observed that section 297 of CA 1956 and the corresponding
provision in CA 2013, section 188, do not deal with the payment of royalty and
instead only deal with contracts for the sale, purchase or supply of goods,
materials or services. In this connection, the judgment of the Hon’ble Supreme
Court in Tata Consulting Services is apposite and royalty does
not qualify as goods, materials or services. In any event, the company and its
officers acted honestly and reasonably and as such are entitled to the reliefs.

FACTS 5

The alleged non-disclosure
of related party transactions in Form AOC 2 in the Board of Directors’ report
is the issue. Accordingly, through a show cause notice the ROC alleged that the
company violated section 134 of CA 2013 read with Rule 8 of the Companies
(Accounts) Rules, 2014.

In reply, the company
pointed out that these transactions are in the ordinary course of business and
on an arm’s length basis. Accordingly, as per the proviso of section
188(1) of CA 2013, the section would not apply to arm’s length transactions in
the ordinary course of business. Consequently, section 134(3)(h) of CA 2013
does not apply. A separate note was also provided by the company in the
Director’s Report under the heading ‘contracts or arrangements’ mentioning that
filing of Form AOC 2 is not required. It was further pointed out that the
present contract is not a material contract; neither section 134 nor AOC 2 is
violated. Hence it was submitted that the petitioners did not violate any of
the provisions of CA 1956 or CA 2013 as alleged by the ROC. Even if there was a
technical breach, such breach was committed honestly and reasonably. Therefore,
a case is made out to grant relief u/s 463(2) of CA 2013.

HELD 5

This relates to the alleged violation of section
134 of CA 2013. Once again, the company replied to the show cause notice and
relied upon the proviso to section 188(1) of CA 2013 on the basis that
the transaction in question is in the ordinary course of business and on an arm’s
length basis. Thus it was held that the breach, if any, is purely technical and
a case is made out to be relieved of liability in this regard.

BCAJ Admin

ALLIED LAWS

6. Continuation
of interim orders – Covid-19
pandemic – Bombay High Court – Interim
orders continued

Writ Petition Urgent 2 of 2020
dated 26^th March, 2020 and 15^th April, 2020 (Bom.)(HC)

In view of
the lockdown due to the Covid-19 pandemic, the Bombay High Court held that all
interim orders operating till 26^th March, 2020 which are not already
continued by some other courts / authorities including this Court, shall remain
in force till 30^thApril, 2020 subject to liberty to parties to move
for vacation of interim orders only in extremely urgent cases. Thus, all
interim orders passed by this High Court at Mumbai, Aurangabad, Nagpur and
Panaji as also all courts / Tribunals and authorities subordinate over which it
has power of superintendence expiring before 30^th April, 2020, shall
continue to operate till then. It is further clarified that such interim orders
which are not granted for limited duration and therefore are to operate till
further orders, shall remain unaffected by this order. In view of the extension
of the lockdown, the interim orders are further extended up to 15^th
June, 2020.

7. Arbitration – Limitation – Delay in filing an appeal beyond 120
days cannot be condoned – Further clarified – 120 days include 30 days of grace
period as per Limitation Act [Arbitration and Conciliation Act, 1996, S. 34, S.
37; Limitation Act, 1963, S. 5]

N.V. International vs. State of
Assam & Ors.; 2019, SCC OnLine 1584

An arbitral
award was passed on 19^th December, 2006 which was challenged before
the District Judge in a petition u/s 34 of the Arbitration and Conciliation
Act, 1996 which ultimately was rejected on 30^th May, 2016. An appeal
was filed against this order in March, 2017 after a delay of 189 days. The
delay was not condoned as no sufficient cause was made out for the same. On an
SLP, the Supreme Court held that apart from sufficient cause, since a section
34 application has to be filed within a period of a maximum of 120 days
including the grace period of 30 days, any appeal u/s 37 should be covered by
the same drill. Allowing a delay beyond 120 days will defeat the overall
purpose of arbitration proceedings being decided with utmost dispatch.

8. Limitation
– Covid-19 pandemic – Supreme Court – Relief for litigants and lawyers
[Constitution of India, Articles 141, 142]

Suo motu Writ
petition (Civil) No. 3/2020 dated 23^rdMarch, 2020 (SC)

On account
of the situation posed by the Covid-19 pandemic, the Hon’ble Supreme Court has suo
motu held that to ease the difficulties faced by the litigants and their
lawyers across the country in filing their petitions / applications / suits /
appeals, irrespective of the limitation prescribed under the general law or
special laws whether condonable or not, shall stand extended w.e.f. 15^th
March, 2020 till further order/s passed by this Court in the present
proceedings.

9. Consumer Protection – Self-contribution scheme for benefit of
employees – Whether consumer-service provider relationship between employee and
employer [Consumer Protection Act, S. 2(1)(d), S. 2(1)(o)]

ONGC & Ors. vs. Consumer
Education Research Society & Ors.; 2019, SCC OnLine SC 1575

In this
case there was no dispute that the claimants were employees of ONGC which had
introduced a self-contribution scheme after obtaining the required permissions
from the government. The scheme was voluntary and optional and the employer was
making a token contribution of Rs. 100 p.a. There was a delay in sending the
claims of the employees to LIC on account of which the employees suffered a
loss. The employees filed a case against the employer (ONGC) for deficiency in
service. The Hon’ble Supreme Court held that there is virtually no privity of
contract for providing services between the employees and the employer.
Further, the scheme is managed and run by a trust and not by ONGC. Therefore,
the service, if any, is being rendered by the Trust and not by ONGC. Thus,
there is no consumer-service provider relationship between the employees and
the employer (ONGC).

10. Priority of employees’ dues over all dues – Not applicable to
co-operative societies [Companies Act, 1956, S. 529A; Maharashtra Co-operative
Societies Act, 1960, S. 167]

Maharashtra State Co-operative
Bank Limited vs. Babulal Lade & Ors.; 2019, SCC OnLine SC 1545

The Hon’ble Supreme Court inter alia held that
section 167 of the Companies Act, 1956 creates a bar on the applicability of
the Companies Act to societies registered under the Societies Act. Given that
the karkhana (factory) was a co-operative society registered under the
said Act, section 167 of the Societies Act, 1960 is applicable and the High
Court committed a grave error in relying upon section 529A of the Companies
Act, 1956. Thus, employees cannot make use of section 529A of the Companies Act
to claim priority over all the other debts of the karkhana.

BCAJ Admin

CORPORATE LAW CORNER

4. Eight Capital India (M) Ltd.
vs. Wellknit Apparels (P) Ltd. [2020] 115 taxmann.com 279 (NCLT-Chen.) IBA No.
312 of 2019 Date of order: 11^th December, 2019

Section 5(8) r/w/s 7 of Insolvency and
Bankruptcy Code, 2016 – A fully convertible debenture which has not been
converted into equity qualifies as a ‘Financial Debt’ – Application was
admitted when there was default in payment of such debentures

FACTS

E Co (the ‘financial creditor’) was a
private limited company incorporated in Mauritius which gave a loan of US$
37,15,000 (equivalent to Rs. 15 crores) as project finance and was issued fully
convertible debentures by W Co (the ‘corporate debtor’). The latter issued
40 debentures of Rs. 25 lakhs each for an amount of Rs. 10 crores on 20^th
August, 2007 and 20 debentures of Rs. 25 lakhs each totalling Rs. 5 crores on
20^th November, 2007; the total value of the debentures was Rs. 15
crores.

The financial creditor and the
corporate debtor entered into a Debenture Subscription Agreement dated 21^stMay, 2007 and a Master Facility Agreement also dated 21^st May,
2007. As per the terms of the agreement, the subscription to the debenture was
done for a period of 84 months and interest was to be paid at the rate of 12%
p.a. An additional interest of 6% p.a. was payable on default.

The corporate debtor made a repayment
only once during the period, for the quarter ended 30^th September,
2007 for an amount of Rs. 39,86,371. The corporate debtor was in default on all
other payments specified in the agreement till 20^th May, 2014. The
financial creditor alleged that the corporate debtor failed to convert the
debentures as agreed.

Article 8 of the agreement specified
that the financial creditor could initiate action against the corporate debtor
upon occurrence of an event of default which included appointment of receiver,
liquidator or making an application for winding up. The financial creditor had
moved the Madras High Court for recovery of interest and for restraining the
corporate debtor from alienating the assets. An application filed by the
corporate debtor opposing the suit had been dismissed by the Madras High Court
on the ground that the suit was a continuing breach of tort, with every act of
breach giving rise to fresh cause of action.

On 18^th April, 2017 a
Memorandum of Agreement (‘MOA’) was executed between the financial creditor and
the corporate debtor, which is stated to have been confirmed and made binding
by the Madras High Court on 14^th July, 2017. The corporate debtor
did not co-operate with the financial creditor to monetise the assets and to
make the payments to the financial creditor as was agreed in the MOA.

The corporate debtor admitted that the
MOA was entered into for a compromise which provided for resolving the disputes
amicably but not to admit or determine its quantum of liability. It was further
stated that the MOA was executed in a spirit of goodwill and compromise and to
put a quietus to the litigation whereby it agreed to share 50% of the
net assets after deducting / adjusting certain statutory dues, etc. which was
higher than the maximum of 37.5% equity entitlement of the financial creditor.
The corporate debtor stated that the claims were sought to be settled on the
basis of the assets available and not on the basis of any liability admitted or
otherwise.

The corporate debtor further contended
that the MOA constituted a separate contract distinguishable from the Master
Facility Agreement. The MOA superseded the earlier contract and clearly
explained the mode and the time of performance of the respective obligations.
The MOA was conditional upon the sale of the property by the authorised officer
of MEPZ.

The corporate debtor also contended
that the action of entering into an MOA which contemplated the sale of assets
and dividing the surplus in an agreed manner, only reinforced the proposition
that the applicant was a stakeholder in the equity and not a financial creditor
as there was no debt involved. The applicant claimed that he fell in the
definition of a financial creditor as he had all along been a debenture holder
and the debentures were never converted into equity at any point in time.
Besides, he corporate debtor in its
balance sheet for the year nding 2016-17
had shown the applicant as a ‘debenture holder’ establishing the fact that it
was a ‘financial debt’ that was due to the ‘financial creditor’.

HELD

The NCLT heard both the parties. It was
observed that the intention of both the parties was manifested in the Master
Facility Agreement and the Debenture Subscription Agreement. The investment was
sought to be made by the financial creditor by way of subscribing to the
debentures in consideration of the money brought in by him into the coffers of
the corporate debtor.

NCLT observed that fully convertible
debentures were a financial instrument within the meaning of section 5(8) of
the Insolvency and Bankruptcy Code, 2016. A convertible debenture which was in
the nature of financial debt (though hybrid in nature), could not be treated as
equity unless conversion was actually done. It could not take on the
characteristics of equity until it was converted.

It was further held that the financial
creditor had taken all precautions to safeguard its interest so long as the
convertible debenture remained a debenture. It was observed that a simple
mortgage was created in favour of the financial creditor which shows that there
was debt which is a financial debt based on the principle that ‘once a
mortgage; always a mortgage’. It postulates that unless and until a mortgage is
discharged it remains a mortgage and as such a financial debt.

The NCLT also
noted that apart from the payment of a sum of Rs. 39,86,371.36 for the quarter
ending September, 2007, interest amount was not paid for the remaining period
by the corporate debtor which constituted a clear default.

The application was thus admitted by
the NCLT and consequential orders including appointment of Interim Resolution
Professional and imposing of moratorium were passed.

5. Deorao Shriram Kalkar vs. Registrar of Companies [2020] 113
taxmann.com 292 (NCLAT) Date of order: 6^th December, 2019

Where company had fixed deposit
receipts (FDRs) with bank and was regularly receiving interest on the same and
TDS was being deducted by the bank on payment of interest and being deposited
with Income tax authorities, it could not be said that company was
non-operational – It would be just that the name of company be restored in the
Register of Companies

FACTS

T Private Ltd. (T Co) is a company
incorporated under the Companies Act, 1956 and having its registered office at
Pune. T Co and its directors were served STK 1, a notice u/s 248(1)(c)
of the Companies Act, 2013 on 11^th March, 2017. In its reply dated
29^th March, 2017, the company intimated the ROC that inadvertently
regulatory filings for the years ending 31^st March, 2015 and 2016
were not filed and it was in the process of completing the same at the
earliest. Thereafter, a public notice was issued on 7^th April, 27^th
April and 11^th July, 2017 and T Co’s name was struck off from the
register of companies.

This order was challenged by T Co
before the NCLT, Mumbai. However, NCLT dismissed the appeal on the ground that
the company did not generate any income / revenue from its operations since the
financial year ending 31^st March, 2014 and till 31^st
March, 2017; the company did not spend any amount towards employee benefit
expenses and the fixed assets of the company were Nil and its tangible assets
were also Nil; therefore the action taken by the ROC was justified and the
Bench did not find any ground to interfere with the action of striking off the
name by the ROC. Being aggrieved, T Co preferred this appeal before the
Appellate Tribunal (AT).

T Co submitted that it had a Fixed
Deposit Receipt (FDR) with the Bank of Maharashtra amounting to Rs. 1,50,00,000
(Rs. 1.50 crores) and a performance bank guarantee was issued in favour of one
of the vendors which was valid up to 11^th November, 2017; the same
was further extended up to 10^th November, 2018. T Co was regularly
receiving interest on the said FDR from the bank and TDS was being deducted by
the Bank on the interest and deposited with the Income tax authorities. T Co
further submitted that the company was regularly filing the Income tax returns.
In addition, T Co submitted that after the expiry of the term of the bank
guarantee, the funds of the company would be released and the Directors of the
company would be in a position to take necessary decisions about its working.

However, counsel for the ROC stated
that due to failure in filing of the statutory returns for a continuous period
of more than two years, the name of T Co was considered for striking off by the
ROC, Pune in a suo motu action under the provisions of section 248 of
the Companies Act, 2013. It was further argued that the STK 1 notice
dated 11^th March, 2017 was issued to T Co with the direction to
submit any representation against the proposed striking off of its name. It was
stated that the fact of non-filing of the statutory returns was admitted by T
Co. But the ROC counsel submitted that on an analysis of the balance sheet and
the Profit & Loss account of the appellant it was observed that the company
had not generated any income / revenue from its operations since the financial
year ending 31^stMarch, 2014 and till 31^st March, 2017.
Besides, the company did not spend any amount towards employee benefit expenses
for these financial years. At the same time, both the fixed assets and tangible
assets of the company were Nil. The counsel for ROC insisted that the ROC had
rightly taken the decision to strike off the name of T Co.

The matter was considered by the AT
which noted that during the course of arguments T Co had admitted that it had
not filed the statutory returns for more than two years as per the Companies
Act, 2013. On receipt of the STK 1 notice from the ROC, T Co vide
its reply had intimated the ROC that regulatory filings for the years ending 31^stMarch, 2015 and 2016 were not filed inadvertently. However, it also
stated that the annual returns and financial statements were ready and could be
filed immediately. The AT also observed that T Co had an FDR with the bank to
the tune of Rs. 1,50,00,000; interest was being received by the company and it
was duly making provision of income tax in its balance sheet. It was further
observed by the AT that T Co had also given a performance guarantee. This was
an attempt to secure business for the company.

The AT further observed that in such
cases the ROC has also to see that the compliance of section 248(6) of the
Companies Act, 2013 is met.

Section 248(6) of the Companies Act,
2013 reads as under:

‘The Registrar, before passing an order
under subsection (5), shall satisfy himself that sufficient provision has been
made for the realisation of all amounts due to the company and for the payment
or discharge of its liabilities and obligations within a reasonable time and,
if necessary, obtain necessary undertakings from the Managing Director,
Director or other persons in charge of the management. Provided that
notwithstanding the undertakings referred to in this sub-section, the assets of
the company shall be made available for the payment or discharge of all its
liabilities and obligations even after the date of the order removing the name
of the company from the Register of Companies.’

However, the ROC counsel in written
submissions stated that the ROC has not received any reply from the company and
its Directors. The AT noted that the appellant has replied vide its
letter dated 29^th March, 2017 and the said letter has the
acknowledgement of the ROC, Pune.

Therefore, the AT observed that it
cannot be said that T Co has not replied. Further there is nothing on record to
show that the compliance of section 248(6) of the Companies Act, 2013 has been
made by the ROC. his fact has also not
been noted in the NCLT order. Without
complying with this provision, the ROC vide Form STK 5 dated 7^th
April, 2017 has struck off the names of various companies including T Co. The
AT reiterated that the company is having an FDR with the bank and a performance
guarantee has been given and income tax is being deposited on the interest
received on fixed deposits.

From the above discussions and
observations, the AT came to the conclusion that it would be just that the
name of the company be restored.

HELD

The following order / directions were
passed:

The order of NCLT was quashed
and set aside.The name of T Co would be restored in the Register of
Companies subject to the following compliances:

T Co shall pay costs of Rs.
25,000 to the Registrar of Companies, Pune within 30 days.

Within 30 days of restoration of
the company’s name in the register maintained by the ROC, the company will
file all its annual returns and balance sheets due for the period ending
31^st March, 2015 onwards and till date. The company will also
pay requisite charges / fee as well as late fee / charges as applicable.

In spite of the present orders, the ROC will be free to take any
other steps, punitive or otherwise, under the Companies Act, 2013 for
non-filing / late filing of statutory returns / documents against the
company and its Directors

BCAJ Admin

RIGHT TO INFORMATION (r2i)

PART A | DECISION OF HIGH COURT

Disclosure of an interest in the information sought would be necessary to establish the bona fides of the applicant

Case name:

Har Kishan vs. President Secretariat through its
Secretary and Anr.

Citation:

Writ Petition (Civil) No.: 7976/2020

Court:

The High Court of Delhi

Bench:

Justice Prathiba M. Singh

Decided on:

12^th January, 2021

Relevant Act / Sections:

Section 8(1)(j) of Right to Information Act, 2005

Brief Facts and Procedural History:

The petitioner sought information on 6th August, 2018 under the Right to Information Act, 2005 (‘RTI Act’), in respect of certain appointments made for Multi-Tasking Staff at the Presidential Estate, Rashtrapati Bhawan.

In reply, the Public Information Officer gave partial information and did not provide information relating to Item Nos. 4, 5 and 6 – the total number of candidates as per every centre separately who appeared for the given examination; complete name and address of the examination centres of all the candidates who had been selected for appointment to the post of Multi-Tasking Staff, Notification Circular No. A35011/7/16-Admn.; and complete residential address and the father’s name of all selected candidates who had been appointed to the post.

Being aggrieved, the RTI applicant preferred an appeal before the First Appellate Authority, the response to which is not on record. Thereafter, a second appeal was preferred by the petitioner before the CIC, which was disposed of by the CIC vide the impugned decision dated 17th July, 2020, where the CIC had directed the respondent to provide the information under Item Nos. 4 and 5 of his application and rejected information under Item No. 6. The present writ petition is filed against the above CIC order.

On a query from the petitioner it is revealed that the petitioner’s daughter had also applied for appointment as Multi-Tasking Staff in the Presidential Estate, Rashtrapati Bhawan. However, this fact does not find any mention in the present writ petition.

Issues before the Court
Whether information sought under Item No. 6 is protected u/s 8(1)(j) of the RTI Act?

Whether disclosure of an interest in the information sought would be necessary to establish the bona fides of the applicant under the RTI Act?

Ratio Decidendi
Whenever information is sought under the RTI Act, disclosure of an interest in the information sought would be necessary to establish the bona fides of the applicant. Non-disclosure of the same could result in injustice to several other affected persons whose information is sought.

The information sought in respect of the names of the fathers and residential addresses of the candidates is completely invasive and would be a roving and fishing inquiry. The said information which is sought is clearly protected u/s 8(1)(j) of the RTI Act which provides that any such information shall not be provided which constitutes personal information and is invasive of the privacy of individuals.

Decision
The Court did not find any merit in the present writ petition which challenges the rejection of information sought under Item No. 6.

For the act of the petitioner having concealed the material facts, including that his daughter had applied for appointment to the post of Multi-Tasking Staff, the petition was dismissed with costs of Rs. 25,000 to be paid to the ‘High Court of Delhi (Middle Income Group) Legal Aid Society’. The said costs shall be paid within two weeks.

PART B | RIGHT TO INFORMATION

How to file RTI online
By now many of us are aware that an RTI application can be filed online without the hassle of printing, posting or even hand-delivering it. But only few of us use this tool effectively. As discussed in our earlier articles, RTI can assist in seeking information which would be necessary in our professional lives, for example, information from the Ministry of Corporate Affairs.

File your online application on: https://rtionline.gov.in

Steps for filing RTI online
1. For submitting an RTI application, click on ‘submit request’ option on the RTI online website. On clicking the ‘submit request’ option, the ‘Guidelines for use of RTI online portal’ screen will be displayed. This screen contains various guidelines for using the RTI online portal.

2. On accepting the ‘I have read and understood the above guidelines’ tab and clicking on ‘submit’, the online RTI request form screen will be displayed next for the user. The Ministry or Department for which the applicant wants to file an RTI can be selected from the ‘Select Ministry / Department / Apex body’. Personal details of the applicant need to be filled along with the information requested. After entering the security code and submitting the application, the portal will take you to a payment gateway.

3.    The applicant can pay the prescribed fee through the following modes:
   (a) Internet banking through SBI;
   (b) Using credit / debit card of Master / Visa;
   (c) Using RuPay Card.
   (Fee for making an application is as prescribed in the RTI Rules, 2012.)

4. No RTI fee is required to be paid by any citizen who is below poverty line as per RTI Rules, 2012. However, the applicant must attach a copy of the certificate issued by the appropriate government in this regard, along with the application.

5. On submission of an application, a unique registration number would be issued which may be referred to by the applicant for any references in future.

6. In case additional fee is required representing the cost for providing information, the CPIO would intimate the applicant through this portal. This intimation can be seen by the applicant through ‘Status Report’ or through his / her e-mail alert.
.

7. Status of the RTI application filed online can be seen by the applicant by clicking at ‘View Status’ and entering the required details.

In case any more information / assistance is required, one can connect with the BCAS RTI Clinic.

PART C | INFORMATION ON AND AROUND

(1) State Information Commission has no power to direct removal of encroachment under RTI ACT: Uttarakhand High Court

The Bench of Justice Manoj Kumar Tiwari hearing the plea of one Manju Agarwal who challenged the order dated 8th August, 2016 passed by the State Information Commission directing Nagar Palika Parishad, Kotdwar, to take necessary action with the help of the local administration to remove the encroachment, observed in its order that giving a direction for removal of encroachment is beyond the scope of the State Information Commission’s powers under the Right to Information Act.1

(2) ‘Beneficiaries of state largesse’: Karnataka High Court holds Bangalore Turf Club and Mysore Race Club as public authorities under the RTI Act

A single Bench of Justice P.B. Bajanthri, while refusing to interfere with the order passed by the Karnataka Information Commission against the companies, said ‘In the present case, state largesse has been extended to the petitioners under lease deeds. Therefore, they are holding lease lands on behalf of the people and are accountable to the people. If this material information is taken into consideration, one has to draw the inference that petitioners do fall under the definition of ‘public authority’ under the Act, 2005.’2

(3) ‘Issue of considerable public importance’: Delhi High Court seeks response from Central government on plea seeking RTI information about Aarogya Setu
A single-judge Bench of Justice Prathiba M. Singh issued notice to the Central Government and RTI authorities seeking their response to the plea (Saurav Das vs. CPIO, NeGD & Ors.) stating that issues raised in respect of supply of information regarding the Aarogya Setu App and its creation are of considerable public importance. The information sought was with respect to the origin of the app, the approval details, communications with private people involved in making / developing the app, internal notes, memos, file notings and minutes of the meetings held while creating the app, among other information.3

1 https://www.livelaw.in/rti/state-information-commission-has-no-power-to-direct-removal-of-encroachment-under-rti-act-uttarakhand-high-court-168102

2 https://www.livelaw.in/news-updates/karnataka-high-court-rti-bangalore-turf-club-mysore-race-club-168489

3 https://www.barandbench.com/news/litigation/delhi-high-court-issues-notice-challenge-cic-order-refusing-information-creation-aarogya-setu

The most valuable of all talents is that of never using two words when one will do
– Thomas Jefferson

If you want to determine the nature of anything,
entrust it to time: when the sea is stormy, you can see nothing clearly
– Seneca

BCAJ Admin

CORPORATE LAW CORNER

9. Man Industries (India) Ltd. vs. State of Maharashtra [2019] 106 taxmann.com 123 (Bom.) Date of order: 22nd April, 2019

Non-payment of dividend to a shareholder is an offence which invites penal action – However, such non-payment will not be called an offence if payment is not made because a dispute regarding entitlement to receive dividend exists between parties

FACTS

•   The complainant ‘S’ was a shareholder of the company ‘M’ Limited.
•   ‘M’ had declared a dividend in the AGM held on 12th December, 2015. All the shareholders were paid the dividend except ‘S’.
•   The dividend was not paid to ‘S’ on account of the pendency of a dispute between the parties and, therefore, taking protection u/s 127(c) of the Companies Act, 2013 (CA 2013), dividends were not distributed to ‘S’.
•   The Sessions Judge, Bombay, by an order dated 30th January, 2017 had issued process and summons against the accused ‘M’ and its directors for non-payment of dividends to ‘S’.
•   The accused (the applicants herein) filed an application u/s 482 of the CrPC praying that the notices which were issued in the company petition and the order of issuance of process dated 30th January, 2017 be quashed and set aside.

HELD

The Court observed / noted as under:
•   The provisions of section 127 of the CA 2013 at the relevant point in time read as under:
   Punishment for failure to distribute dividends – Where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to two years and with fine which shall not be less than one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at the rate of eighteen per cent per annum during the period for which such default continues:
   Provided that no offence under this section shall be deemed to have been committed:
   (a) to (b)**
   (c) where there is a dispute regarding the right to receive the dividend;
   (d) to (e)**

• Whenever there is an ambiguity in the section and the section is susceptible to different amendments, then the proviso controls the main section. How the proviso is worded and in what context the deeming provision is incorporated matters while giving weightage to the section as a whole. Due to the deeming provision, the Legislature wants the Court to believe the existence or non-existence of certain facts, then it undoubtedly forms a part of that section without which the section is incomplete.

• It is to be noted that though proviso and exception are not synonyms, they are usually taken alike. Both the proviso and exception are defences and both while interpreting the statute provide internal aid independently. The proviso carves out certain situation/s from the enacting clause and thus, proviso follows the enacting clause. Exception is an extended section. Exception is used to exempt something absolutely from the statute; otherwise it is a part of the statute. The proviso is subsidiary to the main section. It is not an addendum to the main provision.

• Thus, both the proviso and the exception help the reader to understand the enactment as a whole. Sub-section (c) of section 127 of the CA 2013 is a part of the proviso which further provides deeming provision. While interpreting deeming provision in the proviso, the Court cannot overlook the internal aids which are made available by the Legislature, i.e., the context and simple meaning of the word. Therefore, the completeness of the section is a decisive point while interpreting section 127 of the CA 2013 along with the proviso and deeming provision.

• In the instant case, there is a dispute regarding the right to receive dividend, as the matter was referred to the NCLAT, and if a dispute regarding the right to receive dividend exists then no offence under the section shall be deemed to have been committed. Thus, non-payment of dividend to the shareholder is an offence, which invites penal action. However, non-payment of dividend to the shareholder will not be called an offence if the payment is not made because there exists a dispute between the parties. A dispute regarding entitlement to receive the dividend exists. In other words, the act of non-payment of dividend by the directors of the company can be justified because, according to them, a particular shareholder is not entitled to receive dividend. Merely having an opinion or holding a view that a shareholder is not entitled to receive dividend is not sufficient but there should be the existence of a dispute as understood by law. Therefore, mere denial of the entitlement is not enough to get the benefit of section 127(c) of the CA 2013, but a real dispute between the parties should exist. Similarly, mere denial of the existence of a dispute by the shareholder after pursuing litigation against the company and its directors cannot render the dispute non-existent. Indeed, this can be ascertained on the basis of the facts and circumstances of each case.

• In the instant case, admittedly the dispute existed between the shareholder and the directors and it was pending in the NCLT and the NCLAT. It was also pending before the Arbitrator. In the absence of such litigations before the forums mentioned it would have been difficult to state that there was a dispute between the petitioner and ‘S’.

• The Court perused the order dated 30th January, 2017 passed by the Judge on the issuance of process u/s 127 of the CA 2013. The Court also perused the criminal complaint filed by ‘S’ before the City Civil & Sessions Court. In the said complaint, ‘S’ had made a mention against the present applicants. The order of issuance of the process passed by the Sessions Judge is a reasoned order wherein the Judge has referred to the defence of the applicant / accused as per proviso (c) of section 127 of the CA 2013. It is further mentioned that ‘on account of dispute pending, the dividend on disputed shares of “S” be kept in abeyance’ as alleged in the notice reply, which is a matter of evidence. Therefore, a prima facie case has been made against accused ‘M’ and its directors for commission of an offence.

• Thus, it is apparent from the order that the Judge was aware of the history of the dispute between the parties. The fact of the existence of the dispute is also known to the Judge and, therefore, he has mentioned the word ‘dispute’. Under the circumstances and in view of the deeming provision in the section the Judge should not have issued process when the proviso is attracted and, hence, the offence u/s 127 of the CA 2013 is not constituted.

• In the instant case, the facts are totally different. The record placed before the trial Judge itself discloses the proviso of section 127(c) and if the material placed before the Court clearly fulfils the requirement of the proviso or an exception, then it cannot be ignored and the trial Judge after taking into account the material placed before him and also the proviso, should have formed an opinion that an offence u/s 127 is not constituted.

• Thus, a dispute exists in the instant matter. The orders of issuance of process passed by the Sessions Court and the common notices issued in the company petition were quashed and set aside.

10. Real Time Interactive Media (P) Ltd. vs. Metro Mumbai Infradeveloper (P) Ltd. [2018] 90 taxmann.com 89 (Bom.) Date of order: 12th January, 2018

Nothing in section 248 shall affect the power of the Court to wind up a company the name of which has been struck off from the register of companies

FACTS
• R Pvt. Ltd. (‘R’), the petitioner, was engaged in the business of publishing and managing advertisements on BEST TV LED screens in the BEST buses (BEST TV) running in Mumbai.

• By an agreement entered into between ‘R’ and M Pvt. Ltd., the respondent company, ‘M’, engaged the services of ‘R’ for the purpose of displaying advertisements on BEST TV in 1,300 non-AC buses and 250 AC buses for a period of three months for a consideration of Rs. 15 lakhs plus taxes.

• In accordance with the agreement, ‘R’ displayed the advertisements on BEST TV and raised three invoices. ‘M’ paid in instalments an amount of Rs. 5 lakhs and thus there was a balance outstanding. As no payments came forth, ‘R’ caused statutory notice to be issued to ‘M’.

• ‘R’ filed a winding up petition against ‘M’ stating that the recent MCA website extract of the Company Master of ‘M’ indicated the status of the company as ‘Strike Off’.

HELD
The Court observed / noted as under:

• Though it is not clear why the name of ‘M’ was struck off, section 248(1) of the Companies Act, 2013 empowers the Registrar to remove the name of a company from the register of companies. However, before he does that he shall send a notice to the company and all its directors about his intention to remove the name of the company and requesting them to send their representations along with copies of the relevant documents, if any, within a period of 30 days from the date of the notice. At the expiry of that time, the Registrar may, unless cause to the contrary is shown by the company, strike off its name from the register of companies and shall publish notice thereof in the Official Gazette; on the publication of the notice in the Official Gazette, the company shall stand dissolved. At the same time, nothing in section 248 shall affect the power of the Court to wind up a company the name of which has been struck off from the register of companies.

• The effect on the company notified as dissolved is that it shall, on and from the date mentioned in the notice under sub-section (5) of section 248, cease to operate as a company and the Certificate of Incorporation issued to it shall be deemed to have been cancelled from such date, except for the purpose of realising the amounts due to the company and for the payment or discharge of the liabilities or obligations of the company. Thus, it is clear that just because the name of the company is struck off the register u/s 248 that will not come in the way of the Court to pass an order winding up the company.

• Similar provisions are also available in the Companies Act, 1956, viz., section 560 and section 560(5). Therefore, even under the Companies Act, 1956 if the Registrar of Companies was to strike off the name of a company from the register that would not affect the power of the Court to wind up a company whose name has been struck off the register.

• In the circumstances, there is no bar in winding up ‘M’. It should be noted that ‘M’ has not filed any affidavit in reply opposing the petition. Therefore, the averments in the petition are not controverted. No reply has been filed even to the statutory notice. It is settled law that where no response has been made to a statutory notice, the Court may pass a winding up order on the basis that the amount claimed has not been denied by ‘M’ and there is a presumption of inability to pay by ‘M’. Where no response has been made to the statutory notice, ‘M’ runs a risk of the winding up petition being allowed. By virtue of section 434 of the Companies Act, 1956 a presumption of the indebtedness can be legitimately drawn by the Court where no reply to the statutory notice is forthcoming.

• In the circumstances, having heard ‘R’ and having considered the petition along with the documents annexed to it, the Court held that ‘M’ is indebted to ‘R’ and is unable to discharge its debts, is commercially insolvent and requires to be wound up.

•   The Court accordingly directed that:
•    ‘M’ be wound up by and under the directions of the Court under the provisions of the Companies Act, 1956; and that
•   the Official Liquidator be appointed as the liquidator of ‘M’ to take charge of the assets, books of accounts and properties of ‘M’ with all powers under the provisions of the Companies Act, 1956.

Without ambition one starts nothing. Without work one finishes nothing. The prize will not be sent to you. You have to win it
– Ralph Waldo Emerson

BCAJ Admin

ALLIED LAWS

19. The Internet & Mobile Association of India vs. RBI WP(C) No. 528 of 2018 (SC) Date of order: 4th March, 2020 Bench: Rohinton Fali Nariman J., Aniruddha Bose J., V. Ramasubramanian J.

Cryptocurrencies – RBI – Circular imposing ban on trading in cryptocurrency – Subordinate legislation – Violation of Fundamental Rights [Constitution of India, Art. 19(1)(g), Art. 14; Banking Regulation Act, 1949, S. 35A, S. 36(1)(a), S. 56; RBI Act, 1934, S. 45JA, S. 45L; Payment and Settlement Systems Act, 2007, S. 10(2), S. 18]

FACTS

The Reserve Bank of India (RBI) issued a ‘Statement on Developmental and Regulatory Policies’ on 5th April, 2018 and a Circular dated 6th April, 2018 in exercise of the powers conferred on it by section 35A read with section 36(1)(a) and section 56 of the Banking Regulation Act, 1949; section 45JA and 45L of the RBI Act, 1934; and section 10(2) read with section 18 of the Payment and Settlement Systems Act, 2007, which directed the entities regulated by RBI (i) not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies, and (ii) to exit the relationship, if they already have one, with such individuals / business entities, dealing with or settling virtual currencies (VC).

The petitioner challenged the said Statement and Circular and sought a direction to the respondents not to restrict or restrain banks and financial institutions regulated by RBI from providing access to the banking services to those engaged in transactions in crypto assets.

HELD

The measure taken by the RBI should pass the test of proportionality, since the impugned Circular has almost wiped the VC exchanges out of the industrial map of the country, thereby infringing Article 19(1)(g) of the Constitution.

While regulation of a trade or business through reasonable restrictions imposed under a law made in the interests of the general public is saved by Article 19(6) of the Constitution, a total prohibition, especially through a subordinate legislation such as a directive from RBI, of an activity not declared by law to be unlawful, is violative of Article 19(1)(g). The Circular dated 6th April, 2018 was set aside on the ground of proportionality.

20. Tarabai Wellinkar Charitable Trust & Anr. vs. The State of Maharashtra & Ors. WP No. 448 of 2020 Date of order: 12th February, 2020 Bench: Pradeep Nandrajog J., Bharati Dangre J.

Leave & Licence – No transfer of right, title or interest – Levy u/s 37A of Maharashtra Land Revenue Code is held to be not valid [Maharashtra Land Revenue Code, 1966, S. 37A]

FACTS

Petitioner No. 1, the trust, executed a Leave & Licence agreement with M/s Sheorey Digital Systems Private Limited demising to it, as a licensee, the ground floor of a building popularly known as ‘Tarabai Hall’ for three years commencing from 15th July, 2019 to 14th July, 2022 with licence fee of Rs. 4,00,000 per month plus GST and other taxes to be borne by the licensee.

Treating the Leave & Licence agreement to be a sale / transfer of interest, the Collector has by order dated 21st June, 2019 issued u/s 37A of the Maharashtra Land Revenue Code, 1996 demanded from the petitioner Rs. 41,27,427 towards unearned income.

HELD

A bare reading of the legislation in section 37A of the Maharashtra Land Revenue Code, 1966 makes it clear that the permission of the State Government, with right vested in the State Government under sub-section (2), is required when a sale, transfer, redevelopment, use of additional Floor Space Index, transfer of Transferable Development Rights or change of use is taking place under a document. The transfer referred to in the said section has to be a transfer of an interest in the corpus.

An Indenture of Leave & Licence does not create any right, title or interest in the corpus of the property in favour of the licensee. It only permits the licensee to enter upon the property and do such acts as are permitted and which in the absence of the licence would amount to a trespass.

The Indenture of Leave & Licence, be it for residential, commercial or industrial purpose, would not be subject to any levy u/s 37A of the Maharashtra Land Revenue Code.

21. Vidya Drolia & Ors. vs. Durga Trading Corporation Civil Appeal No. 2402 of 2019 (SC) Date of order: 14th December, 2020 Bench: Sanjiv Khanna J., N.V. Ramana J.

Arbitration – Landlord-Tenant disputes under Transfer of Property Act, 1882 – Arbitrable if Rent Control Laws are not applicable [Arbitration and Conciliation Act, 1996, S. 8, S. 11; Transfer of Property Act, 1882, S. 111, S. 114, S. 114A]

FACTS

A reference was made to a larger bench vide order dated 28th February, 2019 in Civil Appeal No. 2402 of 2019 titled Vidya Drolia and Others vs. Durga Trading Corporation, 2019 SCC OnLine SC 358 as it doubted the legal ratio expressed in Himangni Enterprises vs. Kamaljeet Singh Ahluwalia (2017) 10 SCC 706 that landlord-tenant disputes governed by the provisions of the Transfer of Property Act, 1882 are not arbitrable as this would be contrary to public policy.

The issues that are required to be answered relate to two aspects that are distinct and yet interconnected, namely:

(i) meaning of non-arbitrability and when the subject matter of the dispute is not capable of being resolved through arbitration; and

(ii) the conundrum – ‘who decides’ – whether the Court at the reference stage or the arbitral tribunal in the arbitration proceedings would decide the question of non-arbitrability.

HELD

The landlord-tenant disputes arising out of the Transfer of Property Act, 1882 are arbitrable as they are not action in rem but pertain to subordinate rights in personam that arise from rights in rem.

Further, the Transfer of Property Act, 1882 does not expressly bar arbitration and an arbitral award may be executed and enforced like a decree of a civil court.

The Arbitration and Conciliation Act, 1996 itself does not exclude any category of disputes as being non-arbitrable. However, post the 2015 amendment the structure of the Act was changed to bring it in tune with the pro-arbitration approach. Under the amended provision, the Court can only give a prima facie opinion on the existence of a valid arbitration agreement. In clear cases where the subject matter arbitrability is clearly barred, the Court can cut the deadwood to preserve the efficacy of the arbitral process.

However, where a dispute would be covered by State Rent Control Laws, then the said dispute is not arbitrable.

22. Rajesh Agarwal vs. RBI & Ors. WP 19102 of 2019 (Telangana)(HC) Date of order: 10th December, 2020 Bench: Raghvendra Singh Chauhan J., B. Vijaysen Reddy J.

RBI – Master Circular – Principles of Natural Justice to be read into the Circular

FACTS

The petitioner was the Chairman and Managing Director of the borrower company. In the course of its business, the company approached several banks, including the respondent banks, and availed a loan of Rs. 1,406.00 crores. The company defaulted in repayment of the loan amount.

As per the Circular Guidelines of the Reserve Bank of India, all lender banks, with the State Bank of India as the lead bank, formed the JLF (a Joint Lenders Forum). On 29th June, 2016 the JLF declared the company’s accounts as Non-Performing Assets.

Based on the Forensic Audit Report dated 29th August, 2016, on 31st August, 2016 the JLF closed the issue observing that ‘there were no irregularities, with regard to fraudulent transactions pointed out in the Forensic Audit Report’.

Thereafter, by invoking Clause 2.2.1(g) of the Master Circular, on 2nd February, 2019 the JLF & Fraud Identification Committee declared the account of the company as ‘fraud’. Hence the writ petition.

HELD

Fair play in governance is the gravitational force which binds the entire State. Therefore, before a person or entity is obliterated, or is subjected to civil and penal consequences, the person or entity must be given an opportunity of a hearing. Without giving such an opportunity, without giving the opportunity to explain the intricacies of the accounts, or of the business dealings, to denounce a person is to act unfairly, unjustly, unreasonably and arbitrarily. Even in an administrative action, justice should not only be done but must also appear to be done to the satisfaction of all the parties.

Considering the grave civil consequences and penal action which would follow as a result of classifying a borrower as ‘a fraudulent borrower’, or ‘a holder of a fraudulent account’, it is imperative that the principles of natural justice, especially the principles of audi alteram partem, must be read into Clauses 8.9.4 and 8.9.5 of the Master Circular.

23. Nautilus Metal Crafts (P) Ltd. vs. Joint Director-General of Foreign Trade WP(C) No. 5167 of 2020 (Del.)(HC) Date of order: 18th November, 2020 Bench: Navin Chawla J.

Foreign Trade (Development and Regulation) Act, 1992 – Suspension or cancellation – Licence, certificate, scrip or any instrument bestowing financial or fiscal benefits – Only with ‘for good and sufficient reasons’ – Mandatory requirement [Foreign Trade (Development and Regulation) Act, 1992, S. 9]

FACTS

The petitioner dealt with readymade garments. It procured orders from other countries and after procurement of an order directly approached the manufacturer in India who manufactured the same and thereafter these were supplied by the petitioner to the foreign buyers.

The respondent issued the impugned show cause notice dated 8th November, 2019 to the petitioner stating that the DRI had informed it that an investigation is being carried out against the petitioner ‘for gross overvaluation to fraudulently avail export benefits’ and it had been requested not to issue any export incentives to the petitioner. The petitioner was asked to show cause as to why it be not placed in DEL so that benefits under Foreign Trade Policy (FTP) are stopped, including future refusal of Authorisation / Scrips under Rule 7(c), 7(j) and 7(n) of the Foreign Trade (Regulation) Rules, 1993 (‘Rules’).

The petitioner has challenged the show cause notice dated 8th November, 2019 on the ground that it was vague as it did not spell out the exact nature of violation for which the petitioner is sought to be proceeded against and also the impugned order dated 10th January, 2020 on the ground that the same had been passed without supplying the petitioner the documents sought to be relied upon for proceeding against it.

The petitioner further claimed that pursuant to the Circular No. 16/2019-Customs dated 17th June, 2019 issued by the Director, Customs, Central Board of Indirect Taxes and Customs with regard to IGST refund, the exports made by the petitioner were subjected to 100% examination and no discrepancy was found in the same. It was further claimed that even the export proceeds against these exports and other exports had been realised by the petitioner.

HELD

The Court held that any refusal to grant, suspend or cancel any licence, certificate, scrip or any instrument bestowing financial or fiscal benefits can only be ‘by an order in writing’. In fact, section 9(4) expressly mandates that suspension or cancellation of any licence, certificate, scrip or any instrument bestowing financial or fiscal benefits can only be ‘for good and sufficient reasons’. The requirement of giving reasons cannot, therefore, be dispensed with and is mandatory.

Further, in the order there is no reference to the show cause notices and to the replies submitted by the petitioner and how they have been dealt with and appreciated by the Authority. In fact, it gives no reason except stating that the ‘Firm is under DRI Ludhiana investigation’.

The impugned order dated 10th January, 2020 does not show any application of mind to these submissions as the order contains no reasons. The impugned order was set aside. Costs were imposed on the respondent.

BCAJ Admin

CORPORATE LAW CORNER

5. Hindustan Oil Ltd. vs. Erstwhile Committee of Creditors of JEKPL Pvt.
Ltd.Company Appeal (AT) (Insolvency) No. 969 of
2020 Date of order: 17^th November, 2020

Insolvency and Bankruptcy Code, 2016 – Implementation of a Resolution
Plan which was approved by Committee of Creditors could not be challenged by
the unsuccessful applicants

FACTS

H Co is an unsuccessful resolution applicant
whose Resolution Plan was rejected by the Committee of Creditors (‘CoC’). NCLT,
vide an order dated 9^th September, 2020, directed
implementation of the approved Resolution Plan on or before the extended due
date, 30^th September, 2020.

H Co urged that the Creditors of the Corporate Debtor, in connivance
with the Successful Resolution Applicant, accepted a re-negotiated fresh
Resolution Plan and the application of the CoC u/s 60(5) of the Insolvency and
Bankruptcy Code, 2016 (‘Code’) filed before the NCLT was not maintainable and
should not have been entertained by the NCLT as the CoC had become functus
officio after approval of the Resolution Plan.

It was further argued that NCLT had approved the Resolution Plan on 4^th
February, 2020 and in terms of the approved Resolution Plan the successful
resolution applicant had to bring in Rs. 123 crores for resolution within 30
days of approval of the plan which expired on 5^th March, 2020.
However, the successful resolution applicant did not implement the Resolution Plan
and the erstwhile CoC of the Corporate Debtor, in connivance with the
successful resolution applicant, accepted a fresh Resolution Plan to the
detriment of the legal rights of H Co whose Resolution Plan was rejected on the
ground that he could not provide for a lump sum time-bound payment within 30
days of the approval of its Resolution Plan.

HELD

NCLAT heard the appeal filed by H Co and observed that it had no locus
to question the implementation of the approved Resolution Plan of the
successful resolution applicant. Directions given in the context of the
application filed u/s 60(5) of the Code to the successful resolution applicant
follows as a necessary corollary to the dismissal of appeal filed against
approval of the Resolution Plan of the successful resolution applicant to
implement the approved Resolution Plan on or before the extended date of 30^th
September, 2020.

It was observed that once H Co was out of the fray, it had neither locus
to call in question any action of any of the stakeholders qua
implementation of the approved Resolution Plan, nor could it claim any
prejudice on the pretext that any of the actions post approval of the
Resolution Plan of the successful resolution applicant in regard to its
implementation had affected its prospects of being a successful resolution
applicant.

H Co would not have any right to object if the terms of the approved
Resolution Plan of the successful resolution applicant have been varied or the
time extended to facilitate its implementation and the creditors have not
claimed any prejudice on that count. In fact, the CoC comprising of the
creditors as stakeholders did not object to the same. It was rather privy to it
on account of hardship due to the prevailing circumstances.

It was further observed that this was not a case of alleged material
irregularity in the Corporate Insolvency Resolution Process which is in the
final stages with the approved Resolution Plan being under implementation. The
outbreak of the Covid-19 pandemic slowed down the economic activity and
operations were adversely impacted. NCLAT held that in the given context some
necessary changes in the agreed terms and extension of time for implementation
would not be uncalled for.

NCLAT thus held that H Co had no locus to maintain that the
change in terms of the approved Resolution Plan in regard to extension of time
for induction of upfront amount as also implementation of the Resolution Plan
has jeopardised its legal rights qua consideration of its Resolution
Plan.

The appeal of H Co was accordingly dismissed.

6. Ratna Singh vs. Theme Export Pvt. Ltd.Company Appeal (AT) (Insolvency) No. 917 of
2020 Date of order: 18^th November, 2020

Section 61 of Insolvency and Bankruptcy Code, 2016 – Appeal against a
liquidation order passed u/s 33 could only be made if there was a material
irregularity or fraud in relation to such an order – IBC is not meant for
initiating proceedings for prevention of oppression and mismanagement – It has
been armed with Chapters II and III for initiation of action against
wrongdoers, illegal transactions, etc.

FACTS

Mrs. R and Mr.
B (‘appellants’) were directors in T Co (‘Corporate Debtor’). Corporate
Insolvency Resolution Process was initiated against the Corporate Debtor by an
operation creditor Mr. R u/s 9 of the Insolvency and Bankruptcy Code, 2016
(‘the Code’). The National Company Law Tribunal (‘NCLT’) admitted the
application and appointed Mr. V as Insolvency Resolution Professional (‘IRP’).
The first meeting of the Committee of Creditors (‘CoC’) was held on 28^th
September, 2019 and the second on 4^th November, 2019 confirming IRP
as Resolution Professional (‘RP’) and also deciding to liquidate the Corporate
Debtor.

NCLT passed the
liquidation order primarily on the basis of the recommendation of the CoC which
had the strength of 98.5% voting shares. While passing the liquidation order,
NCLT took a conscious decision not to challenge the commercial wisdom of the
Financial Creditor.

Aggrieved by
the order, both ex-directors filed the present appeal for staying the
liquidation proceedings and quashing the impugned liquidation order. The
appellants submitted that Ms N, a director of the Corporate Debtor, siphoned
off money, evidence of some of which was submitted before the NCLAT.

It was further
submitted that the Corporate Debtor has availed financial credit facility from
Bank of Baroda to the tune of Rs. 25 crores, mortgaging its plant, machinery
and assets, including accessories, stock and fabric as primary security and the
factory at Okhla along with personal / corporate guarantees of the three
directors and the same was being renewed by the bank since 2005. The
performance of the Corporate Debtor started deteriorating from F.Y. 2015-16 –
from approximately Rs. 100 crores to about Rs. 30 crores in 2018-19 on account
of various frauds, leading to oppression and mismanagement by Mrs. N, director
of the Corporate Debtor, along with certain other related parties and employees.
Mr. Ravinder Rai, ex-accountant of the Corporate Debtor, even provided to the
IRP all the data of the illegal acts committed by Mrs. N on 18^th
November 2019 prior to filing of liquidation proceedings by the IRP.

The appellants
had also written to Mrs. N demanding explanation for the theft and criminal
breach of trust amounting to oppression and mismanagement, apart from visiting
Bank of Baroda and informing the Chief Manager, Mr. Lalit Kumar Luthra, about
theft, etc., and demanded the stock statements and the fixed assets register
along with the list of machinery pledged to the Bank on 31^stDecember,
2018.

The respondents
have not filed their counter objections. As per the written submission and also
the oral submission made by the respondent’s counsel, section 61(4) of the
I&B Code, 2016 clearly stated that an appeal against the liquidation order
could be challenged only on the ground of material irregularities or fraud
committed in relation to such liquidation order. It was also submitted that the
appellants did not challenge the liquidation order per se but their
grievance was against the act of oppression and mismanagement by the other
director of the Corporate Debtor.

It was further
submitted that the appellants failed to initiate the filing of a petition u/s
241-242 of the Companies Act, 2013 which deals with oppression and
mismanagement at the appropriate stage. Hence they cannot challenge the issue
of oppression and mismanagement u/s 61(4) of the Code and so the application
needs to be dismissed. The Liquidator further submitted that the documents are
being reviewed by the Forensic Auditor, M/s K.R.A. and Company, Chartered
Accountants, for certain transactions under sections 43, 45 and 66 of the Code
and an appropriate application shall be filed by the Liquidator based on its
findings. Further, the Liquidator argued that there were no chances of revival
of the Corporate Debtor and hence the CoC had passed a resolution liquidating
the Corporate Debtor. Thus, this application needs to be dismissed.

HELD

The NCLAT heard
the parties at length. It was observed that the Corporate Debtor had three
directors – the two appellants were directors and the other director was Ms N;
the shareholding of Ms N in the Corporate Debtor was 92% and of the appellants
8%.

NCLAT observed
that Chapter III of Part II of IBC, 2016 has a mechanism even during
liquidation process to initiate action for various wrongdoings from sections 43
to 51 and section 66, which are all related to undervalued transactions, avoidable
transactions, defrauding creditor, fraudulent trading or wrongful trading, etc.
It was observed that the Liquidator, who is also erstwhile IRP, was required to
take necessary action and the Bank of Baroda is to provide appropriate
assistance. Bank of Baroda was supposed to check the flow of inventory,
cash–to-cash cycle, etc., as they had lent Rs. 25 crores.

The NCLAT relied on judgments which had held that the commercial wisdom
of the CoC cannot be looked into by either the NCLT or the Appellate Authority.
It relied on section 61 of the Code and observed that an appeal against a
liquidation order passed u/s 33 may be filed on the grounds of material
irregularity or fraud committed in relation to the liquidation order. NCLAT did
not find any irregularity or fraud committed in relation to the impugned order.
It was observed that the Code is not meant for initiating proceedings for
prevention of oppression and mismanagement but is armed with provisions under
Part II Chapter – III for initiation of action against wrongdoers / illegal
transactions, etc. NCLAT upheld the order by passed by the NCLT and the appeal
was dismissed.

7. Jaideep Halwasiya vs. AA
Infraproperties (P.) Ltd. [2020] 121 taxmann.com 240 (NCLAT) Date of order: 4^th September, 2020

At the Annual
General Meeting (AGM) and Extra Ordinary General Meeting (EOGM), new directors
were appointed and existing director ‘J’ was removed from directorship – In
view of the fact that neither any resolution nor any minutes of board meetings
were in existence, nor any notice of agenda was circulated in the prescribed
manner, the appointment of new directors and removal of ‘J’ as director was to
be stayed

FACTS

This appeal was
filed by ‘J’, a minority shareholder of ‘AA’ against the order dated 21^st
February, 2020 passed by the National Company Law Tribunal, Kolkata Bench (‘the
Tribunal’) declining grant of interim relief requested by J. The Tribunal had
declined to record findings on the factual controversy as regards serving of
notices of AGM dated 24^th September, 2019 and EOGM dated 4^th
January, 2020. The Tribunal further observed that allowing interim relief as
claimed in the Company Petition would tantamount to deciding the main petition.

Admittedly,
there are two groups of shareholders in the company. The minority shareholders’
group comprises of J holding 12.5% shares, whereas the majority group holds
87.5% shares. Several allegations of oppression and mismanagement as regards
management and operations of the company were levelled by J which included not
being served notice of AGM dated 24^th September, 2019 and notice of
EOGM dated 4^th January, 2020 which was pending. It was during the
pendency of this petition that J sought interim relief alleging that the
respondents in collusion and connivance with each other illegally appointed new
directors in the AGM on 24^th September, 2019 and ousted J from
directorship in the EOGM on 4^th January, 2020. All these acts of
commission attributed to the respondents were alleged to have been done without
giving notice to J. Interim relief was sought on the strength of these
allegations claiming that the resolutions passed in such meetings were bad in
law and void ab initio. J further alleged that the acts of the
respondents, being oppressive in nature, are prejudicial to his interest in the
company.

The respondents
have refuted the allegations and pleaded that notice of the meetings in which
the resolutions inducting new directors in the company and removing J from the
post of director were passed, were given well in advance to J. It was further
pleaded that the majority shareholders were within their rights to pass such
resolutions appointing other persons as directors and removing the existing
directors, including J.

It was further
submitted that the respondents were illegally trying to usurp control over the
company by forcing the ouster of J from the Board and appointing new directors.
It was submitted that the Respondents adopted a modus operandi creating
an impression that new directors were appointed at the meeting held on 24^th
September, 2019 and subsequent to this alleged AGM, an EOGM was held on 4^th
January, 2020 wherein J was removed. It was pointed out that there was no
resolution nor any minutes of the alleged Board Meeting dated 22^nd June,
2019 to show that the two directors of the company had decided to hold the AGM
on 24^th September, 2019. No minutes as required u/s 118 of the Act
had been produced by the company to support its plea. It was further submitted
that as regards the alleged agenda and notice dated 6^th June, 2019,
no notice or agenda was ever circulated. The documents relied upon by the
respondents in this regard were fabricated as they did not bear the necessary
signatures and were not on the letterhead of the company. The notice of AGM was
never served on J or any other shareholder. Even service was not effected
through the prevalent mode of service. The annual returns were filed without
holding an AGM and on the date of the alleged meeting one of the shareholders
(a director) was not even in India.

It was
submitted that since J did not attend any meeting purportedly held on 24^th
September, 2019 the minimum required quorum for the General Meeting as
per section 103(1)(b) of the Act was not present. Such a meeting would therefore
have no meaning and cannot be said to exist in law. Thus, it was contended that
the AGM of 24^th September, 2019 is non est and the
resolutions passed on that date deserved to be stayed. Further, the purported
resolution of 4^th January, 2020 for removal of J as Director was
entirely illegal and void ab initio. There was no evidence to show that
notice of the Board Meeting to be convened on 26^th November, 2019
was served on J. The genuineness of the alleged notice for the EOGM of 12^thDecember, 2019 was disputed. The variation in addresses was also
highlighted. Thus, the very foundation of removal of J from the Board was
nothing but fraudulent and was sought to be supported by fabricated documents.

HELD

The Appellate
Tribunal observed / noted as under:

J is admittedly a minority shareholder whilst the respondents and
associates are the majority shareholders. With allegations of the respondents
making all efforts to usurp control over the company through all means, fair or
foul, emanating from J, it is demonstrated by J that no resolution or any
minutes of the Board Meeting of 22^nd June, 2019, stated to be the
edifice of the alleged AGM, was in existence to even suggest that the two
directors decided to hold the AGM on 24^th September, 2019. It was
contended on behalf of J that adherence to the statutory requirement u/s 118 of
the Companies Act has not been established by respondents which justifies
drawing of an inference that neither any such Board Meeting was conducted nor
any minutes of such Board Meeting recorded. It was also pointed out that no
notice or agenda was circulated in the prescribed manner and bearing the
signatures of J. As regards the notice said to have been issued on 5^th
August, 2019, similar contentions have been raised, it being further pointed
out that the prevalent modes of service have not been resorted to.

It has been
pointed out that although Form No. MGT 7 was filed even without holding the
AGM, the Annual Report falsely declared that the AGM had been attended by both
J as well as the directors. It has been pointed out that J never attended any
such meeting and one of the other directors was not in India on that date. It
was also pointed out that after the respondents realised that the fraud played
by them in this regard had been discovered, one of the respondents cooked up
another false story by setting up the plea that someone had attended the
meeting on his behalf and a clerical error had been made in the Annual Report.
No authorisation in this regard has been produced by the respondents to
demonstrate that someone else had attended as a representative in the alleged
AGM. It was submitted on behalf of J that since J did not attend any purported
meeting on 24^th September, 2019 the minimum required quorum
of the General Meeting not being present, any resolutions said to have been
passed on such date were required to be
stayed. On the strength of these relevant facts, it was contended on behalf of
J that the ouster of J as director was entirely illegal.

Since the foundation
was bad, it was contended that the entire superstructure was bound to collapse.
J has demonstrated all these circumstances to show that he has raised a fair
question which requires a probe in the Company Petition. The arguments raised
on this score cannot be dismissed off hand. Given the status of J, it can be
safely stated that with the existence of a prima facie case in his
favour, the balance of convenience lies to the side of J who is faced with the
prospect of his interests and legal rights being seriously jeopardised in the
wake of the Tribunal order.

For the
foregoing reasons, the Appellate Tribunal opined that the order of the Tribunal
suffered from grave legal infirmity besides factual frailty. Therefore, it cannot
be supported. The appeal was allowed and the order of the Tribunal was set
aside. The appointment of new directors and removal of J as director of the
company was stayed till the decision on the Company Petition.

8. Jaishree Dealcomm (P) Ltd. vs. Registrar of Companies [2020] 119 taxmann.com 418 (NCLAT) Date of order: 29^th November, 2019

Section 252
read with sections 164 and 248 of the Companies Act, 2013 – Name of the company
was struck off from the register of companies – Directors filed an application
for restoration of name which was dismissed on the ground that they being
disqualified could not maintain an appeal – But from share certificates and
annual returns of the company it was found that said directors were also
shareholders and thereby entitled to file an appeal as per section 252(3) –
Further, the company had not filed annual returns since F.Y. 2013-14 onwards
though it was regularly carrying on its business as evidenced by auditors’
reports and financial statements for years ended 31^stMarch, 2014 to
31^st March, 2017 – It was held that the order striking off the name
of the company from the register of companies was prejudicial to the
shareholders and was to be set aside and the name restored

FACTS

J Pvt. Ltd. is
a company incorporated under the Companies Act, 1956 and having its registered
office in Kolkata. It was served notice u/s 248(1)(c) of the Companies Act,
2013. Thereafter, a public notice was issued and the company’s name struck off
from the register of companies.

This order was
challenged before the NCLT, Kolkata. However, NCLT dismissed the appeal on the
ground of maintainability that u/s 252(3) of the Companies Act, 2013 a company
or any member or creditor or workman can file application for restoration of
the name of the company. NCLT had, while dismissing the appeal, also observed
that as per section 164(2)(a) of the Companies Act, 2013, directors being
disqualified cannot maintain the appeal. Being aggrieved, the directors
preferred the present appeal.

It was submitted
that the directors who had preferred this appeal were also shareholders of the
company. Further, J was regularly carrying on business as stated in the main
object clause of the Memorandum of Association of the company and was regularly
filing income-tax returns with the Income-tax Department. However, J had
inadvertently failed to file its audited financial statements and annual
returns from financial year 2013-14 onwards which were annexed with the Memo of
Appeal. It was apparent from the audited balance sheets that J had been
carrying on business.

The ROC, West
Bengal, submitted that J had been grossly negligent in not filing the annual
returns and financial statements since F.Y. 2013-14, thus the order of the NCLT
/ ROC be upheld.

HELD

The Appellate
Tribunal observed / noted as under:

The Memo of
Appeal was filed by shareholders of the company and it was considered on merit.
Clearly, the company had not filed annual returns since F.Y. 2013-2014.
However, it was regularly carrying on its business and filed the reports of the
auditors and financial statements for the years ended 31^st March,
2014 to 31^stMarch, 2017. The audited financials were perused and it
was apparent that J has been carrying on its business continuously. Therefore,
the order of striking off the name of the company from the register of
companies is prejudicial to the shareholders of the company. The order is
liable to be set aside and is hereby set aside.

It was further ordered that within 30 days of restoration of the company’s
name in the register maintained by the Registrar of Companies, the company will
file all its annual returns and balance sheets due for the period ending 31^st
March, 2014 to date. The company will also pay requisite charges / fee as well
as late fee / charges as applicable.

In spite of the
present orders, the ROC will be free to take any other steps, punitive or
otherwise, under the Companies Act, 2013 for non-filing / late filing of
statutory returns / documents against the company and directors.

The best daily investments of time:

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1 hour of exercise

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— Steve Burns

BCAJ Admin

ALLIED LAWS

15. Arnab Manoranjan
Goswami vs. The State of Maharashtra & Ors. Cr.
Appeal No. 742 of 2020 (SC) Date of order: 27^th November, 2020
Bench: Dr. Dhananjay Y. Chandrachud J., Indira Banerjee J.

Human liberty – Role of Courts – Misuse of the criminal law is a matter
to which the High Court and the lower Courts in the country must be alive
[CrPC, 1973, S. 482, Constitution of India, Art. 226, 227]

FACTS

The appellant
is the Editor-in-Chief of an English television news channel, Republic TV who
was arrested on 4^th November, 2020 in connection with FIR No. 59 of
2018 that was registered at Alibaug Police Station under sections 306 and 34 of
the IPC. It was registered on 5^th May, 2018 on the complaint of the
spouse of the deceased informant who is alleged to have committed suicide. The
deceased had not received payment for the work which was carried out by him, as
a result of which he was under mental pressure and committed suicide by hanging
on 5^th May, 2018; there is a suicide note holding the appellant and
others responsible.

HELD

Human liberty
is a precious constitutional value which is undoubtedly subject to regulation
by validly enacted legislation. As such, the citizen is subject to the edicts
of criminal law and procedure. Section 482 recognises the inherent power of the
High Court to make such orders as are necessary to give effect to the
provisions of the Code of Criminal Procedure – or prevent abuse of the process
of any Court or otherwise to secure the ends of justice. The recognition by
Parliament of the inherent power of the High Courts must be construed as an aid
to preserve the constitutional value of liberty. The writ of liberty runs
through the fabric of the Constitution. The need to ensure the fair
investigation of crime is undoubtedly important in itself, because it protects
at one level the rights of the victim and, at a more fundamental level, the
societal interest in ensuring that crime is investigated and dealt with in
accordance with law. On the other hand, the misuse of the criminal law is a
matter to which the High Courts and the lower Courts in the country must be
alive.

In the present
case, the High Court could not but have been cognizant of the specific ground
which was raised before it by the appellant that he was being made a target as
part of a series of occurrences which had been taking place since April, 2020.
The specific case of the appellant is that he has been targeted because his
opinions on his television channel are unpalatable to authority.

In failing to make even a prima facie evaluation of the FIR, the
High Court abdicated its constitutional duty and function as a protector of liberty.
Courts must be alive to the need to safeguard the public interest in ensuring
that the due enforcement of criminal law is not obstructed. The fair
investigation of crime is an aid to it. Equally, it is the duty of Courts
across the spectrum – the district judiciary, the High Courts and the Supreme
Court – to ensure that the criminal law does not become a weapon for the
selective harassment of citizens. Courts should be alive to both ends of the
spectrum – the need to ensure the proper enforcement of criminal law on the one
hand and the need, on the other, of ensuring that the law does not become a
ruse for targeted harassment. Liberty across human eras is as tenuous as
tenuous can be. Liberty survives by the vigilance of her citizens, on the
cacophony of the media and in the dusty corridors of courts alive to the rule
of (and not by) law. Yet, much too often, liberty is a casualty when one of
these components is found wanting.

16. Noy Vallesina Engineering SpA vs. Jindal Drugs Limited & Ors. Civil Appeal
No. 8607 of 2010 (SC) Date of order:
26^th November, 2020 Bench: S.
Ravindra Bhatt J., Indira Banerjee J.

Arbitration – Foreign award – Setting aside – Not maintainable
[Arbitration and Conciliation Act, 1996, S. 34]

FACTS

The appellant company (N.V. Engineering) was incorporated under Italian
law and was involved in the setting up and construction of plants for
production of synthetic fibres, polymers and ascorbic acid in India. The
respondent (Jindal Drugs) is a public limited company incorporated under the
Indian law. Disputes arose between the two in respect of an agreement between
them. The latter (N.V. Engineering) terminated the agreement and claimed
damages. Jindal Drugs filed a request for arbitration before the International
Court of Arbitration (ICC), Paris. But its claims were rejected by the Tribunal
via a partial award.

Jindal then filed a petition before the Bombay High Court u/s 34 of the
Act challenging the partial award which held that since the partial award was a
foreign award, a challenge through a petition was not maintainable u/s 34.
Jindal then preferred an appeal against this order before the Division Bench.
During the pendency of the appeal, N.V. Engineering applied for enforcement of
the two awards, i.e., the partial award and the final award under sections 47
and 48 of the Act, in the chapter relating to foreign awards. This petition was
allowed and Jindal’s objections against the two awards’ enforceability were
overruled. Jindal preferred an appeal and N.V. filed a cross-appeal

Pending these two appeals, the Division Bench decided Jindal’s first
appeal and held that proceedings u/s 34 could be validly maintained to
challenge a foreign award. Hence this appeal by N.V. Engineering.

HELD

The Court relied on the decision of
BALCO vs. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552 wherein
it was held that the Arbitration Act, 1996 has accepted the territoriality
principle which has been adopted in the UNCITRAL Model Law. Section 2(2) makes a
declaration that Part I of the Arbitration Act, 1996 shall apply to all
arbitrations which take place within India. Therefore, Part I of the
Arbitration Act, 1996 would have no application to international commercial
arbitration held outside India. Therefore, such awards would only be subject to
the jurisdiction of the Indian courts when the same are sought to be enforced
in India in accordance with the provisions contained in Part II of the
Arbitration Act, 1996. The provisions contained in the Arbitration Act, 1996
make it crystal clear that there can be no overlapping or intermingling of the
provisions contained in Part I with the provisions contained in Part II of the
Arbitration Act, 1996.

The appeal was allowed and costs imposed on Jindal.

17. Madras Bar Association vs. Union of India & Anr. Writ (C) No. 804 of 2020 (SC) Date of order: 27^th November, 2020 Bench: L. Nageswara Rao J., Hemant Gupta J., S. Ravindra Bhat J.

Judicial Member – Qualification and experience – Appellate Tribunal and
other Authorities Qualification, Experience and Other Conditions of Service of
Members Rules, 2020 [Finance Act, 2017, Administrative Tribunals Act, 1956]

FACTS

The petitioner filed a petition challenging the constitutional validity
of the Tribunal, Appellate Tribunal and other Authorities Qualification,
Experience and Other Conditions of Service of Members Rules, 2020 (Tribunal
Rules) on several grounds, viz., exclusion of advocates for being considered as
a judicial member in ten out of 19 Tribunals, a minimum of 25 years of
experience for an advocate to be eligible to become a member in seven tribunals
(Central Administrative Tribunal, Income-tax Appellate Tribunal, Customs Excise
and Sales Tax Appellate Tribunal, etc.) inter alia.

HELD

The Hon’ble Supreme Court held that the exclusion of advocates in ten
out of 19 Tribunals for being appointed as a judicial member is contrary to the
decision in the case of Union of India vs. R. Gandhi, President, Madras
Bar Association, (2010) 11 SCC 1 and the case of Madras Bar
Association vs. Union of India, (2014) 10 SCC 1.

It further held that the Tribunal Rules shall
be amended to make advocates with an experience of at least ten years eligible
for appointment as judicial members in the Tribunals. While considering
advocates for appointment as judicial members in the Tribunals, the
Search-cum-Selection Committee shall take into account the experience of the
Advocates at the bar and their specialisation in the relevant branches of law.
They shall be entitled for reappointment for at least one term by giving
preference to the services rendered by them for the Tribunals.

18. State of UP vs. Sudhir Kumar Singh & Ors. Civil Appeal No. 3498 of 2020 (SC) Date of order: 16^th October, 2020 Bench: R.F. Nariman J., Navin Sinha J., K.M. Joseph J.

Principle of natural justice – Arbitrary termination is held to be bad
in law [Constitution of India, Art 14, 226]

FACTS

The private respondents filed a case on account of illegal and arbitrary
termination of their tender upon completion of one year, whereas the term
stipulated in the tender was two years. It was prayed that the order
terminating the tender was bad in law due to violation of the principles of
natural justice, i.e., audi alteram partem.

HELD

The principles of natural justice have undergone a sea change. The
earlier view that even a small violation would result in the order being
rendered a nullity is not correct. Some real prejudice must be caused to the
complainant by the refusal to follow natural justice. The prejudice must not
merely be the apprehension of a litigant. No prejudice is caused to the person
complaining of the breach of natural justice where such person does not dispute
the case against him or it. There is a clear distinction between cases where
there was no hearing at all and the cases where there was mere technical
infringement of the principle. Since there was prejudice caused to the private
respondents and financial loss has occurred, the Court upheld the impugned
judgment of the High Court on the ground that natural justice has indeed been
breached.

BCAJ Admin

CORPORATE LAW CORNER

4. Economy Hotels India Services (P) Ltd. vs. Registrar of Companies
[2020] 119 taxmann.com 271 (NCLAT) Date of order: 24^th August, 2020

There was an ‘inadvertent typographical error’ figuring in extract of
‘Minutes of Meeting’ characterising ‘special resolution’ as ‘unanimous ordinary
resolution’. Appellant company had tacitly admitted typographical error in
extract of minutes. Registrar of Companies had noted that appellant / company
had filed special resolution with it which satisfied requirements of section 66
of the Companies Act, 2013. The petition, filed by company u/s 66(1)(b)
rejected by NCLT on ground that there was no special resolution for reduction
of share capital as prescribed u/s 66 and as required in article 9 of the
Articles of Association of company, was set aside

FACTS

E Private Limited (E) is a closely-held private company, limited by
shares, incorporated under the provisions of the Companies Act, 1956. In fact,
Article 9 of the ‘Articles of Association’ of the appellant company specifies
that the company may, from time to time by a special resolution, reduce its
share capital in any manner permitted by law.

E had filed a petition u/s 66(1)(b) of the Companies Act praying for
passing of an order for confirming the reduction of share capital wherein it
had averred as under:

‘That annual general meeting of E was held on 19^th August,
2019 and was attended by both the equity shareholders holding 100% of the issued,
subscribed and paid-up equity share capital of E. The said equity shareholders
present at the said meeting have cast their votes in favour of the aforesaid
resolution, etc.’

More specifically, E in the Company Petition had sought relief to
confirm the reduction of the issued, subscribed and paid-up equity share
capital of E as resolved by the members in the AGM held on 19^th
August, 2019 by passing the special resolution. Further in the said petition, E
had prayed to approve the form of minutes under sub-section 5 of section 66 of
the Act.

E contended that it had placed on record sufficient documents to prove
that ‘special resolution’ as required u/s 66 of the Companies Act, 2013 as well
as in terms of the requirements under Article 9 of the ‘Articles of
Association’ of E was passed.

The National Company Law Tribunal, New Delhi, Bench V while passing the
order on 27^th May, 2020 had observed as under:

‘We have perused the minutes of the Annual General Meeting of the
company held on 19^th August, 2019. On page 124 of the paper book, it
is recorded that the meeting has passed the resolution for reduction of capital
“as an ordinary resolution.” The minutes of the meeting have been
signed by the Chairman of the meeting.

Thus, we observe that the company has not met the specific requirement
of section 66 of the Companies Act by passing “Special Resolution” for
reduction of share capital. The company has also not complied with the
requirements of its own Articles of Association.

We are left with no choice but to reject the application in view of the
fact that there is no special resolution for reduction of share capital as
prescribed u/s 66 of the Companies Act, 2013 and as required in Article 9 of
the Articles of Association of the company. Section 66 of the Companies Act
also requires this Tribunal to approve the minutes of the resolution passed by
the Company which has been passed as ordinary resolution as against the
requirement of special resolution; the Tribunal is not in a position to
approve such minutes in this case.’

HELD

The Appellate Tribunal observed / noted as under:

E had made a plea that the National Company Law Tribunal had failed to
appreciate the creeping in of an ‘inadvertent typographical error’ figuring in
the extract of the ‘Minutes of the Meeting’ characterising the ‘special
resolution’ as ‘unanimous ordinary resolution’. Moreover, E had fulfilled all
the statutory requirements prescribed u/s 114 of the Companies Act and as such
the order of the Tribunal is liable to be set aside.

It transpires
that the ‘Special Resolution’ passed in the ‘Annual General Meeting’ as filed
with the e-form MGT-14 reflects that the resolution passed by the shareholders
u/s 67 of the Companies Act, 2013 on 19^th August, 2019 is a ‘Special
Resolution’ which is taken on record in the MCA21 Registry.

Further, the Resolution passed in the ‘Annual General Meeting’ of the
appellant’s company u/s 66 of the Companies Act was found to be in order by the
ROC. Even the report of the Registrar of Companies, Delhi found that E had
filed the said resolution keeping in tune with the ingredients of section 66 of
the Companies Act, 2013.

The Appellate
Tribunal noted that ‘Reduction of Capital’ is a ‘Domestic Affair’
of a particular company in which, ordinarily, a Tribunal will not interfere
because of the reason that it is a ‘majority decision’ which prevails. The term
‘Share Capital’ is a ‘genus’ of which ‘Equity and Preference share capital’ are
‘species’.

It is further
pointed out that section 114(2) of the Companies Act, 2013 enjoins that
‘Special Resolution’ means a resolution where a decision is reached by a
special majority of more than 75% of the members of a company voting in person
or proxy.

On a careful
consideration of the respective contentions, this Tribunal after subjectively
satisfying itself that E has tacitly admitted the creeping in of a
typographical error in the extract of the minutes and also taking into
consideration the stand of the ROC that E had filed the special resolution with
it, which satisfies the requirement of section 66 of the Companies Act, 2013,
allows the appeal by setting aside the order passed by the National Company Law
Tribunal, Bench V.

The Appellate
Tribunal thus confirmed the reduction of share capital of E as resolved by the
‘Members’ in their ‘Annual General Meeting’ that took place on 19^th
August, 2019 and the Tribunal further approved the form of minutes required to
be filed by E with the Registrar of Companies, Delhi u/s 66(5) of the Companies
Act, 2013.

BCAJ Admin

ALLIED LAWS

11. Ravi Dixit vs. State of U.P. and another Application u/s 482 No. 14068 of 2020
(All.)(HC) Date of order: 23^rd September,
2020 Bench: Dr. Kaushal Jayendra Thaker J.

Dishonour of cheque – Intention not to make
payment – Complainant need not wait 15 days [Negotiable Instruments Act, 1881,
S. 138]

FACTS

A cheque of Rs. 5,00,000 was issued on 1^stMarch, 2019 and another cheque of Rs. 5,98,000 on 2^ndMarch,
2019. Both were dishonoured on 28^th May, 2019 as the drawer (the
petitioner here) had directed the bank to stop the payments. The complainant
sent a notice to the petitioner on 11^th June, 2019. A response was
received on 25^th June, 2019. But the complainant did not receive any
money; therefore, on 29^th June, 2019, he filed a complaint u/s 138
of the Negotiable Instruments Act, 1881.

The Judge, after
referring to the dates, was satisfied that a prima facie case is made
out for issuance of notice and so on 3^rd September, 2019 passed the
summoning order.

The petitioner
approached the High Court stating that the complainant should have waited for a
period of 15 days and should not have filed the complaint on 29^th
June, 2019.

HELD

The provision of section 138 of the N.I. Act
cannot be interpreted to mean that even if the accused refuses to make the
payment the complainant cannot file a complaint. Proviso (c) of the said
section is to see the bona fides of the drawer of the cheque and is with
a view to grant him a chance to make the payment. The proviso does not
constitute ingredients of an offence punishable u/s 138. It simply postpones
the actual prosecution of the offender
till such time as he fails to pay the amount, then the statutory period
prescribed begins for lodgement of complaint.

The petitioner replied to the notice which
goes to show that the intention of the drawer is clear that he did not wish to
make the payment. Once this is clarified, the complainant need not wait for the
minimum period of 15 days. The petition was dismissed with cost.

12. High Court on its own motion vs. the State of Maharashtra Suo motu WP (ST) No. 93432 of 2020 (Bom.)(HC) Date of order: 29^th October, 2020 Bench: Hon’ble C.J., A.A. Sayed J., S.S. Shinde
J., K.K. Tated J.

Covid-19 – Extension of interim orders –
Eviction, demolition and dispossession – Passed by the Courts in Maharashtra
and Goa – Until 22^nd December, 2020

FACTS / HELD

Although the situation in the State of
Maharashtra because of the pandemic has improved over the last few days, access
to the Courts of law is not easy. To ensure that persons suffering orders of
dispossession, demolition, eviction, etc., passed by public authorities are not
inconvenienced by reason of inability to approach the Courts because of the
restrictions on movements imposed by the State Government, as well as the
requirement to maintain social distancing norms, the Court considered it just
and proper to extend the interim orders passed by it on this writ petition till
22^nd December, 2020 or until further orders, whichever is earlier.

13. Srei Equipment Finance Ltd. vs. Seirra Infraventure Pvt. Ltd. A.P. 185 of 2020 (Cal.)(HC) Date of order: 7^th October, 2020 Bench: Moushumi Bhattacharya J.

Arbitration – Interim relief – Jurisdiction
– Where a part of the cause of action has arisen – Valid [Arbitration and
Conciliation Act, 1996, S. 2(1)(e)(i), S. 9]

FACTS

The petitioner / finance company has sought
an injunction restraining the respondent / hirer from dealing with the assets
leased by it (the petitioner) to the respondent under a Master Lease Agreement
entered into between the parties on 15^th March, 2018. The petitioner
has alleged outstanding rental dues as on the date of termination of the agreement
and has sought for appointment of a receiver to take possession of the assets
together with an order directing the respondent to furnish security to the
extent of Rs. 75,19,388.

The respondent has raised a point of
maintainability of the application on the ground that this Court does not have
territorial jurisdiction to entertain the application as would be evident from
the pleadings and documents, as also the relevant provisions of the Arbitration
and Conciliation Act, 1996.

HELD

An application u/s 9 of the Arbitration and
Conciliation Act, 1996 can be filed where a part of the cause of action has
arisen or where the seat of arbitration has been chosen by the parties. It is
stated that part of the cause of action has arisen within the jurisdiction of this
court.

Further, it
must also be borne in mind that the parties have consented to the jurisdiction
in clause 18(k) as well as the seat of arbitration as provided in clause 18(l)
of the agreement. Both these clauses point to ‘Kolkata’. Section 2(1)(e)(i) of
the 1996 Act designates the principal Civil Court of original jurisdiction in a
district, including the High Court in exercise of its Ordinary Original Civil
Jurisdiction, having jurisdiction to decide the questions forming the subject
matter of the arbitration for the purpose of applications in matters of
domestic arbitration under Part I of the Act. Therefore, the preliminary
objection of the respondent with regard to the jurisdiction of this Court,
fails.

14.
Paramount Prop. Build. Pvt. Ltd. through its authorised signatory Mr. Anil
Kumar Gupta vs. State of U.P. and 118 others Writ (C)
No. 12573 of 2020 (All.)(HC) Date of
order: 4^th November, 2020 Bench:
Surya Prakash Kesarwani J., Dr. Yogendra Kumar Srivastava, J.

Promoters – Delay in handing over
possession of the flats – Contravention of obligation cast upon promoters –
Authority empowered to award interest [Real Estate (Regulation and Development)
Act, 2016, S. 18, S. 38]

FACTS

The petitioner is a promoter and the
respondent Nos. 3 to 119 are allottees. The petitioner could not deliver
possession of the flats to the allottees in time and there occurred a delay.
The allottees filed separate complaints before the Uttar Pradesh Real Estate
Regulatory Authority, Gautam Buddh Nagar, who passed the impugned orders
awarding interest.

A writ petition was filed on the ground that
the impugned orders are without jurisdiction inasmuch as the power to grant
interest does not vest with the Authority.

HELD

Section 18 of the RERA Act, 2016 is in
respect of return of amount and compensation in case the promoter fails to
complete or is unable to give possession of an apartment, plot or building.
Sub-section (1) of section 18 provides for two different contingencies. In case
the allottee wishes to withdraw from the project, the promoter shall be liable
on demand to return the amount received by him to the allottees in respect of
the apartment, plot or building as the case may be, with interest at such rate
as may be prescribed, including compensation in the manner as provided under
the Act.

Alternatively, where the allottee does not
intend to withdraw from the project, the promoter shall, as per the proviso
to section 18(1) of the Act, be liable to pay interest for every month of delay
till the handing over of the possession, at such rate as may be prescribed.

Further, section 38(1) of the Act confers
powers upon the Authority to impose penalty or interest in regard to any
contravention of obligations cast upon the promoters, the allottees and the
real estate agents, under the Act or the Rules or the Regulations made
thereunder.

The promoter having contravened the
aforesaid obligation with regard to giving possession of the apartment by the
specified date, and complaints in this regard having been filed by the
allottees, the Authority exercising powers u/s 38(1) of the Act is fully
empowered to impose interest in regard to contravention of the obligation cast
upon the promoter.

BCAJ Admin

CORPORATE LAW CORNER

2. R. Ajayender vs. Karvy Computershare (P)
Ltd. [2020] 119 taxmann.com 412 (NCLT – Hyd.) Date of order: 21^st
October, 2019

Section 58 of the
Companies Act, 2013 – Transfer of shares – Refusal of registration and appeal
against this

Petitioner’s father
had purchased 100 shares of respondent company paying full sale consideration
(through a share broker from its first registered joint holders ‘M’ and ‘D’).
However, petitioner’s father being ignorant of the procedure, kept shares with
him on as-is-where-is basis. Petitioner later approached respondent company
requesting for transfer of physical shares into petitioner’s name. Respondent
company returned original transfer form and original shares stating shares as
bad delivery on account of signature mismatch and directed petitioner to
re-lodge shares with transferor’s attestation. Petitioner stated that
whereabouts of transferor were not known and so he could not submit required
documents. Petitioner filed petition u/s 58 seeking directions to respondents
to transfer share certificate from its first registered holder to him and
further to allot bonus shares and all other benefits in his favour

Whereas
since notice was sent to original transferor / shareholders, ‘M’ and ‘D’, but
notices could not be served and further no complaint was lodged regarding theft
/ loss of share certificate/s, respondent was directed to register transfer of
shares in favour of petitioner provided petitioner furnished indemnity for
amount to be fixed by the respondent

FACTS

One RM, the father of the petitioner
(P), had purchased 100 shares of HF Limited (HF) by paying full sale
consideration through a share broker from its first registered joint holders
‘M’ and ‘D’.

RM being ignorant of the procedure, kept
the shares with him on as-is-where-is basis. P later approached HF and the
transfer agent of HF requesting for transfer of physical shares into P’s name
along with original transfer form and physical share certificates.

HF returned the original transfer form
and original shares stating ‘the shares as bad delivery on account of signature
of transferor mismatch’ and directed P to re-lodge the shares with transferor
attestation, transferor bank attestation on savings bank account, transferor
PAN, address proof of transferor, etc. P requested for transferor attestation
and no objection letter to transfer the shares in favour of P but there was no
response from the transferor which was also informed to HF.

P submitted that the whereabouts of the
transferor were not known, as such he was not in a position to submit / enclose
documents for transferring the shares.

The Registrar and transfer agent (RT)
contended as under:

P has lodged for transfer of shares in
his name after a lapse of 20 years.

RT contended that upon verification it
was found that there was a signature mismatch of the original transferor and
that as requested by HF the petitioner has not complied with the bank
attestation of the signatures of ‘M’ and ‘D’ on the transfer deed, attested
copy of PAN Card and address proof of transferor.

RT relied on section 108(e) of
the Companies Act, 1956 r/w/s 56 of the Companies Act, 2013 which deals with
transfer of shares not to be registered except on production of the instrument
of transfer. The requirement is that the transferee should have presented the
documents for share transfer duly stamped within 60 days from the date of
execution and accompanied by proper instrument of transfer.

Upon verification of share transfer
instrument and accompanying documents which were filed after 20 years, there is
a signature mismatch. In the absence of proper documents, P has no right to
claim for registration of shares. Hence, Tribunal urged to dismiss the
petition.

HELD

The Tribunal observed as under:

i) The shares in question were lodged for
transfer and HF had raised an objection regarding mismatch of signature of the
transferor (‘M’ and ‘D’).

ii) P is not able to contact the original
transferors and they are not residing in the address available as per the
records of HF.

iii) The Tribunal noted that nobody lodged any
complaint with HF or RT for loss of original share certificate. It goes to
establish that there was transfer of shares and therefore original transferors
have not lodged any complaint. Had there been any complaint about loss of
original share certificate at the instance of the transferors, then there is a
reasonable ground for HF to refuse to transfer the shares in the name of the
petitioner. Till date there has been no complaint by the original shareholders
about loss of the share certificate. When such is the case and to avoid future
disputes if any, HF can direct P to give an indemnity in respect of the shares
to be transferred in his name. Therefore, the Tribunal directed P to furnish an
indemnity bond of an amount which can be fixed by HF for effecting transfer.

iv) The Tribunal relied on the decisions of
the Company Law Board, Eastern Region Bench, Kolkata, in the matter of SMC
Global Securities Ltd. vs. ITC Ltd. [2007] 75 SCL 509. Similarly,
counsel for petitioner further relied on the decision of the Company Law Board,
Southern Region Bench, Chennai, in the matter of Altina Securities (P)
Ltd. vs. Satyam Computer Services Ltd. [2007] 75 SCL 56. The Company
Law Board held that since the transferor has not shown any interest in spite of
notices, the company was directed to register the impugned shares in favour of
the petitioner on the authority of the order. The CLB observed that since the original transferor has not raised
any objection, the Company Law Tribunal be directed to register the shares in
the name of the purchaser. Thus, when the transferor has not raised any
objection, the Company Law Board directed the company to register the shares,
including the bonus shares, if any.

v) In the light
of the decisions cited and in the circumstances of the case, NCLT allowed the
petition filed by the petitioner and directed HF to transfer 100 shares in
favour of P subject to P giving requisite indemnity bond within a period of 30
days from the date of the order.

3. Arenja Enterprise Pvt. Ltd. vs. Edward
Keventer (Successors) Pvt. Ltd. Company Appeal (AT)(Insolvency) No. 528 of 2020 Date of order: 16^th October,
2020

Section 5(8)(f) of the
Insolvency and Bankruptcy Code, 2016 – Allotment of built-up area under a
settlement decree did not constitute a financial debt – No sum was raised for
allotment of such area from the allottee under the real estate project – There
was no financial debt due and such an allottee could not be regarded as a
financial creditor

FACTS

A Co and E Co signed a Memorandum of
Understanding (‘MOU’) dated 22^nd June 1989 over a parcel of land,
followed by two other supplementary MOU’s dated 20^th November, 1989
and 22^nd November, 1989. During the year 1992, some dispute arose
between the parties. In accordance with the terms of the MOU, A Co paid a sum
of Rs. 2 crores in September, 1989. As per one of the MoUs signed in November,
1989, the amount of Rs. 2 crores was to be refunded to A Co and its associates
by 28^th February, 1990.

As the MOU dated 22^nd June,
1989 was not re-instated by E Co, it became void.

A Co filed a suit for specific
performance along with other reliefs against E Co in the year 1992. The parties
reached a settlement on 10^th April, 1996 pursuant to which E Co
agreed to develop a group housing complex on a plot of land measuring 22.95
acres. Out of this, A Co was entitled to 34,000 square feet residential covered
/ built-up area along with proportionate super area. As per the terms of the
settlement, if the sanction of plans is not obtained within a period of three
years from the date of signing of the settlement, E Co would give further
built-up area of 1,700 square feet for each delayed year for a maximum period
of three years. On 10^th April, 2002, 5,100 square feet of additional
land was added as per the settlement decree on account of the delay.

Separately, E Co did not refund the
amount of Rs. 2 crores by 28^th February, 1990. A Co filed a suit in
Delhi High Court in the year 1992 and in line with the decision of the Court, E
Co returned the said amount in the month of January, 1995.

A Co filed an execution application in
the year 2008 before the District Court and the same was rejected. Subsequently,
A Co challenged the rejection before the High Court of Delhi. The High Court vide
order dated 6^th August, 2019 stayed the execution proceedings on the
grounds that they were premature in nature.

A change of land use took place in the
year 2018 and A Co alleged that there was a default. By not allotting the
39,100 square feet of built-up area of the land, E Co had committed a default.
A Co claimed that it was a financial creditor as the receivable area from E Co
constituted a financial debt in terms of section 5(8)(f) of the Code.

A Co filed an application before the
NCLT u/s 7 of the Code, instituting insolvency proceedings against E Co, the
financial creditor. NCLT dismissed the application on the grounds that A Co was
not a financial creditor and there was no existence of a ‘financial debt’. A Co
filed an appeal with the NCLAT.

Before the NCLAT, it was argued by A Co
that the amount of Rs. 2 Crores which had been given to the corporate debtor
had the commercial effect of borrowing after the due date, i.e., from 28^th
February, 1990 till its refund in 1995. Further, default occurred on 9^th
August, 2018 when the change of land use happened and three years was granted
as per the settlement decree for approval of building plans and further three
years with delay penalty.

E Co, the corporate debtor, claimed that
the debt, as alleged by the appellant, is not a ‘financial debt’ as defined u/s
5(8)(f) of the Code as no sums were raised from / paid by A Co. Financial debt
can only be money raised and paid and not for any other claims. Further,
allotment as per the settlement agreement to the financial creditor was in
lieu of the claim of the financial creditor against the corporate debtor
for utilisation of Rs. 2 crores beyond the due date. The allotment was therefore
made in lieu of monetary compensation for interest-free utilisation of
Rs. 2 crores for five years beyond the due date of 28^th February,
1990.

HELD

NCLAT heard both the
parties at length. It was observed that the Explanation attached to section 5(8)(f)
of the Code provided that any amount raised from an allottee under a real
estate project shall be deemed to be an amount having the commercial effect of
borrowing. Explanation (ii) to section 5(8)(f) provides that the expressions
‘allottee’ and ‘real estate’ project shall have the meanings respectively
assigned to them in the Real Estate (Regulation & Development) Act, 2016.

NCLAT held that A Co
was not an ‘allottee’ under a real estate project. The allotment of additional
area was made as monetary compensation for interest-free utilisation of Rs. 2
crores for five years beyond the due date, i.e., 28^th February,
1990. Further, A Co could have claimed a financial debt as an ‘allottee’ only
when the amount raised from it as an ‘allottee’ would have been used for a real
estate project. In the facts and circumstances of the case, A Co is neither an
‘allottee’ nor is any amount ‘being raised’ or ‘raised’ from it, that may be
construed to have the effect of borrowing. Thus, there was no ‘financial debt’
in favour of A Co.

The fact that
execution of the decree was determined by the High Court to be premature meant
that it could not be said that there was a ‘default’ in terms of the Code.

The appeal was, thus,
set aside and dismissed. The order passed by NCLT was upheld by the NCLAT.

Money is a bubble that never pops. It’s a consensus
hallucination

— Naval
Ravikant

Misfortune finds the weak spot

— Kalidasa,
AbhiGyaanShakuntalam

BCAJ Admin

ALLIED LAWS

6. Abetment – Denial of loan on loan – Prudent banking – Not abetment to
suicide [Indian Penal Code, 1850, S. 306, S. 107; Code of Criminal Procedure,
1973, S. 482]

Santosh Kumar
vs. State of Maharashtra & Anr. Cr.A.
(APL) No. 63 of 2016 (Bom)(HC) (Nag. Bench) Date of order: 9^th
September, 2020 Bench: V.M. Deshpande J. and Anil S. Kilor J.

FACTS

The applicant was Branch Manager, Bank of Maharashtra, Morshi Branch,
District Amravati. The complainant had a loan account with the Bank. So did his
father Wamanrao. Sudhir Gawande, the brother of the complainant, committed
suicide on 12^th June, 2015 by hanging himself in his house. The
complainant approached Morshi Police Station and lodged a report against the
present applicant. As per the FIR, the bank manager had said no to Sudhir
Gawande for a fresh restructuring of a loan, which led to his suicide.

After
registration of the offence, since the applicant apprehended arrest, he moved
an application, vide Misc. Criminal Bail Application No. 529 of 2015,
for grant of pre-arrest bail. The Sessions Judge at Amravati on 26^th
June, 2015 granted him pre-arrest bail in the event of arrest. Thereafter, the
applicant filed the present proceedings for quashing of the FIR.

HELD

The Court
relied on the decision of the Supreme Court in the case of Dilip s/o
Ramrao Shirasrao and Ors. vs. State of Maharashtra and Anr. 2016 ALL MR (Cri)
4328 wherein it was held that it is incumbent upon the prosecution to
show at least prima facie that the accused had an intention to aid,
instigate or abet the deceased to commit suicide. In the absence of such
material, the accused cannot be compelled to face trial for the offence
punishable u/s 306 of the IPC.

The loan account of the complainant was showing outstandings to the tune
of Rs. 2,32,689. The deceased was not having any loan outstanding in his name.
If a previous loan amount is outstanding and if the applicant, who is the
Branch Manager of the said Bank, refuses to grant any further loan, it can be
said to be an act of a vigilant and prudent banker, and it cannot be said that
by such act he instigated and / or abetted the person to commit suicide. The
criminal application is allowed.

7. Arbitration – Place of Arbitration – Only the High Court named in the
Arbitration agreement has territorial jurisdiction – Only such Court can
appoint an Arbitrator [Arbitration & Conciliation Act, 1996, S. 11(6)]

SJ Biz Solution
Pvt. Ltd. vs. M/s Sany Heavy Industry India Pvt. Ltd. ARBP No. 56 of
2018 (Orissa)(HC) Date of order:
1^st October, 2020 Bench: Mohammad Rafiq CJ

FACTS

An issue arose
between the manufacturer of heavy construction equipment and its dealer in
Orissa. The petitioner filed an application u/s 11(6) of the Arbitration and
Conciliation Act, 1996 (the Act) seeking appointment of an independent
Arbitrator to arbitrate the disputes between the petitioner and the respondent.

The petitioner contended that although as per clause 15 of the
dealership agreement it was agreed that the place of arbitration shall be Pune,
the jurisdiction of this Court to entertain the present application filed u/s
11(6) of the Act is not excluded as the cause of action, wholly or at least in
part, has arisen in the territory of Orissa. The petitioner further contended
that in view of the definition of the Court given in section 2(1)(e) of the
Act, the Courts at Bhubaneswar would have jurisdiction to entertain the
petition u/s 9 and for the same reason the Court would also have the
territorial jurisdiction, especially in view of section 11(11).

HELD

It was held
that in an identical issue before the Supreme Court in the case of Swastik
Gases Private Limited vs. Indian Oil Corporation Limited (2013) 9 SCC 32,
it was held that the territorial jurisdiction to appoint an Arbitrator lies as
per the jurisdiction agreed upon in the agreement.

The Court
considered the decision of the Supreme Court in the case of Duro
Felguera, S.A. vs. Gangavaram Port Limited (2017) 9 SCC 729 which held
that all that the Court at the stage of section 11 of the Act needs to see is
whether an Arbitration agreement exists, nothing more and nothing less. It was
held that legislative policy and purpose is essentially to minimise the Court’s
intervention at the stage of appointing the Arbitrator. Therefore, all other
questions, including the question of territorial jurisdiction, are not open for
consideration.

After analysing
various decisions, the Court held that the argument of the petitioner that
while considering the petition u/s 11(6) of the Act this Court ought to only
examine the existence of the Arbitration agreement and should leave all other
questions, including that of territorial jurisdiction, open for consideration
by the Arbitrator in the scope of section 16 of the Act, cannot be
countenanced.

It held that the Court did not have the territorial jurisdiction to
entertain the present petition filed u/s 11(6) and accordingly dismissed the
petition as not maintainable.

8. Civil dispute – Legal representative – Maintainability of
applications – Inheritance of shares – NCLT has no jurisdiction [Companies Act,
2013, S. 241, S. 242, S. 244]

Aruna Oswal vs.
Pankaj Oswal & Ors. CA Nos. 9340,
9399 and 9401 of 2019 (SC) Date of order:
6^th July, 2020 Bench: Arun Mishra J. and S. Abdul Nazeer J.

FACTS

These appeals
have been preferred against the judgment of the NCLAT concerning
maintainability of applications filed under sections 241 and 242 of the
Companies Act, 2013.

The case is the
outcome of a family tussle. The Late Abhey Kumar Oswal, during his lifetime,
held a large amount of shares in M/s Oswal Agro Mills Ltd., a listed company.
He passed away in Russia on 29^th March, 2016. Prior to that, he
filed a nomination as per section 72 in favour of Mrs. Aruna Oswal, his wife.
Two witnesses duly attested the nomination in the prescribed manner. As per the
appellant, it was explicitly provided therein that this nomination shall
supersede any prior nomination made by him.

Mr. Pankaj
Oswal (son of the deceased) and Respondent No. 1, filed a partition suit,
claiming entitlement to one-fourth of the estate of Abhey Oswal. He also filed a company petition
alleging oppression and mismanagement in the affairs of the Respondent No. 2
company.

HELD

The Supreme
Court, relying on the case of World Wide Agencies (1990) 1 SCC 536
held that a legal representative has a right to maintain an application for
oppression and mismanagement without being registered as a member against the
securities of a company. Further, the Court, relying on the case of Sangramsinh
P. Gaekwad (2005) 11 SCC 314 held that a dispute as to inheritance of
shares is a civil dispute and does not attract the Company Court’s jurisdiction
and held that the matter was not maintainable before the NCLT.

9. Dishonour of Cheque – Post-retirement – Director – Not responsible
for daily affairs – Proceedings including the summons quashed [Negotiable
Instruments Act, 1881, S. 138, S. 141; Code of Criminal Procedure, 1973, S.
482]

Alibaba
Nabibasha vs. Small Farmers Agri-Business Consortium & Ors. CRL. M.C.
1602/2020, CRL. M.A. 9935/2020 (Del)(HC) Date of order:
23^rdSeptember, 2020 Bench: V. Kameswar Rao J.

FACTS

Proceedings
have been initiated by the Respondent No.1 against the petitioner before the
Metropolitan Magistrate, Saket Courts, u/s 138 of the Negotiable Instruments
Act, 1881 (N.I. Act) purportedly on the ground that the petitioner was a
director of the Respondent No. 2. According to the petitioner, the cheques in
question, all dated 31^st December, 2018 were issued by the
Respondent No. 2 for a total amount of Rs. 45 lakhs and the same were
dishonoured due to insufficient funds vide memo dated 11^th
January, 2019.

The petitioner
ceased to be a director of the Respondent No. 2 w.e.f. 27^th October,
2010, at least eight years prior to the issuance of the cheques in question.
The petitioner was a non-executive director of the Respondent No. 2 for a brief
period between 7^th October, 2009 and 27^thOctober, 2010.
The resignation of the petitioner was also notified to the Registrar of
Companies / Ministry of Company Affairs by the Respondent No. 2 by filing Form
32 dated 4^th January, 2011 which is a public document.

However, the
Court, in a mechanical manner, considering only the Company Master Data of the
period when the Petitioner was director, has entertained the complaint u/s 138
of the N.I. Act and without applying any judicial mind and without recording
any satisfactory reasons as to whether the offence is made out against the
petitioner, has issued the summons.

The petitioner
filed a petition u/s 482 of the Code of Criminal Procedure, 1973 (CrPC) to
quash the proceedings initiated by the Respondent No. 1.

HELD

The case of the
Respondent No. 1 is primarily that the petitioner was involved in the
discussion before an agreement was executed between the Respondent No. 1 and
the Respondent No. 2. However, Form 32, i.e. the petitioner ceasing to be a
director, is not disputed. This factum surely suggests that the
petitioner having resigned on 27^th October, 2010 from the Respondent
No. 2 was not the director when the agreement dated 3^rd March, 2011
was executed. Even the cheques dated 31^st December, 2018 were issued
much after the petitioner’s resignation as director of the Respondent No. 2.

It is settled
law that mere repetition of the phraseology of section 141 of the Act that the
accused is in charge and responsible for the conduct of the day-to-day affairs
of the company may not be sufficient and facts stating as to how the accused
was responsible must be averred.

Further, is is a settled position of law that the High Court while
entertaining a petition of this nature shall not consider the defence of the
accused or conduct a roving inquiry in respect of the merits of the
accusation/s but if the documents filed by the accused / petitioner are beyond
suspicion or doubt and upon consideration demolish the very foundation of the
accusation/s levelled against the accused, then in such a matter it is incumbent
for the Court to look into the said document/s which are germane even at the
initial stage and grant relief to the person concerned u/s 482 CrPC in order to
prevent injustice or abuse of the process of law. The petition was allowed and
the proceedings including the summons were quashed.

10. Maintenance – Death of Husband – Wife has right to claim maintenance
– From estate inherited by father-in-law [Hindu Adoptions and Maintenance Act,
1956, S. 19, S. 22]

Sardool Singh
Sucha Singh Matharoo vs. Harneet Kaur widow of Bhupinder Singh Matharoo &
Anr. WP (ST.) No.
4054 of 2020 (Bom)(HC) Date of order:
7^th September, 2020 Bench: Nitin W. Sambre J.

FACTS

The petitioner
had two sons. One of them, Late Bhupinder, was married to Respondent No. 1 on
12^th December, 2004 and died on 21^st May, 2015. The
mother of Respondent No. 1 died in the year 2016, whereas her father died in
February, 2017. It is her case that she has no independent source of income and
she and her son are completely dependent on the earnings of the petitioner.

Respondent No.
1 preferred the proceedings u/s 19 and 22 of the Hindu Adoption and Maintenance
Act, 1956 (Act) before the Family Court with a prayer for grant of maintenance
of Rs. 1,50,000 per month to her and Rs. 50,000 to her son. The claim was
resisted by the present petitioner. Vide impugned order dated 28^th
January, 2020 the Family Court has allowed the prayer partly and granted
maintenance of Rs. 40,000 per month towards the widow and Rs. 30,000 per month
to her son.

It is the case
of the petitioner that he is already incurring expenses of about Rs. 95,000 per
month on the respondents. Further, he has to maintain himself (he is a cancer
patient), his aged wife, his other son and his family, and also to repay bank
loans. Therefore, he filed a Writ Petition to quash and set aside the order.

HELD

A plain reading of section 19 of the Act contemplates that the
respondents have every right to claim maintenance after the death of the
husband from the estate inherited by her father-in-law, i.e., the present
petitioner. As per section 19(1) the respondent has to demonstrate that she is
unable to maintain herself. It is in this eventuality that she can claim
maintenance from the estate of her husband, but still the fact remains that the
said burden can be discharged by Respondent No. 1 at an appropriate stage. The
object with which the provision is made in the statute book for grant of
interim maintenance cannot be ignored.

Further, the income of the petitioner for A.Y.
2018-2019 as reflected in the income-tax returns was Rs. 74,87,007. Therefore,
the maintenance awarded to the respondent appears to be justified. The petition
is dismissed.

BCAJ Admin

CORPORATE LAW CORNER

1. P. Parameswaram vs. Union of India [2020] 118 taxmann.com 113 (Delhi) Date of order: 23^rd July, 2020

Section 164 read with section 167 of the
Companies Act, 2013 and Rule 11 of the Companies Act (Appointment and
Qualification of Director) Rules, 2014 – Disqualifications for appointment of
Director. Director had defaulted in filing annual returns for three consecutive
years. Another company, in which also he was a Director, had been struck off by
the Registrar of Companies on account of its defaults in filing requisite
returns. Thus, the Director was disqualified as a Director and his DIN was
de-activated. Since he had not filed necessary Form with Registrar of Companies
at the material time, his prayer of not treating him as disqualified Director
was rejected. However, since he had been disqualified as a Director, he could
not access the website of the Ministry of Corporate Affairs to file returns or
forms as a Director of any other company and further, since his DIN was not
de-activated in terms of Rule 11 of Appointment and Qualification of Director
Rules, the ROC was directed to activate his DIN

FACTS

PP was appointed as an Independent Director
of KHF Limited (KHF) but had resigned on 22^nd May, 2016. He was not
only a Director in KHF Limited but also in another company, SLD Company Private
Limited (SLD). The name of SLD had also been struck off from the Register of
Companies as it had defaulted in filing annual returns as required under the
Companies Act, 2013. In view of the defaults committed by KHF and SLD, PP was
disqualified as a Director in terms of sections 164(2) and 167(1) of the
Companies Act, 2013.

HELD

The limited
questions that were to be considered by the Court were whether the decision of
the ROC in disqualifying PP was illegal? And whether the other decision of the
ROC to deactivate his DIN was sustainable?

The Court held
as under: There is no dispute that KHF had defaulted in filing its annual
returns for three consecutive years. Similarly, SLD had also been struck off
from the Register of Companies on account of its defaults in filing the
requisite returns under the Companies Act, 2013.

PP claimed
that he had resigned from the Board of Directors of KHF with effect from 26^th
May, 2016. However, he had not filed the necessary form with the Registrar of
Companies at the material time.

The question
whether a Director would be disqualified to act as a Director by virtue of
provisions of sections 164(2)(a) and 167(1)(a) of the Companies
Act is covered by the decision of the Delhi High Court in Mukut Pathak
& Ors. vs. Union of India and Ors. [W.P. (C) 9088/2018 decided on 4^th
November, 2019].

Insofar as the
prayer that his DIN be directed to be activated is concerned, the said issue is
also covered by the decision of the Delhi High Court in Mukut Pathak
& Ors. (Supra). It is not disputed that the DIN of PP
had been deactivated only on account of his being disqualified to act as a
Director. As held in Mukut Pathak’s case, the said action is not sustainable.
The DIN could be deactivated in terms of Rule 11 of the Companies Act
(Appointment and Qualification of Director) Rules, 2014. But admittedly, the
DIN of PP has not been deactivated in terms of the said Rules.

In view of the
above, the prayer that the ROC be restrained from treating PP as a disqualified
Director was rejected. However, the ROC was directed to activate PP’s DIN.

PP had further
prayed that he be permitted to access the website of the Ministry of Corporate
Affairs, Government of India, but it cannot be acceded to. PP has been
disqualified as a Director; therefore, he cannot access the said website to
file returns or forms as a Director of KHF or any other company.

BCAJ Admin

ALLIED LAWS

1. Home-buyer –
Cannot invoke IBC – Recovery of RERA award [Insolvency and Bankruptcy Code,
2016, S. 3(10), S. 5(7) S. 7, S. 65; Real Estate (Regulation and Development)
Act, 2016, S. 40]

Sh. Sushil Ansal vs. Ashok Tripathi &
Ors. Company Appeal (AT) (Insolvency) No. 452 of
2020 (NCLAT) Date of order: 14^th August, 2020

Bench:
Bansi Lal Bhat J. (Acting Chairperson), Anant Bijay Singh J. and Dr. Ashok
Kumar Mishra

FACTS

The respondents are two house allottees who
booked flats with the appellant (Ansal Builders). As per the agreements, the
appellant had undertaken to complete the project within a period of two years
from the initiation of construction in 2015. However, on account of not
fulfilling the terms as per the agreement, the respondents approached the Uttar
Pradesh RERA where they were awarded a decree of Rs. 73 lakhs. Further, RERA
also issued recovery certificates against the builders. The respondent
allottees sought recourse under IBC for the recovery of their dues.

HELD

The three-member Bench held that as per
section 7 of the IBC as amended by the 2020 Amending Act, to make an
application under IBC it requires a minimum of 100 buyers or 10% of all
home-buyers, whichever is lower.

Further, the respondents have not approached
the Adjudicating Authority in the capacity of ‘allottees of a real estate
project’, therefore they cannot be brought within the meaning of ‘financial
creditors’. They can only be construed to be decree-holders on account of
non-payment of principal amount along with penalty as decreed by UP RERA.
Therefore, a decree-holder, though covered by the definition of ‘creditor’ u/s
3(10) of IBC, does fall within the definition of a ‘financial creditor’ across
the ambit of section 5(7) of the IBC and should have taken steps for filing an
execution case in the Civil Court.

2. Co-operative
Societies – Part of Constitutional Scheme – Unnecessary interference to be
avoided [Maharashtra Co-operative Societies Act, 1961, S. 77, S. 80, S. 152;
Constitution of India]

Rambujarat
Ramraj Chaurasia vs. State of Maharashtra WP-ASDB-LD-VC 220 of 2020 (Bom) (HC) Date of order: 2^nd September,
2020 Bench: Ujjal Bhuyan J. and Abhay Ahuja J.

FACTS

The petitioner is the Chairman of Vidhisha
Shantiniketan CHS Ltd. and the petition has been filed challenging the order of the Dy. Registrar, Thane (Respondent No. 2) directing a bank to
not allow the petitioner to operate the Society’s bank account and to allow another member, as assigned by the
Respondent No. 2, to operate the same.

The Society had imposed a penalty on one Mr.
Ramesh Mankar. Aggrieved by the penalty, he had approached the Respondent No. 2
who had given certain directions to the petitioner, failing which the
Respondent No. 2 would appoint an Administrator. Pursuant thereto, and on
account of inaction, Respondent No. 2 dissolved the Managing Committee of the
Society and appointed an Administrator.

The Society appealed before the Divisional
Joint Registrar, Co-operatives, Respondent No. 3, who quashed and set aside the
order of the Respondent No. 2 on 20^th May, 2020. However, Respondent
No. 2, via a communication dated 14^th July, 2020 directed the bank
to allow the Administrator, as appointed by him, to operate the accounts.

HELD

The Court held that the Society shall be
jointly managed under the Chairmanship of the petitioner and the Respondent No.
6 Administrator only for day-to-day affairs till the disposal of the appeal
before the Respondent No. 3. Further, that co-operative societies are now part
of the Constitutional scheme as co-operative societies have been inserted in
the Constitution of India as Part IX B by way of the Constitution (97^th
Amendment) Act, 2011 w.e.f. 15^th February, 2012. Therefore,
co-operative societies should have the necessary space and autonomy to function
and develop to their full potential. Interference in the affairs of
co-operative societies should be avoided unless there is serious statutory
breach or compelling necessity.

3. Unpaid
instalment – As per agreement – Not an operational debt [Insolvency and
Bankruptcy Code, 2016, S. 5(21), S. 9]

Brand Realty Services Ltd. vs. Sir John
Bakeries India Pvt. Ltd. (IB) 1677(ND) of 2019 (NCLT) (Del.) Date of order: 22^nd July, 2020 Bench: Mr. K.K. Vohra and Mr. Abni Sinha

FACTS

Sir John Bakeries India Pvt. Ltd. (the
corporate debtor) approached Brand Realty Services Ltd. (the operational
creditor) for investment and consultancy services vide an agreement in
November, 2014. The agreement was further ratified in 2018. As per the new
agreement, the corporate debtor agreed to pay the outstanding sum of Rs. 33
lakhs via post-dated cheques. However, the corporate debtor then requested the
operational creditor to hold on and not deposit the cheques and that the
payment would be met via RTGS. However, that never happened either.

A legal notice and a demand notice were
issued under the IBC. The corporate debtor denied any liability in the absence
of any document and said that there exists a dispute between the parties with
respect to the debt.

HELD

In order to trigger section 9 of the IBC,
i.e., application for initiation of Corporate Insolvency Resolution Process by
the operational creditor, an operational creditor is required to establish a
default for non-payment of operational debt as defined in section 5(21) of the
IBC. The application u/s 9 of the IBC was filed for the breach of the terms and
conditions of the settlement agreement between the parties and not against the
invoices raised in terms of the original agreement between them. Therefore, a
default on an instalment of the settlement agreement doesn’t come within the
purview of operational debtors.

The application was dismissed.

4. Dishonour of
cheque – Not offence against society – Can be compounded – Sentence reduced
[Negotiable Instruments Act, 1881, S. 138; Code of Criminal Procedure, 1973, S.
147, S. 386, S. 401]

Rakesh Kumar vs. Jasbir Singh and another Crl. Rev. No. 3004 of 2019 (P&H)(HC) Date of order: 11^th August, 2020 Bench: Sudhir Mittal J.

FACTS

The revision petitioner is the accused. He
issued a cheque dated 22^nd April, 2006 to the complainant-respondent
No. 1, which was dishonoured. Vide a judgment dated 8^th July,
2016, the petitioner was convicted and sentenced to undergo rigorous
imprisonment for two years. He was also directed to pay compensation equal to
the cheque amount along with interest at the rate of 9% per annum from the date
of the cheque till the date of the judgment. An appeal against the judgment of
conviction was dismissed, leading to the present revision petition.

HELD

Sentencing is
primarily a matter of discretion as there are no statutory provisions governing
the same. Even guidelines have not been laid down to assist the courts in this
matter. Further, provisions inserted in the Negotiable Instruments Act are for
inculcating greater faith in banking transactions as the same needed more teeth
so that cases involving dishonour of cheques are reduced. Therefore, deterrence
and restoration are the principles to be kept in mind for sentencing. At the
same time, the Court cannot lose sight of the fact that the offence u/s 138 of
the Act is quasi criminal in nature. Section 147 of the Act makes the
offence compoundable notwithstanding anything contained in the Code of Criminal
Procedure, 1973. It is not an offence against society and an accused can escape
punishment by settling with the complainant. It was further held that the
cheque amount is only Rs. 4 lakhs, and the award of maximum sentence is
arbitrary. On the facts of the case, the sentence is reduced to one year and
six months.

5.
Disqualification of Director – Companies Fresh Start Scheme, 2020 –
Disqualification to be set aside [Companies Act, 2013, S. 164(2)(a)]

Sandeep Agarwal & Ors. vs. UOI &
Anr. WP No. 5490 of 2020 (Delhi) (HC) Date of order: 2^nd September,
2020 Bench: Prathiba M. Singh J.

FACTS

The petition has been filed by the
petitioners, Mr. Sandeep Agarwal and Ms Kokila Agarwal, both of whom are
directors in two companies, namely, Koksun Papers Private Limited and Kushal
Power Projects Private Limited. The name of Kushal Power was struck off from
the Register of Companies on 30^th June, 2017 due to non-filing of
financial statements and annual returns. The petitioners, being directors of
Kushal Power, were also disqualified with effect from 1^st November,
2016 for a period of five years till 31^st October, 2021 u/s
164(2)(a) of the Companies Act, 2013. Pursuant to the disqualification, their
Director Identification Numbers (DIN) and Digital Signature Certificates (DSC)
have also been cancelled. In view thereof, they are unable to carry on the
business and file returns, etc. in the active company Koksun Papers. By the
present petition, the disqualification is challenged and quashing is sought of
the impugned list of disqualified directors.

HELD

Companies
Fresh Start Scheme (CFSS) is a new scheme which has been notified on 30^th
March, 2020. This Scheme was not invoked before the learned Division Bench. The
Scheme is obviously launched by the Government in order to give a reprieve to
such companies who have defaulted in filing documents; they have been allowed
to file the requisite documents and to regularise their operations, so as to
not face disqualification. The Scheme also envisages non-imposition of penalty
or any other charges for belated filing of documents.

This Scheme
provides an opportunity for active companies who may have defaulted in filing
of documents, to put their affairs in order. It thus provides the directors of
such companies a fresh cause of action to also challenge their disqualification
qua the active companies.

In view of the
fact that in the present case the petitioners are directors of an active
company Koksun Papers in respect of which certain documents are to be filed and
the said company is entitled to avail of the Scheme, the suspension of the DINs
would not only affect the petitioners qua the company, whose name has
been struck off, but also qua the company which is active.

Further,
considering the Covid-19 pandemic, the MCA has launched the Fresh Start
Scheme-2020, which ought to be given full effect. It is not uncommon to see
directors of one company being directors in another company. Under such
circumstances, to disqualify directors permanently and not allow them to avail
their DINs and DSCs could render the Scheme itself nugatory; therefore, the disqualification of the petitioners as directors is set aside.
The DINs and DSCs of the petitioners are directed to be reactivated within a
period of three working days.

BCAJ Admin

RIGHT TO INFORMATION (r2i)

Part
A I Decisions of Supreme Court

The information to be
gained access to / certified copies on the judicial side to be acquired through
the machinery provided under the High Court Rules, the requirements of the RTI
Act shall not be available¹

Case name:

Chief Information Commissioner vs. High Court of
Gujarat and another

Citation:

Civil Appeal No(s). 1966-1967 of 2020 [Arising out of
SLP(C) No. 5840 of 2015]

Court:

The Supreme Court of India

Bench:

Justice R. Banumathi

Decided on:

4^th March, 2020

Relevant Act/ Sections:

Gujarat High Court Rules, 1993 – Rule 149 – 154

Right to Information Act, 2005 – Sections 2(f), 2(h),
2(i), 2(j), 4(2), 6(2), 8(1), 19, 22, 28

Articles 124, 145, 216, 225 of Indian Constitution

Brief facts
and procedural history

An RTI application dated 5^th
April, 2010 was filed seeking information pertaining to certain civil
applications made along with all relevant documents and certified copies. In
reply, the Public Information Officer, Gujarat High Court, informed that for
obtaining required copies one should make an application personally or through
one’s advocate by affixing court stamp fees of Rs. 3 with the requisite fee to
the ‘Deputy Registrar’; since the applicant was not a party to the said
proceedings, as per Rule 151 of the Gujarat High Court Rules, 1993 the
application should be accompanied by an affidavit stating the grounds for which
the certified copies are required and on making such application, one will be
supplied the certified copies of the documents as per Rules 149 to 154 of the
Gujarat High Court Rules, 1993.

Being aggrieved, the RTI
applicant preferred an appeal before the Appellate Authority-Registrar
Administration. The appeal was dismissed on the ground that for obtaining
certified copies the alternative effectual remedy is already available under
the Gujarat High Court Rules, 1993.

A second appeal was filed
before the Appellant-Chief Information Commissioner. The respondent reiterated
the position on the High Court Rules but was ordered to provide the information
within 20 days.

Challenging the order of
the Chief Information Commissioner, a special civil application was filed
before the High Court by the respondent. The learned Single Judge, while
admitting the petition, passed an interim order directing the respondent to provide
the information sought within four weeks.

Being aggrieved by the
interim order, the High Court preferred Letters Patent Appeal before the
Division Bench. This Bench set aside the order of the Chief Information
Commissioner by observing that when a copy is demanded by any person, the same
has to be in accordance with the Rules of the High Court on the subject.

The Chief Information
Commissioner, aggrieved by the order of the Division Bench, preferred an appeal
to the Hon’ble Supreme Court of India.

Issues before
the Court

Whether Rule 151 of the
Gujarat High Court Rules, 1993 stipulating that for providing a copy of
documents to third parties they are required to file an affidavit stating the
reasons for seeking certified copies, suffers from any inconsistency with the
provisions of the RTI Act?

When there are two types
of machinery to provide information / certified copies – one under the High
Court Rules and another under the RTI Act – in the absence of any inconsistency
in the High Court Rules, whether the provisions of the RTI Act can be resorted
to for obtaining certified copies / information?

Ratio Decidendi

(i) Grant of certified
copies to parties to the litigation and third parties are governed by Rules 149
to 154 of the Gujarat High Court Rules, 1993. As per these Rules, on filing of
an application with prescribed court fees, stamps, litigants / parties to the
proceedings are entitled to receive the copies of documents / orders /
judgments, etc. The third parties who are not parties in any of the
proceedings, shall not be given the copies of judgments and other documents
without the order of the Assistant Registrar. As per Rule 151 of the Gujarat
High Court Rules, the applications requesting for copies of documents /
judgments made by third parties shall be accompanied by an affidavit stating
the grounds for which they are required. Therefore, the access to the
information or certified copies of the documents / judgments / orders / court
proceedings are not denied to the third parties but a procedure needs to be
followed by the applicant. Hence, the Rules framed by the Gujarat High Court
are in consonance with the provisions of the RTI Act. There is no inconsistency
between the provisions of the RTI Act and the Rules framed by the High Court in
exercise of the object of the RTI Act which itself recognises the powers under
Article 225 of the Constitution of India.

(ii) There is a need to
protect the institutional interest and also to make optimum use of limited
fiscal resources and preservation of confidentiality of sensitive information.
The procedure to obtain certified copies under the High Court Rules is not
cumbersome and is very simple. The information held by the High Court on the
judicial side is the ‘personal information’ of the litigants like title cases
and family court matters, etc. Under the guise of seeking information under the
RTI Act, the process of the Court is not to be abused and information not to be
misused.

(iii) If any information
can be accessed through the mechanism provided under another statute, then the
provisions of the RTI Act cannot be resorted to as there is absence of the very
basis for invoking the provisions of the RTI Act, namely, lack of transparency.
In other words, the provisions of the RTI Act are not to be resorted to if the
same are not actuated to achieve transparency.

(iv) The non-obstante clause of the RTI Act does
not mean an implied repeal of the High Court Rules and Orders framed under
Article 225 of the Constitution of India, but only has an overriding effect in
case of inconsistency. A special enactment or rule cannot be held to be
overridden by a later general enactment simply because the latter opens up with
a non-obstante clause, unless there is clear inconsistency between the
two legislations.

Part
B I Right to Information

PM CARES Fund – The ‘gorilla’ in the
room

By now we are
aware that the Appellate Authority of the Prime Minister’s Office (PMO) has
held that the Prime Minister’s Citizen Assistance and Relief in Emergency Situations
Fund (PM CARES Fund) is not a public authority under the Right to Information
Act, 2005 (RTI Act). Moreover, the funds from the trust will not be transferred
to the National Disaster Response Fund (NDRF) and the fund will not be audited
by the Comptroller and Auditor-General of India, as ruled by the Supreme Court
of India. Yet, there are many questions raised and striving for answers.

To start with, the Prime Minister of India
is the Chairman ex-officio of the Prime Minister National Relief Fund
(PMNRF) as well as the PM CARES Fund, constituted to already have the trappings
of a public trust, the NDRF established thereunder, occupying the arena to deal
with disaster situations, then what was the need to constitute the new PM-CARES
Fund?

Given the federal ideologies of our
Constitution, in case of predicaments like these the amounts collected should
be deposited in the PMNRF and from there transferred to the state governments
for meeting the challenges of the pandemic and saving people’s lives.

A sum of Rs. 6,500 crores was collected by
the PM CARES Fund in just one week and Rs. 3,076.62 crores in four days from
the registration of the trust. This was donated by renowned philanthropists of
our country, well-known tycoons and others. Mr. Mukesh Ambani donated Rs. 500
crores and many others like Mr. Aamir Khan, Mr. Shah Rukh Khan and many more
celebrities came forward and donated to the fund.

The PM CARES
Fund was integrated as a ‘public charitable trust’ with the specified objective
of ‘dealing with any kind of public health crisis or other distress
circumstances, like the Covid-19 pandemic’, ‘to provide financial aid to those
affected by it’ and ‘to perform any other activity not varying with the above
two objectives’. The official website of PM CARES² provides the
following details:

(a) The PM is the ex-officio Chairman
and the Minister of Home Affairs, Minister of Finance and the Minister of
Defence are its ex-officio trustees and the PM would nominate three
eminent persons to the Board.

(b) It receives voluntary contributions,
with Rs. 10 being the least allowable amount of support, with no budgetary
outlay.

(c) Foreign individuals and organisations
can contribute to a separate account exempt from the application of the Foreign
Contribution (Regulation) Act, 2010.

(d) Contributions made can be apportioned
towards the mandatory 2% Corporate Social Responsibility (‘CSR’) expenditure
and shall be allowed as 100% deduction to calculate taxable income for the year
2019-2020, provided that the contribution is made before 30^th
June, 2020³. However, contributions flowing out of budgetary sources
of the PSUs are not accepted.

(e) The Fund is administered on an honorary
basis by a Joint Secretary (Administration) in the PMO as Secretary to the Fund
who is assisted on an honorary basis by an Officer of the rank of Director /
Deputy Secretary (Administration) in the PMO. The Prime Minister’s Office
provides such administrative and secretarial support to the trustees for the
management and administration of the Trust as may be required by them.

(f) The Fund is exempted from paying
income tax as per section 10(23)(c) of the Income-tax Act, 1961.

(g) The PM CARES Fund has been allotted a
Permanent Account Number (PAN) AAETP3993P.

(h) The Fund is audited by an independent
auditor. The trustees of the Fund, during the second meeting held on 23^rd
April, 2020 decided to appoint M/s SARC & Associates, Chartered
Accountants, New Delhi as the auditors of the PM CARES Fund for three years.

(i) There is no statutory period
prescribed for audit of the PM CARES Fund under the Income-tax Act.
However, audit will be conducted at the end of the financial year.

Keeping in mind the larger picture of
transparency, the PM CARES Fund should come under the purview of the Right to
Information Act, 2005. Likewise, technical reasons like the fund being set up
by the government by using government machinery to promote it and usage of
gov.in as domain name, providing tax reliefs, etc. needs to be considered.
There are multiple pleas in the High Courts and the Supreme Court of India
requesting to bring the PM CARES Fund under the purview of the RTI Act, 2005
and also asking to transfer the funds from the Trust to the NDRF, which have
been dismissed by the respective courts.

Part
C I Information on and Around

(1)
Appointment of architect for Balasaheb Thackeray Memorial not made by MMRDA but
a trust

In reply to
the RTI application filed by a Mumbai-based RTI activist, Mr. Anil Galgali, the
Mumbai Metropolitan Region Development Authority (MMRDA), the nodal agency for
the construction of the memorial of the late Balasaheb Thackeray which will be
built at Shivaji Park in Dadar, mentioned the procedure of selection of the
architect. The Thackeray Memorial had issued a tender notice directing MMRDA to
appoint a distinguished architect. But the Chairman of the Memorial held a
meeting on 14^th May, 2020 wherein architects and project advisers
were selected. MMRDA being the nodal agency for the project and also because of
the taxpayer’s money being involved, should have appointed the consultant and
the architect. But in this case a private trust did it all without inviting any
tender.⁴

(2) Only 44% State Information
Commissions conduct hearings in July, 2020

The functioning of the State Information
Commissions (SICs) has fallen from 80% in June to 44% in July. This was
observed in a study conducted by the Commonwealth Human Rights Initiative
(CHRI). The study was carried out by contacting each of the 28 SICs across the
country by phone and emails and by following their websites. The first survey
(in April) found that none of the SICs was working, but during the second
survey (in May) 12 SICs had opened their offices. However, only eight were
conducting hearings. According to its third rapid telephonic survey, the
organisation found the SICs that had started attending to litigants in June had
stopped by July.⁵

(3) Bank of Maharashtra writes off Rs.
7,400 crores in the last four years owed by loan defaulters

The Bank of Maharashtra, a public
sector bank, has ‘technically written off’ an astounding Rs. 7,400 crores
unsettled by loan defaulters in the last four years. The bank has said that it
would recover the amount at a later stage and that it has not been waived
permanently. The recovery rate of such defaults is low and it takes a huge
amount of time. According to information provided by the bank, from 2011 to 2020 it
has written off a total of Rs. 7,400 crores⁶.

______________________________________________________________________________________________

1 Chief Information Commissioner vs. High
Court of Gujarat and another available at
https://main.sci.gov.in/supremecourt/2015/4228/4228_2015_5_1501_21164_Judgement_04-Mar-2020.pdf
visited on 18.08.2020

2 https://www.pmindia.gov.in/en/about-pm-cares-fund/

3 http://egazette.nic.in/WriteReadData/2020/218979.pdf

4 https://www.timesnownews.com/mumbai/article/who-appointed-architect-for-balasaheb-thackeray-memorial-mmrda-or-trust/638697

5 https://www.hindustantimes.com/india-news/only-44-state-information-commissions-conduct-hearings-chri-survey/story-tMT6otWRcVxyeC0nM7jCNN.html

6 https://indianexpress.com/article/cities/mumbai/bank-of-maharashtra-writes-off-rs-7000-cr-owed-by-loan-defaulters-6557765/

We live in a country where:

Driving without a license = fine of Rs. 2000,

Not having a PUC = fine of Rs. 1000,

Not wearing a mask outside = fine of Rs. 1000,

Insulting the Supreme Court = fine Rs. 1

— social media post on the recent decision by
the SC

BCAJ Admin

CORPORATE LAW CORNER

10. P. Suresh vs. Super Foodis Pvt. Ltd. IBA/541/2019 – NCLT Chennai Date of order: 20^th December,
2019

Section 7 read with section 1(d) of the
Insolvency and Bankruptcy Code, 2016 – A franchise agreement that is disputed
before a High Court could not be regarded as a financial contract – Any claim
for insolvency on account on unpaid royalty under such a contract could not be
proceeded with

FACTS

Mr. P (‘Financial Creditor’) entered into a
franchise agreement with S Co (‘Corporate Debtor’) to run a vegetarian
restaurant for a period of three years from 12^th August, 2016 to 11^th
August, 2019. The agreement stipulated the use of brand name, quality standards
for the operations of the restaurant and 5% running royalty on the gross sale
value to the financial creditor. In the meantime, in January, 2018, the
management of the corporate debtor was changed and it was alleged that the
financial creditor was promised by the new management that they will discharge
the loan liability, if any, due from the corporate debtor and subsequently the
new management took over on 1^st March, 2019. It was submitted that
there was a loan liability of Rs. 29,95,461 due to the corporate debtor on 31^st
March, 2018.

With regard to the provisions of the
franchise agreement, the financial creditor alleged that there was a sum of Rs.
33,24,962 which was payable to him. On 19^thDecember, 2018 the
financial creditor terminated the franchise agreement and sought for removal of
the sign board and surrender of all articles bearing the trademark ‘Sangeethas
Desi Mane’; but in spite of the said notice the corporate debtor continued to
use the trademark. The financial creditor filed a suit for infringement of
registered trademark which was pending before the High Court of Madras.

The entire claim of the financial creditor
was based on the alleged entry in the financial statements of the corporate
debtor which is also a subject matter of dispute in the case referred to above.

It was submitted by the corporate debtor
that the validity of the franchise agreement and entries in the balance sheet
were all a subject matter of dispute before the High Court. The High Court vide
order dated 18^th July, 2018 had held that issues under dispute are
questions of fact which will have to be proved on trial. The corporate debtor
thus submitted that the subject issue as regards the payment of the unsecured
loan and the default was in itself an issue before the High Court.

HELD

The Tribunal
heard both the parties at length. It examined the provisions of sections 7 and
1(d) of the Code read with Rule 4 of IBBI (Application to Adjudicating
Authority) Rules, 2016 and Regulation 8 of IBBI (Insolvency Resolution Process
for Corporate Persons) Regulations, 2016. It was observed that the financial
creditor had to demonstrate before the Tribunal that there was a ‘financial
contract’, the amount disbursed as per the loan / debt, the tenure of the loan
/ debt, interest payable and conditions of repayment.

Relying on the
decision in the matter of Prayag Polytech Pvt. Ltd. vs. Sivalik
Enterprises Pvt. Ltd. IB-312/(ND)/2019, it was observed that in order
to invoke provisions of section 7 of the Code and for initiation of CIRP
against the corporate debtor, the following conditions were required to be
satisfied: (i) there must be a disbursal of loan; (ii) disbursal should be made
against consideration for time value of money; and (iii) default should have
arisen in payment of interest or in payment of principal, or both, on part of
the corporate debtor. All the above conditions were required to be satisfied by
the financial creditor.

The Tribunal observed that in the absence
of a ‘financial contract’ it was not possible to ascertain the actual amount of
disbursal. There was no financial contract except the franchise agreement which
did not state the consideration for time value of money being granted to the
corporate debtor. Assuming there was a disbursal, the default had arisen in
absence of a financial instrument specifying unambiguously the term of the
financial debt within which it is repayable. In any case, the entire agreement
was in dispute before the High Court.

Thus, the Tribunal held
that default could not be ascertained in the absence of a requisite document
and the application was dismissed.

11. Tony Joseph vs. Union of India [2020] 117 taxmann.com 948 (Kerala) Date of order: 10^th July, 2020

The disqualified directors
of the company did not intend to continue – Since the directors were
disqualified, their DIN and DSC were deactivated – Directors urged that their
DIN and DSC be activated so as to enable them to file returns and make
statutory uploadings of form STK-2 so as to enable a ‘strike off’ of name of
company – It was held that directors should approach ROC for activation of DIN
and DSC and ROC should pass appropriate orders

FACTS

The directors of the
company were disqualified for the reason that the company did not file annual
returns in time. Accordingly, their DIN and DSC have been deactivated taking
recourse to the provisions u/s 164(2) of the Companies Act, 2013.

The directors submitted
that they do not intend to continue with the company. However, it was urged
that they seek to file the returns and make statutory uploadings so as to
enable a ‘strike off’ of the company. They therefore sought to upload form
STK-2 to enable ‘strike off’ of the company from the Registrar of Companies.

HELD

It was
noticed by the Court that the directors have not produced any request made by
them before the ROC in this behalf. In case the directors approach ROC seeking
an activation of the DIN and DSC for the purpose of uploading form STK-2, the
ROC shall take up the application and pass appropriate orders in accordance
with the law on the same within a period of two weeks from its receipt.

BCAJ Admin

ALLIED LAWS

25. Hindu
Succession Act, 1956, section 6 – Hindu Succession (Amendment) Act, 2005 –
Equal right of a daughter in HUF – Devolution of interest in coparcenary property
– Confers status of coparcener on daughters, even if born prior to the
amendment, with effect from 9^th September, 2005 – And it is not
necessary that the father should be living as on 9^th September, 2005
– Amendment is retrospective

Vineeta Sharma vs. Rakesh Sharma & Ors. Diary No. 32601 of 2018 (SC) Date of order: 11^th August, 2020 Bench: Arun Mishra J., S. Abdul Naseer J.,
M.R. Shah J.

FACTS

Several appeals on the issue of
retrospective effect of section 6 of the Hindu Succession Act were filed before
the Supreme Court. In one of the cases, Vineeta Sharma (appellant) filed a case
against her two brothers, viz., Rakesh Sharma and Satyendra Sharma, and her
mother (respondents). The father, Dev Dutt Sharma, had three sons, one daughter
and a wife. He expired on 11^th December, 1999. One of his sons
(unmarried) expired on 1^st July, 2001. The appellant claimed that
being the daughter she was entitled to 1/4^th share in the property
of her father. The case of the respondents was that after her marriage she
ceased to be a member of the joint family. The High Court disposed of the
appeal as the amendments of 2005 did not benefit the appellant because her
father had passed away on 11^th December, 1999.

HELD

The Supreme Court held that the provisions
contained in substituted section 6 of the Hindu Succession Act, 1956 confer the
status of coparcener on the daughter born before or after the amendment, in the
same manner as a son, with the same rights and liabilities. Since the right in
coparcenary is by birth, it is not necessary that the father should be living
as on 9^th September, 2005 (the date of the amendment).

26. Indian
Evidence Act, 1872, section 65B – Evidence – Electronic record – Certificate
u/s 65B(4) – Not necessary that original document itself is produced

Arjun Panditrao Khotkar vs. Kailash
Kushanrao Gorantyal and Ors. CA No. 20825-20826 of 2017 (SC) Date of order: 14^th July, 2020 Bench: V. Ramasubramanian J., R.F. Nariman
J., S. Ravindra Bhat J.

FACTS

Two election petitions were filed by the present
respondents before the Bombay High Court challenging the election of the
present appellant, Arjun Panditrao Khotkar, to the Maharashtra State
Legislative Assembly for the term commencing November, 2014. The case revolved
around the four sets of nomination papers filed by the appellant. It was the
case of the present respondents that each set of nomination papers suffered
from defects of a substantial nature and, therefore, all four sets of
nomination papers having been improperly accepted by the Returning Officer of
the Election Commission, the election of the appellant be declared void. In
particular, the respondents contended that the late presentation of nomination
forms (filed by the RC after the stipulated time of 3.00 p.m. on 27^th
September, 2014), meant that such nomination forms were not filed in accordance
with the law and ought to have been rejected.

The respondents sought to rely upon the
video camera arrangements that were made both inside and outside the office of
the Returning Officer (RO). According to the respondents, the nomination papers
were only offered at 3.53 p.m. (i.e. beyond 3.00 p.m.), as a result of which it
was clear that they had been filed after time. A specific complaint making this
objection was submitted by Kailash Kushanrao Gorantyal before the RO at 11 am
on 28^th September, 2014 in which it was requested that the RO reject
the nomination forms that had been improperly accepted. This request was
rejected by the RO on the same day, stating that the nomination forms had, in
fact, been filed within time. The High Court, by its order dated 16^th March, 2016, ordered the Election Commission and the
officers concerned to produce the entire record of the election of the constituency, including the original video
recordings. A specific order was made that the electronic record needs to be produced along with the ‘necessary
certificates’. The Court held that the CDs that were produced by the Election Commission could not be
treated as an original record and would, therefore, have to be proved by means
of secondary evidence. It was also found that no written certificate as
required by section 65B(4) of the Evidence Act was furnished by any of the
election officials.

HELD

The Supreme Court held that a certificate
u/s 65B(4) is unnecessary if the original document itself is produced. This can
be done by the owner of a laptop computer, computer tablet or even a mobile
phone, by stepping into the witness box and proving that the device concerned,
on which the original information is first stored, is owned and / or operated
by him.

27. Foreign
Exchange Regulation Act (FERA), 1973, sections 8, 51, 68 — Liability for
offence — Role played in company affairs — Not designation or status

Shailendra
Swarup vs. The Deputy Director, Enforcement CA No. 2463 of 2014 (SC) Date of order: 27^th July, 2020 Bench: Ashok Bhushan J., R. Subhash Reddy
J., M.R. Shah J.

FACTS

Modi Xerox Ltd. (MXL) was a company
registered under the Companies Act, 1956 in 1983. Between 12^th June,
1985 and 21^st November, 1985, 20 remittances were made by the
company through its banker Standard Chartered Bank. The Reserve Bank of India
issued a letter stating that despite reminders issued by the authorised dealer,
MXL had not submitted the Exchange Control copy of the customs bills of Entry /
Postal Wrappers as evidence of import of goods into India. The Enforcement
Directorate wrote to MXL in 1991-1993 for supplying invoices as well as
purchase orders. MXL on
9^th July, 1993 provided the documents for four transactions and
Chartered Accountant’s Certificates for balance 16 amounts for which MXL’s
bankers were unable to trace old records dating back to 1985. MXL amalgamated
and merged into Xerox Modicorp Ltd. (hereinafter referred to as “XMC”) on 10^th
January, 2000. A show cause notice dated 19^th February, 2001 was issued by the Deputy Director, Enforcement Directorate to MXL and its
directors, including the appellant. The notice required to show cause in
writing as to why adjudication proceedings as contemplated in section 51 of
FERA should not be held against them. The Directorate of Enforcement decided to
hold proceedings as contemplated in section 51 of the FERA, 1973 read with
sub-sections 3 and 4 of section 49 of FEMA and fixed 22^nd October,
2003 for personal hearing. A notice dated 8^th October, 2003 was sent
to MXL and its directors.

In reply the appellant stated that he is a
practising advocate of the Supreme Court and was only a part-time,
non-executive director of MXL and he was never in the employment of the company
nor had any executive role in its functions. It was further stated that the
appellant was never in charge of, nor ever responsible for, the conduct of the
business of the company. The Deputy Director, Enforcement Directorate, after
hearing the appellant and other directors of the company, passed an order dated
31^st March, 2004 imposing a penalty of Rs. 1,00,000 on the appellant
for contravention of section 8(3) read with 8(4) and section 68 of FERA, 1973.

The appellant approached the Appellate
Tribunal for foreign exchange but his appeal was dismissed on 26^th March, 2008. A criminal appeal was filed by the appellant in
the Delhi High Court but by the impugned judgment dated 18^th
October, 2009 it dismissed the appeal of the appellant.

HELD

The Supreme Court held that for proceeding
against a director of a company for contravention of provisions of FERA, 1973
the necessary ingredient for proceeding shall be that at the time the offence
was committed, the director was in charge of and was responsible to the company
for the conduct of its business. The liability to be proceeded with for an
offence u/s 68 of FERA, 1973 depends on the role one plays in the affairs of
the company and not on mere designation or status.

Editor’s Note: FERA, 1973 has been substituted with FEMA, 1999. Section 51 of
FERA, 1973 is similar to section 13(1) of FEMA, 1999.

28. Constitution
of India, Articles 226, 300A – High Courts bound to issue Writ of Mandamus –
For enforcement of public duties – Right to property is a fundamental right and
human right

Hare Krishna Mandir Trust vs. State of Maharashtra
& Ors. CA No. 6156 of 2013 (SC) Date of order: 7^th August, 2020 Bench: Indu Malhotra J., Indira Banerjee J.

FACTS

The Thorat family was the owner of a plot at
Bhamburda in Pune. By a registered deed of conveyance dated 21^st
December, 1956, one Krishnabai Gopal Rao Thorat sold the northern part of the
plot jointly to Swami Dilip Kumar Roy, one of the most eminent disciples of Sri
Aurobindo, and Indira Devi, daughter-disciple of Swami Dilip Kumar Roy. Swami
Dilip Kumar Roy had moved to Pune to propagate the philosophy of Sri Aurobindo
and established the Hare Krishna Mandir with his daughter disciple, Indira
Devi, on the land purchased from Krishnabai Gopal Rao Thorat.

According to the appellants, the Pune
Municipal Corporation, by an order dated 20^th August, 1970, divided
Plot No. 473 which was originally numbered Survey No. 1092. The final plot No.
473 B was sub-divided into four plots. On 20^th August, 1970 the City
Survey Officer directed issuance of separate property cards in view of a
proposed Development Scheme under the Regional and Town Planning Act which
included Final Plot No. 473, and an Arbitrator was appointed. The Arbitrator
made an award dated 16^th May, 1972 directing that the area and
ownership of the plots were to be as per entries in the property register. The
appellant contended that the Pune Municipal Corporation by its letters dated 29^th
June, 1996, 4^th January, 1997 and 18^th January, 1997
admitted that the internal road had never been acquired by the Pune Municipal
Corporation. The Town and Planning Department also admitted that the Pune
Municipal Corporation had wrongly been shown to be the owner of the said road.

The Urban Development Department rejected
the proposal of the appellant and held that the Pune Municipal Corporation is
the owner of the land. The Hon’ble High Court dismissed the Writ Petition
challenging the said order and refused to issue a Writ of Mandamus.

HELD

The Supreme
Court held that the right to property may not be a fundamental right any
longer, but it is still a Constitutional right under Article 300A and a human
right. In view of the mandate of Article 300A of the Constitution of India, no
person is to be deprived of his property save by the authority of law. The High
Courts, exercising their jurisdiction under Article 226 of the Constitution,
not only have the power to issue a Writ of Mandamus or in the nature of
Mandamus, but they are duty-bound to exercise such power where the Government
or a public authority has failed to exercise or has wrongly exercised
discretion conferred upon it by a statute, or a rule, or a policy decision of
the Government, or has exercised such discretion mala fide or on
irrelevant consideration. The High Court is not deprived of its jurisdiction to
entertain a petition under Article 226 merely because in considering the
petitioner’s right to relief questions of fact may fall to be determined.
Exercise of the jurisdiction is discretionary, but the discretion must be
exercised on sound judicial principles.

We must never ever give up, or give in or throw in the
towel. We must continue to press on! And be prepared to do what we can to help
educate people, to motivate people, to inspire people to stay engaged, to stay
involved and to not lose their sense of hope. We must continue to say we’re one
people. We’re one family. We all live in the same house. Not just an American
house but the world house. As Dr. King said over and over again, ‘We must learn
to live together as brothers and sisters.
If not, we will perish as fools.

— John
Lewis, 8^th June, 2020, New York Interview (civil rights giant,
17-term Congressman, an ally of MLK. He passed away in July, 2020)

BCAJ Admin

CORPORATE LAW CORNER

2 Indus Biotech Private Limited vs. Kotak India Venture (Offshore) Fund (earlier known as Kotak India Venture Limited) & Ors. Arbitration Petition (Civil) No. 48/2019 with Civil Appeal No. 1070 / 2021 @ SLP (C) No. 8120 of 2020 Date of order: 26th March, 2021

Section 7 of the Code and Arbitration Act – NCLT is duty-bound to examine the claim of insolvency on the grounds whether debt is due and there is a default even if the application of arbitration is filed simultaneously – Dispute before NCLT becomes matter in rem only after application is admitted by NCLT and not before that

FACTS
Kotak India Venture Fund (‘Kotak’) had subscribed to Optionally Convertible Redeemable Preference Shares (‘OCRPS’) issued by I Co (the ‘Corporate Debtor’) in the year 2007. Subsequently, the Corporate Debtor had entered into a share subscription and shareholder agreement (‘SSSA’). In pursuance of regulation 5(2) of the Securities Exchange Board of India (Issue of Capital & Disclosure Requirement) Regulations, 2018 (‘SEBI ICDR Regulations’), Kotak chose to convert the OCRPS into equity shares to make a Qualified Initial Public Offering (‘QIPO’).

During the conversion process, the parties had a dispute over the computation of the exchange ratio, the formula to be used and the valuation of the shares to be issued. The formula, which was sought to be applied by Kotak, would have yielded approximately 30% of the paid-up share capital of the Corporate Debtor. On the other hand, the formula that was sought to be applied by the Corporate Debtor (which was in line with the reports of auditors, independent valuers and the agreed formula), would have given Kotak 10% of the total paid-up share capital of the Corporate Debtor.

At the same time, the Corporate Debtor invoked the arbitration clause provided under the SSSA and requested the National Company Law Tribunal (‘NCLT’) to refer the parties to arbitration u/s 8 of the Arbitration & Conciliation Act, 1996.

The Corporate Debtor failed to redeem the debt on the redemption date. Kotak then filed an application for initiating corporate insolvency resolution process (‘CIRP’) against the Corporate Debtor under the Insolvency and Bankruptcy Code, 2016 (‘the Code’).

The NCLT observed that in a section 7 petition there has to be a judicial determination as to whether there has been a default within the meaning of section 3(12) of the Code. It was held that a default had not occurred in the instant case. The NCLT also noted that the Corporate Debtor was a solvent, debt-free and profitable company. Considering that the dispute was purely contractual in nature, the NCLT directed the parties to resolve their dispute by arbitration, thereby dismissing the application filed by Kotak under the Code.

Kotak filed a special leave petition before the Supreme Court. The primary contention raised in it was that the dispute, being a matter in rem, belongs to that class of litigation which falls out of the scope and ambit of arbitration.

HELD
The Supreme Court heard the arguments of both sides at length. It also relied on the decision laid down in Vidya Drolia vs. Durga Trading Corporation (2021 2 SCC 1) to hold that a dispute is non-arbitrable when a proceeding is in rem and IB proceedings are considered to be in rem only after being admitted.

The Court held that insolvency proceedings become in rem only after they are admitted. On admission, third-party right is created in all the creditors of the corporate debtors and will have an erga omnes effect. The mere filing of the petition and its pendency before admission, therefore, cannot be construed as the triggering off of a proceeding in rem. Hence, the admission of the petition for consideration of the CIRP is the relevant stage which would decide the status and the nature of the pendency of the proceedings and the mere filing cannot be taken as the triggering off of the insolvency process.

Further, the Supreme Court observed that the position of law that the provisions of the Code shall override all other laws as provided u/s 238 needs no elaboration. It was observed that in any proceeding which is pending before the NCLT u/s 7 of the IB Code, if such petition is admitted upon the NCLT recording the satisfaction with regard to the default and the debt being due from the corporate debtor, any application u/s 8 of the Act, 1996 made thereafter will not be maintainable.

The Court held that the NCLT is duty-bound to deal with the inquiry u/s 7 of the IBC by examining the material placed before it and record a satisfaction as to whether or not there is a default, even if an application u/s 8 of the Arbitration Act has been filed simultaneously.

It was also held that it would be premature to arrive at a conclusion that there was default in payment of any debt until the said issue is resolved and the amount repayable by the Corporate Debtor to Kotak with reference to equity shares being issued is determined. In the process, if such determined amount is not paid it will amount to default at that stage. The Court proceeded to appoint the arbitration tribunal in accordance with the provisions of the agreement.

The appeal was thus dismissed and the arbitration petition was allowed.

3 Anuj Mittal vs. Union of India 125 taxmann.com 10 (Delhi) Date of order: 15th January, 2021

Petitioners were directors who had been disqualified prior to 7th May, 2018, qua other companies in addition to the defaulting company – In such cases, proviso to section 167(1)(a) of the Companies Act, 2013 would not apply and petitioners would continue to be directors in companies other than defaulting companies and, therefore, DINs and DSCs of petitioners would be reactivated

FACTS
The petitioners were directors in ‘N’ Private Limited (hereinafter ‘N’). Due to alleged non-compliance / default by ‘N’ u/s 164(2)(a) of the Companies Act, 2013, i.e., non-filing of financial statements or annual returns for any continuous period of three financial years, the said petitioners were disqualified as directors from 1st November, 2017 to 31st October, 2022. Their DINs and DSCs were deactivated. ‘N’ had also been struck off from the Register of Companies. The petitioners were directors in other active companies and also wished to start a fresh business.

The Court, after considering the facts, analysed a few judgments and came to the conclusion that the following facts have emerged from the previous judgments. The same are tabulated for ease of reference:

Category	Situation	Decision
A	Directors who have been disqualified prior to 7^th May, 2018 qua other companies in addition to the defaulting company	Since there is no stay on the judgment in *Mukut Pathak, it continues to hold the field. Thus, in cases where directors have been disqualified prior to 7^th May, 2018, the proviso* to section 167(1)(a) of the Companies Act, 2013 would not apply and the directors would continue to be directors in companies other than the defaulting company. The disqualification of such directors qua active companies would therefore be liable to be set aside and their DINs and DSCs reactivated
B	Directors who have been disqualified post 7^th May, 2018 qua other ‘active’ companies	As held in *Mukut Pathak, in all cases where the directors have been disqualified on or after 7^th May, 2018, the proviso* to section 167(1)(a) would apply and such directors would cease to be directors in all the companies, including the defaulting company. In March, 2020, in light of the Covid-19 pandemic, the Ministry of Corporate Affairs vide General Circular No. 12/2020 introduced CFSS-2020 to allow a fresh start for defaulting companies and directors of such companies. The Court, in Sandeep Agarwal, has analysed CFSS-2020 to conclude that the purpose of the scheme is to provide an opportunity for ‘active’ companies, i.e., companies whose names have not been struck off, who may have defaulted in filing of documents, to put their affairs in order
B (continued)	Directors who have been disqualified post 7^th May, 2018 qua other ‘active’ companies	Thus, the DINs and DSCs of disqualified directors of struck-off companies, who are also directors in active companies, may be reactivated qua the active companies in line with the spirit of the CFSS-2020
C	Directors of ‘active’ companies who have been disqualified	In cases where directors of ‘active’ companies have been disqualified, CFSS-2020 would squarely apply. Such directors would be entitled to avail of CFSS-2020 and file documents of the defaulting company
D	Disqualified directors of struck-off companies seeking appointment as directors in other / new companies	In furtherance of the purpose of the scheme, directors of struck-off companies who seek to be appointed as directors of other / new companies ought to be provided an opportunity to avail of the scheme, provided that they have undergone (completed) a substantial period of their disqualification. The scheme clearly seeks to provide a fresh start for directors of defaulting companies who seek appointment in other companies or wish to start new businesses. Therefore, if a substantial period has passed since the disqualification of such directors, they ought to be
D (continued)	Disqualified directors of struck-off companies seeking appointment as directors in other / new companies	given an opportunity to avail of the scheme

Category

Situation

Decision

Directors who have been disqualified prior to 7^th
May, 2018 qua
other companies in addition to the defaulting company

Since there is no stay on the judgment in Mukut Pathak,
it continues to hold the field. Thus, in cases where directors have been
disqualified prior to 7^th May, 2018, the proviso to section
167(1)(a) of the Companies Act, 2013 would not apply and the directors would
continue to be directors in companies other than the defaulting company. The disqualification of such directors qua
active companies would therefore be liable to be set aside and their
DINs and DSCs reactivated

Directors who have been disqualified post 7^th May,
2018 qua other ‘active’
companies

As held in Mukut Pathak, in all cases where the
directors have been disqualified on or after 7^th May, 2018, the proviso
to section 167(1)(a) would apply and such directors would cease to be
directors in all the companies, including the defaulting company. In March,
2020, in light of the Covid-19 pandemic, the Ministry of Corporate Affairs vide
General Circular No. 12/2020 introduced CFSS-2020 to allow a fresh start for
defaulting companies and directors of such companies. The Court, in Sandeep
Agarwal, has analysed CFSS-2020 to conclude that the purpose of the
scheme is to provide an opportunity for ‘active’ companies, i.e., companies
whose names have not been struck off, who may have defaulted in filing of
documents, to put their affairs in order

B
(continued)

Directors who have been disqualified post 7^th May,
2018 qua other ‘active’
companies

Thus, the DINs and DSCs of disqualified directors of struck-off
companies, who are also directors in active companies, may be reactivated qua
the active companies in line with the spirit of the CFSS-2020

Directors of ‘active’ companies who have been disqualified

In cases where directors of ‘active’ companies have been
disqualified, CFSS-2020 would squarely apply. Such directors would be
entitled to avail of CFSS-2020 and file documents of the defaulting company

Disqualified directors of struck-off companies seeking
appointment as directors in other / new companies

In furtherance of the purpose of the scheme, directors of
struck-off companies who seek to be appointed as directors of other / new
companies ought to be provided an opportunity to avail of the scheme,
provided that they have undergone (completed) a substantial period of their
disqualification. The scheme clearly seeks to provide a fresh start for
directors of defaulting companies who seek appointment in other companies or
wish to start new businesses. Therefore, if a substantial period has passed
since the disqualification of such directors, they ought to be

D
(continued)

Disqualified directors of struck-off companies seeking
appointment as directors in other / new companies

given an opportunity to avail of the scheme

At this stage, the Registrar of Companies, Delhi was requested to join the proceedings. On a specific query from the Court, he informed that the Companies Fresh Start Scheme-2020 has expired as on 31st December, 2020. However, he submitted that in case struck-off companies are willing to file their annual returns and balance sheets, the restoration of these companies is being considered by the ROC. He further informed the Court that in the case of more than 2,000 struck-off companies, their restoration has been permitted by the NCLT as the jurisdiction for restoring the struck-off companies rests with the NCLT.

After deliberations, the High Court held as under:

In terms of the judgment in Anjali Bhargava, the petitioners would fall in category ‘D’. Further, since the disqualification of the petitioners is prior to 7th May, 2018, they would also fall in category ‘A’. In terms of the judgment in Mukut Pathak vs. Union of India [2019] 111 taxmann.com 41 (Delhi) and Anjali Bhargava vs. UOI [W.P. (C) No. 11264 of 2020 dated 6th January, 2021] (Unreported), the DINs and DSCs of the petitioners shall be reactivated within a period of ten days. If, in addition, the petitioners wish to seek restoration of the struck-off company, they are permitted to seek remedies in accordance with law before the NCLT.

BCAJ Admin

ALLIED LAWS

5 Sobha Hibiscus Condominium vs. Managing Director, M/s Sobha Developers Ltd. & Anr. AIR 2020 Supreme Court 1163 Date of order: 14th February, 2020 Bench: Mohan M. Shantanagoudar J., R. Subhash Reddy J.

Condominium – Maintainability – Complainant – Condominium is neither ‘consumer’ nor ‘recognised voluntary association’ but group of individual consumers [S. 2(1)(d), S. 12(1)(b) Consumer Protection Act]

FACTS
The appellant / complainant is a statutory body. It consists of members who are the owners of the apartments in a multi-storey building, namely, ‘Sobha Hibiscus’, situated in South Bangalore Taluk in Karnataka.

The National Consumer Disputes Redressal Commission (NCDRC) rejected the complaint filed by the appellant on the ground that the appellant condominium has no locus standi to file the complaint since neither is it a ‘consumer’ nor a ‘recognised consumer association’ within the meaning of section 12 of the Consumer Protection Act, 1986.

HELD
The Court held that the finding of the NCDRC that a recognised consumer association can file a complaint on behalf of a single consumer but cannot file a complaint on behalf of several consumers in one complaint is erroneous and there is no legal basis for it. From a reading of section 12(1)(b) of the Act read with Explanation to section 12 it is clear that a voluntary registered association can file a complaint on behalf of its members to espouse their grievances. There is nothing in the aforesaid provision of the Act which would restrict its application to the complaint pertaining to an individual complainant. If a recognised consumer association is made to file multiple complaints in respect of several consumers having a similar cause of action, that would defeat the very purpose of registration of a society or association and it would result only in multiplicity of proceedings without serving any useful purpose.

The matter is remitted back to the NCDRC with a direction to consider the complaints on merits and pass appropriate orders.

6 Shaik Janimiya vs. State Bank of India AIR 2020 Telangana 126 Date of order: 27th April, 2020 Bench: M.S. Ramachandra Rao J., T. Amarnath Goud J.

Registration – Transfer of prohibited property – Impossible – Highest bidder cannot wait until bank gets clear title – Bidder entitled to relief [Registration Act, 1908]

FACTS
The petitioner is the Managing Director of M/s Crescent Formulations Pvt. Ltd. which is engaged in the manufacture and marketing of pharmaceutical formulations. The respondent bank issued an e-auction notice under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act proposing to conduct an e-auction of several properties on 29th February, 2017 [sic]. The petitioner deposited Rs. 21,80,000 as EMD and later became the highest bidder after quoting Rs. 2,19,00,000. On 30th November, 2017 the respondent addressed a letter to the petitioner declaring him as the highest bidder and directed him to deposit the balance EMD amount of 25% (Rs. 32,75,000) immediately. The petitioner complied and another letter dated 30th November, 2017 was issued by the respondent directing him to deposit Rs. 1,61,81,000 being 75% of the sale consideration within 15 days from the date of the auction. The petitioner was also asked to make arrangements for registration of the sale certificate with the Sub-Registrar concerned.

When the petitioner approached the Sub-Registrar, the latter informed him that the properties in Sy. No. 11 of Khanamet village were in the prohibitory list notified under section 22-A of the Registration Act, 1908 by the State of Telangana and that he would not register the certificate of sale issued by the respondent in favour of the petitioner.

The petitioner contends that he demanded the respondent to refund the sum of Rs. 2,19,00,000 deposited by him with interest at 12% per annum.

HELD
It is not disputed that before the sale certificate could be registered the State Government had imposed a prohibition on the registration of plots in Sy. No. 11 of Khanamet village, in which the above property is located. Hence it became impossible for the title to the property to be conveyed to the petitioner by registering the sale certificate. The petitioner cannot be compelled to wait till the bank litigates with the State and resolves the issue.

This Court has repeatedly expressed the view that Governments and statutory authorities should be model or ideal litigants and should not put forth false, frivolous, vexatious, technical (but unjust) contentions to obstruct the path of justice.

The bona fide claims of the petitioner cannot be defeated by the respondent by raising hyper-technical pleas. The petitioner was entitled to the prayed relief. The writ petition was allowed.

7 Surender Kumar Singhal & Ors. vs. Arun Kumar Bhalotia & Ors. CM(M) 1272 of 2019 dated 25th March, 2021 Date of order: 25th March, 2021 Bench: Prathiba M. Singh J.

Arbitration – Tribunal can decide objections on its jurisdiction – High Courts have limited interference – Jurisdiction should be adjudicated first [Arbitration and Conciliation Act, 1996]

FACTS
Disputes arose between two branches of one family. The Delhi High Court referred the matter to arbitration by a sole arbitrator.

The petitioners herein then filed an application before the arbitrator u/s 16 of the Arbitration and Conciliation Act, 1996 (Act) and raised the objection that the Tribunal does not have any jurisdiction to adjudicate the claims against the petitioners. The arbitrator held that the issue of jurisdiction would be dealt with along with the final order. An application was made for recall of the said order. The said application was rejected by the arbitrator. The orders rejecting the applications were challenged in the present proceedings.

HELD
The Court observed that the arbitrator was of the opinion that a final decision on the application of the petitioners u/s 16 of the Act cannot be taken without further evidence in the matter. The property which the petitioners have purchased as per the arbitrator is clearly the subject matter of the arbitral proceedings and thus the arbitrator, after evidence being recorded, may be required to mould relief in the same manner. The Court did not deem it appropriate to interfere under Article 227. However,
the Court held that the arbitrator’s observation that the said objection shall be decided ‘while passing the award’ may also not be fully in line with the legal position as held in McDermott International Inc. vs. Burn Standard Co. Ltd. and Ors. (2006) 11 SCC 181. Thus, the question of jurisdiction raised by the petitioners would have to be adjudicated first, prior to the passing of the final award.

BCAJ Admin

RIGHT TO INFORMATION (r2i)

PART A | DECISION OF HIGH COURT

Cogent reasons have to be given by the public authority as to how and why the investigation or prosecution will get impaired or hampered by giving the information in question

Case name:

Amit Kumar Shrivastava vs. Central Information
Commission, New Delhi

Citation:

Writ Petition (Civil) No.: 3701/2018

Court:

The High Court of Delhi

Bench:

Justice Jayant Nath

Decided on:

5^th February, 2021

Relevant Act / Sections:

Section 8 of Right to Information Act, 2005

Brief facts and procedural history:

The petitioner filed an RTI application on 5th September, 2016 under Rule 6 of the Right to Information Act, 2005 (‘the RTI Act’) seeking disclosure of point-wise information which was mentioned at serial Nos. 5(i) to 5(xxv) of the said application.

The CPIO did not provide correct information in respect of point 5(i) of the RTI application. The CPIO hid the cases registered under IPC / PC Act. Information was not disclosed u/s 8(1)(h) of the RTI Act.

The petitioner filed a first appeal on 10th October, 2016 before the First Appellate Authority. The Appellate Authority did not decide the appeal of the petitioner in the defined period. The petitioner then filed a second appeal before the Second Appellate Authority CIC. It is the grievance of the petitioner that during the hearing the respondent believed the verbal submissions of the CPIO instead of the written submissions of the petitioner and allowed them to sustain their stand for non-disclosure of the information in respect of all the points by claiming exemption u/s 8(1)(h) of the RTI Act.

Court’s observation and judgment
The Court was of the view that the facts, including details regarding the grave allegations against the petitioner and the pending criminal and departmental proceedings against him, were not disclosed. However, the CIC dismissed his appeal holding that the proceedings initiated by the CBI are pending and exemption can be claimed u/s 8 of the RTI Act that lays down certain conditions when exemptions are allowed.

Section 8(1)(h) of the Act provides that information which ‘would impede the process of investigation or apprehension or prosecution of offenders’ need not be disclosed to citizens. On examination, the High Court observed that what follows from the legal position is that where a public authority takes recourse to this section to withhold information, the burden is on the public authority to show in what manner disclosure of such information could impede the investigation. The word ‘impede’ would mean anything that would hamper or interfere with the investigation or prosecution of the offender.

Further, the word ‘investigation’ used in section 8(1)(h) of the Act should be construed rather broadly and include all inquiries, verification of records and assessments. ‘In all such cases, the inquiry or the investigation should be taken as completed only after the competent authority makes a prima facie determination about the presence or absence of guilt on receipt of the investigation / inquiry report from the investigating / inquiry officer’, said the Single Bench.

Since the CIC in its order made no attempt whatsoever to show how giving the information sought would hamper the investigation and the on-going disciplinary proceedings, the Court decided to quash its order. The Court also remanded the matter back to the CIC for consideration afresh in terms of the legal position held by the High Court in the present matter.

Justice Jayant Nath also referred to the case of Union of India vs. Manjit Singh Bali (2018) where the High Court of Delhi had held that the exclusion u/s 8(1)(h) of the RTI Act (information which would impede the process of investigation or apprehension or prosecution of the offenders) has to be read in conjunction with Article 19(2) of the Constitution of India. Such denial must be reasonable and in the interest of public order1.

PART B | DECISION OF SIC

Private medical colleges within RTI Act’s purview: Rajasthan SIC

The private medical colleges in Rajasthan have been brought within the purview of the Right to Information (RTI) Act, 2005, following an order of the State Information Commission which has imposed a fine of Rs. 25,000 on the Principal of Geetanjali Medical College in Udaipur for flouting the transparency law and refusing to provide information.

Allowing an appeal against the college, the Information Commission held in its recent order that the State Government had allotted land to the institution at concessional rates and the college was established under a law passed by the State Legislature.

‘Based on these facts, the college falls within the purview of the RTI Act. The college is governed by the rules and regulations framed by the State government’, said Information Commissioner Narayan Bareth.

He imposed the fine on the Principal for refusing to provide information sought by an applicant2.

PART C IINFORMATION ON AND AROUND

Vaishno Devi temple got 1,800 kg. of gold in 20 years

The Vaishno Devi Temple in Jammu received over 1,800 kg. of gold and over 4,700 kg. of silver, besides Rs. 2,000 crores in cash, in the past 20 years (2000-2020) as donation3.

Supreme Court refuses to disclose Justice Patnaik’s probe report on ‘Larger Conspiracy’ against judiciary under RTI

The Public Information Officer of the Supreme Court has refused to disclose the details of a report submitted by the former Supreme Court Judge, Mr. Justice A.K. Patnaik, on the probe into the ‘larger conspiracy’ behind the sexual harassment allegations levelled against the then Chief Justice of India, Mr. Ranjan Gogoi4.

Who writes PM Modi’s speeches?

‘Depending upon the nature of event, various individuals, officials, departments, entities, organisations, etc., provide inputs for the PM’s speech and the speech is given final shape by the PM himself,’ the PMO said in its reply to an RTI query5.

SBI refuses data under RTI on interest waiver claims it received

In October, 2020 the Government had appointed SBI as the nodal agency and said it will receive funds for settlement of such (interest waiver) claims. Other lenders were told to submit their claims by 15th December to India’s largest lender. The State Bank of India, in charge of collating and settling compound interest waiver reimbursement claims by lenders for the last round of the interest waiver scheme during the moratorium, has declined to provide information on the quantum of claims it received6.

Centre paid Rs. 4.10 crores as commission to SBI for sale of electoral bonds

The Department of Economic Affairs, Ministry of Finance, in its reply dated 19th March, 2021 to an RTI application stated that an amount of over Rs. 4.35 crores (Rs. 4,35,39,140.86), inclusive of GST, has been charged to the Government as commission consequent to the sale of electoral bonds in 15 phases.

An aggregated amount of Rs. 4.10 crores (Rs. 4,10,16,764.60) has been paid by the Government as commission, consequent to the sale of electoral bonds in 13 phases. Commission for the 14th and 15th phases of electoral bond issuance has not been paid till date7.

1 https://www.latestlaws.com/latest-news/public-authority-to-give-cogent-reasons-for-claiming-exemption-from-disclosure-of-information-sought-under-the-rti-act-read-order/

2 https://www.thehindu.com/news/national/other-states/rajasthan-brings-private-medical-colleges-within-rti-acts-purview/article34135979.ece

3 https://timesofindia.indiatimes.com/city/dehradun/vaishno-devi-temple-received-over-rs-2000-crore-cash-1800-kilos-of-gold-and-4700-kilos-of-silver-in-last-20-years-rti/articleshow/81638135.cms

4 https://www.livelaw.in/top-stories/supreme-court-refuses-disclose-justice-patnaiks-probe-report-larger-conspiracy-rti-171351

5 https://www.indiatoday.in/india/story/who-writes-pm-modi-speeches-pmo-reply-to-rti-1774874-2021-03-02

6 https://www.livemint.com/companies/news/sbi-refuses-data-under-rti-on-interest-waiver-claims-it-received-11616563915641.html

7 https://www.theweek.in/news/india/2021/03/22/centre-paid-rs-4-10-crore-as-commission-to-sbi-for-sale-of-electoral-bonds.html

BCAJ Admin

CORPORATE LAW CORNER

1. Puthenpurakal Properties Private Ltd. vs. UOI, Delhi and Others LSI-128-HC-2021 (Ker) Date of order: 2nd March, 2021

Kerala High Court grants liberty to the Government to proceed against petitioner companies for violating section 203 of the Companies Act, 2013 which inter alia mandates appointment of a whole-time Company Secretary where a company’s paid-up capital exceeds Rs. 5 crores

FACTS
Company P, the petitioner, is a company incorporated with the Registrar of Companies, Kerala. P has filed these writ petitions seeking to direct the respondents to permit it to file E-form ACTIVE, INC-22A without insisting on appointment of a whole-time Company Secretary (CS). P has also sought to declare that the restrictions imposed in filing E-form ACTIVE, INC-22A with regard to non-compliance of section 203 of the Companies Act, 2013 in appointment of a whole-time Company Secretary, or Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, is arbitrary and illegal.

P contended that pursuant to the powers vested u/s 469 of the Companies Act, 2013 the Union of India amended the Companies (Incorporation) Rules, 2014. As per the newly-added Rule 25A, every company incorporated on or before 31st December, 2017 was required to file the particulars of the company and its registered office in E-form ACTIVE (Active Company Tagging Identities and Verification) on or before 25th April, 2019. P further contended that the website of the Ministry of Corporate Affairs was not accepting the E-form ACTIVE submitted by it for the reason that its paid-up capital is more than Rs. 5 crores and yet the petitioners have not appointed a whole-time CS.

It was the case of the petitioners that as per section 203(5) if any company makes any default in complying with the provisions, such company shall be liable for a penalty of Rs. 5 lakhs and Directors and Key Managerial Personnel are personally liable for a penalty of Rs. 50,000, and if the default is a continuing one, with a further penalty of Rs. 1,000 for each day.

The petitioners contended that they have part-time Company Secretaries and Auditors to properly look after the affairs of their companies and for the last several years they have been functioning well within the provisions of the Act without giving any room for initiating any penal proceedings. On these premises, the petitioners contended that they should not be forced to appoint a whole-time Company Secretary and should be permitted to file E-form ACTIVE, INC-22A without insisting on the appointment of a whole-time Company Secretary.

When these writ petitions came up for admission, interim orders were passed by the Court permitting the petitioners to file E-form ACTIVE, INC-22A, Form PAS-03 (change in paid-up capital) and Form DIR-12 (change in Director, except cessation) without insisting on appointment of a whole-time Company Secretary provisionally, pending further orders in these writ petitions.

When the petitions came up for final hearing, the Counsel for the respondents urged as under:

The Central Government counsel representing the respondents argued that as per the existing rules the petitioners are bound to appoint a whole-time Company Secretary as their paid-up capital is more than Rs. 5 crores. The petitioners cannot be granted any exemption from the Rules.

The Counsel further argued that non-appointment of Company Secretary by the petitioners is an offence u/s 383A of the Companies Act, 1956 with effect from 1st December, 1988. If a company fails to comply with this requirement, the Company and every one of its officers who is in default shall be punishable with a fine which may extend to Rs. 500 per day during which the default continues.

HELD
After deliberations, the Kerala High Court held as under:

As things stand now, the petitioners have been permitted to file E-form ACTIVE, INC-22A without insisting on the appointment of a whole-time Company Secretary on a provisional basis. Section 203(5) of the Companies Act, 2013 provides that if any company makes any default in complying with the provisions of section 203 relating to appointment of a Key Managerial Personnel, such company shall be liable to a penalty of Rs. 5 lakhs and every Director and Key Managerial Personnel of the company who is in default shall be liable to a penalty of Rs. 50,000, and where the default is a continuing one, with further penalty of Rs. 1,000 for each day after the first during which such default continues, but not exceeding Rs. 5 lakhs.

It is evident that the petitioner has not adhered to the provisions of the Companies Act, especially section 203 thereof. In such circumstances, the respondents are empowered to proceed against the petitioner companies in accordance with the law.

In the circumstances, the writ petitions were disposed of granting liberty to the respondents to proceed against the petitioners for violating section 203 of the Companies Act, 2013 if they are so advised. It is made clear that the interim orders passed in these writ petitions shall not be taken as pronouncements on merits on the legality of section 203 of the Companies Act, 2013 or Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

BCAJ Admin

ALLIED LAWS

1. Uma Mittal & Ors. vs. UOI & Ors. AIR 2020 Allahabad 202 Date of order: 15th June, 2020 Bench: Shashi Kant Gupta J., Saurabh Shyam Shamshery J.

Guardian – Comatose state – No remedy under law – Wife appointed as guardian – Central Government directed to consider enacting an appropriate legislation [Constitution of India, Art. 21, Art. 226; Guardians and Wards Act, 1890, S. 7]

FACTS
Petitioner No. 1 is the wife of Sunil Kumar Mittal (SKM). The couple has four children (petitioner Nos. 2 to 5), three daughters and a son Raghav Mittal; petitioner No. 2 is a married daughter. However, petitioner Nos. 3 and 4 are unmarried daughters and petitioner No. 5 is the son.

SKM had a fall and suffered a severe head injury. After a series of medical procedures, Doctors opined that till his eventual demise SKM would remain in comatose condition.

SKM was carrying on business as a sole proprietor till December, 2018. He also had a few real estate properties and bank accounts.

Writ Petition was filed to appoint the petitioner No. 1 as the guardian of her husband to protect his interest, administer bank accounts, investments, proprietorship business, etc., and in the event of necessity, to sell the immovable property standing in the name of her husband and to use the proceeds towards medical treatment of her husband and family welfare expenses.

HELD
There appears to be no dispute that any of legislative enactments are applicable qua SKM, a person lying in a comatose state. Further, the petitioners are in dire need of money towards medical treatment of SKM and for the welfare of the family as they have exhausted their financial resources in the past one and a half years.

Further, since the petition has been filed jointly, there is no dispute amongst the legal heirs of SKM.

Petitioner No. 1, Uma Mittal, wife of SKM as the guardian of her husband who is in a comatose condition, is vested with the property of her husband to do all acts, deeds and things for the proper medical treatment, nursing care, welfare and benefit of SKM and his children and with power to do all acts, deeds and things with respect to his assets and properties.

Further, the Central Government to consider enacting an appropriate legislation pertaining to appointment of guardians qua persons lying in a comatose state, as no remedy is provided in any statute to persons in comatose / vegetative state.

2. N. Mani and Ors. vs. Babyammal AIR 2020 (NOC) 511 (Mad) Date of order: 19th September, 2019 Bench: T. Ravindran J.

Registration – Alleged relinquishment of property – Family arrangement – Instrument not registered – Agreement not sustainable [Hindu Succession Act, S. 14(1)]

FACTS
The properties in the plaint belonged to one Natesa Naicker and when it is admitted that the plaintiff and the defendants are the legal heirs of Natesa Naicker, it is found that on the demise of Natesa Naicker, the plaintiff and the defendants would be each entitled to equal share in the schedule properties.

However, the defendants have put forth the case that the defendants had effected a partition amongst the family members by a partition deed and further also put forth the case that in the family arrangement jewels and cash were given to the daughters including the plaintiff and thereby the daughters had relinquished their right in the family properties and accordingly the plaintiff is not entitled to claim any share in the family properties.

HELD
The family arrangement and the alleged relinquishment said to have been made by the plaintiff in respect of her share in the family properties has been stoutly challenged by the plaintiff and despite the same the defendants have not placed any acceptable and reliable materials to establish that the so-called family arrangement said to have been effected between the family members is true and validly effected. When the defendants are unable to put forth the clear case that the daughters had been given jewels and cash in lieu of their shares in the family properties and when the defendants have not tendered clear evidence as to when actually the jewels and cash were given to the daughters, we cannot safely accept the case of the defendants that a valid family arrangement had been effected and the daughters had been given jewels and cash in lieu of their shares and that the daughters had thereby relinquished their right in respect of their family properties.

On a perusal, when such instruments are required by law to be compulsorily registered and when it is found that they are not registered, no safe reliance could be made on the abovesaid documents for sustaining the defence version and the Courts below had rightly rejected the said documents.

3. Food Corporation of India & Anr. vs. V.K. Traders & Anr. (2020) 4 SCC 60 Date of order: 6th March, 2020 Bench: S.A. Bobde C.J., B.R. Gavai J. and Surya Kant J.

Lease deeds – Unregistered lease deeds – Not admissible as evidence – No right in lease [Registration Act, 1908, S. 17; Transfer of Property Act, 1882, S. 107]

FACTS
It was common practice in Punjab for different government agencies to allocate paddy for custom milling to hundreds of rice mills, which in turn would supply the rice, post-milling as per approved specifications, to the appellant FCI. Such allocation would take place through terms of a bipartite agreement and the same took place for the kharif marketing season (KMS) of 2004-05.

A dispute arose as to the quality of the milled rice stock for the aforementioned KMS, leading to an investigation by the Central Bureau of Investigation (CBI). Finding the quality to be defective, the CBI initiated prosecution against numerous rice millers and additionally recommended blacklisting of a total of 182 millers. Such ban was effected by the FCI vide a Circular dated 10th October, 2012.

The blacklisted rice mills, thus, were not allocated any paddy for purposes of custom milling in 2011-12. Allegedly with a view to wriggle out of the ban period, the mill owners leased out their rice mills to other similar partnership / proprietorship firms. Notably, all such lease deeds were unregistered.

These new lessees subsequently applied to the appellant FCI for allocation of paddy and asserted that none of them had committed any default or been blacklisted and that the disqualification attached to their lessors could not traverse onto their lawful entitlements. The FCI, on the other hand, declined to entertain such requests on the ground that the new lessees had simply stepped into the shoes of the earlier blacklisted lessors as the lease deeds were nothing but sham transactions to circumvent the ban.

HELD
No reliance can be placed upon the lease deeds allegedly executed between the defaulting rice miller(s) and the respondent(s), as they do not satisfy the statutory requirements of section 17(1)(d) of the Registration Act, 1908. These lease deeds thus cannot be accepted as evidence of valid transfer of possessory rights. The plea taken by the appellant FCI, that such documentation was made only to escape the liability fastened on the defaulting rice millers, carries some weight, though it is a pure question of fact. The appeal is allowed.

4. Apurva Jagdishbhai Dave vs. Prapti Apurva Dave AIR 2020 Gujarat 124 Date of order: 25th October 2020 Bench: A.P. Thaker J.

Electronic evidence – CD recording – Application dismissed – Certificate u/s 65B filed later – Admitted as primary evidence u/s 62 [Evidence Act, 1872; S. 62, S. 65B]

FACTS

The petitioner wanted to play a CD in the Court proceedings and asked a question to the respondent either to controvert or to admit the incident of a particular date and also asked the respondent whether or not it was her voice. It was contended that the petitioner had made an application for playing the CD.

The respondent raised an objection with regard to playing of the CD in the Family Court and filed a reply wherein she disputed the contents of the recording and stated that no such incident had occurred; after hearing both the parties, the trial Court rejected the application.

HELD

The trial Court dismissed the application on the ground that the certificate under section 65B of the Evidence Act has been produced at a later stage and not at the time when the original document was produced. Now, it is an admitted fact that u/s 65B of the Evidence Act, the electronic document can be produced along with the certificate which is prescribed under the Act.

In view of the provisions of section 65B of the Evidence Act, the Supreme Court in the case of Anwar P.V. vs. P.V. Basheer, reported in (2014) 10 SCC 473 has held that an electronic record by way of secondary evidence shall not be admitted in evidence unless the requirements u/s 65B are satisfied. Thus, in the case of CD, VCD, chip, etc., the same shall be accompanied by the certificate in terms of section 65B obtained at the time of taking the document, without which the secondary evidence pertaining to that electronic record is inadmissible. Although the aforesaid case clarified the position relating to certification to a large extent, it did not specify as to whether the certificate can be supplied at a later stage.

There are two decisions of the Delhi High Court and the Rajasthan High Court, i.e., Kundan Singh vs. State, 2015 SCC Online Delhi 13647 and Paras Jain vs. State of Rajasthan (2015) SCC Online Rajasthan 8331, respectively. Both the Courts have taken the view that section 65B certificate can be provided at a later stage and it is not an illegality going to the root of the matter.

Therefore, the impugned order of the Family Court regarding non-submission of the certificate at the time of production of electronic record is not legally sustainable. The document ought to have been permitted to be produced in the matter and after proper verification it could have been exhibited. Therefore, the impugned order of the trial Court is set aside and the electronic record is liable to be taken on record.

BCAJ Admin

CORPORATE LAW CORNER

11. Dr. Venkadasamy Venkataramanujan vs. Securities and Exchange Board of India, Mumbai [2021] 123 taxmann.com 126 (SAT-Mum.) Date of order: 7th February, 2020

Independent Director – Where appellant was inducted as an Independent Director of company and there was no finding that act of company in collection of funds under collective investment scheme without obtaining certificate of registration occurred with appellant’s knowledge or consent, order of SEBI prohibiting appellant from accessing securities market for four years could not be sustained and same was to be quashed

FACTS

The present appeal has been filed against the order of the whole-time member (‘WTM’) of the Securities and Exchange Board of India (‘SEBI’) who held that the scheme floated by the company was nothing but a collective investment scheme (‘CIS’) in terms of section 11AA of the SEBI Act, 1992 and that this was done without obtaining a certificate of registration as required u/s 12(1B) of the SEBI Act and Regulation 3 of the SEBI (Collective Investment Schemes) Regulations, 1999. The WTM had directed the company and its directors, including the appellant, to abstain from collecting any money from investors or to carry out any CIS, including the present scheme, and further to return the money so collected. The WTM further restrained the appellant and others from accessing the securities market and prohibited them from buying, selling or otherwise dealing in the securities market for a period of four years.

The appellant ‘V’, being one of the directors and being aggrieved by the order, has filed the present appeal.

‘V’ was appointed as an Independent Director on 26th February, 2015 and resigned on 21st July, 2015. His resignation was accepted by the company on 31st August, 2015 and intimated to the Registrar of Companies on 5th October, 2015.

‘V’ contended before the WTM and SAT that he was appointed in view of the requirement under the CIS Regulations for appointment of a professional as an Independent Director. ‘V’ was not a shareholder in the company, he was not directly associated with the persons who were running it, nor was he involved in its day-to-day running. He also urged that in view of section 149(12) of the Companies Act, 2013 an Independent Director cannot be held liable for such misfeasance which occurred without his knowledge.

It was also noted from the WTM order that ‘V’ has been held responsible only on the ground that part of the mobilisation of the fund was done during the period when he was appointed as a director.

HELD

The Tribunal came to the conclusion that the order insofar as it relates to ‘V’ cannot be sustained. There is no dispute about the fact that he was appointed as an Independent Director by the company in order to comply with the eligibility criteria for CIS application under the relevant Regulations. The Tribunal further noted that a specific assertion was made that ‘V’ did not attend any Board meeting which fact has not been disputed by the respondent. It also noted that ‘V’ was not directly associated with the persons having control over the affairs of the company, nor was he involved in the running of the company and this fact has been stated by the company itself. It was also emphasised that ‘V’ was not holding any shares in the company.

The mere fact that the company had mobilised certain funds under the CIS during the short period when ‘V’ was an Independent Director would not by itself make him liable for the misfeasance committed by the company unless it is shown that he was also involved in the decision-making process or in the collection of the funds. Neither of the two elements was present in the instant case.

The Tribunal further noted the provisions of section 149(12) of the Companies Act, 2013 and observed that a perusal of the same makes it clear that an Independent Director shall be held liable only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through a Board process, and with his consent or connivance, or where he had not acted diligently.

In the instant case, there is no finding by the WTM that the acts of the company in the collection of the funds had occurred with the knowledge of ‘V’ or that he was part of the decision-making processes through Board’s resolution, or that the activities of the company were being done with his consent or connivance.

The Tribunal observed that there is no finding that ‘V’ had not acted diligently. In fact, the record indicates that he was only appointed for a period of five months and had not attended any meeting of the Board.

Hence, the Tribunal held that the order insofar as ‘V’ is concerned cannot be sustained and quashed the order passed by the WTM.

12. Union of India, Ministry of Corporate Affairs vs. Mukesh Maneklal Choksi [2019] 101 taxmann.com 98 (NCLT-Mum.) Date of order: 3rd January, 2019

Where family members of statutory auditor were shareholders of the company and statutory auditor had issued audit report without examining books of accounts of company, provisions of section 143(3)(d) of the Companies Act, 2013 had been violated and statutory auditor would cease to function as statutory auditor of the company

FACTS

A complaint was filed alleging that shares of the respondent company were not listed on the Pune Stock Exchange. There was siphoning of investors’ money and the company had not issued financial statements after 1995.

The Inspecting Officer u/s 207(3) of the Companies Act, 2013 issued summons to all the directors of the respondent company in addition to R1, who were the Statutory Auditors of the respondent company for the financial years 2014-15 and 2015-16.

The Statutory Auditor in his statements stated that he had not audited the books of accounts of the company. However, he had signed the Audit Report of the company for the relevant period.

The petitioner Ministry of Corporate Affairs (MCA) filed a petition u/s 140(5) of the Companies Act, 2013 for direction that R1 should immediately cease to function as Statutory Auditor of the respondent company. It was also prayed that MCA be permitted to appoint an independent auditor to replace R1 in terms of the first proviso to section 140(5) of the Companies Act, 2013 read with Explanation 1 thereto.

HELD

The Tribunal on perusal of the application noted that the respondent company is not listed on any stock exchange despite the assurances given in the prospectus dated 10th October, 1996 and its present directors are apparently dummy / shadow directors of the company. The Chairman had dodged his responsibilities to assist in the inspection and it was further noted that all the commonly-known attributes of a shell company were in existence in the case of the company under inspection.

Relying on the statement on the oath of R1, it was clear that R1, i.e., the statutory auditor, has failed to exercise his duty and has further stated that he has issued the Audit Report even without examining any of the records / books of accounts of the company.

It is recorded that family members of R1 are shareholders of the respondent company, whereas section 141(3)(d) of the Companies Act, 2013 specifically prohibits a statutory auditor being appointed as such if his relative or partner is holding any security or interest in the company.

The Tribunal further noted that issuing the audit report of the company even without examining any books of accounts is a clear-cut violation of the statutory provision of section 141(3)(d) of the Companies Act, 2013.

Under the circumstances, the Tribunal ordered that R1 shall immediately cease to function as statutory auditor of the company. The MCA is permitted to appoint an independent auditor for the respondent company to replace R1 in terms of the first proviso to section 140(5) of the Companies Act, 2013 read with Explanation 1 thereto.

13. Phoenix Arc Pvt. Ltd. vs. Spade Financial Services Ltd. Civil Appeal No. 2842 of 2020 (SC) Date of order: 1st February, 2021

Sections 5(7), 5(8) and first proviso to section 21(2) of Insolvency and Bankruptcy Code, 2016 – Parties would not be regarded as Financial Creditors if they entered into collusive or sham transaction with Corporate Debtor – The transaction could not be regarded as financial debt – Parties would qualify as related party and excluded from COC if they were related at the time of creation of debt but ceased to be related parties when CIRP was initiated for the purpose of gaining a backdoor entry to the COC

FACTS

Corporate Insolvency Resolution Process (‘CIRP’) was initiated against P Co (‘Corporate Debtor’) on 18th April, 2018 by an operational creditor, Mr. H. During the process of CIRP, the Resolution Professional (‘RP’) invited claims. S Co filed its claim as a financial creditor in Form C for a sum of Rs. 52.96 crores on 10th May, 2018. S Co later revised its form to submit a claim of Rs. 109.11 crores. The basis for filing these claims was an MOU dated 12th August, 2011 which stated that inter-corporate deposits (‘ICDs’) of Rs. 26.55 crores were granted to the Corporate Debtor by S Co bearing an interest rate of 24%. Subsequently, it was submitted that ICDs worth Rs. 66 crores were granted to the Corporate Debtor between June, 2009 and January, 2013.

AAA filed its claim before the IRP in form F as a creditor other than financial or operational creditor for a sum of Rs. 109.72 crores on 23rd May, 2018. It had entered into a Development Agreement dated 1st March, 2012 with the Corporate Debtor to purchase development rights in a project. On 25th October, 2012 the Development Agreement was terminated and an agreement to sell, along with a side letter, was executed between AAA and the Corporate Debtor for purchase of flats. The sale consideration for the agreement to sell was enhanced to Rs. 86,01,00,000 from Rs. 32,80,00,000 under the Development Agreement. AAA paid a sum of Rs. 43.06 crores which along with interest at the rate of 18% increased to Rs. 109.72 crores.

The Committee of creditors (‘COC’) was established on 22nd May, 2018. On 25th May, 2018 the IRP rejected the claim of Spade inter alia on the ground that the claim was not in the nature of a financial debt in terms of section 5(8) of IBC since there was an absence of consideration for the time value of money, i.e., the period of repayment of the claimed ICDs was not stipulated. The IRP also rejected the claim of AAA on the ground that its claim as a financial creditor in Form C was filed after the expiry of the period for filing such a claim.

Phoenix was a part of the COC on the basis of its claim arising from a registered Deed of Assignment in its favour dated 28th December, 2015 pursuant to which Karnataka Bank Limited had assigned the non-performing assets relating to the credit facilities granted to the Corporate Debtor.

AAA and Spade filed an application before the National Company Law Tribunal (‘NCLT’) to be included in the COC. The NCLT on 30th May, 2018 allowed these applications where none of the other creditors such as Yes Bank or Phoenix were present. As a result of the inclusion of AAA and Spade, the voting share of Phoenix in the COC was reduced to 4.28%.

Yes Bank and Phoenix filed an application before the NCLT to exclude AAA and Spade from the COC on the ground that they were related parties. Upon hearing the submissions, NCLT held that the transactions between the Corporate Debtor and both SPADE and AAA were collusive in nature. Accordingly, they did not qualify to be considered as financial creditors. NCLT took note of the first proviso to section 21(2) of the IBC, which stated that a financial creditor who is a related party of the Corporate Debtor shall not have the right of representation, participation or voting in the COC. Therefore, the application of Yes Bank and Phoenix for exclusion of Spade and AAA was upheld by the Court.

NCLAT upheld the view taken by the NCLT to exclude Spade and AAA from the COC. However, there was an inadvertent observation that ‘admittedly’ Spade and AAA were financial creditors of the Corporate Debtor. Mr. Anil Nanda, in concert with Mr. Arun Anand and his family, had created a web of companies which were related parties to the Corporate Debtor and was now trying to gain a backdoor entry into the COC through them. Phoenix and Yes Bank thus filed an appeal before the Supreme Court challenging the observation of NCLAT that Spade and AAA were financial creditors to the Corporate Debtor.

HELD

The Supreme Court examined in detail the transactions between the Corporate Debtor, Spade and AAA which gave rise to their claims as Financial Creditors.

In the case of Spade, it was observed that the MOU dated 12th August, 2011 which provided ICDs to the Corporate Debtor charged interest at the rate of 24%. However, Spade has stated that actually only 12% interest was charged and hence its claim is on that basis. The Corporate Debtor through this MOU provided security for the ICDs through 37 flats worth Rs. 39.825 crores in their real estate project, AKME RAAGA. Further, additional security was provided through 11 plots worth Rs. 3 crores in another project. The charge was not registered. Out of the ICDs provided to the Corporate Debtor by Spade, Rs. 43.06 crores’ worth were credited to the account of Mr. Arun Anand by consent. However, this has been disputed by Spade.

As for AAA, the Supreme Court noted that the Development Agreement dated 1st March, 2012 was superseded by an agreement to sell dated 25th October, 2012 through which AAA bought a saleable area of 313,928 sq. ft. in AKME RAAGA at a price of Rs. 43.06 crores. A side letter executed on the same day noted that the area bought by AAA was 38.3% of AKME RAAGA and AAA would provide for the cost of its development accordingly.

The Supreme Court also observed that there was a close relationship between the key managerial personnel of the Corporate Debtor, Mr. Anil Nanda, and the director of Spade and AAA, Mr. Arun Anand.

The Court heard the parties at length and also their submissions on the issues.

The submission of the Corporate Debtor that the order of the NCLT dated 31st May, 2018 where it admitted AAA and Spade as financial creditors operated as res judicata was rejected by the Supreme Court on the grounds that other creditors were not heard. The order was passed without giving them an opportunity of being heard.

The next submission of the Corporate Debtor that the issue of the eligibility of Spade and AAA as financial creditors was never raised before the NCLT was found to be contrary to the material produced on record.

The next issue raised by the Corporate Debtor was that NCLAT acted beyond jurisdiction in the appeal filed by AAA and Spade in inquiring into whether they are related parties. This submission was also not accepted by the Supreme Court.

The primary contention of Phoenix and Yes Bank before the Supreme Court was to challenge the observation of the NCLAT that it was an admitted position that AAA and Spade are financial creditors. The Supreme Court examined the provisions of sections 5(7) and 5(8) of the Code which define the terms financial creditor and financial debt, respectively.

The Supreme Court observed that money advanced as debt should be in the receipt of the borrower. The borrower is obligated to return the money or its equivalent along with the consideration for a time value of money, which is the compensation or price payable for the period of time for which the money is lent. A transaction which is sham or collusive would only create an illusion that money has been disbursed to a borrower with the object of receiving consideration in the form of time value of money, when in fact the parties have entered into the transaction with a different or an ulterior motive.

Further, the Court observed that for the success of an insolvency regime the real nature of the transactions has to be unearthed in order to prevent any person from taking undue benefit of its provisions to the detriment of the rights of legitimate creditors.

Relying on the observations of the NCLT and the submissions made by Yes Bank, Phoenix and the Corporate Debtor, the Court held that the MOU entered between Spade and the Corporate Debtor was an eye-wash and collusive in nature. Similarly, the Corporate Debtor and AAA converted the Development Agreement into an agreement to sell executed along with a side letter to circumvent the legal prohibition on splitting a development license in two parts. The transaction between AAA and the Corporate Debtor was also held to be collusive in nature.

Since the commercial arrangements between Spade and AAA and the Corporate Debtor were collusive in nature, they would not constitute a ‘financial debt’. Hence, Spade and AAA are not financial creditors of the Corporate Debtor.

The Supreme Court took note of section 5(24) of the Code which defines the term ‘related party’ along with the detailed submissions of the parties on the relationship of key managerial personnel. It was observed that the definition of ‘related party’ under the Code was significantly broad. The intention of the Legislature in adopting such a broad definition was to capture all kinds of inter-relationships between the financial creditor and the Corporate Debtor.

It was observed that Mr. Arun Anand has held multiple positions in companies which form part of the Anil Nanda Group of Companies. Further, Mr. Anil Nanda has himself invested in companies owned by Mr. Arun Anand and had commercial transactions with them. Through Spade and AAA’s own admission, Mr. Arun Anand was appointed as the Group CEO of the Anil Nanda Group of Companies (for however short a period) on circular approval by Mr. Anil Nanda himself. Finally, Mr. Arun Anand’s brother in-law, Mr. Sonal Anand, has also been consistently associated with companies in the Anil Nanda Group of Companies, including the Corporate Debtor.

It was observed that there was a deep entanglement between the entities of Mr. Arun Anand and Mr. Anil Nanda, and Mr. Arun Anand did hold positions during this period which could have been used by him to guide the affairs of the Corporate Debtor. Based on this, the Supreme Court upheld the conclusion of the NCLAT that Mr. Arun Anand would be a related party of the Corporate Debtor in accordance with section 5(24)(h) and section 5(24)(m)(i). Mr. Arun Anand, Spade and AAA were related parties of the Corporate Debtor during the relevant period when the transactions on the basis of which Spade and AAA claimed their status as financial creditors took place.

The Supreme Court further noted that the COC is comprised of financial creditors, under loan and debt contracts, who have the right to vote on decisions, and operational creditors such as employees, rental obligations, utilities payments and trade credit, who can participate in the COC but do not have the right to vote. The aim of the COC is to enable coordination between various creditors so as to ensure that the interests of all stakeholders are balanced and the value of the assets of the entity in financial distress is maximised.

In the context of the first proviso to section 21(2), the issue before the Supreme Court was whether the disqualification under the proviso would attach to a financial creditor only in praesenti, or whether the disqualification also extends to those financial creditors who were related to the corporate debtor at the time of acquiring the debt.

The Court held that where a financial creditor seeks a position on the COC on the basis of a debt which was created when it was a related party of the corporate debtor, the exclusion which is created by the first proviso to section 21(2) must apply. If the definition of the expression ‘related party’ u/s 5(24) applies at the time when the debt was created, the exclusion in the first proviso to section 21(2) would stand attracted.

The Supreme Court further clarified that the exclusion under the first proviso to section 21(2) is related not to the debt itself but to the relationship existing between a related party financial creditor and the corporate debtor.

Thus, the default rule under the first proviso to section 21(2) is that only those financial creditors that are related parties in praesenti would be debarred from the COC, those related party financial creditors that cease to be related parties in order to circumvent the exclusion under the first proviso to section 21(2), should also be considered as being covered by the exclusion thereunder.

The Supreme Court concluded that Spade and AAA were not financial creditors of the Corporate Debtor and accordingly the NCLAT observation to that extent was set aside. The exclusion of Spade and AAA from the COC was upheld for the reasons stated above.

BCAJ Admin

ALLIED LAWS

24. Jayanta Ghosh & Ors. vs. Ajit Ghoshb AIR 2020 Calcutta 196 Date of order: 25th February, 2020 Bench: Shampa Sarkar J.

Gift deed – Unconditional registered gift deed cannot be revoked – No conditions of maintenance of parents are referred in the gift deed hence no duty cast upon son to maintain the parents [Maintenance and Welfare of Parents and Senior Citizens Act, 2007, S. 10, S. 23; Transfer of Property Act, 1882, S. 122]

FACTS

By a registered deed of gift dated 18th July, 2018, Ajit Ghosh (the respondent), transferred a two-storied building together with the appurtenant land to his son Jayanta Ghosh (petitioner No. 1). Thereafter, by a registered deed of gift dated 14th November, 2018, the petitioner No. 1 transferred the suit property to his wife and son (petitioners Nos. 2 and 3). The petitioners reside on the first floor and the parents on the ground floor.

The petitioners have alleged that the married daughters of the respondent and their husbands with ulterior motive tried to grab the said property, conspired with a few developers and created a cloud over the petitioners’ title over the suit property. Under such circumstances, being left with no other alternative, the petitioners Nos. 2 and 3 were constrained to institute a civil suit seeking a decree for declaration of title and injunction against the daughters and sons-in-law of the opposite party. The Court of the Learned Civil Judge (Jr. Division) directed the parties to maintain status quo in respect of the nature, character and possession of the suit property.

The respondent filed an application seeking maintenance under the Maintenance and Welfare of Parents and Senior Citizens Act, 2007 (the Act). The Tribunal directed the petitioner No. 1 to pay maintenance of a sum of Rs. 10,000 per month. The respondents filed an application before the Tribunal seeking cancellation of the said deed of gift.

The Tribunal allowed the maintenance case, thereby cancelling the two registered deeds of gift dated 18th July, 2018 and 14th November, 2018 and further directing the petitioners to vacate the said property within six months from the said order. Aggrieved, this revisional application has been filed before the High Court.

HELD

From the recitals in the deed of gift, it appears that the respondent being pleased and satisfied with the love and respect shown by the petitioners, considered it his fatherly duty to secure his son in the future and thus had gifted the said property to the petitioner No. 1. The deed of gift was unconditional. No condition was attached with regard to the duty upon the petitioner No. 1 to provide basic maintenance and basic physical needs to the respondents. Therefore, section 23 of the said Act does not have any manner of application in this case. The revisional application is allowed.

25. Ashwin Kumar Ramanathan & Anr. vs. Inspector-General of Registration, Chief Controlling Revenue Authority AIR 2020 Madras 246 Date of order: 27th May, 2020 Bench: M. Govindaraj J.

Family arrangement – Stamp duty is not leviable – Transfer of property between family members [Stamp Act, 1899, Sch. 1 Art. 45(a)]

FACTS

One Mr. K. Ganesan by a Will dated 12th April, 1990 bequeathed life interest in favour of his wife and absolute interest in favour of his grandson (the appellant). On 18th October, 2002 the said Ganesan died. Since the Will was not probated, the family members have entered into a family arrangement. As per this, the wife and daughters of the deceased Ganesan have given the property to the grandchild as intended by the testator in his Will. However, the conveyance by the daughters of Ganesan was considered as settlement by non-family members as they do not fall within the definition of ‘family’. Therefore, stamp duty was imposed in respect of the shares of the daughters of Ganesan settled in favour of their brother’s son under the Indian Stamp Act.

HELD

It is pertinent to note that the Government in Notification No. 5450/C2/05 has clarified the definition of family for the purpose of Article 45(a) of Schedule I of the Indian Stamp Act. The clarification is given by the Government to the effect that even though the parent has died, the sisters and brother shall be construed as sons and daughters and they will fall within the definition of family. This will also apply to the children of the predeceased sons and daughters. As per the clarification, the daughters of Ganesan shall also fall under the definition of family. The conveyance or settlement made by them in favour of the children of the predeceased sons shall be considered as a transaction between the family members. They cannot be treated as members outside the family but included within the meaning of the family. The appeal is allowed.

26. Branch Manager, Indigo Airlines vs. Kalpana Rani Debbarma AIR 2020 Supreme Court 678 Date of order: 28th January, 2020 Bench: A.M. Khanwilkar J., Dinesh Maheshwari J.

Deficiency in service – Failure of passenger to reach the boarding gate after issuance of boarding pass – Airlines not duty-bound to escort every passenger [Consumer Protection Act, 1986, S. 2(1)(g), S. 21]

FACTS

The respondents had booked air ticket(s) for the flight from Kolkata to Agartala operated by the appellant airlines. According to them, they had reported well in time at the check-in counter and after completing the necessary formalities, they were issued boarding passes. However, they were left behind by the ground staff of the airlines and the flight departed without any information about its departure being given to the respondents. The respondents then requested the ground staff of the airlines to accommodate them in the next available flight for Agartala. Even this request was turned down.

As a result, the respondents had to incur expenditure for staying back at a hotel in Kolkata for two nights. They also had to incur loss of salary, mental agony, harassment, etc. Initially, the respondents sent a legal notice through their advocate on 28th January, 2017 demanding compensation of Rs. 3,32,754. As no response thereto was received, the respondents filed a complaint before the District Forum reiterating the grievance made in the legal notice and prayed for direction to the appellants for damages along with interest at the rate of 12% per annum.

HELD

The District Forum, the State Commission and the National Commission ruled in favour of the respondents but granted compensation of varying amounts. The matter was carried to the Apex Court.

The Supreme Court noted that while dealing with such a complaint, the jurisdiction or the nature of inquiry to be undertaken by the consumer fora is limited to the factum of deficiency in service and to award compensation only if that fact is substantiated by the party alleging the same. The expression ‘deficiency in service’ has been defined in section 2(1)(g) of the Consumer Protection Act, 1986 to mean any fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance which is required to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service.

Further, the approach of the consumer fora is in complete disregard of the principles of pleadings and burden of proof. First, the material facts constituting deficiency in service are blissfully absent in the complaint as filed. Second, the initial onus to substantiate the factum of deficiency in service committed by the ground staff of the airlines at the airport after issuing boarding passes was primarily on the respondents. That has not been discharged by them. The consumer fora, however, went on to unjustly shift the onus on the appellants because of their failure to produce any evidence. In law, the burden of proof would shift on the appellants only after the respondents / complainants had discharged their initial burden in establishing the factum of deficiency in service.

Further, after the boarding pass is issued, the passenger is expected to proceed towards the security channel area and head towards the specified boarding gate on his own. There is no contractual obligation on the airlines to escort every passenger, after the boarding pass is issued at the check-in counter, up to the boarding gate. Further, the airlines issuing boarding passes cannot be made liable for the misdeeds, inaction or so to say misunderstanding caused to the passengers, until assistance is sought from the ground staff of the airlines at the airport well in time. It is not the case of the respondents that the boarding gate was changed at the last minute or there was any reason which created confusion attributable to airport / airlines officials, so as to invoke an expansive meaning of ‘denied boarding’. The factual situation in the present case is clearly one of ‘Gate No Show’ and the making of the respondents and not that of ‘denied boarding’ as such.

The appellant airlines cannot be blamed for the non-reporting of the respondents at the boarding gate. The appeal is allowed.

27. Seelam Pra vs. Ganta Mani Kumar AIR 2020 Telangana 189 Date of order: 19th July, 2019 Bench: M.S. Ramachandra Rao J.

Recording evidence through video conferencing – Wife working in USA – Unable to come to India – Cannot be compelled to give up her job to appear in Court – Evidence can be led through video conferencing [Hindu Marriage Act, 1955, S. 13, S. 21; Evidence Act, 1872, S. 65-B]

FACTS

The petitioner is employed in the USA and lives there along with a son born to the parties. The petitioner is represented by her father / G.P.A. holder. She sought recording of evidence by video conference from her residence in the US on the ground that she was living there and it was not possible for her to appear before the Family Court, Hyderabad on the several dates of adjournment. But the trial Court declined to give such permission observing that in the premises of the City Civil Court, Hyderabad where the Family Court was located, infrastructure / facility for video conferencing has not been provided.

HELD

In a situation where one or both of the parties to a matrimonial proceeding is living abroad and is unable to come to India to give evidence on account of his / her employment there, and there is a risk of the party losing his / her employment if he / she were to return to India, it would be unjust to compel the said party to give up her job there so that she can appear on every date of adjournment in the Family Court in India where her case is pending. It is common knowledge that pendency in some of the Family Courts is very high and there is every possibility of the matter getting dragged on indefinitely.

Further, that the petitioner cannot be penalised if her evidence could not be recorded when she was in India in the year 2018 because she admittedly attempted to file her documents through her G.P.A. which was rejected and permitted only much later.

The Principal Judge, Family Court, was directed to record the chief-examination / cross-examination of the petitioner through video conferencing at the video conferencing facility available in City Civil Court, Hyderabad after fixing an appropriate time with the consent of both parties and their counsel.

28. Abhilasha vs. Parkash & Ors. AIR 2020 Supreme Court 4355 Date of order: 15th September, 2020 Bench: Ashok Bhushan J., R. Subhash Reddy J., M.R. Shah J.

Maintenance – Unmarried daughter unable to maintain herself even after attaining majority – The obligation which is cast on the father to maintain his unmarried daughter can be enforced by her against her father [The Hindu Adoptions and Maintenance Act, 1956, S. 20(3); The Code of Criminal Procedure, 1973, S. 125]

FACTS

The respondent No. 2, mother of the appellant, on her behalf as well as on behalf of her two sons and the appellant daughter, filed an application u/s 125 CrPC against her husband, the respondent No. 1, Parkash, claiming maintenance for herself and her three children. The Judicial Magistrate dismissed the application u/s 125 CrPC of the applicants and allowed the same for respondent No. 1 (appellant before us) for grant of maintenance till she attains majority.

Two questions arise for consideration in this appeal:

(i) Whether the appellant, who although she had attained majority but is still unmarried, is entitled to claim maintenance from her father in proceedings u/s 125 CrPC although she is not suffering from any physical or mental abnormality / injury?

(ii) Whether the orders passed by the Judicial Magistrate as well as the Revisional Court limiting the claim of the appellant to claim maintenance till she attains majority on 26th April, 2005 deserves to be set aside with a direction to the respondent No. 1 to continue to give maintenance even after 26th April, 2005 till the appellant remains unmarried?

HELD

Section 20(3) of the Hindu Adoptions and Maintenance Act, 1956 (Act) is nothing but recognition of the principles of Hindu Law regarding maintenance of children and aged parents. Section 20 of this Act casts a statutory obligation on a Hindu to maintain his daughter who is unmarried and unable to maintain herself out of her own earnings or other property. Hindu Law prior to the enactment of the Act of 1956 always obliged a Hindu to maintain an unmarried daughter who is unable to maintain herself. The obligation, which is cast on the father to maintain his unmarried daughter, can be enforced by her against her father if she is unable to maintain herself by enforcing her right u/s 20.

BCAJ Admin

RIGHT TO INFORMATION (r2i)

Supreme Court refuses to recall 2015 verdict directing RBI to divulge information about banks under RTI1

Case name:

Reserve Bank of India vs. Jayantilal N.
Mistry & Anr.

Citation:

M.A. No. 2342 of 2019, M.A. No. 805/2020,
M.A. No. 1870/2020, M.A. No. 534/2020, M.A. No. 1046/2020, M.A. No.
1129/2020, M.A. No. 1646/2020, M.A. No. 1647/2020, M.A. No. 1648/2020, M.A.
No. 2008/2020, M.A. No. 560/2021, M.A. No. 573/2021 in transferred case
(Civil) No. 91 of 2015

Court:

The Supreme Court of India

Bench:

Justice L. Nageswara Rao and Justice Vineet Saran

Decided on:

28^th April, 2021

Relevant Act / sections:

Sections 8(1)(a)(d) and (e) and 2(f) of Right to
Information Act, 2005

Brief facts and procedural history:

An RTI activist named Jayantilal Mistry from Gujarat way back in 2010 had sought information under the RTI Act, 2005 from the RBI about a Gujarat-based co-operative bank.

The information pertained to the annual inspection reports prepared by the RBI which had not been put into the public domain. Mistry filed an application under the RTI Act in October, 2010 before the Central Public Information Officer (CPIO) of the RBI.

The RBI, however, did not provide the requested details. The information seeker then filed an appeal before the designated First Appellate Authority (FAA) of the RBI.

On 30th March, 2011, the FAA disposed of the appeal by upholding the order of the CPIO. The aggrieved Mistry filed a second appeal before the Central Information Commission (CIC), New Delhi.

The CIC in its judgment dated 1st November, 2011 directed the RBI to provide information before 30th November, 2011.

Aggrieved by the decision of the CIC, the RBI filed a writ petition before the Delhi High Court for quashing of the CIC’s judgment. The High Court, while issuing notice, stayed the operation of the CIC’s order.

The matter was finally challenged before the Supreme Court of India.

The Supreme Court in its 2015 judgment on the applicability of RTI has made a detailed reference to section 2(f) of the RTI Act, 2005 which defines ‘information’. The RBI collects inspection reports from various banks. Since these reports fall within the definition of ‘information’, the same must be provided to citizens. Ideally, the RBI should make these reports public through its website.

A joint plea / recall petition was filed by the Central Government and ten banks seeking a recall of the 2015 judgment.

Issues before the Court:

Whether an application can be filed to recall the judgment of the Hon’ble Supreme Court?

Ratio decidendi:

The dispute relates to information to be provided by the RBI under the RTI Act. Though the information pertained to banks, it was the decision of the RBI which was in challenge and decided by this Court.

No effort was made by any of the applicants in the Miscellaneous Applications to get themselves impleaded when the transferred cases were being heard by this Court. The applications styled as recall are essentially applications for review.

The nomenclature given to an application is of absolutely no consequence; what is of importance is the substance of the application – M.C. Mehta vs. Union of India.

A close scrutiny of the applications for recall makes it clear that in substance the applicants are seeking a review of the judgment in Jayantilal N. Mistry (2015).

Decision:

The Court was of the opinion that these applications were not maintainable. It made it clear that it is not dealing with any of the submissions made on the correctness of the judgment of this Court in Jayantilal N. Mistry (2015).

The dismissal of the applications shall not prevent the applicants from pursuing other remedies available to them in law. All the Miscellaneous Applications were dismissed.

PART B | HIGHLIGHTS OF CIC ANNUAL REPORT, 2019-20

Total number of Public Authorities: 2,193

Total number of Public Authorities who have submitted all the four quarterly returns: 2,131

Total number of Public Authorities who have not submitted all the four quarterly returns: 62 (the defaulters include public authorities of four Union Territories and 21 Ministries)

Opening balance of RTI requests received by Public Authorities (as on 1st April of the reporting year): 3,10,110

Total number of RTI requests received during the reporting year: 13,74,315

Total number of RTI requests including opening balance: 16,84,425

Total number of RTI requests transferred to other Public Authorities u/s 6(3): 1,82,988

Total number of first appeals received: 1,52,354

Total number of first appeals disposed: 96,812

Total number of RTI requests rejected by Public Authorities: 58,634

Total number of cases where disciplinary action has been initiated against an officer in respect of administration of the RTI Act: 23

Total amount collected by Public Authorities (in INR): 93,08,534

Total number of designated CAPIOs: 60,432

Total number of designated CPIOs: 21,756

Total number of designated FAAs: 8,923

Number of second appeals / complaints registered during reporting year: 22,243

Number of second appeals / complaints disposed during reporting year: 16,720

Number of second appeals / complaints pending for disposal as on 1st April of reporting year: 35,178

One out of every three RTIs is rejected using section 8 (1)2.

PART C | INFORMATION ON AND AROUND

Two bribery and disproportionate assets complaints had been received against Sachin Waze but no inquiry was going on against him till March, 2021

The Anti-Corruption Bureau of Maharashtra Police has sent a proposal to the Home Department for an open inquiry against allegations of corruption and disproportionate assets against suspended and jailed Assistant Police Inspector Sachin Waze. A Right to Information (RTI) query has separately revealed that the ACB ignored a complaint alleging bribery and disproportionate assets against Waze last year, soon after he was reinstated in the police force3.

Orissa High Court refuses to grant interim stay on OIC order

OIC had issued the order on 9th July 9, 2020 on a complaint for bringing OOA under the ambit of RTI to ensure greater transparency and accountability in its operations. While issuing the order, OIC had directed OOA to comply with the provisions of the Act within 30 days from the date of receipt of the order. The OOA operates and maintains the Barabati Stadium in Cuttack which had come up on land given by the Government under a long-term lease for development of sports in Odisha. OOA is affiliated to the Indian Olympic Association (IOA) which has already subjected itself to the provisions of RTI in compliance with the order passed by the High Court of Delhi in some writ petitions in 20104.

28,000 cases lodged under section 188 of IPC pending with Pune Police

Section 188 of the IPC states that any person who disobeys an order given by a public servant can be imprisoned for up to one month. Even though in 2020 the then State Home Minister Anil Deshmukh had announced that the Government would withdraw cases against people booked for violating Covid lockdown norms, yet the pending cases are in huge numbers5.

_______________________________________________________
1   https://www.livelaw.in/pdf_upload/rbi-v-jayantilal-n-mistry-2021-392582.pdf
2   https://cic.gov.in/sites/default/files/Reports/CIC%20Annual%20Report%202019-20%20-%20English.pdf
3   https://indianexpress.com/article/cities/mumbai/anti-corruption-bureau-sends-proposal-to-home-dept-for-open-inquiry-against-waze-7295985/
4   https://www.newindianexpress.com/states/odisha/2021/may/22/orissa-high-court-refuses-to-grant-interim-stay-on-oic-order-2306012.html
5   https://www.hindustantimes.com/cities/others/28000-cases-lodged-under-section-188-of-ipc-pending-with-pune-police-101621605589107.html

BCAJ Admin

CORPORATE LAW CORNER

4 JCT Limited vs. BSE Limited Before Securities Appellate Tribunal, Mumbai Date of order: 12th November, 2020 Appeal No. 553 of 2019 (Unreported)

If company issues shares against waiver of interest of 3%, said issue is to be considered as for ‘consideration other than cash’

FACTS

The appellant company JCT Limited is listed on the Bombay Stock Exchange (BSE). It availed several credit facilities from a consortium of banks and also issued Foreign Currency Convertible Bonds which were due for redemption. But the FCCBs could not be redeemed due to its unsound financial condition and the bond-holders initiated winding-up proceedings in the Punjab and Haryana High Court.

Even a settlement agreement in terms of the direction of the High Court could not be honoured because the appellant company defaulted in paying the instalments. The company then approached Phoenix ARC Private Limited (‘Phoenix’) which agreed to a one-time settlement of the obligations of FCCBs for a total consideration of Rs. 100 crores as well as for a need-based working capital loan to the company up to Rs. 20 crores. Therefore, the said agreement was for a total loan of Rs. 120 crores with a tenure / maturity of five years to be repaid with interest @ 19% per annum.

But the company contended that the interest rate of 19% was on the high side. The two (the appellant and Phoenix) agreed to revise the interest rate to 16% p.a., with interest payable on a monthly basis and 3% to be paid upfront at the time of assigning / first draw-down of the loan.

It was also agreed that equity shares would be allotted to Phoenix in lieu of the 3% interest component and in September, 2018, Phoenix conveyed its final sanction of the loan on the above terms.

In December, 2018 the company’s Board of Directors approved the issue of fresh equity shares in lieu of the 3% interest which came to Rs. 9.16 crores on discounted value basis; therefore, 3,64,72,067 equity shares of a face value of Rs. 2.50 had to be issued.

In January, 2019 the company submitted an application to the BSE for in-principle approval of the said issue and allotment. Various clarifications were sought by BSE which were replied to.

Next, in February, 2019 at an extraordinary general body meeting of the company, a special resolution was passed empowering the Board of Directors to issue the said shares.

In July, 2019 the company submitted a representation to SEBI seeking in-principle approval for the said issue and allotment.

And in August, 2019 a personal hearing was held before SEBI in which officials from BSE were also present. At this meeting, SEBI endorsed the view taken by the BSE officials and informed the company that approval could not be granted to the proposed issue and allotment in terms of Regulation 169(1) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

In the same month, the company received an e-mail communication from BSE stating that if as part of an agreement of liquidating a future obligation / liability an issue and allotment is made, it shall be treated as for ‘other than cash consideration’.

An appeal was filed by JCT Limited against BSE and SEBI wherein the proposal to issue 3,64,72,067 equity shares to a lender on preferential basis was rejected.

Interpretation by Department of Company Affairs (‘DCA’)

The DCA had issued a Circular and stated that if the consideration for the allotment of shares is actual cash, only then the allotment would be for cash. It stated that ‘cash’ is actual money or instruments, e.g., cheques which are generally used and accepted as money. If the consideration for allotment is not flow of cash but some other mode of payment, such as cancellation of a genuine debt or outstanding bills, for goods sold and delivered, marketable securities, time deposits in banks, etc., then the allotment cannot be treated as for cash. However, the DCA issued a clarification, re-examined the earlier Circular and stated that allotment of shares by a company to a person in lieu of a genuine debt due is in compliance with the provisions of section 75(1) of the Companies Act, 1956. The DCA clarified that ‘the act of handing over cash to the allottee of shares by a company in payment of the debt and the allottee in turn returning the same cash as payment for the shares allotted to him is not necessary for treating the shares as having been allotted for cash. What is required is to ensure that the genuine debt payable by a company is liquidated to the extent of the value of the shares.’

HELD

SAT opined that if, as part of an agreement of liquidating a future obligation / liability an issue and allotment is made, it shall be treated as for ‘other than cash consideration’. SAT rejected the respondents’ (i.e., BSE and SEBI) contention that it has to be an existing debt obligation. It observed that ‘it is a very tight and narrow interpretation, particularly in the context of a beneficial economic legislation where some degree of freedom of doing business is to be granted while interpreting provisions of such law in the absence of any allegation of violation, manipulation or other offences.’

SAT noted that the appellant company was on the brink of liquidation, trying to pay up its past obligations to the financial institutions by availing a term-loan from an ARC who, for its own business considerations, is ready to give such a term loan though at an exorbitant rate of interest of 19%. While noting that 19% was too high (which might again make the company non-viable), SAT appreciated that the company had entered into an agreement with an ARC for a reduction in the interest liability in terms of giving some shares of the company, which the ARC was willing to accept and for which NPV calculation was also agreed to by the parties.

By the NPV method, a potential liability of Rs. 21.55 crores was converted into Rs. 9.16 crores. SAT stated that ‘There are lots of genuine business decisions in terms of this agreement. Even if it is possible to read such an interest adjustment for shares as for cash consideration, it is also possible to read the same futuristic NPV-based consideration as not for cash’. In such a context of ‘right versus right’ and that, too, in the case of business decisions, ‘we need to read it with a positive spirit’ for enabling business and genuine business decisions.

SAT held that the said issue by the company to issue and allot shares in lieu of 3% reduction in interest is clearly ‘other than cash’. It observed that ‘These words are clear, plain and unambiguous and need no further interpretation, and therefore use of any additional words to give a purposeful meaning to the provision is not required, especially when clarifications, as quoted above, have been made.’

BCAJ Admin

ALLIED LAWS

8 Chief Information Commissioner vs. High Court of Gujarat AIR (2020) SC 4333
Date of order: 4th March, 2020 Bench: R. Banumathi J., A.S. Bopanna J., Hrishikesh Roy J.

Right to Information – Certified copies to third parties – Only on affidavit – Not inconsistent with RTI Act – RTI Act will not override High Court Rules [Right to Information Act, 2005, S. 6(2), S. 11, S. 12; Gujarat High Court Rules, R. 151]

FACTS

An RTI application dated 5th April, 2010 was filed by respondent No. 2 seeking information pertaining to certain cases along with all relevant documents and certified copies. In reply, by a letter dated 29th April, 2010, the Public Information Officer, Gujarat High Court, informed respondent No. 2 that for obtaining the required copies he should make an application personally or through his advocate by affixing a court fee stamp of Rs. 3 along with the requisite fees to the ‘Deputy Registrar’. It was further stated that as respondent No. 2 is not a party to the said proceedings, as per Rule 151 of the Gujarat High Court Rules, 1993 his application should be accompanied by an affidavit stating the grounds on which the certified copies are required and on making such application he will be supplied with the certified copies of the documents as per Rules 149 to 154 of the Gujarat High Court Rules, 1993.

HELD

Rule 151 of the Gujarat High Court Rules stipulates that a third party to have access to the information / obtaining the certified copies of the documents or orders is required to file an application / affidavit stating the reasons for seeking the information, and this is not inconsistent with the provisions of the RTI Act but merely lays down a different procedure from the practice of payment of fees, etc., for obtaining information. In the absence of any inherent inconsistency between the provisions of the RTI Act and other laws, the overriding effect of the RTI Act would not apply.

For information to be accessed / certified copies on the judicial side to be obtained through the mechanism provided under the High Court Rules, the provisions of the RTI Act shall not be resorted to.

9 In Re: Expeditious trial of cases u/s 138 of the Negotiable Instruments, Act, 1881 Suo motu W.P. (Crl) No. 2 of 2020 Date of order: 17th April, 2021 Bench: A.S. Bopanna J., B.R. Gavai J., L. Nageswara Rao J., Ravindra Bhat J., S.A. Bobde CJI

Dishonour of cheques – Long pendency of disputes – Guidelines issued [S. 138, Negotiable Instruments Act, 1881]

FACTS

Special Leave Petition (Criminal) No. 5464 of 2016 pertains to dishonour of two cheques on 27th January, 2005 for an amount of Rs. 1,70,000. The dispute has remained pending for the past 16 years. Concerned with the large number of cases filed u/s 138 of the Negotiable Instruments Act, 1881 (the 1881 Act) pending at various levels, a Division Bench of this Court decided to examine the reasons for the delay in disposal of these cases. The Registry was directed to register a suo motu Writ Petition (Criminal).

HELD

Courts are inundated with complaints filed u/s 138 of the 1881 Act. The cases are not being decided within a reasonable period and remain pending for a number of years. This gargantuan pendency of complaints has had an adverse effect on disposal of other criminal cases. Concerned with the large number of cases pending at various levels, a larger bench of the Supreme Court has examined the reasons for the delay in disposal of cases. The following conclusions were arrived at:

1) The High Courts are requested to issue practice directions to the Magistrates to record reasons before converting trial of complaints u/s 138 from summary trial to summons trial.
2) Inquiry shall be conducted on receipt of complaints u/s 138 to arrive at sufficient grounds to proceed against the accused when such accused resides beyond the territorial jurisdiction of the court.
3) For the conduct of inquiry u/s 202 of the Code, evidence of witnesses on behalf of the complainant shall be permitted to be taken on affidavit. In suitable cases, the Magistrate can restrict the inquiry to examination of documents without insisting on examination of witnesses.
4) We recommend that suitable amendments be made to the Act for provision of one trial against a person for multiple offences u/s 138 committed within a period of 12 months, notwithstanding the restriction in section 219 of the Code.
5) The High Courts are requested to issue practice directions to the Trial Courts to treat service of summons in one complaint u/s 138 forming part of a transaction, as deemed service in respect of all the complaints filed before the same court relating to dishonour of cheques issued as part of the said transaction.
6) Judgments of this Court in Adalat Prasad [(2004) 7 SCC 338] and Subramanium Sethuraman [(2004) 13 SCC 324] have interpreted the law correctly and we reiterate that there is no inherent power of Trial Courts to review or recall the issue of summons. This does not affect the power of the Trial Court u/s 322 of the Code to revisit the order of issue of process in case it is brought to the court’s notice that it lacks jurisdiction to try the complaint.
7) Section 258 of the Code is not applicable to complaints u/s 138 and findings to the contrary in Meters and Instruments [(2004) 13 SCC 324] do not lay down the correct law. To conclusively deal with this aspect, amendment to the Act empowering the Trial Courts to reconsider / recall summons in respect of complaints u/s 138 shall be considered by the committee constituted by an order of this Court dated 10th March, 2021.
8) All other points, which have been raised by the Amici Curiae in their preliminary report and written submissions and not considered herein, shall be the subject matter of deliberation by the aforementioned committee. Any other issue relating to expeditious disposal of complaints u/s 138 shall also be considered by the committee.

10 Asset Reconstruction Company (India) Limited vs. Bishal Jaiswal & Anr. CA No. 323 of 2021 Date of order: 15th April, 2021 Bench: Rohinton Fali Nariman J., B.R. Gavai J., Hrishikesh Roy J.

Period of Limitation – Balance Sheet entries – Acknowledgement of debt [S. 18, Limitation Act, 1963]

FACTS

In 2009, Corporate Power Ltd. (corporate debtor) set up a thermal power project in Jharkhand and availed of loan facilities from various lenders, including the State Bank of India (SBI). The account of the corporate debtor was declared as a non-performing asset by SBI on 31st July, 2013. On 27th March, 2015, SBI issued a loan-recall notice to the corporate debtor in its capacity as the lenders’ agent. On 20th June, 2015, the appellant issued a notice u/s 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) on behalf of itself and other consortium lenders to the corporate debtor.

On 1st June, 2016, the appellant took actual physical possession of the project assets of the corporate debtor under the SARFAESI Act. On 26th December, 2018, the appellant filed an application u/s 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal, Calcutta (NCLT) for a default amounting to Rs. 59,97,80,02,973 from the corporate debtor. As the relevant form indicating the date of default did not indicate any such date, this was made up by the appellant on 8th November, 2019 by filing a supplementary affidavit before the NCLT, specifically mentioning the date of default and annexing copies of balance sheets of the corporate debtor which, according to the appellant, acknowledged periodically the debt that was due.

On 19th February, 2020, the section 7 application was admitted by the NCLT, observing that the balance sheets of the corporate debtor, wherein it acknowledged its liability, were signed before the expiry of three years from the date of default and entries in such balance sheets being acknowledgements of the debt due for the purposes of section 18 of the Limitation Act, 1963 (Limitation Act), the section 7 application is not barred by limitation. The corporate debtor filed an appeal before the National Company Law Appellate Tribunal (NCLAT), which held that entries in balance sheets would not amount to acknowledgement of debt for the purpose of extending limitation u/s 18 of the Limitation Act on account of a NCLAT Full Bench decision in the case of V. Padmakumar vs. Stressed Assets Stabilisation Fund, Company Appeal (AT) (Insolvency) No. 57 of 2020 (decided on 12th March, 2020).

HELD

The default had been admitted by the corporate debtor and the signed balance sheet of the corporate debtor for the year 2016-17 was not disputed by it. As a result, the NCLT held that the section 7 application was not barred by limitation and therefore admitted the same. It further held that the majority decision of the Full Bench in V. Padmakumar (Supra) is contrary to a catena of judgments and hence set aside.

11 In Re: Cognizance for Extension of Limitation Suo motu W.P. (C) No. 3 of 2020 Date of order: 27th April, 2021 Bench: S.A. Bobde CJI, Surya Kant J., A.S. Bopanna J.

Covid-19 – Supreme Court – Relief for litigants and lawyers [Constitution of India, Articles 141, 142]

FACTS

Due to the onset of the Covid-19 pandemic, this Court took suo motu cognizance of the situation arising from difficulties that might be faced by the litigants across the country in filing petitions / applications / suits / appeals / all other proceedings within the period of limitation prescribed under the general law of limitation or under any special laws (both Central or State).

The Supreme Court in the same case vide order dated 23rd March, 2020 had extended the due date till further orders. The said order was extended from time to time.

Thereafter, on 8th March, 2021, it was noticed that the country is returning to normalcy and since all the Courts and Tribunals have started functioning either physically or by virtual mode, extension of limitation was regulated and brought to an end. The period between 15th March, 2020 and 14th March, 2021 stood excluded.

The Supreme Court Advocates on Record Association (SCAORA) has now, through this Interlocutory Application, highlighted the daily surge in Covid cases in Delhi and stated how difficult it has become for the Advocates-on-Record and the litigants to institute cases in the Supreme Court and other courts in Delhi. Consequently, restoration of the order dated 23rd March, 2020 has been prayed for.

HELD

The period from 14th March, 2021 till further orders shall also stand excluded in computing the periods prescribed under sections 23(4) and 29A of the Arbitration and Conciliation Act, 1996, section 12A of the Commercial Courts Act, 2015, and provisos (b) and (c) of section 138 of the Negotiable Instruments Act, 1881 and any other laws which prescribe period(s) of limitation for instituting proceedings, outer limits (within which the court or tribunal can condone delay) and termination of proceedings.

12 The Chief Election Commissioner of India vs. M.R. Vijayabhaskar & Ors. CA 1767 of 2021 Date of order: 6th May, 2021 Bench: Dr. D.Y. Chandrachud J., M.R. Shah J.

Oral comments – reported by media – Sanctity and validity [Article 19, 226, Constitution of India]

FACTS

The Madras High Court entertained a Writ Petition under Article 226 of the Constitution to ensure that Covid-related protocols are followed in the polling booths at the 135-Karur Legislative Assembly Constituency in Tamil Nadu. During the hearings, the Division Bench is alleged to have made certain remarks, attributing responsibility to the Election Commission (EC) for the present surge in the number of cases of Covid-19, due to its failure to implement appropriate safety measures and protocol during the elections. The Court observed, ‘the institution that is singularly responsible for the second wave of Covid-19…’ and that the EC ‘should be put up for murder charges’. These remarks, though not part of the order of the High Court, were reported in the print, electronic and tele-media.

The issue is that these oral remarks made by the High Court, which the EC alleges are baseless, tarnished the image of the EC which is an independent constitutional authority.

HELD

Courts must be open both in the physical and metaphorical sense. Our legal system is founded on the principle that open access to courts is essential to safeguard valuable constitutional freedoms. The concept of an open court requires that information relating to a court proceeding must be available in the public domain. Citizens have a right to know about what transpires in the course of judicial proceedings. The dialogue in a court indicates the manner in which a judicial proceeding is structured. Oral arguments are postulated on an open exchange of ideas.

Article 19(1)(a) of the Constitution guarantees every citizen the right to freedom of speech and expression. The Constitution guarantees the media the freedom to inform, to distil and convey information and to express ideas and opinions on all matters of interest. Freedom of speech and expression extends to reporting the proceedings of judicial institutions as well. Courts are entrusted to perform crucial functions under the law. Their work has a direct impact not only on the rights of citizens but also the extent to which the citizens can exact accountability from the executive whose duty it is to enforce the law.

The independence of the judiciary from the executive and the legislature is the cornerstone of our Republic. Independence translates to being impartial, free from bias and uninfluenced by the actions of those in power, but also recognises the freedom to judges to conduct court proceedings within the contours of the well-established principles of natural justice. Judges in the performance of their duty must remain faithful to the oath of the office they hold which requires them to bear allegiance to the Constitution. An independent judiciary must also be one which is accountable to the public in its actions (and omissions).

BCAJ Admin

CORPORATE LAW CORNER

7. Karn Gupta vs. Union of India & Anr. Delhi High Court W.P.(C) 5009/2018 and CM No. 19290/2018 Date of order: 23rd May, 2018

The Director of a company who has resigned from the Directorship would not incur disqualification u/s 164 of the Companies Act, 2013

FACTS
• Mr. KG in his writ petition complained that he had been appointed as a Director in a company registered under the name of M/s EWC Pvt. Ltd. on 11th July, 2012. He resigned on 5th December, 2012.

• The company failed to submit Form 32 regarding his resignation in accordance with the provisions of the erstwhile Companies Act, 1956 with the Registrar of Companies.

• On 6th September, 2017 and 12th September, 2017, MCA notified a list of Directors who had been disqualified u/s 164(2)(a) of the Companies Act, 2013 as Directors with effect from 1st November, 2016.

• Mr. KG’s name featured in this list, despite his resignation. As a result, he was prohibited from being appointed or re-appointed as a Director in any other company for a period of five years.

• It was submitted before the Delhi High Court that Mr. KG had resigned from the Directorship of the company a long time back. Therefore, he would not incur disqualification u/s 164 of the Companies Act, 2013.

• Consequently, he pleaded that the disqualification as notified in the lists dated 6th September, 2017 and 12th September, 2017 by the Registrar of Companies was incorrect and illegal.

HELD
• The Delhi High Court held that the disqualification of Mr. KG as notified in the impugned list as disqualified
Director of the company and the resultant prohibition u/s 164(2)(a) of the Companies Act, 2013 by virtue of his name featuring in the lists dated 6th September, 2017 and 12th September, 2017 was incorrect, set aside and quashed.

• The Court further directed the Registrar of Companies to ensure that its records are properly rectified to delete the name of Mr. KG from the lists.

8. The Registrar of Companies West Bengal vs. Sabyasachi Bagchi National Company Law Appellate Tribunal, New Delhi Company Appeal (AT) No. 12 of 2019 Date of order: 24th June, 2020

NCLT cannot ignore the provisions relating to minimum penalty for compounding of offence as per sub-section (6) of section 165 of Companies Act, 2013

FACTS
• Mr. SB was holding Directorship in 17 companies as on 1st April, 2014 when section 165(1) of the Act came into force. However, he vacated Directorship of three companies during the period from 1st April, 2014 to 31st March, 2015.

• Later, he received a show cause notice from the Registrar of Companies, West Bengal, (ROC). After receipt of the said notice, Mr. SB resigned from the Directorship of four companies on 22nd February, 2016; thus, he had contravened the provisions of section 165(1) of the Companies Act, 2013 for the period from 01st April, 2015 to 21st February, 2016 – i.e., for 326 days.

• The reply to the show cause notice of Mr. SB was found unsatisfactory; therefore, the ROC filed a complaint u/s 165 (6) against him before the Chief Metropolitan Magistrate, Kolkata. During the pendency of the prosecution, Mr. SB filed an application u/s 441(1) of the Act before the National Company Law Tribunal, Kolkata (NCLT) for compounding the offence.

• The ROC filed his report on the compounding application before the NCLT. After hearing the parties, NCLT allowed the application subject to payment of the compounding fees of Rs. 25,000 within 15 days from the date of the order.

• But the ROC being aggrieved with the NCLT order, preferred to file an appeal against this before the National Company Law Appellant Tribunal (NCLAT) along with an application for condonation of delay in filing the appeal. After hearing the parties and being satisfied, NCLAT, in exercise of its powers condoned the delay of 41 days in filing the appeal.

HELD
NCLAT observed and held that:
• Mr. SB had violated the provisions u/s 165(1) read with section 165(3) of the Act for the period from 1st April, 2015 to 21st February, 2016 which was punishable u/s 165(6) of the Act before amendment.

• Further, NCLAT noted that the Tribunal had failed to notice the minimum fine prescribed under sub-section 6 of section 165, which was applicable at the relevant time, i.e., before the amendment.

• Hence, taking into consideration the facts and circumstances of the case, NCLAT set aside the NCLT order and imposed a minimum fine at the rate of Rs. 5,000 for every day for the period from 1st April, 2015 to 21st February, 2016, i.e., 326 days, adding up to a total of Rs. 16,30,000. Thus, the appeal of the ROC was allowed.

9. In the Supreme Court of India, Civil Appellate Jurisdiction Civil Appeal No. 1650 of 2020 Dena Bank (now Bank of Baroda) vs. C. Shivakumar Reddy & Anr.

FACTUAL BACKGROUND
The instant appeal was filed u/s 62 of the Insolvency and Bankruptcy Code, 2016. It was filed against the judgment passed by the National Company Law Appellate Tribunal (NCLAT) which had held that the petition of the appellant bank u/s 7 of the IBC was barred by limitation. The verdict passed by the Supreme Court goes on to resolve issues regarding what can and what cannot be accepted as an acknowledgment of debt by the corporate debtor, the period of limitation, and whether belated filing of additional documents can be done at a later stage under the IBC.

HELD BY NCLT & NCLAT
In October, 2018, the appellant bank filed the petition before the NCLT u/s 7 of the IBC. Further, in 2019, it filed an application under Rule 11 of the NCLT Rules, 2016 read along with Rule 4 for permission to place on record the final judgment of the DRT and the Recovery Certificate that was issued; this application was allowed by the Adjudicating Authority. In March, 2019, a similar application was filed once again, this time to take permission to place on record additional documents, including the letter dated 3rd March, 2017 of the corporate debtor (CD) to the said bank proposing a one-time settlement; the annual report of the CD for the years 2016-2017; the financial statement of the CD for the period from 1st April, 2016 to 31st March, 2017; and also for the period from 1st April, 2017 to 31st March, 2018 – and this application, too, was allowed.

Further, in February, 2019, the CD filed its preliminary objections to the petition filed by the bank u/s 7 of the IBC, inter alia contending that the said petition was barred by limitation. This objection was rejected by the Adjudicating Authority, the petition filed by the bank was allowed and an Interim Resolution Professional was appointed in March, 2019. The CD filed an appeal against this order before the NCLAT u/s 61 of the IBC. The NCLAT allowed the appeal and set aside the earlier judgment passed by the NCLT, stating that the petition filed by the appellant bank u/s 7 of the IBC was barred by limitation.

ISSUES INVOLVED
Whether a petition u/s 7 of the IBC would be barred by limitation on the sole ground that it had been filed beyond three years from the declaration of the loan account as an NPA, even though the corporate debtor may have subsequently acknowledged the liability?

Whether a final judgment and decree of the DRT in favour of the financial creditor, or a Recovery Certificate, would give rise to a fresh cause of action to initiate proceedings u/s 7 of the IBC?

Whether there is any bar in law to the amendment of pleadings to include additional documents under a section 7 petition?

APPELLANT’S CONTENTIONS
(1) It was contended that the corporate debtor had, in its annual reports for the financial years 2016-2017 and 2017-2018, acknowledged its liability in respect of the loan taken by it from the appellant bank.

(2) That NCLAT reversed the initial judgment of the Adjudicating Authority and held that the petition was barred by limitation on the basis of the fact that there was nothing on record that suggested that the CD had acknowledged its debt to the appellant bank, thereby ignoring the documents filed by the bank which were allowed by the Adjudicating Authority. The petition u/s 7 of the IBC was filed well within three years from the date of such acknowledgment.

(3) Further, placing reliance on Sesh Nath Singh and Anr. vs. Baidyabati Sheoraphuli Co-operative Bank Ltd. and Ors.; Laxmi Pat Surana vs. Union Bank of India and Ors.; and Asset Reconstruction Company (India) Limited vs. Bishal Jaiswal and Ors., it was argued that section 18 of the Limitation Act applied to proceedings under the IBC.

RESPONDENT’S CONTENTIONS
(A) Under the scheme of the IBC, NCLAT is the final forum for determination of facts and the factual determination by the NCLAT is that the records reveal no acknowledgment of debt for the purpose of extending limitation. Since this appeal has been filed on the basis of documents that were brought on record before the Adjudicating Authority (NCLT) at a belated stage, it was contrary to the provisions of IBC and the law laid down by this Court.

(B) The appellant bank filed its petition u/s 7 of the IBC on 12th October, 2018, about five years after the date of default, and was thus well beyond the period of limitation of three years under Article 137 of the Schedule to the Limitation Act.

(C) That u/s 7(3) of the IBC, a financial creditor is required to furnish ‘record of the default recorded with the information utility or record of evidence of default as may be specified’ and ‘any other information as may be specified by the Board’.

(D) Section 62 of the IBC, under which the instant appeal has been filed, is restricted to questions of law, unlike an appeal to the NCLAT from an order of the Adjudicating Authority (NCLT), which is an appeal both on facts and in law. Further, it was contended that the foundation for a plea of extension of limitation by virtue of acknowledgment of debt should be in the pleadings and cannot be developed at a later stage.

(E) Lastly, that the petition u/s 7 of the IBC was not based on the Recovery Certificate issued by the DRT or the judgment and order of the DRT. Therefore, there could be no question of reckoning limitation from the date of failure to make payment in terms of the Recovery Certificate.

COURT’S OBSERVATIONS
(i) An application to the Adjudicating Authority (NCLT) u/s 7 of the IBC in the prescribed form cannot be compared with the plaint in a suit.

(ii) The application does not lapse for non-compliance of the time schedule. Nor is the Adjudicating Authority obliged to dismiss the application. On the other hand, the application cannot be dismissed without compliance with the requisites of the proviso to section 7(5) of the IBC.

(iii) As per the provisions of the IBC, and in particular the provisions of section 7(2) to (5) of the IBC read
with the 2016 Adjudicating Authority Rules, there is no bar to the filing of documents at any time until a final order either admitting or dismissing the application has been passed.

(iv) There is no penalty prescribed for inability to cure the defects in an application within seven days from the date of receipt of notice, and in an appropriate case the Adjudicating Authority may accept the cured application, even after expiry of seven days for the ends of justice.

HELD BY SUPREME COURT
The Supreme Court has inter alia held that a final judgment, decree and / or a recovery certificate passed / issued by a court or tribunal would give rise to a fresh cause of action for a financial creditor to initiate proceedings u/s 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).

The Court, while placing reliance on Asset Reconstruction Company (India) Limited vs. Bishal Jaiswal and Anr.; Bengal Silk Mills Co. vs. Ismail Golam Hossain Ariff; and Re Pandem Tea Co. Ltd., held that an acknowledgment of liability that is made in a balance sheet can amount to an acknowledgment of debt. Thus, entries in books of accounts and / or balance sheets of a corporate debtor would amount to an acknowledgment u/s 18 of the Limitation Act.

Further, referring to the observations made in Ferro Alloys Corporation Limited vs. Rajhans Steel Limited, the Court held that the order / decree of the DRT and the Recovery Certificate gave a fresh cause of action to the appellant bank to initiate a petition u/s 7 of the IBC and the Court also held that an offer of one-time settlement of a live claim, made within the period of limitation, can be construed as an acknowledgment to attract section 18 of the Limitation Act.

BCAJ Admin

ALLIED LAWS

9 Rohit Nath vs. KEB Hana Bank Ltd. AIR 2021 Madras 241 Date of order: 28th July, 2021 Bench: Sanjib Banerjee CJ

Guarantor’s liability – Insolvency proceedings can be initiated before appropriate Debts Recovery Tribunal [Insolvency and Bankruptcy Code, 2016 (Code), S. 95, S. 79, S. 60; Companies Act, 2013, S. 408; Recovery of Debts and Bankruptcy Act, 1993, S. 3; Contract Act, 1872, S. 128]

FACTS
An individual (petitioner) had stood as a guarantor to a credit facility taken by a corporate entity. On non-payment of the credit facility the bank (respondent) proceeded against the petitioner by serving a notice as per Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules, 2019. Pursuant thereto, the bank initiated proceedings before the Debts Recovery Tribunal. It is the case of the petitioner that insolvency proceedings cannot be initiated against an individual u/s 95 of the Insolvency and Bankruptcy Code, 2016 (the Code).

HELD
Section 95(1) of the Code read with section 79(1) thereof permits a creditor to apply to any Debts Recovery Tribunal for initiating an insolvency resolution process under such provision.

Section 95(1) of the Code, in its ordinary form, allows a creditor to initiate an insolvency resolution process. It does not specify as to who the debtor may be. Further, the enactment is a complete code in itself and the three classes of persons indicated to be governed by the Code are corporate persons, partnership firms and individuals. The Debt Recovery Tribunal having jurisdiction over such firms and individuals is the adjudicating authority in matters related to insolvency.

Further, in view of section 128 of the Contract Act, 1872, the liability of a guarantor is co-extensive with that of the principal-debtor, unless it is otherwise provided by the contract. Therefore, the petitioner can be held liable as a guarantor to the credit facility taken by the company. The petition was dismissed with Rs. 50,000 costs.

10 R. Selvam vs. R. Mani C.M.P. No. 8020 of 2016 (Mad)(HC) Date of order: 22nd July, 2021 Bench: G.K. Ilanthiraiyan J

Gift Deed – Unilateral cancellation by the donor – Invalid [Transfer of Property Act, 1882, S. 123, S. 126]

FACTS
The suit is filed for declaration and permanent injunction in respect of the suit property. The case of the plaintiff is that the suit property belonged to the first defendant as per the preliminary decree passed in O.S. No. 18 of 2010 dated 8th December, 2011 on the file of the Fast-Track Court No. 2, Salem. The first defendant filed a suit against her brothers and the suit property was allotted in her favour. Thereafter, the first defendant had executed a registered gift settlement deed in favour of the plaintiff on 8th March, 2012. From the date of the gift settlement deed, the plaintiff had taken possession of the suit property and he is in possession and enjoyment of the same.

According to the plaintiff, in the meanwhile, under the influence of defendants 2 to 4, the first defendant unilaterally executed a registered cancellation deed dated 3rd July, 2012.On the same day, the first defendant executed another gift settlement deed in favour of the plaintiff and defendants 2 to 4. The said cancellation deed and the subsequent gift settlement deed executed by the first defendant are void ab initio. The plaintiff’s case is that once the first defendant had lost her title to the suit property, after execution of the registered settlement deed in favour of the plaintiff, she has no title over the property. On the strength of the settlement deed executed in favour of defendants 2 to 4, they created encumbrance by execution of an agreement for sale with defendant 5 and hence, the suit for declaration and permanent injunction.

According to the second defendant, the registered gift settlement deed in favour of the plaintiff was obtained by the plaintiff by misrepresentation or undue influence and he played fraud without knowledge of the first defendant. This was not acted upon and the first defendant rightly cancelled the gift deed by cancellation.

HELD
The Court noted that the entire issue was revolving around the first defendant. Even then, the other defendants failed to examine the first defendant to support their case whether the gift settlement deed in favour of the plaintiff was obtained on compulsion, misrepresentation or by fraud or undue influence.

The Court held that there is a specific recital that the first defendant has no power to revoke the gift deed and even if she cancelled the deed, the said cancellation would not be valid. When no right has been reserved by the first defendant to cancel the settlement deed, the Court below rightly declared the title in respect of the suit property in favour of the plaintiff. It is settled law that in settlement, once the ‘settlee’ accepts the transfer, it is presumed that the said document has been acted upon irrespective of the fact whether the ‘settlee’ has obtained possession immediately or not. Referring to the judgment of the Supreme Court of India in the case of Jamil Begum vs. Shami Mohd. [(2019) 2 SCC 727], the Court held that there is a presumption that a registered document is validly executed. The appeal suit was dismissed.

11 Davesh Nagalya (D) vs. Pradeep Kumar (D) AIR 2021 Supreme Court 2717 Date of order: 10th August, 2021 Bench: Hemant Gupta J, A.S. Bopanna J

Tenant – Partners – Business in suit premises – Death of partners – Results in dissolution of partnership – Property will be vacant [Urban Buildings Act, 1972, S. 12, S. 25, S. 41; Indian Partnership Act, 1932, S. 42]

FACTS
An application was filed by one Pradeep Kumar in July, 1982 before the Court of the Rent Control and Eviction Officer in terms of the Urban Buildings Act (Act) stating that after the death of the tenant partner, he inducted the legal heir of the deceased, one Subhash Chand, and continued the business in the same premises. The application was, however, opposed by the landlord. The District Magistrate permitted Subhash Chand to be inducted as a partner on 15th November, 1982. The landlord challenged the order passed by the District Magistrate before the District Judge. The revision petition was dismissed on 12th December, 1983. A further challenge before the High Court through a writ petition also remained unsuccessful vide order dated 10th October, 2007. The appellant challenged the said order by way of a Special Leave Petition before this Court but the same was dismissed on 10th January, 2008.

The appellant filed an application for review before the High Court inter alia on the ground that pursuant to the death of the tenant, Pradeep Kumar, i.e., one of the partners of the firm, the partnership does not survive in view of section 42(c) of the Partnership Act.

The review was dismissed vide order impugned in the present appeal on the ground that the petitioners have entirely set up a new case and the grounds urged are different from those of the writ petition. As on record, both the partners, i.e., Pradeep Kumar and Subhash Chand, had died on 21st May, 2004 and 25th June, 2014, respectively. Hence, now the argument is that in terms of section 42(c) the partnership stands dissolved by law. There is no clause in the partnership deed which permits the legal heirs of the deceased partners to continue with the partnership firm. Therefore, by operation of law, the partnership has come to an end.

HELD
The order of permitting Subhash Chand as partner with Pradeep Kumar has come to an end by efflux of time and operation of law. In terms of section 42(c) of the Partnership Act, the partnership stands dissolved by death of a partner. One of the partners, i.e., Pradeep Kumar, died on 21st May, 2004. The High Court has not taken note of such fact in the review petition and failed to take into consideration the subsequent events which were germane to the controversy. Subhash Chand, the other partner, also died during the pendency of the appeal on 25th June, 2014. It was represented to the District Magistrate by Pradeep Kumar that Subhash Chand is a divorcee and has no children but such assertion was not found to be correct as he had two children, a son and a daughter, who were impleaded as his legal heirs.

Therefore, with the death of both the partners and not having any clause permitting continuation of the partnership by the legal heirs, the non-residential tenanted premises is deemed to be vacant in law as the tenant is deemed to have ceased to occupy the building. In view thereof, the order passed by the High Court in the Review Application dated 23rd April, 2008 is set aside. Therefore, the tenant is deemed to cease to occupy the premises in question. Consequently, the tenanted property has fallen vacant as well. The appellants may take recourse to remedy as may be available to them and may proceed in accordance with law and the provisions of the Act.

12 Hemraj Ratnakar Salian vs. HDFC Bank Ltd. and Ors. AIR 2021 Supreme Court 507 Date of order: 17th August, 2021 Bench: S. Abdul Nazeer J, Krishna Murari J

Registration – Tenancy – Claim of tenancy not supported by a registered document – Claim of tenant as ‘tenant in sufferance’ – No protection under the Rent Act [Maharashtra Rent Control Act, 2000, S. 3(2)]

FACTS
HDFC Bank had granted financial facility to the respondent Nos. 2 and 3 (the borrowers). They had mortgaged a property in favour of the bank with an intention to secure the said credit facility.

The accounts of the borrowers were declared as non-performing assets (NPA) on 31st October, 2013. On 25th January, 2014, the bank issued a notice u/s 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) to the borrowers. It is the case of the appellant that he is a tenant of the secured asset on a monthly rent since 12th June, 2012. And he has been paying rent regularly to his landlord since the inception of his tenancy.

The appellant filed an application before the Magistrate seeking protection of his possession of the secured asset as the Magistrate was seized with the petition u/s 14 of SARFAESI filed by the respondent No. 1 Bank. The intervention application of the appellant was dismissed by the Magistrate holding that there was no registered tenancy agreement placed on record by the appellant.

HELD
There is a serious doubt as to the bona fides of the tenant, as there is no good or sufficient evidence to establish his tenancy. According to the appellant, he is a tenant of the secured asset from 12th June, 2012. However, the documents produced in support of his claim are photocopies of the rent receipts and the first copy of the rent receipt is of 12th May, 2013 which is after the date of creation of the mortgage. The borrowers have not claimed that any tenant is staying at the secured asset. The appellant has pleaded tenancy from 12th June, 2012 to 17th December, 2018. This is not supported by any registered instrument. Further, even according to the appellant, he is a ‘tenant in sufferance’, therefore, he is not entitled to any protection of the Rent Act. Secondly, even if the tenancy has been claimed to be renewed in terms of section 13(13) of SARFAESI, the borrower would be required to seek consent of the secured creditor for transfer of the secured asset by way of sale, lease or otherwise, after issuance of the notice u/s 13(2) of SARFAESI and, admittedly, no such consent has been sought by the borrower in the present case. The appeal was dismissed.

BCAJ Admin

CORPORATE LAW CORNER

3 CADS Software India Pvt. Ltd. and Ors. vs. K.K. Jagadish & Ors. National Company Law Appellate Tribunal Company Appeal (AT) No. 320 of 2018 Date of order: 7th May, 2019

Removal of a Director due to loss of confidence not covered under provisions of the Companies Act, 2013 hence the Managing Director who was removed was eligible for compensation for loss of office

FACTS
KKJ was functioning as Managing Director of M/s CADS since its incorporation in 1996. He was not appointed for a fixed tenure and was removed from the company w.e.f. 7th August, 2015 at an EGM of M/s CADS held pursuant to section 169 of Companies Act, 2013 through a special notice.

Upon his removal, KKJ filed a petition before the NCLT, Chennai Bench for relief against oppression and mismanagement under sections 241 and 242 of the Companies Act, 2013 and that he was entitled to compensation for loss of office of Rs. 10 crores as per section 202 of the said Act.

CADS argued that KKJ was removed due to loss of confidence and that he was not legally entitled to any compensation for the loss of office as Managing Director. It further contended that KKJ was not entitled to claim any exemplary damages and his exit package would come to around Rs. 1 crore, including his terminal benefits on the basis of last salary drawn in the F.Y. 2013-14, which was Rs. 33.79 lakhs.

NCLT held that the action of removal of the KKJ from the post of MD by the majority shareholders cannot be questioned. Hence, his removal from the office would remain valid.

It was further held that with regard to the claim for damages, in terms of section 202(3) of the Companies Act, 2013 upon removal the MD would be entitled to receive remuneration which he would have earned if he had been in office for the remainder of his term or for three years, whichever is shorter. Accordingly, NCLT deemed it fit to order a compensation of Rs. 105 lakhs (calculated at the rate of Rs. 35 lakhs p.a. for three years) together with interest @ 10% from the date of removal of the petitioner, plus other benefits as already offered till the date of payment to him by M/s CADS.

Aggrieved by the order, M/s CADS preferred an appeal before NCLAT u/s 421 of the Companies Act, 2013, contending that KKJ was not legally entitled to any compensation for the loss of office since his appointment as MD was not for any fixed period.

HELD
NCLAT held that loss of confidence as argued by M/s CADS was not covered in the Companies Act, 2013 and accordingly NCLT had rightly given its findings and arrived at a compensation. NCLAT did not find any merit in the appeal and hence dismissed the same.

4 Sabse Technologies Private Limited vs. Registrar of Companies, Mumbai National Company Law Tribunal, Mumbai Bench-IV Compounding application CP No. 1740/441/NCLT/MB/MAH/2019 Date of order: 18th December, 2019

Where the compounding application was filed before NCLT, Mumbai Bench by the company for violating the provisions of section 96 of the Companies Act, 2013 as it was not able to conduct its Annual General Meeting within the permissible time, such compounding application was maintainable

FACTS
M/s STPL had appointed M/s B & Co., Chartered Accountants, as the statutory auditors to conduct statutory audit for the financial year ended 31st March, 2018. However, M/s. B & Co. resigned on 24th September, 2018, thereby causing a vacancy in the office of auditors of the company. M/s STPL then appointed M/s S & Associates, Chartered Accountants, at an EGM held on 24th October, 2018 to conduct the statutory audit for the financial year ended 31st March, 2018.

The said AGM for the F.Y. 2017-2018 was held on 3rd November, 2018 where no shareholders were present and therefore the meeting was adjourned to the following week at the same time and place, i.e., on 10th November, 2018. (The company should have conducted the AGM for the financial year ended 31st March, 2018 on or before 30th September, 2018.) Since the meeting was held on 10th November, 2018 after a delay of 41 days beyond the prescribed limit specified in the Act, there was a violation of the provisions of section 96 of the Companies Act, 2013.

The compounding application was filed before the NCLT, Mumbai Bench by M/s STPL for non-compliance with the provisions of section 96 of the Companies Act, 2013 as it had failed to conduct its AGM within the permissible time. It was averred in the compounding application that the default was not intentional and the circumstances were beyond the control of the management. It was further averred that M/s STPL had not deliberately conducted the said offence and had subsequently made good the committed default.

HELD
NCLT held that the company had violated the provisions of section 96 of the Companies Act, 2013 and that the said violation was punishable as per section 99 of the Act. The compounding fee of Rs. 25,000 by the company and Rs. 25,000 each by the two Directors was levied as a deterrent for not repeating the default in future. The offence stood compounded subject to the remittance of the compounding fee.

5 M/s K.C. Agro Private Limited vs. Registrar of Companies, Mumbai National Company Law Tribunal, Mumbai Bench-IV Compounding application CP No. 332/44 /NCLT/MB/MAH/2017 Date of order: 6th November, 2019

Where the compounding application was filed before NCLT, Mumbai Bench by the company for violating the provisions of section 137(1) of the Companies Act, 2013, since company was not able to file financial statements within the permissible time, such compounding application was maintainable

FACTS
During the F.Y. ended 31st March, 2014, a member of M/s KCPL had filed a petition with the Company Law Board (CLB), Mumbai Bench against its Directors and members. On 29th April, 2015, the CLB passed an order against M/s KCPL. Thereafter, the latter preferred an appeal before the Bombay High Court which stayed the judgment pronounced by the CLB.

M/s KCPL was continuously involved in the litigations pending before the High Court and the necessary compliances in respect of convening and holding the Annual General Meeting could not be observed.

Due to the deadlock, M/s KCPL held the Annual General Meeting and thereafter the financial statements were filed. The financial statements for the F.Y. ended 31st March, 2014 needed to be filed within 30 days of the AGM but the financial statements in e-Form 23AC and e-Form 23ACA were filed only on 1st April, 2017. Thus, the default period in respect of non-compliance of filing the financial statements was 885 days.

M/s KCPL had not deliberately committed the said offence and subsequently, after ascertaining the correct position, made good the committed default.

The compounding application was filed before the Registrar of Companies, Mumbai (hereinafter ‘ROC’) and the same was forwarded to the NCLT, Mumbai along with the ROC report. The application was filed because M/s KCPL had violated the provisions of section 137(1) of the Companies Act, 2013 and had failed to give an explanation for the non-filing of financial statements within the permissible time.

HELD
NCLT held that the company had violated the provisions of section 137(1) and the said violation was punishable u/s 137(3) of the Companies Act, 2013. A compounding fee of Rs. 10,000 by the company and Rs. 5,000 each by three Directors totalling Rs. 25,000 (Rupees twenty five thousand only) was levied as a deterrent for not repeating the default in future. NCLT further held that the offence stood compounded subject to the remittance of the compounding fee.

6. Pratap Technocrats (P) Ltd. & Ors. vs. Monitoring Committee of Reliance Infratel Limited & Anr. Civil Appellate Jurisdiction, Civil Appeal No. 676 of 2021 (SC)

FACTS
The CIRP was commenced against Reliance Infratel Limited (‘RIL’) vide order dated 15th May, 2018 by the NCLT.

Pursuant to such order, an Interim Resolution Professional (‘IRP’) was appointed and the CoC was formed on 24th May, 2019. The IRP was replaced with Mr. Anish Niranjan as the resolution professional (‘RP’). The process for inviting resolution plans ensued and subsequently four prospective resolution applicants submitted plans. After due deliberations between the CoC and the prospective resolution applicants, the plan submitted by Reliance Digital Platform and Project Services Limited (‘Successful Resolution Applicant / SRA’) was approved by the CoC with 100% vote on 2nd March, 2020, on the basis of its feasibility, viability and implementability’. An application u/s 30(6) of the IBC was submitted for approval of the resolution plan, which was approved by the NCLT vide order dated 3rd December, 2020.

QUESTION OF LAW
Whether once a resolution plan in respect of the corporate debtor is approved by 100% voting share of the Committee of Creditors (CoC), exclusion of certain financial debts and hence, exclusion of certain financial creditors from CoC, will be of no consequence; resolution plan continues to be approved with 100% majority even after their exclusion.

RULING IN CASE
Once the resolution plan is approved by 100% voting share of the CoC, exclusion of certain financial debts and hence exclusion of certain financial creditors from the CoC will be of no consequence; the resolution plan continues to be approved with 100% majority even after their exclusion.

HELD
In the present case, the resolution plan has been duly approved by a requisite majority of the CoC in conformity with section 30(4). Whether or not some of the financial creditors were required to be excluded from the CoC is of no consequence, once the plan is approved by a 100% voting share of the CoC. The jurisdiction of the Adjudicating Authority was confined by the provisions of section 31(1) to determining whether the requirements of section 30(2) have been fulfilled in the plan as approved by the CoC. As such, once the requirements of the statute have been duly fulfilled, the decisions of the Adjudicating Authority and the Appellate Authority are in conformity with law.

BCAJ Admin

ALLIED LAWS

5 Korukonda Chalapathi Rao & Ors. vs. Korukonda Annapurna Sampath Kumar CA (No.) 6141 of 2021 (SC) Date of order: 1st October, 2021 Bench: K.M. Joseph J, S. Ravindra Bhat J

Deed of family settlement – Merely recording of past transaction – Registration not mandatory – It may not require to be stamped [Registration Act, 1908., S. 17, S. 49; Code of Civil Procedure, 1908, Ord. 13, R. 3]

FACTS

An issue regarding partition of property arose between the plaintiff and the respondents. The High Court did not admit the Kharurunama (family settlement) as the same was not registered or stamped.

The contention of the appellants was that the Kharurunama dated 15th April, 1986 merely sets out the arrangement arrived at between the brothers which is the family arrangement and it was a mere record of the past transaction and therefore by itself it did not create or extinguish any right over immovable property. As a result, the document did not attract section 17(1)(b) of the Registration Act.

HELD

As per section 49(1)(a) of the Registration Act, a document which it is compulsory to register but which is not registered, cannot have any effect on the rights in immovable property by way of creation, declaration, assignment, limitation or extinguishment. Thus, it prevents an unregistered document being used ‘as’ evidence of the transaction, which ‘affects’ immovable property.

If the Kharurunama by itself does not ‘affect’ immovable property, there would be no breach of section 49(1)(c) of the Registration Act, as it is not being used as evidence of a transaction affecting such property. The transaction or the past transactions cannot be proved by using the Kharurunama as evidence of the transaction. Merely by admitting the Kharurunama containing a record of the alleged past transaction, it is not to be understood as if those past transactions require registration or that it would have any legal effect on the immovable properties in question.

It is further held that the Kharurunama being a record of the alleged transactions, it may not require to be stamped. The appeal is allowed.

6 Asha John Divianathan vs. Vikram Malhotra AIR 2021 Supreme Court 2932 Date of order: 26th February, 2021 Bench: A.M. Khanwilkar J, Indu Malhotra J, Ajay Rastogi J

Foreign Citizen – Transfer of immovable property – Without taking mandatory prior approval from RBI – Transfer unenforceable [Foreign Exchange Regulation Act, 1973 (FERA), S. 31]

FACTS

Mrs. F.L. Raitt, widow of the late Mr. Charles Raitt, is a foreigner and the owner of the immovable property. The property was gifted to respondent No. 1 (Vikram Malhotra) without obtaining previous permission of the Reserve Bank of India u/s 31 of FERA. Before executing the gift deed, she had executed an agreement of sale in favour of one Mr. R.P. David, father of the appellant (Asha John Divianathan).

The appellant filed a suit against the respondent No. 1 to declare the gift deed and the supplementary as null and void.

The Karnataka High Court held that lack of permission u/s 31 of FERA does not render the subject gift deeds as void much less illegal and unenforceable. An appeal was filed against this order of the Karnataka High Court.

HELD

A contract is void if prohibited by a statute under a penalty, even without express declaration that the contract is void, because such a penalty implies a prohibition. The condition predicated in section 31 of FERA of obtaining ‘previous’ general or special permission of the RBI for transfer or disposal of immovable property situated in India by sale or mortgage by a person, who is not a citizen of India, is mandatory.

Until such permission is accorded, in law, the transfer cannot be given effect to; and for contravening that requirement, the person concerned may be visited with penalty u/s 50 FERA and other consequences provided for in the 1973 Act.

The decision of the High Court taking the view that section 31 of the 1973 Act is not mandatory and the transaction in contravention thereof is not void or unenforceable, is not a good law. The Appeal was allowed.

7 Jagannath & Ors. vs. Radheshyam and Ors. AIR 2021 (NOC) 645 (Chh) Date of order: 19th August, 2020 Bench: Sanjay K. Agarwal J

Deeds – Unregistered gift deed – Immovable property – Not admissible [Transfer of Property Act, 1882, S. 123; Registration Act, 1908, S. 17]

FACTS

The dispute relates to the property left by Parau and his wife Sumrit Bai. They had four daughters, namely, Samundra Kunwar (defendant No. 1 is her son), Badki Kani (defendant No. 2), Majhali Kani (defendant No. 3) and Nanki Kani (defendant No. 4). The plaintiff, Radheshyam, is the son of defendant No. 4. The plaintiff filed a suit for permanent injunction and, in the alternative, restoration of possession pleading inter alia that the suit property was originally held by Parau and he was in possession of the suit property during his life time.

The defendants filed their joint written statement stating inter alia that they have never surrendered their share by way of gift deeds in favour of the plaintiff and that they are in possession of the suit property jointly and, as such, the suit deserves to be dismissed.

The trial court upon appreciation of oral and documentary evidence available on record, by its judgment and decree dated 7th April, 2007, dismissed the suit holding that the alleged gift deeds are inadmissible in evidence for want of registration, therefore, no title has been conveyed in favour of the plaintiff and the plaintiff is not in exclusive possession of the suit land.

The first Appellate Authority held that the plaintiff cannot be dispossessed from the suit land without following the due procedure of law and accordingly granted decree for permanent injunction in favour of the plaintiff restraining the defendants from interfering with his possession.

The defendants are in appeal against the said order.

HELD

The gift deeds by which the defendants have allegedly gifted the property to the plaintiff are unregistered gift deeds and by virtue of the provisions contained in section 123 of the Transfer of Property Act, 1882 gift deeds are required to be registered. In view of the matter, they are inadmissible in evidence for want of registration and thereby no title was conveyed to the plaintiff.

As the gift deeds have been held to be inadmissible by two Courts and affirmed by this Court, the first appellate Court could not have restrained the defendants from using the joint property by decree of permanent injunction.

The appeal was allowed.

8 High Court of Judicature at Madras Rep. by its Registrar-General vs. M.C Subramaniam and Others AIR 2021 Supreme Court 2662 Date of order: 17th February, 2021 Bench: Mohan M. Shantanagoudar J, Vineet Saran J

Court fee – Refund of Court fee – To be granted even in case of private settlement of dispute outside court [Court Fees Act, 1870, S. 16; Civil Procedure Code, 1908, S. 89; Tamil Nadu Court Fees and Suit Valuation Act, 1955, S. 69A]

FACTS

The respondent No. 1 purchased two vehicles from respondent No. 2. As per the terms of the agreements, respondent No. 1 was to pay sums in instalments to the respondent No. 2 as per the stipulated terms. On account of non-payment, the respondent No. 2 filed suits and sought recovery of the balance amounts along with interest thereon. Both the suits were partly decreed by the Courts.

The respondent No. 1 preferred an appeal before the High Court. While the appeal was still pending consideration, the parties entered into a private out-of-court settlement, thus resolving the dispute between them. The respondent No. 1 sought withdrawal of the appeal and refund of the court fee. Despite the order of the High Court, the Registry orally refused respondent No. 1’s request for refund of court fees on the ground that such refund is not authorised by the relevant rules.

The respondent No. 1 filed a Miscellaneous Application before the High Court which was allowed. The Registry is in appeal against the said order.

HELD

The provisions of section 89 of CPC must be understood in the backdrop of the long-standing proliferation of litigation in the civil courts, which has placed undue burden on the judicial system, forcing speedy justice to become a casualty. As the Law Commission has observed in its 238th Report on Amendment of section 89 of the Code of Civil Procedure, 1908 and Allied Provisions, section 89 of the CPC has now made it incumbent on civil courts to strive towards diverting civil disputes towards alternative dispute resolution processes and encourage their settlement outside of court. These observations make the object and purpose of section 89 crystal-clear – to facilitate private settlements and enable lightening of the overcrowded docket of the Indian judiciary. This purpose is sacrosanct and imperative for effecting timely justice in Indian courts. Section 69A of the Tamil Nadu Court Fees and Suit Valuation Act, 1955 also encourages settlements by providing for refund of court fees.

Further, the Court observed that the Court Fees Act is a taxing statute and has to be construed strictly and the benefit of any ambiguity has to go in favour of the party and not to the State. The High Court’s order was upheld.

BCAJ Admin

CORPORATE LAW CORNER

1 Achintya Kumar Barua alias Manju Baruah & Ors. vs. Ranjit Barthakur & Ors. Company Appeal (AT) No. 17 of 2018 National Company Law Appellate Tribunal [2018] 143 CLA 233 Date of order: 8th February, 2018

Section 173(2) which gives right to the Directors to participate in the Board meetings through video conferencing / other audio-visual means (VC/OAVM), is mandatory and companies need to provide the facilities as per section 173(2) of the Companies Act, 2013 subject to fulfilling the requirements of Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014

FACTS
The petition was filed by Mr. R.B. and Others before the NCLT seeking the facility of attending Board meetings through video conferencing u/s 173(2) of the Companies Act, 2013.

The matter had earlier come up before the Company Law Board (‘CLB’) and, being aggrieved by certain observations, the same was carried to the High Court of Guwahati. The High Court found that the appeal did not raise any question of law and sent the matter back to the the National Company Law Tribunal (NCLT), Guwahati Bench which allowed the application and directed that the facility should be made available u/s 173(2).

An appeal was filed before the National Company Law Appellant Tribunal (‘NCLAT’) against the order passed by the NCLT, Guwahati Bench where it was submitted that when the Director participates in the meetings through video-conferencing, it would not be possible to ensure that nobody else is present at the place from which the Director would be participating.

It was averred that the Secretarial Standards on Meetings of the Board of Directors have also considered this aspect and have prescribed that such option under the provisions of the Companies Act, 2013 and Rules should be resorted to only when the facilities are provided by the company to its Directors.

It was further submitted that sub-section (2) of section 173 of the Act was not a mandatory provision and it was not compulsory for the company to provide such facility. The counsel during the course of the hearing submitted that the responsibility had been put on the Chairperson to ensure that no person other than the Director concerned was attending or having access to the proceedings of the meeting through video-conferencing mode or other audio-visual means. It was also stated that when a Director resorts to availing the facility of video conferencing, it would not be possible for the Chairperson to ensure that the Director was alone while participating from wherever the video call was made as the Chairperson would have no means to know as to who else was sitting in the room or place concerned.

HELD
The NCLAT held that section 173 of the Companies Act, 2013, as well as the Rules referred to, were introduced under the 2013 Act and, following these provisions, it would be in the interest of the companies as well as the directors. It would not be appropriate to shut out these provisions on mere apprehensions.

The word ‘may’ which has been used in sub-section (2) of section 173 only gives an option to the Director to choose whether he would be participating in person or through video-conferencing or other audio-visual means. This word ‘may’ does not give an option to the company to deny this right given to the Directors for participation through video-conferencing or other audio-visual means if they desire to do so. In this regard, the provisions of Rule 3 are material.

The NCLAT further referred to the order of NCLT, Guwahati Bench and noted that it had taken note of the fact that the company had all the necessary infrastructure available and had no reason not to provide the facility. Hence, NCLT had come to the conclusion that the provisions of section 173(2) of the Companies Act, 2013 are mandatory and the companies cannot be permitted to make any deviations therefrom.

An important observation made by the NCLAT was that the rules require that the company shall comply with the procedure prescribed for convening and conducting the Board meetings through video-conferencing or other audio-visual means. The Chairperson and Company Secretary, if any, have to take due and reasonable care as specified in Rule 3(2). The argument of the counsel for the appellant is that sub-Rule (2)(e) puts the burden on the Chairperson to ensure that no person other than the Director concerned is attending and this would not be possible for the Chairperson to ensure in video-conferencing.

NCLAT did not find force in the submission as the Rules, read as a whole, were a complete scheme. Sub-clause (4)(d) of Rule 3 also puts responsibility on the participating Director. The Chairperson was required to ensure compliance of sub-clause (e) or clause (2), and the Director would need to satisfy the Chairperson that sub-clause (d) of Clause 4 was being complied with.

The NCLAT noted that counsel for the appellants tried to rely on the Secretarial Standard on Meetings of the Board of Directors, that such participation could be done ‘if the company provides such facility’. NCLAT observed that such guidelines cannot override the provisions under the Rules. The mandate of section 173(2) read with the Rules mentioned above cannot be avoided by the companies.

The NCLT thus directed the company to provide the facilities as per section 173(2) of the Companies Act, 2013 subject to fulfilling the requirements of Rule 3(3)(e) of the Rules.

Thus, NCLAT did not find any reason to interfere with the NCLT order and observed that the order was progressive and in the right direction and therefore the admission of the appeal was denied.

2 CGI Information Systems and Management Consultants Private Limited Compounding Application CP No.: 55/2017 National Company Law Tribunal, Bengaluru Bench Source: NCLT Official Website Date of order: 27th April, 2018

If the company did not have adequate surplus in the profit and loss account but had declared interim dividend based on the belief that it indeed did have adequate profits and surplus in its profit and loss account, a compounding application on suo motu basis can be entertained even though the company had contravened the provisions of section 123(3) of the Companies Act, 2013

FACTS
The compounding application was filed by M/s CISMCPL (‘the company’) u/s 441 of the Companies Act, 2013 before the NCLT, Bengaluru Bench with a prayer for compounding of the violation committed under the provisions of section 123(3) of the Companies Act, 2013.

The submissions of the company were as follows:

The company, based on its estimates and belief that it had adequate profits and surplus in its profit and loss account, had declared an interim dividend of Rs. 96,14,14,080 pursuant to the Resolution of the Board of Directors dated 25th September, 2014 and accordingly paid the same to the eligible shareholders.

However, at the time of declaration of interim dividend the company had not finalised any method of accounting and believed that the method of accounting would not result in any deficit in the profits or in the surplus in the profit and loss account.

However, later on the company adopted the Pooling of Interest Method for accounting its amalgamation.

While declaring dividend, it had inadvertently not considered the fact that by adopting the pooling of interest method of accounting, there would be a deficit in the surplus in the profit and loss account, as a result of which the company had contravened the provisions of section 123(3) of the Companies Act, 2013.

Hence, the company and its Directors suo motu filed the application for admitting violation and had prayed for compounding.

HELD
NCLT held that the company had violated the provisions of section 123(3) of the Companies Act, 2013 and shall be punishable u/s 450 of the said Act. The company and every officer of the company who was in default, or such other person, shall be punishable with fine which may extend to Rs. 10,000, and where the contravention was a continuing one, with a further fine which may extend to Rs. 1,000 for every day after the first day during which the contravention continued.

Therefore, the compounding fee of Rs. 94,200 on the company and Rs. 94,200 on each of the Directors was levied considering the delay of 932 days.

BCAJ Admin

ALLIED LAWS

1 Ramesh and Others vs. Laxmi Bai AIR 2021, Madhya Pradesh 56 Date of order: 1st March, 2021 Bench: Vivek Rusia J

Condonation of delay – Appeal cannot be decided without deciding on the application for condonation of delay in favour of the appellant [Civil Procedure Code, 1908, Ord. 41, R. 3A; Limitation Act, 1963, S. 5]

FACTS
The plaintiffs had filed a civil suit for declaration of title and partition of joint family property. By the judgment dated 24th January, 2009 it was held that they were entitled to partition through the Court. Defendant No. 1 was restrained from getting a mutation in his name. Being aggrieved by the aforesaid judgment and decree, the Defendants filed an appeal in the year 2013 along with an application for condonation of delay u/s 5 of the Limitation Act.

On 24th February, 2019, it came to the notice of the Additional District Judge that the application u/s 5 of the Limitation Act had not been decided so far. Both the parties agreed to first argue on the aforesaid application. The arguments were heard and kept for order on 27th April, 2019. By an order dated 27th April, 2019, the Additional District Judge decided that the application u/s 5 of the Limitation Act would be decided along with the first appeal on merit.

The plaintiffs filed a petition challenging this order of 27th April, 2019 on the ground that the Additional District Judge had committed an error of law while keeping the application u/s 5 for consideration along with the appeal while finally hearing the appeal on merit.

HELD
The Court referred to the decision in the case of State of M.P. vs. Pradeep Kumar 2000 (7) SCC 372. In that the Supreme Court held that the object of enacting Rule 3-A of Order 41 of the Civil Procedure Code seems to be two-fold. The first is to inform the appellant himself that appeal is time-barred and it would not be entertained unless it is accompanied by an application explaining the delay. The second is to communicate to the respondent a message that it may not be necessary for him to get ready to meet the grounds taken up in the memorandum of appeal because the Court has to deal with the application for condonation of delay as a condition precedent.

The Court also referred to the decision in S.V. Matha Prasad vs. Lalchand Meghraj and Others (2007) 14 SCC 772 wherein the Supreme Court had held that the Division Bench of the High Court had not only condoned the delay but took a decision on the merit as well and such exercise was not justified as the only issue before the Division Bench was the question of limitation; accordingly, the judgment of the High Court was set aside to the extent that it went on to the merits of the controversy but maintained it insofar as it dealt with the question of limitation.

In view of the above, the Court held that the Additional District Judge was required to decide first the application u/s 5 of the Limitation Act and if it condoned the delay then there would not be any impediment to deciding the appeal on merit. Further, the Court held that although there is no specific bar which restrains the appellate Court from hearing and deciding the appeal along with the application for condonation of delay, the provisions put a bar on the appellate Court on deciding the appeal unless the application for condonation of delay is decided in favour of the appellant. The petition was allowed.

2 Amola Saikia and Others vs. Pankajit Narayan Konwar AIR 2021, Gauhati 50 Date of order: 23rd January, 2021 Bench: Anchintya Malla Bujor Barua J

Intestate succession – Property of Hindu female – Grant of succession certificate to husband held to be proper [Indian Succession Act, 1925, S. 372; Hindu Succession Act, 1956, S. 15]

FACTS
The respondent-husband filed an application u/s 372 of the Indian Succession Act for grant of succession certificate. The respondent had succeeded in the said application vide order dated 10th June, 2015.The appellants, viz., the mother, sisters and brother of the deceased, challenged the said order of 10th June, 2015.

HELD
As per section 15(1) of the Hindu Succession Act, 1956 it is clearly provided that the property of a female Hindu dying intestate shall devolve firstly upon the sons and daughters and the husband. Thereafter, it would devolve upon the mother and father and then upon the heirs of the father, and finally upon the heirs of the mother. Hence, the grant of succession certificate was in accordance with law.

The appeals were dismissed.

3 Sozin Flora Pharma LLP vs. State of Himachal Pradesh and another AIR 2021, Himachal Pradesh 44 Date of order: 7th January, 2021 Bench: Tarlok Singh Chauhan J and Jyotsna Rewal Dua J

Stamp Duty – Conversion of partnership firm to limited liability partnership – No stamp duty or registration fee [Limited Liability Partnership Act, 2008, S. 58(1), 58(4)(b); Himachal Pradesh Tenancy and Land Reforms Act, 1974, S. 118]

FACTS
The petitioner was registered as a partnership firm on 14th December, 2005 in the office of the Deputy Registrar of Firms. With the intention of availing of the benefits of the Limited Liability Partnership Act, 2008, the petitioner firm converted itself from ‘Firm’ to ‘Limited Liability Partnership’ (LLP). The conversion was as per section 55 of the LLP Act.

The petitioner applied to the Deputy Commissioner for changing its name in the revenue record from ‘M/s Sozin Flora Pharma’ to ‘M/s Sozin Flora Pharma LLP’. The permission to change the name in the revenue record was granted on the condition that stamp duty and registration fee shall be chargeable. The petitioner submitted a representation to the respondent on 25th June, 2019 against the imposition which was rejected on 23rd August, 2019. Hence the writ petition.

HELD
Upon conversion of a registered partnership firm to an LLP under the provisions of the Limited Liability Partnership Act, all movable and immovable properties of the erstwhile registered partnership firm automatically vest in the converted LLP by operation of section 58(4)(b) of the Limited Liability Partnership Act.

The transfer of assets of the firm to the LLP is by operation of law. Being a statutory transfer, no separate conveyance / instrument is required to be executed for transfer of assets.

Since there is no instrument of transfer of assets of the erstwhile partnership firm to the limited liability partnership, the question of payment of stamp duty and registration charges does not arise as these are chargeable only on the instruments indicated in section 3 of the Indian Stamp Act and section 17 of the Indian Registration Act.

The partnership firm’s legal entity after conversion to limited liability partnership does not change. Only the identity of the firm as a legal entity changes. Such a conversion or change in the name does not amount to a change in the constitution of the partnership firm.

Therefore, stamp duty and registration fee cannot be levied upon conversion of a partnership firm to an LLP.

4 Kiran Gupta vs. State Bank of India and another AIR 2021, Gauhati 50 Date of order: 2nd November, 2020 Bench: Hima Kohli J and Subramonium Prasad J

Recovery of dues – Pendency of IRP proceeding against principal borrower – Bank can proceed against guarantor under SARFAESI Act [SARFAESI Act, 2002, S. 13; Insolvency and Bankruptcy Code, 2016, S. 14, S. 31; Contract Act, 1872, S. 128]

FACTS
The short question that arises for consideration in this writ petition is whether a bank / financial institution can institute or continue with proceedings against a guarantor under the SARFAESI Act when proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) have been initiated against the principal borrower and the same are pending adjudication.

HELD
The view expressed by the Supreme Court in the case of State Bank of India vs. V. Ramakrishan and Another, (2018) 17 SCC 394 amply demonstrates that neither section 14 nor section 31 of the IBC place any fetters on banks / financial institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues. That being the position, the plea taken by the counsel for the petitioner that all proceedings against the petitioner, who is only a guarantor, ought to be stayed under the SARFAESI Act during the continuation of the Insolvency Resolution process qua the principal borrower, is rejected as meritless. The petitioner cannot escape her liability qua the respondent / bank in such a manner. The liability of the principal borrower and the guarantor remain co-extensive and the respondent / bank is well entitled to initiate proceedings against the petitioner under the SARFAESI Act during the continuation of the Insolvency Resolution process against the principal borrower. The petition is dismissed.

Editor’s Note: The Supreme Court in the case of Lalit Kumar Jain vs. Union of India [2021] 167 SCL 1 had held that a personal guarantor is also liable under the Insolvency and Bankruptcy Code, 2016.

BCAJ Admin

CORPORATE LAW CORNER

9 Registrar of Companies, West Bengal vs. Goouksheer Farm Fresh (P) Ltd. and Another Company Appeal (AT) No. 127 of 2020 National Company Law Appellate Tribunal [(2021) 160 CLA 317 (NCLAT)] Date of order: 19th November, 2020

There is no provision under the Companies Act, 2013 that permits the Registrar of Companies to take on record the documents sought to be registered / filed without payment of requisite filing fee and / or payment of additional fees even if company is in ‘Corporate Insolvency Resolution Process’

FACTS

The Registrar of Companies, West Bengal (ROC), had struck off the name of the company, M/s G Private Limited, after complying with all the requirements of section 248 of the Companies Act, 2013 and the Companies (Removal of Names of Companies from Register of Companies) Rules, 2016.

The ‘Financial Creditor’ (M/s P Pvt. Ltd.) had filed an application u/s 7 of the Insolvency and Bankruptcy Code, 2016 against the Corporate Debtor, M/s G Pvt. Ltd. The application to initiate Corporate Insolvency Resolution Process against the Corporate Debtor was admitted on 13th December, 2019.

The NCLT, Kolkata Bench, through its order dated 22nd January, 2020, allowed restoration of the company with a direction to the ROC not to levy any fee / penalty on the company because of the fact that the company was in Corporate Insolvency Resolution Process.

The ROC preferred an instant appeal against the NCLT order contending that pursuant to section 403 (1) of the Companies Act, 2013, any document required to be filed under the Act shall be filed within the time prescribed in the relevant provisions on payment of such fee as may be prescribed. Further, it was contended that in view of the first proviso to section 403(1) of the Act, if any document, fact or information required to be submitted, filed, registered or recorded under sections 92 or 137 is not submitted, filed, registered or recorded within the period provided in those sections, without prejudice to any other legal action or liability under this Act, it may be submitted, filed, registered or recorded after the expiry of the period so provided in those sections on payment of such additional fee as may be prescribed, which shall not be less than Rs. 100 per day and different amounts may be prescribed for different classes of companies.

HELD

The NCLAT stated in its order that the Tribunal was empowered by Rule 11 of the National Company Law Tribunal Rules, 2016 to make such orders as may be necessary for meeting the ends of justice. However, it was to be pointed out that the same cannot be pressed into service when section 403(1) of the Companies Act, 2013 deals expressly with the fee for filing, etc., coupled with Rule 12 of the Companies (Registration Offices and Fees) Rules, 2014. These provisions were regarded as in-built, self-contained and exhaustive ones, and viewed in that perspective, the invocation of Rule 11 of the NCLT Rules, 2016 was not needed.

Further, NCLAT observed that the direction issued by the NCLT to the ROC ‘not to levy any fee / penalty’ to the company because it was in Corporate Insolvency Resolution Process was legally untenable, especially in the absence of any express provisions under the Companies Act, 2013 and the relevant Rules for waiver of fees / penalty in respect of filing of documents required to be registered / filed under the Companies Act. Hence, the said direction was set aside to secure the ends of substantial justice.

10 Sandeep Agarwal and Another vs. Union of India and Another W.P. (C) 5490/2020 Source: Delhi High Court Official Website Date of order: 2nd September, 2020

The purpose and intent of the Companies Fresh Start Scheme, 2020 is to allow a fresh start for companies which have defaulted. For the Scheme to be effective, directors of these defaulting companies must be given an opportunity to avail the Scheme

FACTS

The petition was filed by Sandeep Agarwal and Muskoka Agarwal (collectively referred to as P), both of whom were directors in two companies, namely M/s KP Private Limited and M/s KPP Private Limited. The name of M/s KPP Private Limited was struck off from the Register of Companies on 30th June, 2017 due to non-filing of financial statements and annual returns. P, being directors of M/s KPP Private Limited, were also disqualified with effect from 1st November, 2016 for a period of five years till 31st October, 2021 u/s 164(2)(a) of the Companies Act, 2013. In view of their disqualification, their Director Identification Numbers (DINs) and Digital Signature Certificates (DSCs) were also cancelled. Consequently, they were unable to carry on the business and file returns, etc., in the active company, M/s KP Private Limited.

Through the present petition, the disqualification was challenged and quashing was sought of the order disqualifying the directors.

HELD

The Delhi High Court observed that the Scheme provides an opportunity to put their affairs in order for active companies that may have defaulted in filing of documents. It thus provides directors of such companies a fresh cause of action to challenge their disqualification qua the active companies. In the present case, the relief was sought by the directors of two companies, one whose name was struck off and one which was still active. In such a situation, the disqualification and cancellation of DINs was a severe impediment for them in availing remedies under the Scheme in respect of the active company. The purpose and intent of the Scheme was to allow a fresh start for companies which have defaulted. The Scheme can be effective if its directors are given an opportunity to avail of it.

It is not uncommon to see directors of one company being directors in another company. Under such circumstances, to disqualify directors permanently and not allowing them to avail their DINs and DSCs could render the Scheme itself nugatory as its launch constitutes a fresh and continuing cause of action.

Thus, in order to enable P to continue the business of the active company, M/s KP Private Limited, the Court directed MCA to set aside the disqualification of P as directors. The DINs and DSCs of P were also directed to be re-activated within a period of three working days from the date of the order.

11 Medeor Hospitals Ltd. vs. Registrar of Companies, Delhi Company Appeal No. 394 of 2018 National Company Law Appellate Tribunal [(2020) 156 CLA 129 (NCLAT)]
Date of order: 29th January, 2020

Where application for conversion of public limited company into a private limited company has complied with the requisite conditions for conversion, the application has to be approved

FACTS

M/s M Limited was incorporated on 4th August, 2004 under the Companies Act, 1956 as a public limited company and was a wholly-owned subsidiary of M/s V Private Limited, having eight equity shareholders. While the holding company M/s. V Private Limited was holding almost 100 % of the issued share capital, seven other shareholders were holding one share each on behalf of M/s V Private Limited.

A petition was filed before the NCLT for conversion of the company into a private limited company. The Delhi Bench of the NCLT by its order of 28th August, 2018, observed that the petition was filed three months after the date of passing of the Special Resolution. In the notice for the EGM, no reasons had been assigned for giving a shorter notice. It was further observed by the NCLT that on 17th October, 2016, the statutory auditor had resigned and on the same day, a new auditor M/s DY & Co. was appointed. It was noticed that the new auditor signed the balance sheet on the same day. This raised a doubt as to how the new auditor could have conducted the audit in one day. Further, two independent directors resigned after the passing of the resolution for conversion and this fact was not mentioned in the petition. It was also found that the claims of two objectors, namely, Mr. PS and Mr. RS and E&Y LLP were pending before the Arbitral Tribunal. During such pendency it would not be appropriate to permit conversion of the company from public to private limited. In view of these shortcomings, the NCLT rejected the petition. M/s M Limited, being aggrieved with this order of the NCLT, filed the present appeal.

HELD

* NCLAT considered the issue of limitation referring to Rule 68(1) of the NCLT Rules, 2016 which provide that a petition u/s 14(1) of the Companies Act, 2013 for conversion of a public company into a private company shall, not less than three months from the date of the passing of the special resolution, be filed with the Tribunal in Form No. NCLT-1. This means that such petition shall be filed after three months from the date of passing of the special resolution. Thus, the petition was well within the limitation.

* The board resolution of the holding company dated 17th June, 2017 mentioned that written consent of shareholders was obtained for shorter notice for the resolution dated 14th August, 2017. No illegality or irregularity in passing the resolution dated 14th August, 2017 was found by the NCLAT.

* M/s M Limited, vide its appointment letter dated 2nd September, 2016, appointed M/s DY & Co. tax auditor and, after the appointment, M/s DY & Co had reviewed and signed the financial statements for the F.Y. 2015-16. In such circumstances the explanation given by M/s M Limited was satisfactory as to how M/s DY & Co. had signed the financial statements for the year
2015-16.

* NCLAT further considered the submission of M/s M Limited that it was a wholly-owned subsidiary and unlisted public company. Therefore, in view of sub-rule (1) of Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, appointment of at least two independent directors was not applicable. Hence, non-disclosure of the resignation of two independent directors would not affect the merit of the petition in any manner.

* M/s M Limited also placed on record the ‘No dues certificates’ obtained from all creditors (except the dispute between E&Y and M/s M Limited as it was pending before the Arbitral Tribunal), hence, the conversion of M/s M Limited shall not affect the responsibility and liabilities of M/s M Limited.

The NCLAT thus noted that M/s M Limited had fulfilled all the conditions for conversion and the shortcomings pointed out by the NCLT were inconsequential. Therefore, the NCLAT set aside the order and approved the special resolution dated 14th August, 2017 for conversion of M/s M Limited from public to private company.

12 R. Narayanasamy vs. The Registrar of Companies, Tamil Nadu Company Appeal (AT) No. 171 of 2020 Source: NCLAT Official Website Date of order: 19th January, 2021

Divergent views on disposal of the appeal pertaining to striking off of the name of company after following necessary procedure u/s 248 of the Companies Act, 2013

FACTS

This appeal was filed against the order dated 5th May, 2020 passed by the NCLT, Chennai dismissing the appeal u/s 252(3) of the Companies Act, 2013 for restoration of the name of the company ‘M/s Shri L S Pvt. Ltd.’ which was struck off by the ROC after following the necessary procedure u/s 248 of the Companies Act, 2013. R N, who was the Managing Director of the company, claimed that non-filing of annual returns and filing statements was due to absence of expert professional guidance. Further, the striking off was prejudicial to the interest of the company and that returns were not filed out of ignorance and inadvertence.

HELD

The members of the NCLAT Bench delivered divergent judgments on analysing the law as it was existing, on the basis of what is ‘just’ u/s 252(3) of the Companies Act. Thereafter, it was placed before a third member. This third member of the NCLAT observed that section 252 provides for relief to aggrieved parties when the Registrar notifies a company as dissolved u/s 248 of the Companies Act, 2013.

The name of the company was required to be restored if the NCLT
* was satisfied that the company, at the time of its name being struck off, carried out any business or operation,
OR
* otherwise it was ‘just’ that the name of the company be restored to the register of companies.

In the present matter, the admitted fact was that when the name of the company was struck off, it was not functional and was not carrying on business or operations for more than two years immediately preceding the financial year and thus attracted section 248(1)(c) of the Companies Act, 2013. When the question of law has neither been framed nor referred, and it appeared from the judgments that the two Hon’ble Members had divergent views, on the basis of facts the appeal should be dismissed by not interfering with the dismissal order passed by the NCLT.

13 The Canning Industries Cochin Ltd. vs. Securities and Exchange Board of India (SEBI) Company Appeal (AT) No. 115 of 2019 Source: The Securities Appellate Tribunal Official Website Date of order: 28th January, 2020

Whether the issue of unsecured fully convertible debentures (‘FCDs’) by an unlisted public company is rights offer or public offer, or an offer that violates the provisions of private placement of securities under the Companies Act, 2013

FACTS

M/s CIC Ltd., an unlisted public company, passed a special resolution under sections 62(3) and 71 of the Companies Act, 2013 to issue 1,92,900 unsecured fully convertible debentures (FCDs) to its 1,929 shareholders, with a condition that there would exist no right to renounce the offer to any other person. However, only 335 shareholders subscribed to the offering. Consequently, one disgruntled shareholder filed a complaint before SEBI and the NCLT alleging that the company had made a public issue of securities without complying with the applicable provisions of the Companies Act, 2013.

On 18th March, 2019, SEBI passed an order which held that the offer of FCDs made by the company was a ‘deemed public issue’ u/s 42(4) of the Companies Act, 2013 read with Rule 14(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, as the offer was made to more than 200 shareholders and, hence, directed the company to comply with the prescribed provisions of ‘public issue’ in the Act.

Aggrieved by the order, M/s CIC Ltd. appealed before the Securities Appellate Tribunal (SAT) and contended that the issuance of FCDs was neither a rights issue (as the issue was not made on a proportionate basis), nor was it a private placement and that the issue falls u/s 62(3) of the Companies Act, 2013 which had not been considered by SEBI.

HELD

SAT held that a rights issue of FCDs was not a ‘private placement’ of securities as the offer of shares to the company’s shareholders cannot be termed as an offer to a ‘select group of persons’. The expression ‘select group of persons’ means ‘an offer made privately such as to friends and relatives or a selected set of customers distinguished from approaching the general public or to a section of the public by advertisement, circular or prospectus addressed to the public’. Hence, the restriction of subscription of shares to 200 persons or more in the case of private placement of securities envisaged u/s 42 of the Companies Act, 2013 was not applicable in the instant case.

Further, section 62(3) was fully applicable as M/s CIC Ltd. had duly complied with it by passing the special resolution; thus, issuance of FCDs by M/s CIC Ltd. cannot be termed as a public issue or a private placement. Hence, a company issuing FCDs is not mandated to comply with any additional requirement of public issue or private placement specified under sections 23 and 42 of the Companies Act, 2013, respectively.

In light of the aforesaid, the order passed by the whole-time Member cannot be sustained. The interim order as well as the order and the directions so issued were all quashed and thus the appeal was allowed.

14 Hytone Merchants Pvt. Ltd. vs. Satabadi Investment Consultants Pvt. Ltd. Company Appeal (AT) (Insolvency) No. 258 of 2021

CASE NOTE
1. NCLAT confirmed rejection of the insolvency application even when the same was complete in all respects on the ground of collusion between the applicant creditor and the respondent corporate debtor.
2. Quantum of default was very meagre in comparison to the net worth of the corporate debtor.
3. The corporate debtor had made substantial investments in companies which were under insolvency and also extended corporate guarantee.

The brief facts of the case are as follows:

(a) Corporate debtor (‘company’) had accepted loan of Rs. 3 lakhs from the financial creditor @ 15% pa.
b) The company accepted the loan default and also acknowledged the debt.
c) The company was also the guarantor for two other companies which were under insolvency and liquidation.
The application u/s 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) was filed by the financial creditor. NCLT rejected the application even after concluding that the application was complete in all respects and the default and debt existed.

The creditor argued that the NCLT has no jurisdiction to go beyond the completeness of the application. It only has to see the completeness of the application along with the existence of debt and default.

NCLAT, after going through the submissions, confirmed the NCLT order. It observed that NCLT has rightly rejected the application and is correct in lifting the corporate veil.

The corporate debtor had stood as corporate guarantor for two companies which were under insolvency and one had even gone under liquidation. The value of the corporate guarantee given by the corporate debtor amounted to Rs. 482 crores while the net worth of the company was Rs. 15 crores. It appeared to the Tribunal that the acknowledgement of debt and acceptance of default was collusive. The defaulted debt of Rs. 3 lakhs was a meagre amount in comparison to the net worth of the company.

The Tribunal also observed that the Court has to see the persons behind the company to come to a conclusion whether the insolvency is proposed to be initiated in a collusive manner. It relied on the Supreme Court judgment in Swiss Ribbons vs. Union of India wherein the Court had held that the insolvency application can be rejected and also cost can be imposed u/s 65 of the IBC. This is a safeguard against fraudulent or malicious initiation of insolvency proceedings.

This judgment has clarified that the insolvency proceedings are not mere compliance proceedings. The Tribunal has seen the real intent of the parties and the IB Code. The object of the Code is to resolve the insolvent companies and in the interest of all stakeholders.

BCAJ Admin

ALLIED LAWS

18 Arun Kedia (HUF) vs. Runwal Homes (P) Ltd. Consumer Case No. 1115 of 2017 (NCDRC)(Del) Date of order: 24th June, 2021 Bench: Ram Surat Ram Maurya J. and Mr. C. Vishwanath

Consumer Protection – Builder cancels sale agreement – Without consent – Not handing over timely possession – Interest levied [Maharashtra Ownership of Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963, S. 8]

FACTS

A registered agreement for sale was executed between the complainant and the builders on 5th June, 2013. Clause 17 of the agreement provided that the builder would give possession of the premises to the purchasers by March, 2016.

The complainants received a demand letter dated 12th September, 2016 on 13th September, 2016 but as no date of delivery of possession was mentioned, they did not deposit the amount demanded in it, rather, they requested for handing over of possession of the flat allotted to them. They were not allowed to go to the site to verify the progress under construction, although 85% of the sale consideration was paid. The directors and officers of the builder assured that they need not worry and that the possession would be given to them within a short time.

When the builder neglected to give possession of the flat allotted to them, they served a registered notice on the builders on 15th March, 2017 for handing over the possession of the flat. The builders, through a letter dated 15th March, 2017 (served on 20th March, 2017) unilaterally cancelled the agreement dated 5th June, 2013, mentioning therein that in spite of the demand letter dated 12th September, 2016, they had not deposited the instalment as stated in the agreement. The complainants gave registered notices dated 23rd March, 2017 and 4th April, 2017 to the builders, asking them to withdraw their letter dated 15th March, 2017 cancelling the agreement dated 5th June, 2013, and to hand over possession of the flat allotted to them. Since the notices have not been complied with, the present complaint was filed on 18th April, 2017 by the complainants.

HELD

It is admitted by the builders and also mentioned in the agreement that the Maharashtra Ownership of Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 is applicable. According to section 8 of the said Act, if the builder is not able to hand over the possession of the building / flat within the time specified in the agreement, then the builder is liable to pay interest for the period for which the possession has not been handed over. The builders had failed to complete the construction and hand over possession of the flat in March, 2016 as agreed. Due to the latches on the part of the builders, the complainants are suffering loss. The agreement for sale has been cancelled illegally and the complainants are forced to opt for litigation. The Builders shall pay simple interest at 6% p.a. to the complainants on the amount deposited by them from the due date of possession to the offer of possession after obtaining the occupancy certificate.

19 Compack Enterprises India (P) Ltd. vs. Beant Singh (2021) 3 SCC 702 (SC) Date of order: 17th February, 2021 Bench: Mohan M. Shantanagoudar J. and Vineet Saran J.

Consent decree – No estoppel – Compromise arrived by fraud, misrepresentation or mistake [Code of Civil Procedure, 1908, Or. XII, R. 6]

FACTS
On a dispute arising on account of mesne profits, the Court had passed a consent decree directing that the petitioner shall pay to the respondent (owner of the property), by way of mesne profits, an enhanced sum of Rs.1,00,000 p.m., with a 10% increase every 12 months, i.e., from 1st October, 2009, 1st October, 2011 and so on, till the date the petitioner hands over actual possession of the suit property measuring 5,472 sq. ft. to the respondent.

The petitioner filed a review petition against the consent terms, contending that the High Court had erred in recording the terms of the consent decree agreed to by the petitioner. It contended that the judgment records that the mesne profits be increased by 10% every 12 months, instead of recording a 10% increase every 24 months and that the petitioner was in possession of only 2,200 sq. ft. The review petition was rejected.

HELD
The Court, inter alia, relied on the decision in the case of Byram Pestonji Gariwala vs. Union Bank of India & Ors., (1992) 1 SCC 31, wherein it was held that a consent decree would not serve as an estoppel where the compromise was vitiated by fraud, misrepresentation or mistake. In the exercise of its inherent powers, the Court may also unilaterally rectify a consent decree suffering from clerical or arithmetical errors, so as to make it conform to the terms of the compromise.

The Court observed that the learned Judge of the High Court, in noting that the figure of mesne profits of Rs. 1 lakh will be increased by 10% after every 12 months, i.e., from 1st October, 2009, 1st October, 2011 and so on, (emphasis supplied), has confused not only himself but also the parties to the litigation. Referring to the final decree by the Trial Court awarding a 10% increase only every alternate year and the original terms of the license agreement between the parties, the period of 12 months in the consent decree was rectified to 24 months by the Court. The plea of the petitioner that he was in possession of only 2,200 sq. ft. and not 5,472 sq. ft. was rejected.

20 Trustees of H.C. Dhanda Trust vs. State of M.P. (2020) 9 SCC 510 (SC) Date of order: 17th September, 2020 Bench: Ashok Bhushan J., R. Subhash Reddy J. and M.R. Shah J.

Stamp Act – Imposition of penalty – Ten times of duty deficit – Exercise of discretion – Cannot be imposed normally [Indian Stamp Act, 1899, Ss. 33, 35, 38, 39 and 40]

FACTS
A resolution was passed by the executors / trustees under the will of Late Shri Harish Chand Dhanda to transfer and vest the area to the beneficiaries. On 21st April, 2005, a Deed of Assent was executed between M/s H.C. Dhanda Trust, a private trust, as one part and Jogesh Dhanda and others as the other part. By this Deed of Assent, the trustees / executors gave assent to complete the title of the legatees and vest two properties absolutely and forever in their favour.

A notice was issued by the Collector of Stamps, District Indore, stating that proper stamp duty has not been paid on the Deed of Assent dated 21st April, 2005. The notice further stated that there was a deficit stamp duty on the said document and asked why ten times penalty should not be imposed. The Trust appeared before the Collector of Stamps and filed its objection. The Collector holding the Deed of Assent as a gift deed held that the deficit duty was Rs. 1,28,09,700. He imposed penalty ten times the deficit duty. The Trustees challenged the order of the Collector imposing the penalty.

HELD
The legislative intent is clear from a reading of sections 33, 35, 38 and 39 of the Indian Stamp Act, 1899. It indicates that with respect to the instrument not duly stamped, ten times penalty is not always retained and the power can be exercised u/s 39 to reduce penalty and in regard to that there is a statutory discretion with the Collector to refund the penalty.

The purpose of penalty generally is a deterrence and not retribution. When a discretion is given to a public authority, such public authority should exercise such discretion reasonably and not in an oppressive manner. The responsibility to exercise the discretion in a reasonable manner lies more in cases where discretion vested by the statute is unfettered. Imposition of the extreme penalty, i.e., ten times the duty or deficient portion thereof, cannot be based on the mere factum of evasion of duty. Reasons such as fraud or deceit in order to deprive the Revenue or undue enrichment are relevant factors to arrive at a decision as to what should be the extent of penalty u/s 40(1)(b). The penalty was reduced to five times the duty deficit.

21 Daulat Singh (D) Thr. LRS. vs. The State of Rajasthan (2021) 3 SCC 459 (SC) Date of order: 21st May, 2021 Bench: N.V. Ramana J., S. Abdul Nazeer J. and Surya Kant J.

Gift – Immovable property – Acceptance criterion [Transfer of Property Act, 1882, Ss. 122 and 123]

FACTS

The appellant was the owner of 254.2 bighas of land. On 19th December, 1963, he gifted away 127.1 bighas to his son. After the said transfer, the appellant was left with 17.25 standard acres of land, which was below the prescribed limit under the Ceiling Act.

Although proceedings were initiated under the Ceiling Act, the same were dropped on 15th April, 1972 by the Court of the Deputy Sub-Divisional Officer, Pali, Rajasthan. However, by a notice dated 15th March, 1982, the Revenue Ceiling Department reopened the case of the appellant.

The Court of the Additional District Collector, Pali vide order dated 28th October, 1988, declared that the mutation of the land done in favour of the son of the appellant was invalid as there was no acceptance of the gift. It was declared therein that the appellant was holding 11 standard acres of extra land over and above the ceiling limit. The Collector, therefore, directed the appellant to hand over vacant possession of the aforesaid 11 standard acres of extra land to the Tahsildar, Pali.

HELD

The Court, inter alia, on the issue of validity of the gift deed held that section 122 of the Transfer of Property Act, 1882 (TOPA) neither defines acceptance, nor does it prescribe any particular mode for accepting the gift. The word acceptance is defined as ‘is the receipt of a thing offered by another with an intention to retain it, as acceptance of a gift.’ The only requirement stipulated under TOPA is that the acceptance of the gift must be effected during the lifetime of the donor.

Gifts do not contemplate payment of any consideration or compensation. It is, however, beyond any doubt or dispute that in order to constitute a valid gift, acceptance thereof is essential. The document may be handed over to a donee, which in a given situation may also amount to a valid acceptance. The Court held that the fact that possession had been given to the donee also raises a presumption of acceptance. The Court referred to the statement made by the son – the donee – before the Court of the Additional District Magistrate stating that the land transferred to him by virtue of the gift deed was under his possession and he was cultivating the same. The gift was held to be a valid gift.

22 UOI & Ors. vs. Vishnu Aroma Pouching Pvt. Ltd. & Anr. SLP (C) Diary No. 1434 of 2021 (SC) Date of order: 29th June, 2021 Bench: Sanjay Kishan Kaul J. and Krishna Murari J.

Delay in filing appeal – Not justified – Cost imposed – SLP dismissed

FACTS

The Department filed an application for condonation of delay. It was stated in the application that the judgment was pronounced on 14th November, 2019. But the proposal for filing the Special Leave Petition was sent after almost six months, on 20th May, 2020, and it took another three months to decide whether or not to file the Special Leave Petition.

HELD

Such lethargy on the part of the Revenue Department with so much computerisation having been achieved is no longer acceptable. The application shows the casual manner in which the petitioner has approached this Court without any cogent or plausible ground for condonation of delay. In fact, other than the lethargy and incompetence of the petitioner, there is nothing which has been put on record. The leeway which was given to the Government / public authorities on account of innate inefficiencies was the result of certain orders of this Court that came at a time when technology had not advanced and, thus, greater indulgence was shown.

Cases of this kind were ‘certificate cases’ filed only with the objective to obtain a quietus from the Supreme Court on the ground that nothing could be done because the highest Court had dismissed the appeal. The objective was to complete a mere formality and save the skin of the officers who may be in default in following the due process, or may have done it deliberately. Looking to the period of delay and the casual manner in which the application had been worded, the Court considered it appropriate to impose costs on the petitioner(s) of Rs. 25,000 for wastage of judicial time which has its own value. The Special Leave Petition was dismissed as time-barred. A copy of the order was ordered to be placed before the Secretary, Ministry of Finance, Department of Revenue.

BCAJ Admin

ALLIED LAWS

13 Dhanjibhai Hirjibhai Nasit vs. State of Gujarat & Ors. AIR (2020) Gujarat 70 Date of order: 20th February, 2020 Bench: Vikram Nath CJ, Vipul M. Pancholi J. and Ashutosh J. Shastri J.

Co-operative society – Tenure of members appointed by State Government [Gujarat Co-operative Societies Act, 1962, S. 80]

FACTS

The petitioner is a member of the Una Taluka Khand Vechan Sangh Ltd. (union). The union is a specified co-operative society as defined u/s 74C of the Gujarat Co-operative Societies Act, 1961 (Act). The elections of specified co-operative societies are required to be held and conducted as provided u/s 74C read with Chapter XI-A of the Act as well as the Rules framed thereunder. It is further stated that the respondent State Government, in purported exercise of the powers conferred upon it u/s 80(2) of the Act, on 4th January, 1999 appointed three government nominees on the Board of Directors of the Union.

The grievance of the petitioner is that the nominee directors, for reasons best known to them, insisted on continuing on the Board of Directors of the Union. The petitioner had, therefore, prayed that the nominee directors be restrained from taking part in the meeting of the Board of Directors which was scheduled to be held on 10th May, 2007.

HELD

The Committee means ‘Managing Committee’ or other governing body of a society to which the direction and control of the management of the affairs of a society are entrusted. The term of the elected members of the Managing Committee shall be five years from the date of election as provided in section 74C(2) of the Act. It is further clear that where the State Government has subscribed to the share capital of the society directly or through another society, or as per the circumstances enumerated in section 80(1) of the Act, the State Government is empowered to nominate three prescribed representatives on the Committee of the society and such members so nominated shall hold office during the pleasure of the State Government, or for such period as may be specified in the order by which they are appointed. Similarly, section 80(2) of the Act empowers the State to appoint the representatives having regard to the public interest involved in the operation of a society as if the State Government had subscribed to the share capital of the society and the provisions contained in section 80(1) of the Act will be applicable to such nomination.

The petition was disposed of accordingly.

14 Benedict Denis Kinny vs. Tulip Brian Miranda & Ors. AIR 2020 Supreme Court 3050 Date of order: 19th March, 2020 Bench: Ashok Bhushan J. and Navin Sinha J.

Right to judicial review – Citizen has the right against any order of a statutory authority [Constitution of India, Art. 226]

FACTS
The respondent as well as the appellant contested the election for the seat of Councillor in the Mumbai Municipal Corporation reserved for backward class citizens. On 23rd February, 2017, the respondent No. 1 was declared elected. Section 5B of the Mumbai Municipal Corporation Act, 1888 (Act) requires the candidate to submit his caste validity certificate on the date of filing the nomination papers. A candidate who has applied to the Scrutiny Committee for the verification of his caste certificate before the date of filing of nomination but who has not received the said certificate on the date of filing the nomination, has to submit an undertaking that he shall submit within a period of six months from the date of election the validity certificate issued by the Scrutiny Committee.

It is further provided that if a person fails to produce the validity certificate within the period of six months from the date of election, that election shall be deemed to have been terminated retrospectively and he shall be disqualified from being a Councillor. The period of six months was amended to 12 months by the Amendment Act, 2018.

The Scrutiny Committee, vide its order dated 14th August, 2017, held that respondent No. 1 does not belong to the East Indian category. Therefore, it refused to grant caste validity certificate in favour of the respondent. Writ Petition No. 2269 of 2017 was filed by the respondent challenging the above order of the Caste Scrutiny Committee.

The High Court, vide order dated 18th August, 2017, passed an interim order in favour of respondent No. 1. The High Court, vide its judgment and order dated 2nd April, 2019, allowed the writ petition filed by respondent No. 1 and quashed the order of the Scrutiny Committee dated 14th August, 2017 and remanded the matter to the Scrutiny Committee for fresh consideration.

By the judgment dated 2nd April, 2019, the High Court also directed that the respondent No. 1 is entitled to continue in her seat, since the effect of disqualification was postponed by the interim order and the impugned order of the Caste Scrutiny Committee had been set aside.

Aggrieved by the judgment and order dated 2nd April, 2019, Review Petition (L) No. 20 of 2019 was filed by the appellant which, too, was rejected by the High Court by an order dated 2nd May, 2019. Both the orders, dated 2nd April and 2nd May, 2019, have been challenged by the appellant in this appeal.

HELD
The Court, inter alia, on the question of whether the High Court in exercise of jurisdiction under Article 226 can interdict the above consequences envisaged by section 5B of the Act by passing an interim or final judgment, held as under:

An interim direction can be passed by the High Court under Article 226, which could have helped or aided the Court in granting the main relief sought in the writ petition. In the present case, the decision of the Caste Scrutiny Committee having been challenged by the writ petitioners and the High Court finding prima facie substance in the submissions, granted interim order which ultimately fructified in the final order setting aside the decision of the Caste Scrutiny Committee. Thus, the interim order passed by the High Court was in aid of the main relief, which was granted by the High Court.

The interim order passed by the High Court was in exercise of judicial review by the High Court to protect the rights of the respondents. The appeal was dismissed.

15 Suo motu Public Interest Litigation No. 01 of 2021 Date of order: 11th June, 2021 Bench: Dipankar Datta CJI, A.A. Sayed J., S.S. Shinde J. and Prasanna B. Varale J.

Covid-19 – Extension of interim orders

FACTS
The Court On its Own Motion addressed matters wherein interim orders have been passed by the High Court of Bombay at its Principal Seat, and the Benches at Nagpur and Aurangabad, the High Court of Bombay at Goa, and the Courts / Tribunals subordinate to it, including the Courts / Tribunals in the Union Territory of Dadra and Nagar Haveli, and Daman and Diu, during the second wave of the Covid pandemic and for extending protection to those who are unable to access justice because of the restricted functioning of Courts / Tribunals.

HELD
Taking an overall view of the matter, which tends to suggest that resumption of physical hearings in all the Courts across Maharashtra is still at some distance, the protection granted by the interim orders passed on this PIL stand extended till 9th July, 2021 or until further orders, whichever is earlier, on the same terms.

Further, the Court held that the media has reported incidents of building collapses leading to loss of precious lives. Therefore, if indeed there are buildings / structures which are either dilapidated or dangerous / unsafe requiring immediate demolition and vacation thereof by their inhabitants, the particular Municipal Corporation / Municipal Council / Panchayat / Local Body within whose territorial limits such buildings / structures are located, may, considering the imminent need to have such buildings / structures vacated and demolished, bring the particular instance to the notice of the relevant Division Bench in seisin of suo motu Public Interest Litigation No. 1 of 2020 (High Court On its Own Motion vs. Bhiwandi Nizampur Municipal Corporation & Ors.) and seek appropriate orders for proceeding with the demolition process to take it to its logical conclusion.

16 Lalit Kumar Jain vs. UOI & Ors. Transferred case (Civil) No. 245 of 2020 Date of order: 21st May, 2021 Bench: L. Nageswara Rao J. and S. Ravindra Bhat J.

Personal guarantor – Liable under IBC Code [Constitution of India, Article 32; Insolvency and Bankruptcy Code, 2016, S. 2(e), 31, 60, 78, 79, 239, 240, 249]

FACTS
The petition was preferred under Article 32 as well as transferred cases under Article 139A of the Constitution of India. The common question which arises in all these cases concerns the vires and validity of a Notification dated 15th November, 2019 issued by the Central Government (impugned notification). The petitioners contend that the power conferred upon the Union u/s 1(3) of the Insolvency and Bankruptcy Code, 2016 (Code) could not have been resorted to in a manner so as to extend the provisions of the Code only as far as they relate to personal guarantors of corporate debtors.

HELD
It is quite evident that the method adopted by the Central Government to bring into force different provisions of the Act had a specific design: to fulfil the objectives underlying the Code.

The Amendment of 2018 also altered section 60 of the Code in that insolvency and bankruptcy processes relating to liquidation and bankruptcy in respect of three categories, i.e., corporate debtors, corporate guarantors of corporate debtors and personal guarantors to corporate debtors, were to be considered by the same forum, i.e., the NCLT.

It is, therefore, clear that the sanction of a resolution plan and finality imparted to it by section 31 of the Code does not per se operate as a discharge of the guarantor’s liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself.

Therefore, it is held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee.

The writ petitions were dismissed.

17 Urmila Devi & Ors. vs. Branch Manager, National Insurance Company Limited & Anr. (2020) 11 SCC 316 Date of order: 30th January, 2020 Bench: S.A. Bobde CJI, B.R. Gavai J. and Surya Kant J.

Scope of cross-objection – Even if appeal is withdrawn or dismissed – Cross-objection would survive [Civil Procedure Code, 1908, Or. 41. R. 22]

FACTS
On 2nd May, 2008, Sanjay Tanti, husband of appellant No. 1, father of appellant Nos. 2 to 4 and son of appellant No. 5, met with an accident while he was travelling from Ladma to Goradih by a Tata Maxi vehicle. The appellants filed a claim petition u/s 166 of the Motor Vehicles Act, 1988 (the M.V. Act). The owner of the vehicle was joined as Opponent No. 1; the driver of the vehicle was joined as Opponent No. 2; whereas, the National Insurance Company Limited (hereinafter referred to as ‘the Insurance Company’) was joined as Opponent.

The claim of the Insurance Company was that the driver and the owner of the vehicle had breached the terms and conditions of the insurance policy and, as such, they are not liable for payment of compensation.

The Motor Vehicle Accidental Claim Tribunal (Tribunal) vide judgment and order dated 29th January, 2011, rejected the contention of the Insurance Company that the driver and owner of the vehicle had breached the terms and conditions, and while allowing the claim petition directed the Insurance Company to pay compensation of Rs. 2,47,500 to the claimants.

Being aggrieved by the judgment and award passed by the Tribunal, the Insurance Company preferred Misc. Appeal No. 521 of 2011 before the High Court at Patna contending that the Tribunal had erroneously fastened the liability on it. In the said appeal, a cross-objection came to be filed by the appellants.

When the appeal came up for hearing, it was noticed that the appeal was dismissed for want of office objections and the counsel for the appellants (the Insurance Company) stated that they were not interested in reviving the appeal. The appeal was, as such, disposed of by the High Court. Insofar as the cross-objection of the appellants (the claimants) was concerned, the High Court held that when the appeal filed by the Insurance Company is only restricted to denial of its liability to make the payment of compensation, then in such case the cross-objection at the behest of the claimants in the shape of appeal would not be tenable. It, however, held that if the Insurance Company in the appeal challenges the quantum of compensation, in such a case the claimant(s) will have a right to file an objection.

Being aggrieved, the appellants filed the present appeal by special leave.

HELD

A conjoint reading of the provisions of section 173 of the M.V. Act; Rule 249 of the Bihar Motor Vehicle Rules, 1992; and Order XLI Rule 22 of the CPC, would reveal that there is no restriction on the right to appeal of any of the parties. It is clear that any party aggrieved by any part of the award would be entitled to prefer an appeal. It is also clear that any respondent, though he may not have appealed from any part of the decree, apart from supporting the finding in his favour, is also entitled to take any cross-objection to the decree which he could have taken by way of appeal. When in an appeal the appellant could have raised any of the grounds against which he is aggrieved, a respondent cannot be denied the right to file cross-objection in an appeal filed by the other side challenging that part of the award with which he was aggrieved. The said distinction as sought to be drawn by the High Court is not in tune with a conjoint reading of the provisions of section 173 of the M.V. Act; Rule 249 of the Bihar Motor Vehicle Rules, 1992; and Order XLI Rule 22 of the CPC.

Therefore, even if the appeal of the Insurance Company was dismissed in default and the Insurance Company had submitted that it was not interested to revive the appeal, still the High Court was required to decide the cross-objection of the appellants herein on merits and in accordance with law.

BCAJ Admin

CORPORATE LAW CORNER

5 Muthu Kumar G. vs. Registrar of Companies [127 taxmann.com 550 (Mad)] Date of order: 2nd March, 2021

Where no notice was given to the director before disqualifying him as director of company, order passed by Registrar of Companies disqualifying such individual u/s 164(2)(a) of the Companies Act, 2013 was illegal and was to be set aside

FACTS

This writ petition has been filed challenging the disqualification of the petitioner as director u/s 164(2)(a) of the Companies Act, 2013 on the ground that he has not submitted financial statements for three consecutive financial years. The petitioner has challenged the order dated 17th December, 2018 passed by the Registrar of Companies on the ground that it was passed without affording him an opportunity of a hearing.

HELD

The High Court observed that the ratio laid down by the Division Bench of the Court in the matter of Meethelaveetil Kaitheri Muralidharan vs. Union of India [2020] 120 Taxmann 152 applies to the facts of the instant case also. In the instant case, too, no notice was given to the petitioner director before disqualifying him.

The Court held that since no notice was given to the petitioner director, the order passed by the Registrar of Companies disqualifying him u/s 164(2)(a) was illegal and was to be set aside.

6 Regional Director, Southern Region, MCA and Registrar of Companies, Chennai vs. Real Image LLP (NCLAT) [Company Appeal (at) No. 352 of 2018; Source: NCLAT Official Website] Date of order: 4th December, 2019

If an Indian Limited Liability Partnership (‘LLP’) is proposed to be merged into an Indian Company u/s 232 of the Companies Act, 2013 then the LLP has first to apply for registration / conversion u/s 366 of the Companies Act, 2013

FACTS

The National Company Law Tribunal (NCLT), Chennai Bench vide its order dated 11th June, 2018 allowed the amalgamation of an LLP into a private limited company.

M/s Real Image LLP (referred to as transferor LLP) with M/s Qube Cinema Technologies Private Limited (referred to as transferee company) and their respective partners, shareholders and creditors moved a joint company petition under sections 230 to 232 of the Companies Act, 2013 before the NCLT, Chennai. The NCLT, after considering the scheme, found that all the statutory compliances have been made under sections 230 to 232 of the Companies Act, 2013.

NCLT further found that as per the earlier section 394(4)(b) of the Companies Act, 1956, an LLP could be merged into a company but there is no such provision in the Companies Act, 2013. However, an explanation to sub-section (2) of section 234 of the Act, 2013 permits a foreign LLP to merge with an Indian company; hence it would be wrong to presume that the Companies Act, 2013 prohibits the merger of an Indian LLP with an Indian company.

The NCLT observed that there was no legal bar to allow the merger of an Indian LLP with an Indian company. Therefore, applying the principle of casus omissus (a situation not provided by statute and hence governed by common law), NCLT by an order allowed the amalgamation of the transferor LLP with the transferee company.

The appellants preferred an appeal u/s 421 of the Companies Act, 2013 with a question for consideration before the National Company Law Appellant Tribunal (NCLAT) whether by applying the principle of casus omissus an Indian LLP incorporated under the LLP Act, 2008 can be allowed to merge into an Indian company incorporated under the Companies Act, 2013?

HELD

The NCLAT in its order stated that it is undisputed that the transferor LLP is incorporated under the provisions of the LLP Act, 2008 and the transferee company is incorporated under the Companies Act, 2013. Thus, these corporate bodies were governed by the respective Acts and not by the earlier Companies Act, 1956.

As per section 232 of the Companies Act, 2013 a company or companies can be merged or amalgamated into another company or companies.

It was observed that the Companies Act, 2013 has taken care of the merger of an LLP into a company. In this regard section 366 of the Companies Act, 2013 for Companies Capable of Being Registered provides that for the purpose of Part I of Chapter XXI (for Companies Authorised to Register Under this Act) the word company includes any partnership firm, limited liability partnership, co-operative society, society or any other business entity which can apply for registration under this part.

It means that under this part LLP will be treated as a company and it can apply for registration, and once the LLP is registered as a company, then the company can be merged in another company as per section 232 of the Companies Act, 2013.

The NCLAT concluded in its order that on reading the provisions of the Companies Act, 2013 as a whole in reference to the conversion of an Indian LLP into an Indian company, there is no ambiguity or anomalous results which could not have been intended by the Legislature. The principle of casus omissus cannot be supplied by the Court except in the case of clear necessity, and when a reason for it is found within the four corners of the statute itself, then there is no need to apply the principle of casus omissus.

The NCLAT held that the order passed by the NCLT, Chennai Bench is not sustainable in law, hence it set aside the order which sought to allow the merger of an Indian LLP with an Indian Company without registration / conversion of the LLP into a company u/s 366 of the Companies Act, 2013.

7 Joint Commissioner of Income Tax (OSD), Circle (3)(3)-1, Mumbai and Income Tax Officer, Ward 3(3)-1, Mumbai vs. Reliance Jio Infocomm Ltd. and M/s Reliance Jio Infratel Pvt. Ltd. Company Appeal (at) No. 113 of 2019 [National Company Law Appellate Tribunal (NCLAT), New Delhi; Source: NCLAT Official Website] Date of order: 20th December, 2019

Mere fact that a Scheme of Compromise or Arrangement may result in reduction of tax liability does not furnish a basis for challenging the validity of the same

FACTS

A joint petition under sections 230 to 232 of the Companies Act, 2013 was filed seeking sanction of the Composite Scheme of Arrangement amongst Reliance Jio Infocomm Limited, Jio Digital Fibre Private Limited and Reliance Jio Infratel Private Limited and their respective shareholders and creditors before the National Company Law Tribunal (NCLT), Ahmedabad Bench.

The NCLT, Ahmedabad Bench, by its order dated 11th January, 2019 directed the Regional Director, North-Western Region to make a representation u/s 230(5) of the Companies Act, 2013 and the Income-tax Department to file a representation.

According to the appellants, the NCLT has not adjudicated upon the objections raised by the appellants that the NCLT has not dealt with the specific objection that conversion of preference shares by cancelling them and converting them into loan would substantially reduce the profitability of the de-merged company / Reliance Jio Infocomm Limited which would act as a tool to avoid and evade taxes.

Under the Scheme of Arrangement, the transferor company has sought to convert the redeemable preference shares into loans, i.e., conversion of equity into debt which would reduce the profitability or the net total income of the transferor company causing a huge loss of revenue to the Income-tax Department.

According to the appellants, the scheme seeks to do indirectly what it could not have done directly under the law. By way of the composite scheme, there is an indirect release of assets by the de-merged company to its shareholders which is used to avoid dividend distribution tax which would have otherwise been attracted in the light of section 2(22)(a) of the Income-tax Act.

Further, when preference shares are converted into loan, the shareholders turn into creditors of the company. There are two consequences of this. Firstly, the shareholders who are now creditors can seek payment of the loan irrespective of whether or not there are accumulated profits, and secondly, the company would be liable to pay interest on the loans to its creditors, which it otherwise would not have had to do to its shareholders. Payment of interest on such huge amounts of loans would lead to reducing the total income of the company in an artificial manner which is not permissible in law.

It was also alleged that the proposed scheme does not identify the interest rate payable on the loan which will be a charge on the profits of the company. Even if 10% interest rate is considered as per section 186 of the Companies Act, 2013, this would amount to interest of approximately Rs. 782 crores per annum which would reduce the profitability of the company as this interest would reduce tax by Rs. 258 crores (approximately) each year. The reduction in the profitability is clearly resulting in tax evasion.

HELD
The NCLAT held that it was not open to the Income-tax Department to hold that the Composite Scheme of Arrangement amongst the petitioner companies and their respective shareholders and creditors is giving undue favour to the shareholders of the company and also the overall Scheme of Arrangement results in tax avoidance. The mere fact that a scheme may result in reduction of tax liability does not furnish a basis for challenging the validity of the same.

The NCLT, Ahmedabad bench, while approving the Composite Scheme of Arrangement, has granted liberty to the Income-tax Department to inquire into the matter, whether any part of the Composite Scheme of Arrangement amounts to tax avoidance or is against the provisions of the Income Tax, and to let it take appropriate steps if so required.

Thus, NCLAT upheld the decision of the NCLT, Ahmedabad bench and in view of the liberty given to the Income-tax Department, decided not to interfere with the Scheme of Arrangement as approved by the Tribunal and dismissed the appeals filed.

8 Lalit Kumar Jain vs. Union of India & Ors. Transferred Civil case No. 245 of 2020 [2021 127 Taxmann.com 368 (SC)] Date of order: 21st May, 2021

CASE NOTE
1. Central Government has power to notify different sections on different dates and also to special species of individuals, i.e., personal guarantors
2. Approval of resolution plan of the corporate debtor shall not ipso facto absolve the personal guarantors of their liability

FACTS OF CASE
The case deals with various writ petitions which challenged the constitutional validity of Part III of the IBC, which deals with insolvency resolution for individuals and partnership firms. The Supreme Court transferred all writ petitions from the High Courts to itself to take up interpretation of the impugned provisions of the IBC.

QUESTIONS OF LAW INVOLVED IN THE CASE
(1) Whether executive government could have selectively brought into force the Code, and applied some of its provisions to one sub-category of individuals, i.e., personal guarantors to corporate creditors?

HELD BY THE SUPREME COURT
• The intimate connection between such individuals and corporate entities to whom they stood guarantee, as well as the possibility of two separate processes being carried on in different forums, with its attendant uncertain outcomes, led to carving out personal guarantors as a separate species of individuals for whom the Adjudicating Authority was common with the corporate debtor to whom they had stood guarantee.

• The Court held that there is no compulsion in the Code that it should, at the same time, be made applicable to all individuals (including personal guarantors), or not at all. There is sufficient indication in the Code, by section 2(e), section 5(22), section 60 and section 179, indicating that personal guarantors, though forming part of the larger grouping of individuals, were to be, in view of their intrinsic connection with corporate debtors, dealt with differently through the same adjudicatory process and by the same forum (though not insolvency provisions) as such corporate debtors. The notifications under section 1(3), (issued before the impugned notification was issued) disclose that the Code was brought into force in stages, regard being given to the categories of persons to whom its provisions were to be applied. The exercise of power in issuing the impugned notification under section 1(3), therefore, is held not ultra vires and the notification valid.

(2) Whether the impugned notification, by applying the Code to personal guarantors only, takes away the protection afforded by law as once a resolution plan is accepted, the corporate debtor is discharged of liability?

• Approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of his or her liabilities under the contract of guarantee. As held by this Court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e., by operation of law, or due to liquidation or insolvency proceedings, does not absolve the surety / guarantor of his or her liability, which arises out of an independent contract.

• The Court referred to provisions of sections 128, 133, 134 and 140 of the Contract Act, 1872 and rejected the argument of extinguishment of liability on the ground of variance of contract and held that the operation of law shall not be at variance. It was held that in view of the unequivocal guarantee, such liability of the guarantor continues and the creditor can realise the same from the guarantor in view of section 128 of the Contract Act as there is no discharge u/s 134 of that Act.

• It held that the impugned notification is legal and valid. It also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors).

BCAJ Admin

CORPORATE LAW CORNER

15 Chandrasekar Muruga vs. Registrar of Companies (TN) Company Appeal (AT) No. 76 of 2019 (NCLAT) [2019] 151 CLA 366 Date of order: 29th May, 2019

Where name of the Company is struck off due to non-filing of financial documents but it is found that significant accounting transactions were undertaken during the relevant period and the Company being in operation was carrying on business, the name of the Company is to be restored in the Register

FACTS
The shareholders and directors of M/s MPC India Private Limited (‘M/s MPC’) had filed an instant appeal against the order dated 20th February, 2019 by which the National Company Law Tribunal at Chennai (‘NCLT’) declined to restore the name of M/s MPC in the Register of Companies as maintained by the Office of the Registrar of Companies (‘ROC’) on the ground of failure to file its financial statements and annual returns with the ROC from the financial years 2009-10 to 2017-18.

The NCLT observed that since M/s MPC had not filed financial statements and annual returns for the F.Ys. 2009-10 to 2017-18, there was no adequate reason to restore the company’s name. Therefore, there was no scope to grant an order for restoration of the name in the Register of Companies.

However, the NCLT noted the submission made by M/s MPC that the balance sheet was prepared and Annual General Meetings were held on time and duly signed by the respective directors but for reasons unknown the officials concerned failed to upload the same. NCLT also admitted that the Income-tax Returns and bank statements submitted by M/s MPC show that there have been significant accounting transactions during the aforesaid period.

The order was challenged primarily on the ground that the ROC had improperly exercised jurisdiction u/s 248 of the Companies Act, 2013 and the NCLT failed to notice that the parameters as set out in section 252(3) of the Companies Act, 2013 had been satisfied by M/s MPC.

HELD
The NCLAT observed that M/s MPC was struck off by the ROC on the ground of non-filing of financial statements and annual returns for the financial years 2009-10 to 2017-18, though it was not disputed that it had filed Income-tax Returns and bank statements for the A.Ys. 2008-09 to 2017-18, which demonstrated significant accounting transactions during the aforesaid period.

NCLAT further observed that it was futile to address the issue of non-adherence to the procedural requirements on the part of the ROC in striking off the name of the company within the ambit of section 248 of the Companies Act, 2013 and the fact was observed in the order that the NCLT had overlooked the factum of the significant accounting transactions admittedly undertaken by M/s MPC during the relevant period justifying no conclusion other than that M/s MPC was in operation and carrying on business.

Accordingly, the NCLAT held that the findings recorded by the NCLT being erroneous cannot be supported and the same were liable to be reversed and a just ground existed for restoration of the name of the company. The appeal was accordingly allowed, the order set aside and the ROC directed to restore the name of M/s MPC subject to statutory compliances being filed together with the prescribed fees and penalties leviable thereon as mandated by law.

16 M/s Vintage Hotels Private Limited & Ors. vs. Mr. Ahamed Nizar Moideen Kunhi Kunhimahin Company Appeal (AT) No. 408 of 2018 (NCLAT) Source: NCLAT Official Website Date of order: 12th November, 2020

The discretionary power of directors to refuse ‘Transfer of Shares’ is not to be resorted to in a deliberate or arbitrary fashion but in good faith – The directors are to give due weightage to shareholder’s right to transfer his share

FACTS
Mr. K was an existing shareholder and also one of the Directors of M/s Vintage Hotels Private Limited (‘VHPL Company’). It was learnt from the contents of the affidavit of Mr. TH dated 10th April, 2015 that he was holding 20,000 equity shares of Rs. 100 each of the company and that he had transferred the aforesaid shares to Mr. K and further that the share certificates were lost and were not in his possession. The deponent (Mr. TH) had averred that he had made a request to VHPL Company to issue duplicate share certificates in lieu of the original share certificates in the name of Mr. K.

The VHPL Company, through its communication dated 30th October, 2015, had rejected the request for transfer of shares in the name of Mr. K. The company submitted that in the share transfer form SH-4 furnished by Mr. K the distinctive numbers of the shares were not mentioned, the corresponding share certificate numbers were not mentioned, the witness’s signature and name was not found and the transferee’s details were not mentioned. Further, the allotment letter or the ‘Original Share Certificate’ was not enclosed with the share transfer form.

Mr. K also contended that the board of directors had not issued the duplicate share certificates even though a request was made by him.

The NCLT Bengaluru bench via an order dated 16th October, 2018 after considering the facts and circumstances of the case and also taking into consideration the existing law, came to the conclusion that the action of VHPL Company in refusing to transfer the shares in favour of Mr. K was an arbitrary and unjustifiable one and consequently issued a direction to VHPL Company to rectify the register of shareholders by incorporating the name of Mr. K in place of Mr. T.H in respect of the 20,000 equity shares under transfer.

The VHPL Company was aggrieved by the order passed by the NCLT which directed it to register the transfer of shares in favour of Mr. K.

HELD
The NCLAT observed that the discretionary power to refuse ‘Transfer of Shares’ was not to be resorted to in a deliberate, arbitrary, fraudulent, ingenious or capricious fashion. As a matter of fact, the directors were to exercise their discretion in good faith and to act in the interest of the company. The directors were to give due weightage to the shareholder’s right to transfer his shares. When the original share certificates are lost, it is not prudent for VHPL Company to insist upon the production of the original share certificates in question to give effect to the transfer of shares. Thus, NCLAT upheld the order passed by the NCLT, Bengaluru bench and dismissed the appeal.

17 Ghanashyam Mishra & Sons (P) Ltd. vs. Edelweiss Asset Reconstruction Co. Ltd. Supreme Court of India [2021] 126 Taxmann.com 132 (SC)

CASE NOTE
Amendment to section 31 by IBC (Amendment) Act, 2019 is declaratory and clarificatory in nature Central Government, any State Government or any local authority to whom an operational debt is owed would come within ambit of ‘operational creditor’ as defined under sub-section (20) of section 5

FACTS
Insolvency proceedings were initiated by State Bank of India u/s 7 of the Insolvency and Bankruptcy Code (IBC) before the National Company Law Tribunal, Kolkata bench.

In response to the invitation made by the resolution professional for a resolution plan, three resolution plans were received, one each from Edelweiss Asset Reconstruction Company Limited (EARC), Orissa Mining Private Limited (OMPL) and Ghanashyam Mishra & Sons Private Limited (GMSPL).

The GMSL resolution plan was duly approved with the voting share right of more than 89.23%.

QUESTIONS OF LAW INVOLVED
Whether after approval of the resolution plan by the Adjudicating Authority a creditor including the Central Government, State Government or any local authority is entitled to initiate any proceedings for recovery of any of the dues from the corporate debtor which are not part of the resolution plan approved by the Adjudicating Authority.

Whether any creditor, including the Central Government, State Government or any local authority is bound by the resolution plan once it is approved by the Adjudicating Authority u/s 31(1) of the Code.

Whether the amendment to section 31 is clarificatory / declaratory or substantive in nature.

HELD BY THE SUPREME COURT
The Government is covered under the definition of creditor under the IBC. The Court, through a harmonious construction of the definition of operational creditor, operational debt and creditor, observed that even a claim in respect of the dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority would come within the ambit of operational debt.

The operational debt owed to the Central Government, any State Government or any local authority would come within the ambit of operational creditor. Similarly, a person to whom a debt is owed would be covered by the definition of creditor.

The Supreme Court further observed that the claims as mentioned in the resolution plan shall stand frozen and will be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders, once a resolution plan is duly approved by the NCLT u/s 31(1) of the IBC.

Consequently, all the dues, including the statutory dues owed to the Central Government, State Government or any local authority if not part of the resolution plan, shall stand extinguished and proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval u/s 31 cannot be continued.

The Court further observed that the section 31 amendment of the IBC is clarificatory in nature and therefore will come into effect from the date on which the IB Code came into effect.

BCAJ Admin

ALLIED LAWS

23 Laureate Buildwell (P) Ltd. vs. Charanjeet Singh 2021 SCC OnLine SC 479 (SC) Date of order: 22nd July, 2021 Bench: U.U. Lalit J, Hemant Gupta J and S. Ravindra Bhat J

Consumer protection – Consumer – Real estate – Subsequent purchaser from original allottee – Same rights against builder [Consumer Protection Act, 1986, S. 2]

FACTS
One Ms Madhabi Venkatraman, the original allottee, applied for allotment of a residential flat. According to the allotment letter, the possession of the flat was to be handed over within 36 months. Upon noticing the slow construction, the original allottee decided to sell the flat. The purchaser (respondent) who was in search of a residential flat was approached by the original allottee through a broker. He was assured that the possession of the flat would be delivered on time and he agreed to purchase the flat. The purchaser alleged that possession was not delivered as promised in the allotment letter. The original allottee requested the builder (appellant) to transfer the flat in favour of the respondent.

The respondent was informed that possession of the said flat could not be delivered till the end of year 2017. After this, the purchaser sought for refund of the amount paid from the builder. On refusal of the payment of instalment, the officials of the builder threatened the purchaser with cancellation and forfeiture of the amounts paid. In these circumstances, the appellant approached the National Consumer Disputes Redressal Commission (NCDRC).

The NCDRC allowed a refund with 10% interest and imposed cost on the respondent. The respondent is in appeal against the said order.

HELD
The original allottee had approached the builder, informing him that the purchaser had stepped into her shoes and would continue with the obligations and was therefore entitled to possession. Subsequently, the builder endorsed and even required the purchaser to execute the letter of undertaking, which he did. Thereby, the builder acknowledged that the rights and entitlements of the original allottee were assumed by the purchaser and also confirmed his own obligations to the new purchaser (the consumer).

The definition of ‘consumer’ under the Act is very wide and it includes beneficiaries who can take benefit of the insurance availed by the insured. If one also considers the broad objective of the Consumer Protection Act, it is to provide for better protection of the interests of consumers. Therefore, a subsequent purchaser of a flat has the same rights as the original allottee.

24 Dena Bank vs. C. Shivakumar Reddy Civil Appeal No. 1650 of 2020 (SC) Date of order: 4th August, 2021 Bench: Indira Banerjee J and V. Ramasubramanian J

Additional documents – Insolvency application – Can be admitted later [Insolvency and Bankruptcy Code, 2016, S. 7]

FACTS
The bank sanctioned a term loan to the Corporate Debtor which was to be repaid in 24 quarterly instalments. Upon failure on the part of the Corporate Debtor to repay, the Bank initiated proceedings under Insolvency and Bankruptcy Code (IBC) before the National Company Law Tribunal (NCLT).

During the IBC proceedings, on two occasions the bank filed applications to place new documents on record. Both the applications were allowed. Pursuant thereto, the NCLT passed an order admitting the application of the bank.

The Corporate Debtor challenged the order before the NCLAT and succeeded. Aggrieved by the order of the NCLAT, the bank approached the Supreme Court.

HELD
The Supreme Court, inter alia, held that on a careful reading of the provisions of the IBC, and in particular the provisions of section 7(2) to (5) read with the 2016 Adjudicating Authority Rules, there is no bar to the filing of documents at any time until a final order either admitting or dismissing the application has been passed. The time stipulation of 14 days in section 7(4) to ascertain the existence of a default is apparently directory and not mandatory. The proviso inserted by an amendment with effect from 28th December, 2019 provides that if the Adjudicating Authority has not ascertained the default and passed an order under sub-section (5) of section 7 of the IBC within the aforesaid time, it shall record its reasons in writing for the same. No other penalty is stipulated.

Furthermore, the proviso to section 7(5)(b) of the IBC obliges the Adjudicating Authority to give notice to an applicant to rectify the defect in its application within seven days of receipt of such notice from the Adjudicating Authority, before rejecting its application under Clause (b) of sub-section (5) of section 7 of the IBC. When the Adjudicating Authority calls upon the applicant to cure some defect, that defect has to be rectified within seven days. There is no penalty prescribed for inability to cure the defects in an application within seven days from the date of receipt of notice, and in an appropriate case the Adjudicating Authority may accept the cured application even after the expiry of seven days to meet the ends of justice.

Therefore, there is no bar in law to the amendment of pleadings in an application u/s 7 of the IBC, or to the filing of additional documents, apart from those initially filed along with the application u/s 7 of the IBC in Form-1. In the absence of any express provision which either prohibits or sets a time limit for filing of additional documents, it cannot be said that the Adjudicating Authority committed any illegality or error in permitting the appellant bank to file additional documents.

25 South Eastern Coalfields Ltd. vs. S. Kumar’s Associates AKM (JV) 2021 SCC OnLine SC 486 Date of order: 23rd July, 2021 Bench: Sanjay Kishan Kaul J and Hemant Gupta J

Letter of intent – No binding relation – Forfeit the bid security amount [Indian Contract Act, 1872, S. 3, S. 7]

FACTS
In June, 2009, South Eastern Coalfields Ltd. (the appellant) floated a tender. The respondent was the successful bidder amongst others. A Letter of Intent (LOI) was issued by the appellant awarding the contract for a total work of Rs. 387.4 lakhs.

The respondent, in pursuance of the LOI, mobilised resources at the site. The respondent apparently faced difficulties soon thereafter as the truck-mounted drill machine employed by it suffered a major breakdown. The work, thus, had to be suspended for reasons beyond the control of the respondent. The endeavour to rectify the position or arrange alternative machinery did not work out and the purchase of new machines was expected only after about three months.

The contractual relationship apparently deteriorated. The appellants issued a letter alleging breach of terms of contract and the applicable rules and regulations by the respondent. The appellant further asked the respondent to show cause as to why penal action be not initiated for – (a) termination of work; (b) blacklisting of the respondent company; and (c) award of execution of work to another contractor at the cost and risk of the respondent. Subsequently, the final termination of work was carried out vide letter dated 15th April, 2010.

The respondent filed a writ petition under Articles 226 and 227 of the Constitution of India seeking quashing of the termination letter dated 15th April, 2010. The Division Bench of the Chhattisgarh High Court opined that there was no subsisting contract inter se the parties to attract the general terms and conditions as applicable to the contract.

The appellant filed a Special Leave Petition against the said order.

HELD
None of the mandates was fulfilled except that the respondent mobilised the equipment at the site; the handing over of the site and the date of commencement of the work was also fixed. The respondent, thus, neither submitted the Performance Security Deposit nor signed the Integrity Pact. Consequently, the work order was also not issued nor was the contract executed. Thus, the moot point would be whether mobilisation at the site by the respondent would amount to a concluding contract inter se the parties. The answer to the same would be in the negative. Therefore, all that the appellants can do is to forfeit the bid security amount.

26 Edelweiss Asset Reconstruction Co. Ltd. vs. TRO and Ors. WP(L) No. 7964 of 2021 Date of order: 28th July, 2021 Bench: S.P. Deshmukh J and Abhay Ahuja J

Recovery of dues – Priority of debtor – Secured creditor would have priority over Government dues [SARFAESI Act, 2002, S. 13(2)]

FACTS
The petitioner, as assignee of right, title and interest of the credit facilities to one Classic Diamonds (India) Ltd. (the borrower, now in liquidation) purporting to have a superior secured and prior charge in time over the attached properties, having commenced proceedings under the SARFAESI / Securitisation Act by issue of notices under sections 13(2) and 13(4) and having taken possession of one of the attached properties (as will be described hereinafter), is aggrieved by the order of attachment dated 17th January, 2013 passed by the respondent, i.e., the Tax Recovery Officer (TRO), seeking recovery of income tax dues of the borrower.

The moot issue arising herein is whether the secured debt assigned in favour of the petitioner has a priority over Government dues / tax dues.

HELD
Relying on the decision of the Supreme Court in the case of Bombay Stock Exchange vs. V.S. Kandalagaokar (2015) 2 SCC 1 and the decision in the case of State Bank of India vs. State of Maharashtra and Ors. (2020) SCC OnLine Bom 4190, the Court held that the charge of the secured creditor would have priority over the Government dues under the Income-tax Act. There is no provision in the IT Act which provides for any paramountcy of the dues of the IT Department over secured debt.

BCAJ Admin

Corporate Law Corner Part B: Insolvency and Bankruptcy Law

7. Rajratan Babulal Agarwal vs. Solartex India Pvt. Ltd. & Ors.
Supreme Court of India Civil Appellate Jurisdiction
Civil Appeal No. 2199 of 2021

The standard i.e., the reference to which a case of a pre-existing dispute under IBC must be employed, cannot be equated with even the principle of preponderance of probability.

FACTS

The Operational Creditor (“OC”) and Corporate Debtor (“CD”) entered into an agreement for supply of 500 MT of Indonesian coal. The purchase order was dated 27th October, 2016 and the OC supplied 412 MT of coal between 28th October, 2016 to 2nd November, 2016. The CD sent a demand notice on 3rd February, 2018 to the OC for debt due of Rs. 21,57,700 against which the CD sent a reply notice holding the OC liable for an amount of Rs. 4,44,17,608 for its losses.

The OC filed a Section 9 application against the CD in the National Company Law Tribunal, Ahmedabad Bench (“NCLT”). Before NCLT, the OC stated that the CD’s reply notice has been done to create a spurious dispute that was not in existence before receiving of the notice, and that the claim raised by the CD concerns an associate company of the OC, and not the OC itself. The CD submitted that Section 9 petition should be rejected since there existed a pre-existing dispute in response to the demand notice dated 13th April, 2018. The CD stated that civil suits are pending that seek damages for loss suffered, and that disputes between the parties existed from the very beginning. The CD also resisted the application saying that the inferior quality of the coal could be tested only upon its receipt. The NCLT, in its order, recorded that no pre-existing disputes were observed and passed an order in favour of the OC.

An ex-director of the CD appealed before the National Company Law Appellate Tribunal (“NCLAT”) stating that emails were sent by the CD on 30th October, 2016 and 3rd November, 2016 informing the OC of the inferior quality of coal and similarly vide an email dated 4th November, 2016 which stated that moisture content in the coal is not as per specifications and thus, it suffered losses. It filed a suit on 26th March, 2018 seeking damages against the losses caused. The OC stated that a suit seeking damages Rs. 3 crores was filed after receiving the statutory notice, and hence as per Section 8(2)(a) of the Insolvency and Bankruptcy Code (“IBC), the suit was not pending before the receipt of the statutory notice, and hence is not a pre-existing dispute. Reliance was further placed on the judgement of Hon’ble Supreme Court in the case of Mobilox Innovations Pvt. Ltd. vs. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353 (“Mobilox judgement”) wherein it was held that dispute should not be a patently feeble legal argument or an assertion of fact unsupported by evidence. The NCLAT relied on the emails dated 30th October, 2016, 3rd November, 2016 and 4th November, 2016 along with a lab analysis report of raw material, the reply to statutory notice and civil suit for damages filed by the OC. The NCLAT held that the 30th October, 2016 email is not related to the transaction in question. After perusal of the other two emails, it was said that the CD consumed the coal after the 4th November, 2016 email, and filed a civil suit against the OC only upon receipt of statutory notice. That civil suit for damages was filed on 26th March, 2018 post receiving the notice on 8th February, 2018 and therefore should not be treated as existence of dispute. Therefore, the appeal was dismissed. The ex-director of the CD filed an application for appeal against the NCLAT order, and hence this appeal.

Question of law

Whether existence of the civil suit as raised by the CD be classified as ‘pre-existing dispute’ as understood by Hon’ble SC in the Mobilox judgement?

Ruling

Before the SC, the Appellant submitted that the 30th October, 2016 email contained reference of not just the purchase order of 27th October, 2016 but also with regard to supply of coal to the CD, and the 3rd November, 2016 email mentioned the inferior quality of supplied coal. He contended that as per Section 12 of the Sales of Goods Act, 1930 (“Act”), in a contract of sale of goods, a term may be a condition or a warranty, and that he treated the condition relating to quality of goods as a warranty, as per Section 59 of the Act which declares remedies open for such buyer.

A perusal of the section reveals that a stipulation in a contract of sale can be a condition or a warranty depending upon construction of the contract. Section 59 of the Act, on the other hand, contemplates a suit for damages as well as setting up the extinction of the price. It provides for the remedy for breach of warranty, and that the buyer can set up a breach of warranty in diminution or extinction of the price which further does not prevent him from suing for the same breach of warranty if he has suffered further damage. The context for further damage in this case can be seen from the 3rd November, 2016 email which stated that in case of any further damage, the same would be debited to the account of the OC, while the CD continued using the coal until that very day as per the OC.

The Supreme Court (“SC”) perused Section 13 of the Act that deals with when the conditions can be treated as warranty. Further emphasis was laid on Section 15 of the Act which provides for ‘sale of specific goods by description’ and that in case of sale of goods by description, there is an implied condition for the goods to correspond with the description.

The SC perused the purchase order, which mentioned that the coal must be of a certain quality in terms of its characteristics. It was stated that the transaction could be treated as a ‘sale of goods by description’ as a contract for the sale of 500 metric tonnes of Indonesian coal. The SC said that there indeed was an email dispatched to the OC on 30th October, 2016 which was wrongly brushed aside by the NCLAT.

The SC referred to the Mobilox judgement that essentially provided the non-requirement of the dispute being ‘bona fide’ to decide if a dispute exists or not, that the adjudicating authority only needs to see is if there is a plausible contention which requires further investigation, and that the ‘dispute’ is not a feeble legal argument or assertion of fact unsupported by evidence.

The SC stated that the transaction should be treated as a sale of goods as the contract gleaned from purchase order that related to goods sold by description, i.e., Indonesian coal (as also mentioned in email of 3rd November, 2016 about poor quality of ‘Indonesian coal’). The Court supported the Appellant’s argument that the specific objective criteria of quality of coal was not taken care of by the OC, thereby attracting Section 59 of the Act, hence permitting the CD to treat the breach of the condition (of specific coal quality) when there is acceptance of goods as only a breach of a warranty. It was provided that the CD has right to seek damages on the same breach.

SC considered the case of Mobilox judgement where it was held that,

“one of the objects of IBC in regard to operational debts is to ensure that the amount of such debts which is usually smaller than the financial debts does not enable the operational creditor to put the Corporate Debtor into insolvency resolution process prematurely, the same being enough to state that dispute exists between the parties. The Mobilox judgement also provided that Section 5(6) of IBC excludes the expression ‘bona fide’, and that the only requirement is existence of a plausible contention, which must be investigated.”

HELD

Holding that the standard i.e., the reference to which a case of a pre-existing dispute under IBC must be employed, cannot be equated with even the principle of preponderance of probability which guides a Civil Court at the stage of finally decreeing a suit, the SC decided that the NCLAT had erred in holding that there was no dispute within the meaning of IBC.

The SC held that, to determine a pre-existing dispute, the impact of Section 13(2) r.w.s. 59 cannot be ignored. It clarified that Section 13 of the Act permits the buyer to waive a condition, and therefore the OC persuaded the Court that the CD has waived the alleged condition as regards the coal’s quality.

The Appellant’s appeal was allowed on the basis that pre-existing dispute existed under IBC, and Section 9 application filed by the OC against the CD rejected.

BCAJ Admin

Corporate Law Corner Part A : Company Law

12. Economy Hotels India Services Pvt. Ltd.
vs. Registrar of Companies & Anr.
Company Appeal (AT) No. 97 of 2020
Date of order: 24th August, 2020

A ‘typographical error’ in the extract of ‘Minutes’, does not alter the fact that the resolution passed by the shareholders is a ‘special resolution’.

FACTS

The National Company Law Tribunal (NCLT) observed the following:

Section 66 of the Companies Act, 2013 (CA 2013) states that subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner.

Article 9 of the Articles of Association of EHISPL allowed it to reduce its share capital by passing a special resolution. The Board of Directors, vide their resolution dated 29th July, 2019 recommended a reduction in the capital. Article 9 further provided that the said resolution was subject to the consent of members by a special resolution.

The NCLT perused the minutes of the Annual General Meeting (AGM) of the company held on 19th August, 2019. The minutes stated that Mr. BS was elected to chair the meeting. The minutes recorded that in the said AGM, members had passed the resolution for reducing capital “as an ordinary resolution”. The Minutes of the said AGM were signed by the Chairman of the meeting.

The NCLT observed that EHISPL had not met the specific requirement of Section 66 of CA 2013 by passing a ‘Special Resolution’ for reduction of share capital. EHISPL had also not complied with the requirements of its Articles of Association.

The NCLT rejected the application in view of the fact that there was no special resolution for reduction of share capital as prescribed u/s 66 of CA 2013 and as required in Article 9 of the company’s Articles of Association. Section 66 of CA 2013 also requires the Tribunal to approve the minutes of the resolution passed by the company, which had been passed as ordinary resolution as against the requirement of special resolution. NCLT was not in a position to approve such minutes and, consequently, rejected the petition by granting liberty to the Appellant/Petitioner to file a fresh application after complying with all the requirements of Section 66 of CA 2013.

EHISPL, dissatisfied with the order dated 27th May, 2020 passed by NCLT, Bench V in Company Petition No. 149/66/ND/2019, which rejected the petition filed u/s 66(1)(b) of CA 2013, thereafter filed an appeal through Mr. RR, Authorised representative of EHISPL.

Mr. RR submitted the following:

EHISPL is a wholly owned subsidiary of a company incorporated under the laws of Singapore.

As of 30th June, 2019, the issued, subscribed and paid-up share capital of EHISPL was increased from Rs. 30 lakhs divided into 3 lakhs equity shares of Rs. 10 each to Rs. 67,47,90,000 divided into 6,74,79,000 equity shares of Rs. 10 each.

The AGM of EHISPL was held on 19th August 2019, and was attended by both the equity shareholders holding 100 per cent of the issued, subscribed and paid-up equity share capital of EHISPL. The said equity shareholders present at the said meeting had cast their votes in favour of the aforesaid resolution etc.

Sufficient documents were present to prove that the special resolution as required u/s 66 of CA 2013 and in terms of the requirement under Article 9 of the ‘Articles of Association’ of EHISPL was passed in the AGM conducted.

Mr. RR pointed out that the Tribunal failed to appreciate that the unanimous resolution was passed on 19th August, 2019, which was in fact, a ‘Special Resolution’ passed unanimously by the shareholders of EHISPL.

The resolution passed on 19th August, 2019 was in complete compliance with all the three requisites of Section 114(2) of CA 2013, and since the Tribunal treated the aforesaid ‘resolution’ as an ‘ordinary’ resolution, the impugned order is liable to be set aside in the interests of justice.

Mr. RR lent support to his contention that the resolution passed on 19th August, 2019 by EHISPL was a ‘special resolution’ that adverts to the ingredients of Section 114 of CA 2013.

The pre-mordial plea of EHISPL was that the NCLT had failed to appreciate the creeping in of an ‘inadvertent typographical error’ figuring in the extract of the ‘Minutes of the Meeting’ characterising the ‘special resolution’ as ‘unanimous ordinary resolution’. Moreover, EHISPL had fulfilled all the statutory requirements prescribed u/s 114 of CA 2013 and as such the impugned order of the Tribunal was liable to be set aside.

It transpired that the ‘Special Resolution’ passed in the ‘Annual General Meeting’ as filed with the e-form MGT-14 reflects that the resolution passed by the shareholders on 19th August, 2019 was a ‘Special Resolution’ which was taken on record in MCA21 Registry.

HELD

The NCLAT observed that ‘Reduction of Capital’ u/s 66 of CA 2013 is a ‘Domestic Affair’ of a particular Company in which, ordinarily, a Tribunal will not interfere because of the reason that it is a ‘majority decision’ which prevails.

EHISPL had admitted its typographical error in the extract of the Minutes of the Meeting characterising the ‘special resolution’ as an ‘unanimous ordinary resolution’ and also taking into consideration of the fact that EHISPL had filed the special resolution with ROC, which satisfied the requirement of Section 66 of CA 2013.

On a careful consideration of respective contentions, the NCLAT, after subjectively satisfying itself that EHISPL has tacitly admitted its creeping in of typographical error in the extract of the minutes and also taking into consideration that EHISPL had filed the special resolution with it, which satisfied the requirement of Section 66 of CA 2013, allowed the Appeal. NCLAT further confirmed the reduction of share capital of EHISPL as resolved by the ‘Members’ in their ‘Annual General Meeting’ that took place on 19th August, 2019. NCLAT further approved the form of Minutes required to be filed with Registrar of Companies, Delhi u/s 66(5) of CA 2013, by EHISPL.

BCAJ Admin

Allied Laws

38. M Baburaj vs. State of Kerala
AIR 2022 Kerala 148
Date of order: 15th July, 2022
Bench: A. Badharudeen J.

Succession certificate – not mandatory – for claim of award under land acquisition cases [S.214(1)(b), Succession Act, 1925; S.31, Land Acquisition, 1894]

FACTS

In a land acquisition case, the Hon’ble Supreme Court granted enhanced compensation. The Respondent deposited the same in court after the death of the claimant. The claimant was succeeded by her son, who is the Petitioner. The Sub Court insisted that the Petitioner produce a copy of the succession certificate. The Petitioner preferred a Writ Petition against this insistence.

HELD

The law emerges is that production of succession certificate is mandatory as per Section 214(1)(b) of the Succession Act when the decree-holder dies in cases where the decree amount comes under the category ‘debts’ or ‘securities’. The compensation arising out of motor accidents or from land acquisition proceedings or cases involving grants of compensation under the Electricity Act, etc., would not come under the purview of `debts’ or `securities’. Therefore, in such cases, the production of a succession certificate is not mandatory. Therefore, the surviving decree holder can execute the decree on his own behalf and on behalf of the legal representative of the deceased decree holder and in such case, the succession certificate as per Section 214(1)(b) of the Succession Act is not necessary.

The petition is allowed.

39. Ram Karan vs. Gugan
AIR 2022 Punjab and Haryana 152
Date of order: 9th August, 2022
Bench: Dinesh Maheshwari and
Krishna Murari JJ.

Registration of Documents – Consensual decree – Does not require registration [S. 17, Registration Act, 1908; Or 23 R. 3 Civil Procedure Code, 1908]

FACTS

An issue regarding property arose between members of a family, wherein inter alia, an issue arose in an appeal as to whether a decree obtained by the consent of both parties have to be mandatorily registered. The lower appellate court had set aside on the ground of non-registration.

On Appeal.

HELD

It was held that a decree based on the admission of a party does not require any registration, and also, a family settlement did not require compulsory registration. Therefore, the finding recorded by the lower appellate court that the impugned decree is liable to be set aside on account of non-registration or account of no pre-existing right is apparently erroneous.

The appeal is allowed.

40. Kantaben Parsottamdas vs. Ganshyambhai Ramkrishan Purohit (Dead) by LRs
AIR 2022 Gujarat 146
Date of order: 9th June, 2022
Bench: A. P. Thaker J.

Judgements – Judges required to give citation or reference of cases being relied on in their decision [Or. 20, R 1, Civil Procedure Code, 1908]

FACTS

Being aggrieved and dissatisfied with the judgment and decree passed by the District Judge in appeal, the original defendant has preferred the present Second Appeal.

On appeal, inter alia, it was challenged that the impugned judgment of the First Appellate Court had relied upon some decision without giving any name or citation thereof and merely upon memory.

HELD

The reliance on a decision without any name or citation number and merely on the basis of memory is not proper on the part of the learned District Judge. The judgment of the court has to be based only upon the facts proved. If there is any precedent applicable in the given facts, then, the particular precedent has to be referred to by name as well as where such a decision is reported. A Judge cannot pass any order or make any observation merely on his own memory without referring names of the parties or the numbers of proceedings and where such a decision is reported. The First Appellate Court Judge has committed a serious error of facts and law in creating a new case in favour of the plaintiff of natural rights.

The appeal is allowed.

41. A. Narahari and Anr. vs. Suman Chit Fund Pvt. Ltd.
AIR 2022 Telangana 158
Date of order: 4th July, 2022
Bench: G Anupama Chakravarthy J.

Attachment – Recovery from properties of Guarantor – Legal [Or.21 Rr 43, 54 of Civil Procedure Code, 1908; S. 128, Indian Contract Act, 1872]

FACTS

The trial court passed an order directing the petitioners to deposit a sum with the court. Pursuant to the said decree, the plaintiff filed the execution petition under Order 21 Rules 43, 64 and 66 of CPC to attach and sell the petition schedule properties of judgment, for realization of the decretal amount. The revision petitioners, i.e., judgment debtors filed their detailed counters before the trial court, contending that they were not aware of the decree till they received notices in the execution petition and that the decree-holder obtained ex parte decree behind their back. Ultimately, the execution petition was allowed by the trial court ordering attachment against the revision petitioners.

HELD

The principal borrower, i.e., the prized subscriber, was also made as a party along with the guarantors. In the law of indemnity, it is a tri-party agreement, and the law permits the decree holder to proceed with the execution either against the principal borrower or against the guarantors. Further, the decree-holder can proceed against any one of the judgment-debtors, and he is not required to proceed against the principal borrower at the first instance.

The revision petition is rejected.

BCAJ Admin

Corporate Law Corner Part A : Company Law

11. M/s Magma Cellular Systems Marketing Pvt. Ltd. vs. The Registrar of Companies, Bihar
National Company Law Tribunal
Kolkata Bench, Kolkata
Appeal No. 12/KB/2022
Date of order: 10th May, 2022

Inadvertent removal of the name of the Company from the Register of Companies while charges are pending for satisfaction and remedial measures.

FACTS

The Registrar of Companies (RoC), Bihar had filed this appeal u/s 252(1) of the Companies Act, 2013, praying that an order be passed for restoring the name of the respondent company namely M/s Magma Cellular Systems Marketing Pvt. Ltd. (MCSMPL) in the register of companies maintained by the RoC.

It was submitted that Rule 3(1)(ix) of the Companies (Removal of name of companies) Rules, 2016 provides that companies having charges pending for satisfaction cannot be struck off by the RoC.

It was further submitted that the name of MCSMPL was inadvertently struck off from the register of companies by the office of RoC due to the voluminous task and mechanical process being followed in the generation of the list of companies from the MCA-21 portal and lack of manual verification and internal check thereof.

It was stated that the Ministry, on analysis of the list taken from MCA-21 records centrally on a pan-India basis, found that there are various companies which have been struck off but still have open charges as per back office master data. In this regard, the Ministry has directed vide letter dated 10th December, 2021 to the RoC to file an application before the Tribunal seeking restoration of the name of MCSMPL.

HELD

In view of the aforesaid pleadings in the petition and the submissions made in the Court on behalf of the RoC, NCLT directed the restoration of the name of MCSMPL in the register of companies maintained by RoC, Bihar along with other consequential orders to give effect to MCSMPL and its officers and the stakeholders, the same status as if the company had never been struck off.

BCAJ Admin

Allied Laws

34 State of HP vs. Bmd Pvt. Ltd.
AIR 2022 Himachal Pradesh 134
Date of order: 2nd June, 2022
Bench: Sandeep Sharma J.

Arbitration clause – Appointment of Arbitrator – Not open for one of the parties to file an application for the appointment of Arbitrator when both the parties have subjected to its jurisdiction [S. 11(6), 13, Arbitration and Conciliation Act of 1996]

FACTS

A dispute arose between the parties and the Respondent served a Notice requesting for a refund of the upfront premium, and in the event the same is not responded, the notice to be treated as an invocation of the arbitration clause as per the agreement between the parties. The Petitioner did not respond to the said notice. Therefore, the Respondent sent a request to the Arbitrator to proceed with the Arbitration. However, pursuant to the Arbitrator taking cognizance of the proceedings, the Petitioner filed this application before the Court for the appointment of the Arbitrator.

HELD

The Petitioner admitted to receiving the Notice which invoked the Arbitration and not objected to the same. Therefore, as the Arbitrator was appointed as per the arbitration clause contained in the agreement between the parties, and the Petitioner had subjected itself to the jurisdiction, it was not open for the Petitioner to challenge the mandate by filing an application before the Court for appointment of Arbitrator.

Petition is not maintainable.

35 Vijayalaxmi Chandrashekara Gowda vs. Chandrashekara Gowda
AIR 2022 Karnataka 182
Date of order: 20th April, 2022
Bench: Sreenivas Harish Kumar J.

Benami – Alienation of suit properties – Temporary injunction – Properties purchased by husband – in the name of the wife – Wife restrained to sell the said properties [Or 39, R 1, 2, Civil Procedure Code, 1908]

FACTS

The respondent is the husband of the appellant, and it is his case that he purchased the schedule properties in the name of his wife when he was serving in the Indian Army as a Subedar. He borrowed money from a bank for purchasing one of the properties and that he himself is repaying the loan though the loan was obtained in the name of his wife. When he learnt that the appellant was about to sell away the properties, he brought the suit claiming declaration of title over the properties and ancillary relief of permanent injunction. Along with the plaint, he made an application for temporary injunction to restrain the appellant from alienating the properties, and as it stood allowed by the impugned order, this appeal has been preferred by the defendant.

The appellant does not dispute that she is the wife of the respondent, what she has contended is that she purchased the properties from her money without the aid of the respondent. She admits that the respondent made some payments towards loan installments and submits that over time, he stopped making payments. The loan has not been cleared yet and that she has school going children. She has found it difficult to maintain the family without any help from the plaintiff and in this view, she has got every right to dispose of the properties for the benefit of the family.

HELD

The Trial Court has not committed any error in exercising discretion to grant temporary injunction in favour of the respondent-plaintiff. Though the appellant has contended that she purchased the suit properties from her own income, there is no material to substantiate her contention. Rather, she has admitted that the loan was raised in their joint names for purchasing the property and that the respondent repaid the loan. The appellant is a housewife and for this reason, it is difficult to believe that she could purchase the suit properties. It is the clear case of the respondent that he was working as a Subedar in the Indian Army and till 2015, the appellant and the children were living with him. In this view, it may not be possible to hold at this stage that she had independent source of income. Moreover, purchase of a property by husband in the name of the wife cannot be called a benami transaction.

Appeal is dismissed.

36 Mahettar Sidar Singh Kanwar vs. Karmihin Hariram Kanwar and others
AIR 2022 (NOC) 715 (CHH.)
Date of order: 22nd July, 2022
Bench: Deepak Kumar Tiwari J.

Succession – Taking care of deceased and performing last rights – Cannot override succession [S. 8, Hindu Succession Act, 1956, S. 372, Indian Succession Act, 1925]

FACTS

The petitioner filed an application u/s 372 of the Indian Succession Act, 1925 before the Civil Judge. As per the pedigree, petitioner’s grandfather Awadhram was the cousin brother of the deceased Mangluram who died on 2nd May, 2014, and was unmarried. The deceased was working at Nagar Palika, Kharsiya and also opened an account with the SBI, Kharsiya in which salary of the deceased was being deposited. At the time of death, Rs. 96,622 was deposited in the said account. As the petitioner had taken care of the deceased during his lifetime and also performed last rituals, he preferred a petition for grant of succession certificate in his favor to obtain the said amount.

HELD

The property of a male Hindu dying intestate is governed by Section 8 of the Hindu Succession Act, 1956. It is apparent that the petitioner’s grandfather is the cousin brother of the deceased, and as per the Schedule, only the father’s brother and father’s sister have been stipulated as heirs. Therefore, the property devolves to the mother’s side.

The petitioner fails to demonstrate that the petitioner covers under any of the category. The Revision Petition fails.

37 Seepathi Keshavalu vs. Pogaku Sharadha and others
AIR 2022 Telangana 134
Date of order: 27th April, 2022
Bench: K. Lakshman J.

Court Procedure – Application for copies of certified copies is rejected – Copy should be made from original as per definition of ‘certified copies’ [S. 126, Civil Procedure Code, 1908; R. 188, 199, Civil Rules of Practice and Circular Orders]

FACTS

The petitioner herein, third party to the suit, had filed an application under Rule 188 (2) of the Civil Rules of Practice, 1990 (CRP) seeking copies of certified copies of certain exhibits, which was rejected by the lower court.

On Revision.

HELD
A ‘copy’ means a document prepared from the original which is an accurate or ‘true copy’ of the original. The originals were returned to the Plaintiff on filing of an application after substituting by its certified copies on record. Therefore, a copy made from the certified copies will not come within the definition of “certified copies”.

Revision Application is rejected.

BCAJ Admin

Corporate Law Corner Part A : Company Law

10 Onn Chits Private Ltd.
Roc/2021/Onn Chits/Penalty Order/6324-6327
Office of the Registrar of Companies, NCT of Delhi & Haryana
Adjudication order
Date of order: 2nd November, 2021

Order for Penalty u/s 454 for violation of section 12(1) r.w.s. 12(4) of the Companies Act, 2013

FACTS

M/s OCPL has its registered address at Faridabad, Haryana.

RoC had received a letter from the Registrar of Chit Fund, New Delhi (RCF) dated 10th June, 2020 as a complaint received from Sajneev Hinanandani against M/s OCPL stating that M/s OCPL was not maintaining its registered office. The Complaint Cell referred the matter to Adjudication Cell for initiation of action u/s 12 of the Companies Act, 2013, against M/s OCPL and its officers in default, which attracted the violation of section 12(1) and the provision of section 12(8) of the Companies Act, 2013.

Thereafter, RCF issued a Show Cause Notice u/s 12(8) dated 10th December, 2020 to M/s OCPL and its officers in default. No reply was received from M/s OCPL or its representative against the SCN issued by RCF on 10th December, 2020. Notice of Inquiry was sent vide notice dated 31st August, 2021 fixing date of hearing on 20th September, 2021 before the Adjudicating Officer.

An e-mail was received on 20th September, 2021 from FCA Anurag Kapoor requesting for grant of some time. An e-mail was sent to M/s OCPL wherein the date of hearing was fixed on 29th September, 2021 by the Adjudicating Officer.

On 29th September, 2021, Navneet Bhutan (Mr. NB), authorized representative, appeared before the Adjudicating Officer and period of default was fixed i.e., from 24th July, 2019 to 4th September, 2019, and was directed to bring the relevant
documents on next date of hearing i.e., on 13th October, 2021.

Extracts of sections 12(1), 12(4) And 12(8)
Section 12(1) – A company shall, on and from the fifteenth day of its incorporation and at all times thereafter, have a registered office capable of receiving and acknowledging all communications and notice as may be addressed to it.

Section 12(4) – Notice of every change of the situation of the registered office, verified in the manner prescribed, after the date of incorporation of the company, shall be given to the Registrar within fifteen days of the change, who shall record the same.

Section 12(8) – If any default is made in complying with the requirements of this section, the company and every officer who is in default shall be liable to a penalty of one thousand rupees for every day during which the default continues but not exceeding one lakh rupees.

Factors to be taken into account by the Adjudicating Officer

While adjudging quantum of penalty u/s 12(8) of the Act, the Adjudicating Officer shall have due regard to the following factors, namely:

a. The amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of default.

b. The amount of loss caused to an investor or group of investors as a result of the default.

c. The repetitive nature of default.

With regard to the above factors to be considered while determining the quantum of penalty, it was noted that the disproportionate gain or unfair advantage made by M/s OCPL and its officers in default or loss caused to the investor as a result of the delay on the part of M/s OCPL and its officers in default to redress the investor grievance were not available on record. Further, it was difficult to quantify the unfair advantage made by M/s OCPL and its officers in default or the loss caused to the investors in a default of this nature.

HELD

Having considered the facts and circumstances of the case and after taking into account the factors and as per documents submitted by Mr. NB, penalty amount of Rs. 43,000 each on M/s OCPL and its officers in default was imposed by the Adjudicating Officer, and thus a total penalty of Rs. 1,39,000 was levied for the period of default from 24th July, 2019 to 4th September, 2019 (default of non-maintenance of registered office admitted before the Adjudicating Officer on date of hearing).

BCAJ Admin

Allied Laws

30 Anurag Padmesh Gupta vs. Bank of India
AIR 2022 Bombay 3751
Date of order: 7th June, 2022
Bench: A.S. Chandurkarand & Amit Borkar JJ.

Fundamental Rights – Powers to Debt Recovery Tribunal – No power to restrain individual from travelling abroad [Art. 19, 21, Constitution of India; S. 19, 22, 25, Recovery of Debts due to Banks and Financial Institutions Act, 1993]

FACTS

The petition raised an important issue regarding the interpretation of Article 21 of the Constitution of India as to whether the expression “personal liberty” occurring in the said Article includes the right to travel abroad. Second important question that arose was whether the order passed by the Debt Recovery Tribunal refusing to grant permission to travel abroad results in the infringement of Article 21 of the Constitution of India?

HELD

If the right to travel is a part of the personal liberty of a person, he cannot be deprived of his right except according to the procedure established by law. The right to travel abroad is a right distinct and separate from the right of freedom of movement in a foreign country. The right to travel abroad by its necessary implications means the right to leave the home country and visit a foreign country. The right to travel abroad has been spelt out from the expression “personal liberty” in Article 21 of the Constitution.

Further held, the Tribunal, while exercising the powers of a Civil Court adjudicating money suit, is limited to the extent of passing interim order by way of injunction or stay which are expressly conferred on it. The Tribunal can travel beyond the powers conferred by the Code of Civil Procedure with a view to observe the principle of natural justice. In our view, Section 22 of the Act confers the procedural right to regulate proceedings before it. In the absence of a specific provision conferred on the Debt Recovery Tribunal by statute, the Debt Recovery Tribunal does not have power to restrain a citizen from travelling abroad, particularly when the said right has been recognized as a facet of Article 21 of the Constitution of India.

Petition is allowed.

31 Ayan Kumar Das and another vs. UOI & others
AIR 2022 Gauhati 120
Date of order: 6th April, 2022
Bench: Devashis Baruah JJ.

Appointment of Guardian – Mother of the Petitioner in comatose state – Petitioner appointed as a guardian to deal with the properties of his mother. [Art. 226, Constitution of India]

FACTS

The question that arose for consideration was as to whether in law and on facts the petitioner could be appointed as the guardian of the mother who is in ‘persistent vegetative state’ and ‘coma’ for managing her properties so as to meet medical expenses.

HELD

Article 226 of the Constitution empowers this Court to pass suitable orders on an application being filed to appoint a guardian or a next friend to an incompetent person like the petitioners’ mother who is in persistent vegetative state. In absence of any appropriate legislation, the High Court in exercise of the jurisdiction under Article 226 of the Constitution, can issue guidelines as temporary measures till the field is taken over by a proper legislation for appointment of guardian to a person lying in a comatose state or a vegetative state. Accordingly, on the basis of the materials on record, the Court was of the view that the reliefs sought for by the petitioners were reasonable and may be granted considering the peculiar facts and circumstances of the case. However, to ensure that the order of this Court is followed in letter and spirit and there is no breach thereof, it is also essential that there should be some kind of monitoring of the functioning of the guardian though for a limited duration to ensure that guardianship is being used for the benefit of the person who is in a vegetative state and such monitoring be carried out through the forum of the Assam State Legal Services Authority constituted under the Legal Services Authority Act, 1987.

Petition was allowed.

32 State of Himachal Pradesh vs. Sita Ram Sharma
AIR 2022 Himachal Pradesh 120
Date of order: 30th March, 2022
Bench: Mohammad Rafiq CJ & Ajay Mohan Goel & Sandeep Sharma JJ.

Constitutional Rights – Right to property – Unless land is voluntarily surrendered – the landowner is entitled to compensation [Art. 300A, Constitution of India]

FACTS

The matter has been referred to a larger bench on account of conflict of opinion between judgements. The question before the larger bench is whether a person(s) whose land(s) has been utilised for construction of road under ‘PMGSY’ is entitled to compensation?

HELD

Even after the right of property enshrined under Article 19(I)(f) was deleted by the 44th amendment to the Constitution, Article 300A still retains the right to property as the constitutional as well as legal right, and mandates that no person can be deprived of his property except by authority in law. The action of the State in dispossessing a citizen of his private property, without following the due process of law, would be violative of Article 300A of the Constitution of India, as also negate his human right. Thus, the right to property has been acknowledged, not only constitutional as well as statutory, but also human right, to be construed in the realm of individual rights, such as right to health, livelihood, shelter, employment etc. in a Welfare State. The State Authorities cannot dispossess any citizen of his property except in accordance with the procedure established by law, that too by due process of law and by acquiring land and paying adequate compensation.

33 Sudipta Banerjee vs. L.S. Davar and Company and others
AIR 2022 Calcutta 261
Date of order: 5th April, 2022
Bench: Soumen Sen and Ajoy Kumar Mukherjee, JJ.

No specific legislation – Trade secret – Factors for determining whether information is confidential. [O. 39 R. 1, Civil Procedure Code, 1908]

FACTS

Dr. Sudipta Banerjee and Dr. Indira Banerjee are well qualified patent professionals. They were working in L.S. Davar and Company, a reputed Intellectual property firm since 1st June, 1994 and 1st September, 1994 respectively until their resignations in June 2020. Arpita Ghosh was working as an office assistant of L.S. Davar & Company since 2010 until she resigned on 22nd January, 2021. All of them joined another firm by the name of P.S. Davar and Company, after their resignations were accepted by their erstwhile employer.

On the allegation that the appellants are divulging the confidential information and trade secrets acquired during their course of employment in L.S. Davar and Company, in clear breach of the confidentiality agreement, L.S. Davar and Company filed a suit.

In the suit the plaintiff filed an application for injunction in which the ad interim order of injunction was passed and subsequently extended from time to time.

HELD

There is no specific legislation in India to protect trade secrets and confidential information. Nevertheless, Indian Courts have upheld trade secret protection on basis of principles of equity, and at times, upon a common law action of breach of confidence, which in effect amounts to a breach of contractual obligation. The remedies available to the owner of trade secrets is to obtain an injunction preventing the licensee from disclosing the trade secret, return of all confidential and proprietary information, and compensation for any losses suffered due to disclosure of such trade secrets.

In India, a person can be contractually bound not to disclose any information that is revealed to him/her in confidence. The Indian courts have upheld a restrictive clause in a technology transfer agreement, which imposes negative covenants on the licensee to not disclose or use the information received under the agreement for any purpose other than that agreed to in the said agreement.

The court, while assessing an ad interim order of injunction is required to assess if the plaintiff was able to make out a prima facie case and thereafter consider the other two factors namely; balance of convenience and irreparable loss that might result in the event the ex parte ad interim order of injunction not being passed. In fact, an ad interim order of injunction should be of limited duration, which the learned Trial Court granted; however, we find that extension of the said ad interim order was made mechanically and could be prejudicial to the appellant. The non-compete clause in the instant case may be prejudicial to the appellants, but no order has been passed restraining them from carrying on their profession.

The plaintiff as a professional body may not have any trade secrets per se, but the persons who were/are in the employment of the plaintiff would certainly be privy to privileged information, and any sharing of such information and communication would not only be unethical but also a breach of the confidentiality clause resulting in serious prejudice and harm to the clients of the plaintiff firm. It may also expose the plaintiff firm to civil and criminal consequences. The nature of the complaints, on which the plaintiff relies, is to be assessed at the final disposal of the injunction application. However, at this stage, it cannot be said that the trial court has overstepped its limit or did not follow the accepted guidelines in passing the ad interim order of injunction. However, there is a possibility of the ad interim order being misconstrued as it appears to be widely worded to cover issues beyond the scope of the confidentiality and non-compete clauses, and not intended by the impugned order. Accordingly, the ad interim order is modified by restraining the appellants from disclosing, divulging or sharing confidential information gathered during the course of their employment in any manner whatsoever till the disposal of the injunction application on merits.

The order of injunction passed by the trial court is modified and clarified to the aforesaid extent.

BCAJ Admin

Corporate Law Corner Part B: Insolvency and Bankruptcy Law

6 Vallal RCK vs. M/s Siva Industries and Holdings Ltd. and Ors.
Civil Appeal Nos. 18111812 of 2022

Supreme Court Of India Civil Appellate Jurisdiction

FACTS

IDBI Bank filed an application u/s 7 of the IBC for initiation of CIRP. The NCLT admitted the application, and CIRP was initiated. The RP had presented a Resolution Plan before the CoC. The Plan could not meet the requirement of receiving 66% votes. Later, the RP filed an application seeking initiation of the liquidation process. The appellant, the promoter, filed a settlement application before the NCLT u/s 60(5) of the IBC, showing his willingness to offer a one-time settlement plan.

The appellant sought necessary directions to the CoC to consider the terms of the Settlement Plan as proposed by him. Deliberations took place in the COC meetings with regard to the said Settlement Plan. Initially, the Plan received only 70.63% votes. Subsequently, one of the financial creditor having a voting share of 23.60%, decided to approve the Settlement Plan. The Plan stood approved by more than 90% voting share; the RP filed an application seeking necessary directions. The NCLT ordered the RP to reconvene a meeting of the CoC and place the e-mail of financial creditor before it. Accordingly, in the 17th CoC meeting, the Settlement Plan was approved with a voting majority of 94.23%. Accordingly, the RP filed an application before the ld. NCLT seeking withdrawal of CIRP in view of the approval of the said Settlement Plan by CoC.

The NCLT, while rejecting the application for withdrawal, held the Settlement Plan was not a settlement simpliciter u/s 12A of the IBC but a “Business Restructuring Plan”, and initiated liquidation process. The appellant preferred two appeals before the learned NCLAT, and the same came to be dismissed. Hence, the present appeals.

QUESTION OF LAW

Whether the Adjudicating Authority can adjudicate over the commercial wisdom of CoC considering the minimum requirement to meet 90% voting share for approval of withdrawal of CIRP u/s 12A of the Insolvency and Bankruptcy Code, 2016 read with Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ?

RULING

Adjudication over commercial wisdom of CoC

The commercial wisdom of the CoC has been given paramount status without any judicial intervention to ensure the completion of the stated processes within the timelines prescribed by the IBC. It has been held that there is an intrinsic assumption, that financial creditors are fully informed about the viability of the corporate debtor and the feasibility of the proposed resolution plan. They act based on thorough examination of the proposed resolution plan and assessment made by their team of experts.

Requirement to meet 90% voting share for approval of withdrawal of CIRP qua allowing for commercial wisdom to prevail

The provisions u/s 12A of the IBC have been made more stringent compared to Section 30(4) of the IBC. Whereas u/s 30(4) of the IBC, the voting share of CoC for approving the Resolution Plan is 66%, the requirement u/s 12A of the IBC for withdrawal of CIRP is 90%.

A perusal of the said Regulation would reveal that where an application for withdrawal u/s 12A of the IBC is made after the constitution of the Committee, the same has to be made through the interim resolution professional or the resolution professional, as the case may be. The application has to be made in Form FA. It further provides that when an application is made after the issue of invitation for expression of interest under Regulation 36A, the applicant is required to state the reasons justifying withdrawal of the same. The RP is required to place such an application for consideration before the Committee. Only after such an application is approved by the Committee with 90% voting share, the RP shall submit the same along with the approval of the Committee to the Adjudicating Authority. It could thus be seen that a detailed procedure is prescribed under Regulation 30A of the 2016 Regulations as well.

When 90% and more of the creditors, in their wisdom after due deliberations, find that it will be in the interest of all the stakeholders to permit settlement and withdraw CIRP, the Adjudicating Authority or the Appellate Authority cannot sit in an appeal over the commercial wisdom of the CoC. The interference would be warranted only when the Adjudicating Authority or the Appellate Authority finds the decision of the CoC to be wholly capricious, arbitrary, irrational and de hors the provisions of the statute or the Rules.

Considering the case of Swiss Ribbons Private Limited and Another vs. Union of India and Others, it was held that:

Main thrust against the provision of Section 12A is the fact that ninety per cent of the Committee of Creditors has to allow withdrawal. This high threshold has been explained in the ILC Report as all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into. This explains why ninety per cent, which is substantially all the financial creditors, have to grant their approval to an individual withdrawal or settlement. In any case, the figure of ninety per cent, in the absence of anything further to show that it is arbitrary, must pertain to the domain of legislative policy, which has been explained by the Report.

HELD

The decision of the CoC is taken after the members of the CoC have done due deliberations to consider the pros and cons of the Settlement Plan and exercising their commercial wisdom. Therefore, neither the ld. NCLT nor the ld. NCLAT were justified in not giving due weightage to the commercial wisdom of the CoC.

If the CoC arbitrarily rejects a just settlement and/or withdrawal claim, the ld. NCLT, and thereafter the ld. NCLAT can always set aside such decision under the provisions of the IBC. There must be the need for minimal judicial interference by the NCLAT and NCLT in the framework of IBC.

The appeals are allowed.

BCAJ Admin

Corporate Law Corner Part A : Company Law

9 Kejriwal Casting Limited
RoC Adjudication Order
ROC/ADJ/2022
Registrar of Companies, West Bengal
Date of order: 27th April, 2022

Order of Adjudicating Authority for violation of section 134 of the Companies Act, 2013.

FACTS
M/s KCL had contravened provisions of section 134 of the Companies Act, 2013 in as much as it had not prepared the report of the Board of Directors for the financial year ended 31st March, 2019 and 31st March, 2020.

M/s KCL and its Managing Director had filed suo moto application for adjudication of offence u/s 454 of the Companies Act, 2013 for violation of section 134 of Companies Act, 2013 and the penalty for such default prescribed under sub-section 8 of section 134 is as follows:

“If a company is in default in complying with the provisions of this section, the company shall be liable to a penalty of three lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.”

Thereafter, in response to the application, the office of RoC, West Bengal, issued a Notice of Inquiry vide no. ROC/ADJ/2022/2482 and 2483 dated 15th March, 2022 to M/s KCL and its Managing Director to appear personally or through a representative before the adjudicating authority as per Rule 3(5) of Companies (Adjudication of Penalties) Rule, 2014 on the specified date mentioned in the said notice.

Mr. MRG, practising Company Secretary, who appeared on behalf of M/s KCL and its Managing Director, had submitted the reasons for default for such delay:

i. For the Financial Year ended on 31st March, 2019– Board’s Report was not prepared timely due to the non-availability of financial data due to migration of accounting data into ERP from Tally operating software and malfunctioning of the new ERP accounting software.

ii. For the Financial Year ended on 31st March, 2020– Board’s Report was not ready due to a delay in obtaining accounting data due to the spread of novel coronavirus and medical issues of persons managing accounts.

M/s KCL further submitted the details of delays (in the number of days) u/s 129 of Companies Act, 2013 as under:

F.Y. ended	Date of Board Meeting	Date of AGM	Due date of AGM	Delays (in days)
31^st March, 2019	7^thNovember, 2019	18^th November, 2019	30^thSeptember, 2019	48
31^st March, 2020	28^th May, 2021	29^th May, 2021	31^stDecember, 2020	149

F.Y. ended

Date of Board Meeting

Date of AGM

Due date of AGM

Delays (in days)

31^st
March, 2019

7^thNovember, 2019

18^th
November, 2019

30^thSeptember, 2019

31^st
March, 2020

28^th
May, 2021

29^th
May, 2021

31^stDecember, 2020

149

Further, according to Mr. MRG, practising Company Secretary, the following was the probable penalty to be levied on the Company and its Managing Director for the following Financial Years:

F.Y. ended	Penalty as per Companies Act, 2013	Total (in Rs.)
31^st March, 2019	Rs. 3,00,000	Rs. 50,000	Rs. 3,50,000
31^st March, 2020	Rs. 3,00,000	Rs. 50,000	Rs. 3,50,000

F.Y. ended

Penalty as per
Companies Act, 2013

Total (in Rs.)

On Company
(M/s KCL)

On Managing Director

31^st March, 2019

Rs.
3,00,000

Rs.
50,000

Rs.
3,50,000

31^st March, 2020

Rs.
3,00,000

Rs.
50,000

Rs.
3,50,000

ORDER/HELD

The Office of RoC, West Bengal, after considering the facts and circumstances of the case and taking into account the factors imposed a penalty of Rs. 6,00,000 on M/s KCL and Rs. 1,00,000 each on the Managing Director/Officer in default u/s 134(8) for failure to comply with sections 134(1) and 134(3) for F.Y. ended on 31st March, 2019 and 31st March, 2020.

It was further directed to pay the amount of penalty individually for M/s KCL and its Managing Director (out of own pocket) by way of e-payment mode within 90 days of receipt of the order and that the generated challan of payment of penalty be forwarded to the Office of RoC, West Bengal.

BCAJ Admin

Allied Laws

26 Rajesh Panditrao Pawar and others vs. Parwatibai Bhimrao Bende and another.
AIR 2022 Bombay 172
Date of order: 7th April, 2022
Bench: Shrikant D. Kulkarni, J.

Hindu Succession Act – Adopted son – Adopted by widow – No rights in deceased husband’s property. [Ss. 8, 14, 15, Hindu Succession Act, 1956; S. 12, Hindu Adoption and Maintenance Act, 1956]

FACTS

Mr. Rajesh Pawar (Original defendant) is the adopted son of Kausalyabai (Original Plaintiff No. 1). The defendant was adopted by Kausalyabai in 1973 after the death of her husband, Sopanrao, in 1965. Parwatibai Bende (Original Plaintiff No. 2) is the daughter of Plaintiff No. 1 from her marriage to Sopanrao.

The defendant sought ½ share in the property of his mother’s deceased husband, Sopanrao.

HELD

The Court referred to section 12 of the Hindu Adoption and Maintenance Act, 1956, which provides that the adoption takes effect from the date of adoption and not prior to adoption. It also referred to clause (c) of the proviso to section 12 of the Hindu Adoption and Maintenance Act, 1956, which provides that the adopted child shall not divest any person of any estate vested in him or her before the adoption. It was held that as per section 8 of the Hindu Succession Act, 1956, there was an intestate succession in 1965 on the demise of Sopanrao. Soapanrao’s widow and daughter took one-half share each in the property left by Sopanrao. The defendant was not in the picture at the time of the intestate succession and thus will not be entitled to any share in the widow’s husband’s property. The property will be divided equally amongst the deceased’s daughter and widow.

After the death of the widow, the share of the widow (½ property) will be divided equally amongst her daughter (Plaintiff No. 1) and adopted son (defendant).

The appeal is dismissed.

27 Somakka (dead) by LRs vs. K.P. Basavaraj (dead) by LRs
AIR 2022 Supreme Court 2853
Date of order: 13th June, 2022
Bench: S. Abdul Nazeer & Vikram Nath, JJ.

Hindu Succession – Father in possession of tenanted property – later gets occupancy rights – Such rights are heritable – Will be divided amongst the legal heirs. [Mysore (Religious and Charitable) Inams Abolition Act, 1955]

FACTS

The appellant is the own sister of the sole respondent. Their father, Puttanna, had inherited certain properties from his father, which were ancestral properties. Amongst other properties, at the time of death, the father was pursuing occupancy rights in respect of a property under the Inam Act.

An issue arose on the partition of the father’s estate. The respondent claimed that after the demise of the father, he got himself impleaded as the legal representative of late Puttanna, and he was, thereafter, granted occupancy rights by the Land Tribunal, and it became his self-acquired property.

HELD

The Court held that the father had applied for occupancy rights under the Inam Act, which were heritable in nature. For this reason, it would be inherited by both his children, i.e., the appellant and the respondent and under the law, both of them would be entitled to ½ (half) share each.

The appeal was allowed.

28 Santosh Kumar Sahoo vs. Secretary, the Urban Co-operative Bank Ltd. and others
AIR 2022 (NOC) 512 (ORI)
Date of order: 2nd November, 2021
Bench: D. Dash, J.

Guarantor & Borrower – Liability is same – No need to exhaust all remedies before approaching the guarantor [S. 128, Indian Contract Act, 1872]

FACTS

The plaintiff stood as a guarantor for a loan availed by defendant Nos. 3 to 5 from the Urban Co-operative Bank Ltd., Rourkela (defendant No.1). The loan was advanced by defendant No. 1 to defendant Nos. 3 to 5 for purchase of an old bus and the plaintiff had stood as a guarantor for smooth payment of the loan by those defendants. In course of time, defendant Nos. 3 to 5 when defaulted in payment of the loan dues, defendant No. 1- Bank straightway started deducting a sum every month from the savings account maintained by the plaintiff with the said Bank.

HELD

The liability of the guarantor is co-extensive with the principal borrower and the option lies with the banker to proceed for recovery of the loan dues either against both or one of the two. It is not the position of law that the action by the banker against the guarantor is permissible only after exhausting all the remedies against the borrower and in the event of failure of recovery of dues from the borrower. It is settled law that even after a decree making borrower and guarantor jointly pay the loan dues is passed, the decree-holder – banker may proceed to recover the amount from the guarantor only without proceeding against the borrower. The guarantor has the eventual remedy to recover the amount from the borrower which has been recovered from him by the banker towards the loan dues of the borrower. The principle is that the guarantor would pay the banker; the same is recoverable by him from the borrower.

The appeal was dismissed.

29 Ragya Bee (dead) and another vs. P. S. R. Constructions and another
AIR 2022 Telangana 105
Date of order: 27th January, 2022
Bench: P Naveen Rao and G. Radha Rani JJ.

Arbitration – Scope of section 34 – Only to set aside the award – cannot modify the award. [S. 34, Arbitration & Conciliation Act, 1996]

FACTS

A dispute arose between the owners of the property (appellant) and the developer (respondent). The issue was referred to arbitration. The Arbitrator rejected the claim of the appellants. Aggrieved by the award, the appellants filed an application for setting aside the award. The lower Court modified the award while exercising the powers u/s 34 of the Arbitration & Conciliation Act, 1996 (Act). The said decision was challenged by the applicants before the High Court.

HELD

The Court referred to the decision of the Hon’ble Supreme Court in the case of McDermott International Inc vs. Burn Standard Company Limited (2006) 11 SCC 181 and National Highways Authority of India vs. M. Hakeem 2021 SCC Online SC 473, and held that the issue is beyond pale of doubt. It noted that the Supreme Court has held that Section 34 of the Act cannot be held to include within it a power to modify the award. Therefore, the Civil Court is not competent to alter or modify the award of Arbitrator in a petition filed u/s 34 of the Act

The petition was allowed.

BCAJ Admin

ALLIED LAWS

21 Papiya Mukherjee vs. Aruna Banerjea and another
AIR 2022 Calcutta 201
Date of order: 30th March, 2022
Bench: Prakash Shrivastava, J.

Partnership Deed – Arbitration clause – Valid after the partner’s death – Enforceable against the legal heirs of the deceased partner. [S. 11, Arbitration and Conciliation Act of 1996; S. 46, Partnership Act, 1932]

FACTS
Application under Section 11 of the Arbitration and Conciliation Act, 1996 was filed by the applicant for the appointment of an arbitrator to resolve dispute between the parties. One Dr. Dhrubajyoti Banerjea and the applicant had entered into a partnership deed for running the laboratory business. Dr. Dhrubajyoti Banerjea being of old age, had executed a power of attorney in favour of his wife, respondent No.1 herein. Dr. Dhrubajyoti Banerjea passed away on 9th April, 2015. The respondent denied the arbitration by taking the stand that there was no valid arbitration agreement between the parties.

HELD
It was held that respondents are the legal heirs/successors of Dr. Dhrubajyoti Banerjea. Section 40 of the Arbitration Act clearly provides that an arbitration agreement will not be discharged by the death of a party thereto and will be enforceable by or against the legal representatives of the deceased. Section 42 of the Partnership Act, 1932 provides for the dissolution of partnership firms by the death of a partner. In terms of Section 46 of the Partnership Act, on the dissolution of the firm every partner or his legal representative is entitled to, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm and to have the surplus distributed amongst the partners or their representatives according to their rights.

The application was allowed.

22 Jayasudha vs. Karpagam and others
AIR 2022 (NOC) 373 (MAD.)
Date of order: 4th March, 2021
Bench: T. Ravindran, J.

Hindu Undivided Family – Family Manager – Alienation of property – No immoral purpose – Binding on the family [S. 6, Hindu Succession Act, 1956; S. 92, Indian Evidence Act, 1872]

FACTS
The plaint was filed by the daughters of the family manager as the ancestral properties of the family had been sold by the family manager to his son and daughter-in-law. The plaintiffs claimed a share in the suit property on account of the amendment in the Hindu Succession Act. Further, the plaintiffs submitted that their signatures had been taken as attestors on the sale deed without disclosing the contents of the sale deed.

HELD
As the plaintiffs have admitted to signing the deed, their defence is found to be not in consonance with the provisions of Section 92 of the Indian Evidence Act. Further, the father of the Hindu Joint Family is entitled to alienate the joint family property, and the transfer made by the father need not be for legal necessity, and the same is binding on all the members of the family. When the sale deed executed by the father is not tainted with illegality or immorality, the daughters being the coparceners as per the amended Hindu Succession Act, would be bound by the sale deed executed by their father. Accordingly, the suit filed by the daughter claiming share in the alienated property was dismissed, and the appeal was allowed.

23 Dilip Hariramani vs. Bank of Baroda
AIR 2022 SUPREME COURT 2258
Date of order: 9th May, 2022
Bench: Ajay Rastogi, Sanjiv Khanna, JJ.

Dishonour of Cheque – Proceedings against Partner of Firm – No proceedings against the Firm – Firm not made accused or summoned – Conviction set aside. [Ss. 138, 141, Negotiable Instruments Act, 1881; Partnership Act, 1932]

FACTS
The appellant is challenging his conviction for the dishonour of cheques. The respondent had granted term loans and a cash credit facility to a partnership firm – Global Packaging. It is alleged that in part repayment of the loan, the firm, through its authorised signatory, had issued three cheques. However, the cheques were dishonoured on presentation due to insufficient funds. The bank, through its branch manager, issued a demand notice to the appellant u/s 138 of the Negotiable Instrument Act, 1881 (Act). The respondent bank, through its branch manager, filed a complaint before the Court of Judicial Magistrate, and subsequently, the appellant was convicted.

HELD
It is an admitted case of the respondent bank that the appellant had not issued any of the three cheques, which had been dishonoured, in his personal capacity or otherwise than as a partner. The provisions of Section 141 impose vicarious liability by deeming fiction which presupposes and requires the commission of the offence by the company or firm. Therefore, unless the company or firm has committed the offense as a principal accused, the persons mentioned in sub-section (1) or (2) would not be liable and convicted as vicariously liable. Section 141 of the Act extends the vicarious criminal liability to officers associated with the company or firm when one of the twin requirements of Section 141 of the Act has been satisfied, which person(s) then, by deeming fiction, is made vicariously liable and punished. However, such vicarious liability arises only when the company or firm commits the offence as the primary offender.

Conviction set aside. The appeal was allowed.

24 Namdeo Babuji Bangde vs. State of Maharashtra & Ors.
AIR 2022 MAHARASHTRA 151
Date of order: 4th April, 2022
Bench: Rohit B. Deo, J.

Maintenance of senior citizen – harassed by son & daughter-in-law – Eviction of son & daughter-in-law by Tribunal – Proper [Ss. 4, 7, 23, 32, Maintenance and Welfare of Parents and Senior Citizens Act (56 of 2007)]

FACTS
The petitioners are the son and daughter-in-law respectively of respondents 2 and 3, and are assailing the order dated 21st January, 2020 rendered by the Tribunal constituted u/s 7 of the Maintenance and Welfare of Parents and Senior Citizens Act, 2007 (Act) whereby the petitioners were directed to vacate the self-acquired residential house of the respondents 2 and 3. Respondent 2, who was then aged 78 years and respondent 3, who was then aged 67 years, preferred an application dated 21st August, 2018 contending that respondent 2 has constructed the residential house from self-earning in Nagpur, and that the petitioner 1 has illegally and forcibly taken possession of part of the said house and is conducting himself in a manner as would pose a serious threat to the safety and security of the respondents 2 and 3.

The Tribunal found from the material on record that there is a real possibility of the safety and security of the aged petitioners being jeopardised, and therefore, directed eviction by the order impugned. The petitioners have challenged the said order.

HELD
The petitioners claimed that the aged parents have lost their mental balance and are therefore, levelling false allegations. In the conservative Indian society, a son is not expected to brand his aged father a ‘swindler’ or then allege that the aged parents have lost mental balance. The Courts have repeatedly acknowledged the right of senior citizens or parents to live peacefully and with dignity. Therefore, an order of eviction is absolutely necessary in order to ensure the physical and emotional health and safety of the parents.

25 Indian Overseas Bank vs. RCM Infrastructure Limited & Another
2022 LiveLaw (SC) 496
Date of order: 18th May, 2022
Bench: L. Nageswara Rao & B.R. Gavai, JJ.

Recovery of Dues – After appointment of CIRP – All actions to foreclose – Insolvency and Bankruptcy Code, 2016 – Complete Code – Overrides any anything contained in other law. [Ss. 13, 14, 238, Insolvency and Bankruptcy Code, 2016; R. 8, 9, Security Interest (Enforcement Rules, 2002)]

FACTS
The appellant bank had extended certain credit facilities to the Corporate Debtor. However, the Corporate Debtor failed to repay the dues, and the loan account of the Corporate Debtor became irregular and came to be classified as a ‘NonPerforming Asset’ (NPA).

The appellant bank issued a demand notice u/s 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESIA), calling upon the Corporate Debtor and its guarantors to repay the outstanding amount due to the appellant bank. Since the Corporate Debtor failed to comply with the demand notice and repay the outstanding dues, the appellant bank took symbolic possession of the two secured assets mortgaged exclusively with it. The same was done by the appellant bank in exercise of the powers conferred on it u/s 13(4) of the SARFAESIA read with Rule 8 of the Security Interest (Enforcement) Rules, 2002 (Rules). One of the said properties stood in the name of Corporate Debtor and the other in the name of Corporate Guarantor. An E-auction notice came to be issued by the appellant bank to recover the public money availed by the Corporate Debtor. In the meantime, the Corporate Debtor filed a petition u/s 10 of the Code before the learned NCLT.

HELD
After the CIRP is initiated, there is a moratorium for any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including any action under the SARFAESIA. It is clear that once the CIRP is commenced, there is complete prohibition for any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property. It could thus be seen that the provisions of the IBC shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. This Court has consistently held that the IBC is a complete Code in itself and in view of the provisions of Section 238 of the Code, the provisions of the Code would prevail notwithstanding anything inconsistent therewith contained in any other law for the time being in force.

BCAJ Admin

ALLIED LAWS

16 Kanhu Pradhan alias Pradhan alias Kanhu Charan Pradhan and others vs. Pitambara Padhan alias Pradhan AIR 2022 Orissa 67 Date of order: 25th January, 2022 Bench: Arindam Sinha, J.

Adverse possession – Unregistered document – Cannot be relied on as evidence. [S. 17; Registration Act (16 of 1908)]

FACTS
Plaintiffs filed suit for declaration of right, title, interest and injunction in respect of the suit property. The trial Court dismissed the suit on the ground that the defendants had adverse possession on the basis of an unregistered sale document dated 29th September, 1960. They had tendered the document as an ancient document and accordingly the trial Court found in favour of the defendants, to have perfected their title by adverse possession. The first appellate Court relied on Section 17 of the Registration Act, 1908, to hold that a document of sale of immovable property valued at more than Rs. 100 was compulsorily registerable. A compulsorily registerable document, not registered, could not be relied upon in evidence.

HELD
It was held by the High Court that finding by the Trial Court on adverse possession was clearly wrong. Adverse possession can be claimed only on the evidence adduced of possession, openly and hostile to the real owner. There cannot be a finding on adverse possession, when the claim is based on a document, inadmissible in evidence.

17 Mrs. Umadevi Nambiar vs. Thamarsseri AIR 2022 SUPREME COURT 1640 Date of order: 1st April, 2022 Bench: Hemant Gupta and V. Ramasubramanian, JJ.

Transfer of Property – Power of Attorney – No clause empowering to sell property – The title cannot be transferred.

FACTS
The suit property originally belonged to one Ullattukandiyil Sankunni. After his death, the property devolved upon his two daughters. One of the daughters i.e., Umadevi Nambiar (appellant) executed a general Power of Attorney on 21.07.1971 in favour of her sister Smt. Ranee Sidhan and registered it. The said power was cancelled on 31.01.1985. But in the meantime, the sister was found to have executed four different documents in favour of certain third parties, assigning/releasing some properties. The assignees/releasees had further sold the property. The purchaser of the property from the assignees/releasees is the Respondents herein. The appellant filed a suit for partition of her share in the property. The trial Court granted a preliminary decree in favour of the appellant. However, the regular appeal filed by the Respondent was allowed by a Division Bench of the High Court holding that though the power of attorney did not contain power to sell but the Respondent was a bona fide purchaser as the appellant had constructive notice of sale through Power of Attorney. Therefore, the appellant has come up with the above appeal.

HELD
The Supreme Court, held that there remains a plain and simple fact that the deed of Power of Attorney executed by the appellant on 21.07.1971 in favour of her sister contained provisions empowering the agent: (i) to grant leases under Clause 15; (ii) to make borrowals if and when necessary with or without security, and to execute and if necessary, register all documents in connection therewith under Clause 20; and (iii) to sign in her own name, documents for and on behalf of the appellant and present them for registration, under Clause 22. But there was no Clause in the deed authorizing and empowering the agent to sell the property. Thus, the draftsman has chosen to include, (i) an express power to lease out the property; and (ii) an express power to execute any document offering the property as security for any borrowal, but not an express power to sell the property. Therefore, the draftsman appears to have had clear instructions and he carried out those instructions faithfully. The power to sell is not to be inferred from a document of Power of Attorney. Unfortunately, after finding (i) that the Power of Attorney did not contain authorization to sell; and (ii) that the Respondent cannot claim the benefit of Section 41 of the Transfer of Property Act, 1882 (Bonafide Purchase), the High Court fell into an error in attributing constructive notice to the appellant in terms of Section 3 of the Transfer of Property Act, 1882. The High Court failed to appreciate that the possession of an agent under a deed of Power of Attorney is also the possession of the principal and that any unauthorized sale made by the agent will not tantamount to the principal parting with the possession. It is not always necessary for a Plaintiff in a suit for partition to seek the cancellation of the alienations. It is a fundamental principle of the law of transfer of property that “no one can confer a better title than what he himself has” (Nemo dat quod non habet). The appellant’s sister did not have the power to sell the property to the vendors of the Respondent. Therefore, the vendors of the Respondent could not have derived any valid title to the property. If the vendors of the Respondent themselves did not have any title, they had nothing to convey to the Respondent, except perhaps the litigation.

18 Abhimanyu Jayesh Jhaveri vs. Nirmala Dharmadas Jhaveri and another AIR 2022 Bombay 132 Date of order: 17th December, 2021 G.S. Kulkarni, J.

Maintenance of senior citizen – harassed by son & grandson for property – Will of Husband not probated – property with grandmother – son and grandson to be vacated [Ss. 4, 5, 23, Maintenance and Welfare of Parents and Senior Citizens Act (56 of 2007)]

FACTS
Claim of eviction from flat in question was made by Nirmala Dharmadas Jhaveri who was 89 years of age, against her son and her grandson, before the Senior Citizen’s Tribunal, Mumbai under the Maintenance and Welfare of Parents and Senior Citizens Act (56 of 2007). The son and grandson were financially well off and well placed but were torturing grandmother with greedy and acquisitive intention to grab here flat. The grandson on the basis of the will in his favour by his grandfather was claiming right over the flat. The grandmother denied the claim of the grandson based on the will as said will was not probated and contended that she was the sole owner of the flat.

HELD
It was held that both the son and the grandson have not only failed to maintain their grandmother, but also have caused mental and physical harassment and depravement to her material needs to extreme extent that she was thrown out of her own house, only with intention to grab said flat. Further, the share certificate with respect to the flat was in the name of the grandmother and the flat was shown in her Income tax returns. As the will under which grandson was claiming the rights was not probated, his claim to the flat could not be entertained. Hence, the son and the grandson were directed to vacate the flat in question.

19 U.P.S.E.B. Hathras vs. Hindustan Metal Works Hathras AIR 2022 ALLAHABAD 132 Date of order: 11th February, 2022 Bench: Sunita Agarwal and Krishan Pahal, JJ.

Appointment of arbitrator – Death of sole arbitrator initially appointed–case of appointment of new arbitrator and not of supply of vacancy. [Ss. 8, 9(b); Arbitration Act, 1940 (10 of 1940)]

FACTS
An agreement was entered into between the appellant and the respondent no. 2 on 9th May, 1964, whereby the appellant had agreed to supply power to the Mill. Pursuant to a dispute, the respondent no. 2 served the notice dated 9.9.1970 upon the appellant asking to agree for appointment of a sole arbitrator in terms of the first part of the arbitration clause 18 in the agreement. The appellant agreed to the said proposal and on 29.9.1970, Mr. Justice T.P. Mukherji, a retired Judge of the Allahabad High Court was appointed as the sole arbitrator. However, before the arbitrator could enter upon the reference, unfortunately, he died. A notice dated 6.7.1982/3.8.1982 under Section 8 of the Arbitration Act, 1940 (the Act) was then served upon the appellant proposing Shri A.C. Bansal, a retired District & Sessions Judge to be the sole arbitrator. This Notice was not objected to by the appellant. On 10th February, 1983, the arbitrator put both the parties to notice intimating that he had entered into the reference and that 7th March,1983 was the date fixed for striking of issues and preliminary hearing. The appellant did not participate in the Arbitral Proceedings on the ground that the appointment was illegal and the proceedings were void ab initio. To challenge the validity of the arbitral award, it was submitted that it was a case of supplying the vacancy on account of death of the appointed arbitrator which would fall within the scope of Section 8(1)(b) of the Arbitration Act, 1940. In that case, in the event of failure of the appellant to appoint the arbitrator by supplying the vacancy after service of notice, only option before the respondent no. 2 was to approach the Court by moving the application seeking for appointment of arbitrator.

HELD
In the instant case, the sole arbitrator who was appointed in accordance with the arbitration clause 18 of the agreement with the consent of the parties could not even enter into the reference. The proceedings of arbitration had not begun. It, therefore, became a case of appointment of a new arbitrator and not of supplying the vacancy. A new arbitrator was to be appointed by the parties in terms of the arbitration clause 18, which contained two options; firstly, that a single arbitrator could be appointed by agreement between the parties or else the dispute could be referred to two arbitrators, one appointed by each party.

The failure on the part of the appellant to appoint one more arbitrator for 15 clear days after the notice had given right to the respondent to invoke Section 9(b) to appoint arbitrator nominated by it to act as sole arbitrator in the reference. It cannot be successfully argued that since the appellant had kept silent, it should be presumed as its non-concurrence to the proposal for the appointment of the sole arbitrator and the respondent had the only option to approach the Court under Section 8 of the Act, 1940. The option available to the appellant to appoint its own arbitrator, as per clause 18 of the arbitration agreement, in case of disagreement to the proposal of sole arbitrator was never exercised. In case argument of the appellant is accepted, the provision of Section 9(b) giving power to the party to appoint sole arbitrator would become redundant. The present is a case which would fall within the scope of Section 9(b) where the award passed by the sole arbitrator on account of failure on the part of one of the parties to appoint another arbitrator, was binding on both the parties as if the sole arbitrator had been appointed by consent. The silence on the part of the appellant in such a case would be treated as its consent.

20 B.V. Subbaiah vs. Andhra Bank, Hyderabad and others AIR 2022 Telangana 78 Date of order: 31st January, 2022 Bench: P. Naveen Rao and G. Radha Rani, JJ.

Money suit – Limitation – Plaintiff practicing advocate handling several matters of defendant Bank before various Courts, Tribunals, Forums etc. – Bank failed to pay his fees and expenses – Payment to professional person like Advocate and CA is described as “fee” and not “price – ‘Price of work done’ cannot be made applicable to professions where professionals merely provide services for fee – Article 18 of Limitation Act not applicable to claim of plaintiff – Article 113 would be applicable. [Article 18, Limitation Act, 1963]

FACTS
Appellant/plaintiff filed a suit for recovery of amount of Rs. 19,46,701.31 with subsequent interest at the rate of 18% p.a. against the defendant bank for recovery of his legal fees. The defendant bank, though a nationalized bank, had not chosen to pay his fees, not even the expenses incurred, in spite of several requests made by him. The defendants contended that the suit is barred by limitation as it was instituted nearly eight years after the judgment in O.S. No. 1211 of 1991 and nearly 10 or more years after the results of other cases. The fee was claimed beyond three years after the result of the cases. Further, the suit was not filed within three years of the termination of his services in the respective cases and thus as per Article 18 of the Limitation Act, suit has to be instituted within three years on completion of work and when payment was due. The trial court dismissed the suit without costs holding that the suit was barred by time and that the plaintiff was not entitled for recovery of suit amount.

HELD
It is apparent from the reading of both Articles 18 and 113 of the Limitation Act that though the period of limitation is three years, but under Article 18 it begins to run when the “work is done” and under Article 113 it begins to run when the “right to sue” accrues. A professional activity cannot be considered as a commercial activity and the term ‘price’ is not synonymous with the term ‘fee’. In M.P. Electricity Board and others vs. Shiv Narayan and others (2005) 7 SCC 283, the Hon’ble Apex Court held that there is a fundamental distinction, therefore, between a professional activity and an activity of a commercial character. In Dharmarth Trust, Jammu and Kashmir, Jammu and others vs. Dinesh Chander Nanda 2010 (10) SCC 331, the Hon’ble Apex Court held that the term ‘Price’ does not cover the services provided by the professionals such as Architect, Lawyer, Doctor, etc., as professionals charge a ‘fee’. Also, the term ‘work done’ will not be applicable to professionals such as Architect, Lawyer, Doctor, etc. as these professionals render services to their clients. The remuneration of a professional is in the form of a ‘fee’ and therefore, it cannot be said that the professional earns a ‘price’.

It was thus held that the price of work done is not applicable to professionals and therefore Article 18 of the Limitation Act is not attracted to the claim of the plaintiff.

It was further held that an advocate was entitled to be paid his full fee and a change of advocate could not be made without the permission of the court and the right to fee of a counsel was not dependent on the quantum of work that he actually did in the court. It was also held that the conduct of the defendants, a Nationalized Bank, towards their standing counsels of adopting dilatory tactics and raising technical pleas to avoid payments and making him to take recourse to prolonged litigation by wasting the time not only in terms of money but also the valuable time of the counsel and the court is highly reprehensible. The Trial Court order was set aside.

BCAJ Admin

ALLIED LAWS

13 Sant Shri Gajanan Maharaj Sansthan vs. United India Insurance Company Limited AIR 2021 Bombay 177 (Nag)(HC) Date of order: 29th January, 2021 Bench: A.S. Chandurkar J, N.B. Suryawanshi J

Insurance claim – Insurance agreement entered into at Khamgaon – Property situated at Pandharpur – Property destroyed – Part of cause of action at Khamgaon – Court at Khamgaon has jurisdiction [Insurance Act, 1938, S. 20]

FACTS
The plaintiff is a public trust registered under the provisions of the Bombay Public Trust Act, 1950 and the Societies Registration Act, 1860. It runs various educational institutions and charity hospitals at various places in the State of Maharashtra. The Trust on 4th August, 1977 purchased a non-agricultural property at Pandharpur for construction of the Sant Gajanan Maharaj Temple. With a view to safeguard the said property, it entered into an agreement of insurance with the defendant.

The structure was damaged on account of floods during 2001-2003. The trust pleaded that it was required to bear substantial costs and therefore there was a cause of action for recovering money from the defendants.

The insurance company raised an objection to the territorial jurisdiction of the Civil Court at Khamgaon. The property insured was situated at Pandharpur in Solapur District which was beyond the territorial jurisdiction of the Khamgaon Court. The claim for insurance was based on the damage caused to the insured property on account of the occurrence of the events also at Pandharpur. Merely because the insurance policy was entered into at Khamgaon the same could not be a reason to confer jurisdiction on the Court at Khamgaon.

HELD
The contract between the parties was entered into at Khamgaon and the amount of premium was paid by the plaintiff and received by the defendant at Khamgaon. This indicates that as the contract of insurance between the parties was executed at Khamgaon and the policy of insurance was also issued by the office of the defendant at Khamgaon, part of the cause of action arose at Khamgaon. On acceptance of premium by the defendant at Khamgaon, the policy of insurance commenced and though the property insured was located at Pandharpur, District Solapur, the Court at Khamgaon had jurisdiction to entertain the suit based on the insurance policies as the part of the cause of action had arisen at Khamgaon. The Trial Court has rightly held that the Court had territorial jurisdiction to entertain the suit.

14 Collector of Stamps vs. Tulsi Rice and Pulse Mills AIR 2021 Gujarat 72 Date of order: 22nd March, 2021 Bench: Vineet Kothari J, Biren Vaishnav J

Stamp Duty – Retiring partner – Assigning his interest in land to partnership firm – No transfer of assets – No stamp duty [Stamp Act, 1899, S. 48]

FACTS
One of the seven partners of a partnership firm, viz. Tulsi Rice and Pulse Mills, assigned his interest in the leasehold land leased for 99 years by GIDC to the partnership firm.

It is the case of the Stamp Duty Authorities that the assignment amounted to ‘transfer’ as defined in the Stamp Law and the Stamp Authority was justified in levying Stamp Duty vide order dated 16th April, 2008.

The case of the partnership firm was allowed by the Single Judge of the Gujarat High Court. The State of Gujarat filed an appeal against the judgment and order dated 18th October, 2016 allowing the writ petition filed by the respondent and holding that on the deed of assignment dated 5th August, 2000, stamp duty could not be demanded by the Stamp Authorities.

HELD
Even though the said document was titled as ‘Deed of Assignment’, it could not be an assignment or transfer of asset or property by one of the partners of the partnership firm as he had no exclusive right, title or interest in the said leasehold land which was on 99 years’ lease given by GIDC to the said firm. The Court held that the document in question executed in the present case is, in effect, a retirement of one of the partners of the firm who, upon his retirement from the said firm, released his right in the leasehold land in question in favour of the continuing six partners.

The case under this document would squarely fall within the ambit and scope of section 48 of the Indian Partnership Act, 1932 which provides for the mode of settlement of accounts between the partners. It appears that the Stamp Authority in the present case was misled by the title of the document ignoring the actual event or intention of the document by which seven continuing partners assigned the right, title or interest in favour of the six continuing partners, except the seventh and the outgoing retiring partner and the same was construed as a ‘transfer’ or ‘assignment’ by the outgoing partner in favour of the six continuing partners.

The appeal was dismissed.

15 Alka Khandu Avhad vs. Amar Syamprasad Mishra and Anr. AIR 2021 Supreme Court 1616 Date of order: 8th March, 2021 Bench: Dr. D.Y. Chandrachud J, M.R. Shah J

Dishonour of cheque – Proceedings against husband and wife – Wife neither signatory – No joint bank account – No joint liability u/s 138 of the Negotiable Instrument Act, 1881

FACTS
The respondent No. 1 (Amar Syamprasad Mishra) had filed a criminal complaint against the appellant and her husband for the dishonour of a cheque in the Court of the Metropolitan Magistrate, Mumbai. That the original complainant raised a professional bill for the legal work done by him to represent accused Nos. 1 and 2 in the legal proceedings. That, thereafter, original accused No. 1, husband of the appellant herein, handed over to the complainant a post-dated cheque of 15th March, 2016. The said cheque was presented for encashment and the same came to be returned unpaid with the endorsement ‘funds insufficient’. The Respondent No. 1 filed a complaint against both the accused (husband and wife) for the offence punishable u/s 138 of the Negotiable Instrument Act, 1881 (NI Act). The Metropolitan Magistrate directed to issue process against both the accused.

HELD
On a fair reading of section 138 of the NI Act, before a person can be prosecuted the following conditions are required to be satisfied:

i) that the cheque is drawn by a person on an account maintained by him with a banker;

ii) the cheque is for the payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability; and

iii) the said cheque is returned by the bank unpaid, either because the amount of money standing to the credit of that account is insufficient to honour the cheque, or that it exceeds the amount arranged to be paid from that account.

Section 138 of the NI Act does not speak about joint liability. Even in case of a joint liability, in case of individual persons a person other than a person who has drawn the cheque on an account maintained by him cannot be prosecuted for the offence u/s 138. A person might have been jointly liable to pay the debt but such a person cannot be prosecuted unless the bank account is jointly maintained and she / he was a signatory to the cheque.

The appeal was allowed.

16 Prabhat General Agencies and Ors. vs. Jammu Kashmir Bank Ltd. and Ors. AIR 2021 Supreme Court 3469 Date of order: 9th July, 2021 Bench: A.M. Khanwilkar J, Sanjiv Khanna J

Sale of mortgaged property – Challenge on portion of land sold – Challenge on private sale by bank – No violation as sufficient opportunity given to the debtor – Only portion of land which is mortgaged can be sold [Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, S. 38, R.8, R.9]

FACTS
The appellants herein have questioned the auction process inter alia on the ground that the land mortgaged to the respondent bank was only 550 marlas, but possession of 784.5 marlas is being handed over to the respondent Nos. 3 and 4 (private parties) who have purchased the same in the sale by the bank. Further, the reserve price was fixed at Rs. 5.50 crores but the same was sold for Rs. 4.50 crores.

HELD
The appellants have not made the payments in spite of several opportunities. Further, with respect to the sale price the respondents resorted to private sale only when the auction proceedings did not fructify. The appellants were duly informed by the bank and were given sufficient opportunity to deposit the dues. However, the bank must ensure handing over only 550 marlas of land to the private parties from the larger property.

The appeal was dismissed.

17 Ankit Vijaykumar Khandelwal vs. Aarti Rajkumar Khandelwal AIR 2021 Bombay 151 Date of order: 28th April, 2021 Bench: Anuja Prabhudessai J

Arbitration – Partnership deed – Arbitration clause to resolve all disputes through arbitration – Post dissolution of firm – Arbitration clause would not cease to exist [Arbitration and Conciliation Act, 1996, S. 8; Indian Partnership Act, 1932, S. 43]

FACTS
The plaintiff (Aarti Rajkumar Khandelwal) filed a suit for dissolution of partnership firm and rendition of accounts against the respondent (Ankit Vijaykumar Khandelwal). The defendant filed a notice of motion to refer the dispute to arbitration in terms of clause 19 of the Partnership Deed.

HELD
The arbitration clause is widely worded and is not restricted or limited to disputes arising prior to dissolution of partnership firm. The partnership deed does not indicate that the parties intended to exclude post-dissolution disputes from arbitral reference. Consequently, there is no embargo to refer such disputes to arbitration. The enforcement of clause 18 and provisions under sections 46 and 48 of the Arbitration Act, 1996 come into operation post dissolution of partnership. In the absence of any embargo to refer a post-dissolution dispute to the arbitrator, it is not possible to accept that the arbitration clause would cease to exist with dissolution of the partnership firm. Thus, there is a valid arbitration agreement between the parties. The dispute raised in the suit has its genesis in the arbitration clause.

The revision application is allowed.

BCAJ Admin

CORPORATE LAW CORNER

PART A | COMPANY LAW

4 M/s Technicolor India Private Limited vs. The Registrar of Companies, Karnataka The National Company Law Tribunal, Bengaluru Bench C.P. No. 124/BB/2019 Date of order: 20th January, 2020

Voluntary revision of Board’s report by the Company. The Company filed a petition u/s 131 r.w.s. 134 of the Companies Act, 2013 and Rule 77 of the NCLT Rules, 2016 to permit the Company to revise the Board’s report due to some mismatch in the amount spent on CSR. The Company was permitted to revise the Board’s report without prejudice to the rights of the statutory authorities to initiate any proceedings against the Company, for violation of any provisions of the Companies Act.

FACTS
The petition was filed by M/s TIPL before the NCLT u/s 131 r.w.s. 134 of the Companies Act, 2013 and Rule 77 of the NCLT Rules, 2016 seeking to permit the Company to revise the Board’s report and in specific, the annexure to the report related to Corporate Social Responsibility (CSR).

Following are the brief facts of the case, as mentioned in the Company Petition, which are relevant to the issue in question:

a) The Company met the net profit criteria u/s 135 of the Companies Act, 2013, and had a CSR committee. The Company had spent some amount as per the CSR Policy of the Company during the fiscal year 2017-18, which was below the threshold mentioned in section 135 (5) of the Companies Act.

b) Due to human lapse, the concerned department misreported the amounts spent on CSR and mentioned it in the CSR annexure to the Board’s report for the fiscal year ended 31st March, 2018 as against the amount reported in the audited financials.

c) The Board of Directors of M/s TIPL, in their meeting dated 21st September, 2018 approved the draft Board’s report for the year ended 31st March, 2018, which mentioned the amount spent on CSR and associated details incorrectly.

d) Subsequently, in the AGM held on 28th September, 2018, the shareholders had adopted the audited financial statement for the year ended 31st March, 2018, including the audited balance sheet as on 31st March, 2018, the statement of profit and loss account with the report of the Board of Directors and the Auditors.

e) The error was discovered during the pre-scrutiny stage of filing of the audited financials. Thereafter, the Board of Directors had taken a call to set things right with the suo moto intent to make an application u/s 131 (1) (b) of the Companies Act to rectify the error.

Following were the submissions of the Regional Director, RoC, Karnataka (RD), who had filed an affidavit dated 3rd December, 2019:

a) It was observed that M/s TIPL had only one member in the CSR Committee in 2017-18, which was below the statutory requirement.

b) M/s TIPL had spent “some amount” as per the CSR policy of the M/s TIPL during the fiscal year 2017-18, which remained below the threshold mentioned u/s 135(5) of the Companies Act.

c) M/s TIPL did not specifically state in the annexure attached to the Board’s report for 2017-18 the reasons for non-spending of due CSR amount.

d) Since M/s TIPL had violated Section 135 of the Companies Act, 2013, RD urged that TIPL may be directed to make good the offence and get the offence compounded u/s 441 of the Companies Act, 2013 w.r.t the above-mentioned points. Further, as per the new amendment to the Companies Act, 2013, the unspent amount under CSR Policy was required to be kept in a separate account. Hence, M/s TIPL needed to follow the procedure accordingly. Therefore, it urged the NCLT to dismiss the Petition.

Following were the submissions of M/s TIPL, who had filed an affidavit dated 1st January, 2020:

a) M/s TIPL had mentioned in the CSR annexure to the Board’s report that after the end of the fiscal year, they had taken steps to co-opt two Board members to be part of the CSR Committee. Further, it had specifically stated the reasons for not spending the stipulated amount on CSR activities.

b) M/s TIPL had sought permission for revision of the annexure to the Board’s report relating to CSR only. The Petition was filed only for correction in annexure and not for making the offence good, as alleged by the RD.

c) The sole purpose of the petition was to seek approval for revision of the CSR annexure to the Board’s report to ensure that the CSR expense report in the CSR annexure matches with the amount disclosed as CSR expenses in the financial statement in order to comply with the provision of Section 134 (3) (o) of the Act read with Rule 9 of the Companies Rules, 2014 and second proviso to section 135 (5) of the Act read with rule 8 of the Companies Rules, 2014.

The Office of the Deputy Commissioner of Income-Tax, Bangalore, vide its letter dated 19th September, 2019, had inter alia stated that the Department did not have any objection to the appeal filed by M/s TIPL.

Section 131 of the Companies Act, 2013, empowers the Company to seek to revise financial statements or revise a report in respect of any of the three preceding financial years after obtaining the approval of the Tribunal by filing an appropriate application in a prescribed form. Therefore, the issue was only to seek approval of the Tribunal to revise the Board’s report and not for seeking any compounding of offence as contended. Moreover, examination of an issue raised before it of any other issues, if any, such as a violation of any provisions of the Act, was beyond the scope of the Tribunal in the present Petition.

HELD
The NCLT was convinced with the reasons furnished by M/s TIPL to seek the relief sought. Therefore, the NCLT was inclined to allow the application as sought in the interest of justice, and on the principle of ease of doing business, however, without prejudice to the right(s) of the Registrar of Companies to initiate appropriate proceedings, if the Company violated any provision of Companies Act, 2013 and the Rules made thereunder. Further, M/s. TIPL was also at liberty to file an application suo moto to seek compounding of any violation if it thinks so.

The NCLT disposed of the application with the following directions:

a) M/s TIPL was permitted to revise the Board’s report, as sought for, with a direction to follow all the extant provisions of Section 135 of the Companies Act, 2013, the Company (CSR) Rules, 2014 amended from time to time, and also Rule 77 of NCLT Rules, 2016.

b) This order was passed without prejudice to the rights of the statutory authorities to initiate any proceedings against M/s TIPL, for violation of any provisions of the Companies Act, 2013.

c) There was no order as to costs.

PART B | INSOLVENCY AND BANKRUPTCY LAW

3 Potens Transmissions & Power Pvt. Ltd vs. Gian Chand Narang NCLAT, Delhi Company Appeal (AT) (Insolvency) No. 532 of 2022 Date of judgement/order: 12th May, 2022

Cancellation of E-auction because of non-compliance of time limit of 90 days payment. The provision is mandatory, and the auction has to be cancelled in case of default.

FACTS
In 2018, ICICI Bank Ltd. filed a petition u/s 7 of the Insolvency and Bankruptcy Code, 2016 before NCLT New Delhi, seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against Apex Buildsys Ltd. (“Corporate Debtor”). The CIRP was initiated by the NCLT, (“Adjudicating Authority”) vide an order dated 20th September, 2018 and subsequently, an order for liquidation of the Corporate Debtor was passed on 9th January, 2020.

Further, the Liquidator had invited bids for the E-auction of the Corporate Debtor as a going concern. Potens Transmissions & Power Pvt. Ltd. (“Appellant /Successful Bidder”) became the successful bidder in the E-auction of the Corporate Debtor conducted on 3rd June, 2021. The bid amount was Rs. 73.01 crore and earnest money amounting to Rs. 7.3 crore was paid by the Appellant on 31st May, 2021.

The Liquidator asked the Appellant to deposit the sale consideration by 10th June, 2021, i.e. within 30 days from 31st May, 2021. The Appellant had deposited Rs 10,95,25,000 till 10th/11th June, 2021. A term sheet was executed between the Appellant and the Liquidator, as per which 3rd July, 2021 was fixed as the timeline for payment of the balance amount of Rs. 54,75,75,000, on failure of which an interest at 12% would be applicable from 3rd July, 2021 onwards. The total payment was to be made on or before 1st September, 2021, i.e. within 90 days. Further, the Appellant filed an application before the adjudicating authority seeking the prayer to:

“(a) allow the Applicant to pay/adjust the sale consideration in the following matter (i) R50 crore by way of investment into the equity shares of the Corporate Debtor; and (ii) the balance amount of R23 crore in the form of Optionally Convertible Debentures;”

And another application was filed to seek an extension of time to pay the balance consideration amount. While these applications were pending for adjudication, the Liquidator moved an application seeking permission to cancel the sale of the Corporate Debtor as a going concern to the Appellant, in view of the latter’s failure to make payment in terms of the provisions of law and grant of further time to conduct a fresh E-Auction of the Corporate Debtor as a going concern.

PROVISION OF LAW
Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Regulations”) – Clause 1(12) of Schedule I.

“1 Auction.

(12) On the close of the auction, the highest bidder shall be invited to provide balance sale consideration within ninety days of the date of such demand: Provided that payments made after thirty days shall attract interest at the rate of 12%:

Provided further that the sale shall be cancelled if the payment is not received within ninety days.”

RULING IN THE MATTER
Failure to pay consideration in 90 Days, NCLAT Delhi cancels the sale of Corporate Debtor to the Auction Purchaser in liquidation proceedings. The NCLAT, while adjudicating an appeal in Potens Transmissions & Power Pvt. Ltd vs. Gian Chand Narang, has upheld the cancellation of sale of Apex Buildsys Ltd. as a going concern to Potens Transmissions & Power Pvt. Ltd. (Auction Purchaser), over the latter’s failure to pay the sale consideration amount within 90 days, as stipulated under IBBI (Liquidation Process) Regulations 2016.

HELD
The NCLAT Bench observed that 90 days period provided in the Liquidation Process Regulation is the maximum period for the Auction Purchaser to deposit the consideration amount, failing which the regulation expressly mentions that the sale shall be cancelled. It was held that “when the Consequence of non-compliance of the provision is provided in the statute itself, the provision is necessary to be held to be mandatory.” The NCLAT opined that the Adjudicating Authority had no option except to allow the Application filed by the Liquidator for cancellation of the sale, and such action is in accordance with the statutory provisions. Further, the prayer made by the Appellant in I.A. No. 3153 of 2021, that Appellant was never interested in making the payment and wanted to prolong the proceedings. The NCLAT Bench upheld the order of the Adjudicating Authority and cancelled the sale of the Corporate Debtor to the Appellant, and also upheld the conducting of a fresh E-auction of the CD.

BCAJ Admin

ALLIED LAWS

11 Narinder Garg & Ors. vs. Kotak Mahindra Bank Ltd. & Ors. WP(C) No. 93 of 2022 (SC) Date of order: 28th March, 2022 Bench: Uday Umesh Lalit; J., S. Ravindra Bhat; J. Pamidighantam and Sri Narasimha, J.

Insolvency & Bankruptcy – Liability of a Director – Negotiable Instruments – Would be statutorily liable under the Negotiable Instruments Act [Insolvency & Bankruptcy Code, 2016 (Code), S. 14, Negotiable Instruments Act, 1881, S. 138, S. 141]

FACTS
The Petitioner filed a writ petition seeking to quash the criminal complaints filed against the corporate debtor and its directors u/s 138 of the Negotiable Instruments Act, 1881 (Act) pending before concerned Judicial Magistrate/Chief Metropolitan Magistrate/Judicial Magistrate of 1st Class in view of the order dated 18th March, 2020 passed by the National Company Law Tribunal, Chandigarh, by which the Resolution Plan was approved by the CoC u/s 30(4) of the Code and as the Respondent Complainants have accepted the approved Resolution Plan.

HELD
Relying on the decision in the case of P. Mohanraj & Others vs. Shah Brothers Ispat Private Limited, (2021) 6 SCC 258, it was held that the moratorium provisions contained in Section 14 of the Insolvency and Bankruptcy Code, 2016 would apply only to the corporate debtor and that the natural persons mentioned in Section 141 of the Act would continue to be statutorily liable under the provisions of the Act.

The writ petition was dismissed.

12 K. C. Laxmana vs. K.C. Chandrappa Gowda & Anr. Civil Appeal No. 2582 of 2010 (SC) Date of order: 19th April, 2022 Bench: S. Abdul Nazeer J, and Krishna Murari J.

Gift – Hindu Undivided Family – Karta cannot gift ancestral property for other than ‘pious purpose’ – Property can be alienated only for legal necessity, the benefit of estate, or with the consent of all coparceners – Term ‘alienation’ includes gift.

FACTS
K.C. Chandrappa Gowda (Plaintiff) filed a suit against his father K.S. Chinne Gowda and one K.C. Laxmana (Defendants) for partition and separate possession of his one-third share in the suit property and a declaration that the gift/settlement deed dated 22nd March, 1980 executed by the first Defendant K.S. Chinne Gowda in favour of the second Defendant K.C. Laxmana as null and void.

According to Plaintiff, the schedule property belongs to the joint family consisting of himself, the first Defendant and one K.C. Subraya Gowda. It was further contended that the first Defendant had no right to transfer the schedule property in favour of the second Defendant as he is not a coparcener or a member of their family. Consequently, it was contended that the alienation made without the Plaintiff’s consent is null and void and thus not binding on him.

HELD
It is trite law that Karta/Manager of joint family property may alienate joint family property only in three situations, namely, (i) legal necessity, (ii) for the benefit of the estate, and (iii) with the consent of all the coparceners of the family. In the instant case, the alienation of the joint family property was not with the consent of all the coparceners. It is settled law that where alienation is not made with the consent of all the coparceners, it is voidable at the instance of the coparceners whose consent has not been obtained. Therefore, the alienation of the joint family property in favour of the second Defendant was voidable at the instance of the Plaintiff whose consent had not been obtained as a coparcener before the said alienation.

Further held, the settlement deed is, in fact, a gift deed which was executed by the first Defendant in favour of the second Defendant ‘out of love and affection’ and by virtue of which the second Defendant was given a portion of the joint family property. It is well settled that a Hindu father or any other managing member of a HUF has the power to make a gift of the ancestral property only for a ‘pious purpose’, and what is understood by the term ‘pious purpose’ is a gift for charitable and/or religious purpose. Therefore, a deed of gift in regard to the ancestral property executed ‘out of love and affection’ does not come within the scope of the term ‘pious purpose’.

It was also held that the word ‘alienation’ in Article 109 of the Second Schedule to the Limitation Act, 1963 includes ‘gift’.

13 Asha Joseph vs. Babu C. George & Ors. RFA No. 543 of 2012 (Ker) Date of order: 8th April, 2022 Bench: P.B. Suresh Kumar J. and C.S. Sudha, J.

Sale Deed – Immovable Property – Specific performance – Demonstration of funds for purchasing property – Not necessary. [Specific Relief Act, 1963, S. 16(c)]

FACTS
The Plaintiff had entered into a sale agreement by which Defendants 1 to 3 agreed to sell their property for a total sale consideration of Rs. 55,44,000. On the date of the agreement, an amount of Rs. 10,00,000 was paid as advance. The agreement was to execute the sale deed within a period of three months from the date of the agreement.

The Plaintiff was always ready and willing to perform her part of the contract. However, the Defendants were never ready to perform their part of the contract. So, the Plaintiff issued a lawyer’s notice calling upon the Defendants to execute the deed, to which they sent a reply notice raising false and untenable contentions. Hence the suit.

The Defendants filed a written statement contending that there was never any sale agreement as alleged in the plaint. According to the Defendants, the agreement was executed as security when the first Defendant borrowed an amount of Rs. 10,00,000 from the Plaintiff.

The Court below disbelieved Plaintiff’s case and disallowed the prayer for specific performance. Aggrieved, the Plaintiff preferred an appeal.

The Defendants raised a contention that the pleadings in the plaint are totally insufficient and that do not satisfy the requirements u/s 16(c) of the Specific Relief Act, 1963 (Act). The Defendants contended that plaint does not give the details of the funds in possession of the Plaintiff or how she intended to raise the necessary funds to pay the balance sale consideration. As there is non-compliance of Section 16(c) of the Act, the Plaintiff is not entitled to the relief of specific performance.

HELD
The Court noted that the Hon’ble Supreme Court in Nathulal vs. Phoolchand, AIR 1970 SC 546 has held that, to prove himself ready and willing, a purchaser does not have to necessarily produce the money or to vouch for a concluded scheme for financing the transaction.

Further, in the case of Ganesh Prasad vs. Saraswati Devi, AIR 1982 All 47, it has been held that it is not necessary for the plaintiff to work out actual figures and satisfy the Court what specific amount a bank would have advanced to him.

The Plaintiff does not have in such a case to go about jingling money to demonstrate his capacity to pay the purchase price. All that the Plaintiff has to do in such a situation is to be really willing to purchase the property when the time for doing so comes and have the means to arrange for payment of the consideration payable by him. There could, therefore, be no objection if the owner raises the money for payment when the time for doing so comes as Clause (1) of the Explanation to Section 16(c) of the Act clearly enacts that money need be produced only when directed by the Court.

Therefore, the Plaintiff need only establish that she had the capacity to raise the necessary funds, which she has done in this case through the testimony.

Application is allowed.

14 Rajesh Kasera vs. Bank of India & Anr. AIR 2022 (NOC) 272 (Jha.) Date of order: 18th November, 2021 Bench: Rajesh Shankar J.

Succession Certificate – Deceased mother having three children – No nominees to the bank account – Release of bank account in favour of one child cannot be done unless there is a succession certificate. [Banking Regulation Act, 1949, S. 45ZA]

FACTS
The present writ petition has been filed for issuance of direction to the Respondents to release the entire amount of Late Urmila Devi favouring the Petitioner, who claims to be her only son and heir/legal representative.

The Petitioner’s mother, Urmila Devi, died on 14th January, 2019, leaving behind two sons, i.e. the Petitioner and Ramesh Kasera. Ramesh Kasera, Petitioner’s brother, also died on 28th June, 2019 and as such, the Petitioner is the only surviving heir/legal representative of Late Urmila Devi. The father of the Petitioner had already died on 9th June, 1993. The Petitioner obtained a family relation certificate from the Circle Officer, which discloses that the Petitioner is the only son, and his two married sisters live separately in their matrimonial houses. Under the aforesaid circumstance, the Petitioner submitted that the Petitioner being the only surviving son of late Urmila Devi, is entitled to receive the amount lying in the aforesaid bank account.

HELD
The Petitioner is not the only heir/legal representative of the late Urmila Devi, as his two married sisters are alive. Moreover, the concerned bank account of late Urmila Devi did not mention any nominee to operate the same after her death. Though the Respondents have stated in the counter affidavit that two daughters of Late Urmila Devi (sisters of the Petitioner) have raised oral objection against release of the amount lying in the concerned bank account in favour of the Petitioner, this Court does not wish to comment on the same, as no such written objection has been brought on record by the Respondents. However, the substance in the stand taken by the Respondents in the counter affidavit is that since the name of nominee has not been mentioned in the concerned bank account, if the Petitioner claims the amount lying in the said account, he should produce a succession certificate issued by a competent Court of law before the bank.

Hence, no writ of mandamus, as prayed for by the Petitioner in the present writ petition, can be issued.

15 S. Murugesan vs. District Registrar, Madurai. AIR 2022 Madras 296 Date of order: 28th January, 2022 Bench: C. V. Karthujeyan J.

Gift – Cancellation – Deed expressly mentions about no power to cancel – Plea of ignorance is not valid. [Transfer of Property Act, 1882, S. 122]

FACTS
A writ petition has been filed in the nature of Mandamus seeking a direction to the sub-registrar to permit the Petitioner to cancel a gift deed executed and registered by the Petitioner in the office of the Respondent.

HELD
The Petitioner was around 39 years of age when he had executed the gift deed. Plea of lack of knowledge or ignorance or innocence and, therefore, seeking indulgence cannot be pleaded by the Petitioner as he had voluntarily executed the gift deed.

A ‘gift’ is defined u/s 122 of the Transfer of Property Act. The definition is very clear and straightforward. Section 122 of the said Act also deals with accepting a particular gift. It is stated that if the donee accepts the gift or it is accepted on behalf of the donee, then the act of gift becomes complete.

A perusal of the gift deed shows that the Petitioner had very clearly stated that he has no right to cancel and frustrate the gift deed and that, even if he takes any steps to frustrate the gift deed, such steps would be void. There is no condition attached to the gift, as seen from reading that document.

The Writ Petition is dismissed.

BCAJ Admin

CORPORATE LAW CORNER

PART A | COMPANY LAW

3 Neera Saggi vs. Union of India & Ors. with Renu Chattu vs. Union of India & Ors. Supreme Court of India [2021] 164 CLA 370 (SC) Civil Appeal Nos. 2841 of 2020 & 3531 of 2020 Date of Order: 15th February, 2021

While Independent Directors have a vital role, they are intended to be independent, and where they have resigned from directorship and still impleaded in a case of fraudulent lending without hearing and considering facts relating to ex-independent directors, the order impleading them is liable to be set aside.

FACTS
The National Company Law Tribunal (‘NCLT’) and National Company Law Appellate Tribunal (‘NCLAT’), in the course of their proceedings relating to M/s IL&FS and M/s IFIN have impleaded Independent Directors (IDs) of Companies, among other Directors based on Serious Fraud Investigation Office (‘SFIO’) Report submitted before both NCLT and NCLAT.

The NCLT, while dealing with the question as to whether they should be impleaded observed that:-

a. SFIO had stated in its complaint before the Special Court at Mumbai that the IDs and CFO of the company ignored all alarming indicators and failed to save the interest of the company and its stakeholders by not raising these issues in the Board Meetings and remained mute spectators.

b. Further, it is revealed that in connivance with each other, the IDs, Directors, CFO of M/s IFIN, group CFO and Audit Committee members abused their positions. They used various modus operandi to continue lending from M/s IFIN to group entities by causing wrongful loss to M/s IFIN and its stakeholders. An investigation revealed that they were aware of the stressed asset portfolio and the modus operandi used for granting loans to group companies of existing defaulting borrowers to prevent their being classified as NPA.

c. The NCLT observed that in the 2nd SFIO Report, no role of IDs was specified; however, NCLT directed the impleadment of the two more IDs, i.e. Mr. SK and Ms. SP, in addition to the two appellants Ms. NS and Ms. RC.

Thereafter, NCLT, by its order dated 18th July, 2019, has directed that several persons be impleaded. Among them were both the executive and non-executive directors and the auditors of M/s IL&FS.

Both Ms. NS and Ms. RC were appointed as IDs of M/s IL&FS. Ms. NS was appointed as an ID on 18th March, 2015. She resigned from the position on 25th July, 2016. Ms. RC (in the companion appeal) was appointed as an ID on 27th September, 2017. She resigned on 17th September, 2018.

Further, NCLAT vide order dated 4th March, 2020 had disposed of the appeal filed against NCLT order on the ground that a similar question of law is involved and upheld the NCLT order.

Ms. NS and Ms. RC, both being aggrieved parties, filed separate appeals before Hon’ble Supreme Court of India (‘Supreme Court’) on the ground that by both NCLT and NCLAT, there was no application of mind as to the role of Ms. NS and Ms. RC regarding their position as IDs.

Union of India (‘UOI’) had made its submission before the Supreme Court that the provisions of sub-sections (8) and (12) of section 149 of the Companies Act, 2013 read with Schedule IV specifies the Code for IDs. Section 149(12) provides as follows:

‘(12) Notwithstanding anything contained in this Act,

i. an independent director; and

ii. a non-executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.’

Hence, it was urged that an ID can be held liable in respect of such acts of omission or commission by a company that had occurred with their knowledge attributable through Board processes and with his consent or connivance or where he had not acted diligently.

HELD
Supreme Court, after considering submissions, observed that neither before the NCLT nor before the NCLAT, there was an appropriate and due application of mind to the facts pertaining to Ms. NS and Ms. RC before an order impleading them was passed.

The Supreme Court further observed that the ends of justice would be met if an order of remand is passed, requiring the NCLT to apply its mind to the issue as to whether Ms. NS and Ms. RC should be impleaded. Undoubtedly, ID has a vital role, as is indicated by the provisions of the Companies Act, 2013.

The Supreme Court further stated that IDs are intended to be independent; they cannot remain indifferent to the company’s position.

Since the NCLT and NCLAT have not devoted due consideration to the role, position and allegations against Ms. NS and Ms. RC, the Supreme Court held to remand the proceedings only in relation to Ms. NS and Ms. RC, which will not affect the impleading of other directors and auditors. The Supreme Court clarified that it had not expressed any opinion on the merits of the rival submissions wherein it emphasised the necessity of impleading Ms. NS and Ms. RC.

Hence, SC allowed the appeals and set aside the impugned judgment and order of the NCLAT and the proceedings, in consequence, were remitted back to the NCLT, in relation to Ms. NS and Ms. RC in this case, for a fresh decision on the issue of their being impleaded.

The NCLT was requested to pass fresh orders within one month from the date of receipt of a certified copy of this order.

PART B | INSOLVENCY AND BANKRUPTCY LAW

2 Subhankar Bhowmik vs. Union of India [WP(C)(PIL) No. 04/2022] Tripura High Court Confirmed by SC in SLA [6104/2022]

Decree holders cannot be at par with Financial Creditors Under IBC: Tripura HC, and confirmed by SC.

FACTS
The petitioner filed a writ petition for declaring Section 3(10) of the Insolvency and Bankruptcy Code, 2016 r/w Regulations 9A of IBBI(CIRP) Regulations, 2016 as ultra vires in as much as it failed to define the terms ‘other creditors’ and for striking them down.

Relief was also sought for including the words ‘decree-holder’ existing in Section 3(10) to be at par with ‘financial creditors’ under Regulation 9(a).

SUBMISSIONS
Petitioner submitted that the decree-holder has a better right and should be treated as a secured creditor who is a financial creditor, since his rights are crystallised.

The Court discussed the rights of decree holders; it said that the same is having the right to execute the decree. The provisions under The Civil Procedure Code, 1908 give the right for execution. However, the same may be the subject matter of appeal till the Apex Court. Further, assuming it has attained finality, the same shall lead to giving an adversarial litigant the right to obstruct the non-adversarial process.

The petitioner’s contention was that there is an omission by the legislature for non-incorporation of decree-holder in the statute, and the same shall be categorized as financial creditors.

HELD
The rights of the decree holders are protected as a class of creditors, and therefore the legislature has not overlapped the classification with operational and financial creditors. It further observed that the Code rightly recognises the decree-holder as creditor and, at best, an admitted claim against the corporate debtor.

The Court did not find favour with the arguments of the petitioner and upheld the provisions of decree-holder as a creditor. Hence, no priority is given to the decree-holder as a financial creditor in classification and distribution.

BCAJ Admin

ALLIED LAWS

6 Sri Subhankar Bhowmik vs. Union of India and Anr. WP(C)(PIL) No. 04 of 2022 (Tri.)(HC) Date of order: 14th March, 2022 Bench: S G Chattopadhyay J. and Indrajit Mahanty J.

Insolvency & Bankruptcy – ‘Decree-holders’ cannot be treated at par with Financial Creditors. [Insolvency & Bankruptcy Code, 2016 (Code), S.3(10), S. 14]

FACTS
The Petitioner, a shareholder of the company, sought for declaration of section 3(10) of the Insolvency & Bankruptcy Code (IBC) read with regulation 9A as ultra vires, for failing to define the term ‘other creditor’ and also to include a decree-holder at par with ‘financial creditors’.

HELD
The right of a decree-holder, in the context of a decree, is at best a right to execute the decree in accordance with the law. Even in a case where the decree passed in a suit is subject to the appellate process and attains finality, the only recourse available to the decree-holder is to execute the decree in accordance with the relevant provisions of the Civil Procedure Code, 1908. Suffice it to say that the provisions contained in Order 21 provide for the manner of execution of decrees in various situations. The said provisions also provide the rights available to judgement debtors, claimant objectors, third parties etc., to ensure that all stakeholders are protected.

The rights of a decree-holder, subject to execution in accordance with the law, remain inchoate in the context of the IBC. This is principally because the IBC, by express mandate of the moratorium envisaged by Section 14(1) of the Code, puts a fetter on the execution of the decree itself.

Therefore, in terms of Section 14(l)(a) of the Code, the right of a decree-holder to execute the decree in civil law freezes by virtue of the mandatory and judicially recognized moratorium that commences on the insolvency commencement date. This is because a decree, in a given case, may be amenable to challenge by way of an appellate process and/or by way of objections in the execution process.

Therefore, the IBC rightly categorizes a decree holder as a creditor in terms of the definition contained in Section 3(10) of the Code. Execution of such a decree, is however subject to the fetters expressly imposed by the IBC, which cannot be wished away.

Editor’s Note: SLP dismissed in Sri Subhankar Bhowmik vs. Union of India and Anr SLP (C) No. 6104 of 2022 dated April 11, 2022 (SC).

7 Experion Developers Pvt. Ltd vs. Sushma Ashok Shiroor Civil Appeal No. 6044 of 2019 (SC) Date of order: 7th April, 2022 Bench: Uday Umesh Lalit J., S. Ravindra Bhat J. and Pamidighantam Sri Narasimha J.

Consumer Protection Act, 1986 – Real Estate (Regulation and Development) Act, 2016 – Interpretation of Statute – Where there are more than two judicial fora – choice offered for effective access to justice – Statutes must be harmoniously construed. [Consumer Protection Act, 1986, S. 14, 2(g), 23; Real Estate (Regulation and Development) Act, 2016, S. 18]

FACTS
Experion Developers Private Ltd. is the promoter of apartment units. The Consumer booked an apartment and agreed to construction linked payment plan, which led to the execution of the Apartment Buyer’s Agreement dated 26th December, 2012. As per Clause 10.1 of the Agreement, possession was to be given within 42 months from the date of approval of the building plan or the date of receipt of the approval of the Ministry of Environment and Forests (Government of India) or date of the execution of the agreement whichever is later. Clause 13 of the agreement provided for Delay Compensation. Under this clause, if the Developer did not offer possession within the period stipulated in the agreement, it was obliged to pay liquidated damages till the possession was offered to the Consumer.

The Consumer approached the National Disputes Redressal Commission by filing an original complaint alleging that he had paid a total consideration and the possession was not granted even till the filing of the complaint. He, therefore, sought a refund of his consideration along with interest.

The Commission, in its judgment dated 19th June, 2019, allowed the complaint. Thus, the Developer filed the present Civil Appeal.

HELD
A consumer invoking the jurisdiction of the Commission can seek such reliefs as they consider appropriate. A consumer can pray for a refund of the money with interest and compensation. The consumer could also ask for possession of the apartment with compensation. The consumer can also make a prayer for both in the alternative. If a consumer prays for a refund of the amount without an alternative prayer, the Commission will recognize such a right and grant it, of course, subject to the merits of the case. If a consumer seeks alternative reliefs, the Commission will consider the matter in the facts and circumstances of the case and will pass appropriate orders as justice demands. This position is similar to the mandate under Section 18 of the RERA Act.

It is crystal clear that the Consumer Protection Act and the RERA Act neither exclude nor contradict each other. When Statutes provisioning judicial remedies fall for construction, the choice of the interpretative outcomes should also depend on the constitutional duty to create effective judicial remedies in furtherance of access to justice. A meaningful interpretation that effectuates access to justice is a constitutional imperative, and it is this duty that must inform the interpretative criterion.

When Statutes provide more than one judicial forum for effectuating a right or to enforce a duty obligation, it is a feature of remedial choices offered by the State for effective access to justice. Therefore, while interpreting statutes provisioning plurality of remedies, it is necessary for Courts to harmonise the provisions constructively.

8 Swarnalatha & Ors. vs. Kalavathy & Ors. Civil Appeal No.1565 of 2022 (SC) Date of order: 30th March, 2022 Bench: Hemant Gupta J. and V. Ramasubramanian, J.

Will – Suspicious Circumstances – Exclusion of one natural heirs name – Not a ground for suspicion – Article 14 not applicable to Wills. [Indian Succession Act, 1925, S. 384, Indian Evidence Act, 1872, S. 68]

FACTS
The mother Adhilakshmiammal died on 14th August, 1995. She left behind a Will dated 30th January, 1995, bequeathing the properties purchased by her and the properties which she got from her maternal uncle, in favour of her two sons. The daughter Kalavathy was not given any share on the ground that she had already been provided sufficiently. The father Mannar Reddiar died on 8th August, 2000. He left behind a Will dated 10th December, 1998, bequeathing his properties favouring his two sons and grandchildren. The daughter Kalavathy was not allotted any property even under this Will, but the Will contained reasons for the same.

The eldest son V.M. Chandrasekaran died subsequently in October, 1999, leaving behind him surviving his wife Swarnalatha and two sons, who are the appellants in the present appeal. Thereafter, the daughter Kalavathy and the surviving son V.M. Sivakumar (of the testators) filed a suit for partition before the District Munsiff Court. Upon coming to know of the same, the appellants filed a petition in probate before the Principal District Judge for the grant of probate of the Wills of Mannar Reddiar and Adhilakshmiammal.

By a judgment dated 7th June, 2010, the District Court granted probate of both the Wills. Challenging the judgment of the Probate Court, the daughter Kalavathy and the other son of the testators (respondents 1 and 2 herein) filed an appeal before the High Court of Judicature at Madras. The High Court allowed the said appeal by the impugned judgment on the ground that there were suspicious circumstances surrounding the execution of both the Wills. Therefore, aggrieved by the said judgment, the legatees filed an appeal.

HELD
When it was not even the respondents’ case that the testators were not in a sound and disposing state of mind, the High Court found fault with the appellants for not disclosing the nature of the ailments suffered by them. The exclusion of one of the natural heirs from the bequest cannot by itself be a ground to hold that there are suspicious circumstances. The reasons given are more than convincing to show that the exclusion of the daughter has happened in a very natural way. If the Will had been fabricated on blank papers containing the mother’s signature, there would have been no occasion for the father to make a mention in his own Will about the execution of the Will by the mother.

The law relating to suspicious circumstances surrounding the execution of a Will is already well settled, and it needs no reiteration. But cases in which suspicion is created are essentially those where either the testator’s signature is disputed or the mental capacity of the testator is questioned. In the matter of appreciating the genuineness of execution of a Will, there is no place for the Court to see whether the distribution made by the testator was fair and equitable to all of his children. Further, Article 14 does not apply to dispositions under a Will.

9 CA. Manisha Mehta and Ors. vs. The Board of Directors Represented by its Managing Director of ICICI Bank and Ors. Writ Petition (L) No. 8418 of 2022 (Bom.) (HC) Date of order: 23rd March, 2022 Bench: Dipankar Datta CJ. and M. S. Karnik, J.

SARFAESI – Debtors of Banks – Natural Justice to be not read into section 14 of SARFAESI Act. [Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, S. 14]

FACTS
This writ petition is at the instance of multiple petitioners who are all debtors of different banks/financial institutions (secured creditors). They are aggrieved by the orders passed by District Magistrates/Chief Metropolitan Magistrate under section 14 of the SARFAESI Act. Some petitioners have approached the jurisdictional Debts Recovery Tribunal under section 17 of the SARFAESI Act, and proceedings are pending.

It is prayed, inter alia, for a declaration that natural justice should be read into section 14 of the SARFAESI Act.

HELD
Section 14 of the SARFAESI Act was amended twice, in 2013 and then again in 2016. If it were the legislature’s intention to extend the opportunity of hearing to a borrower before the District Magistrate/Chief Metropolitan Magistrate, as the case may be, it was free to do so. Advisedly, the legislature did not do so, for it would have militated against the scheme of the SARFAESI Act and, more particularly, section 13 thereof. It is implicit in the scheme of the SARFAESI Act that natural justice, only to a limited extent, is available and not beyond what is expressly provided. The language of section 14 is too clear and unambiguous, and does not admit to any requirement of complying with natural justice by putting the borrower on notice while an application thereunder is under consideration.

10 Mohinder Singh (D) Thr. Lrs. & Ors. vs. Mal Singh (D) Thr. Lrs. & Ors. Civil Appeal No.1731 of 2009 9 (SC) Date of order: 9th March, 2022 Bench: Sanjay Kishan Kaul J. and M.M. Sundresh, J.

Gift – out of his own free will and volition – Exclusive owner of the properties – nobody’s concern – to whom properties are given – when document is executed validly. [Transfer of Property Act, 1882, S. 122]

FACTS
The suit was filed on 19th October, 1971 by Mohinder Singh and Gurnam Singh, who are represented by their legal heirs as appellants before us for declaring that a gift deed executed by their brother, Gian Singh, in favour of Pritam Kaur is null and void. It was the appellants’ case that Gian Singh was governed by general customary law till the enforcement of the Hindu Succession Act and Hindu Adoption and Maintenance Act, and the appellants were the nearest best legal heirs of Gian Singh. It was alleged that Gian Singh was issueless, without a wife, had no relationship with Pritam Kaur, the beneficiary of the gift deed and that Pritam Kaur was not the wife of Gian Singh. The appellants alleged later, as per facts set out hereinafter that Gian Singh was married to one Pritam Kaur daughter of Inder Singh who had pre-deceased him.

HELD
It is in these circumstances that one of the issues framed originally was also whether Pritam Kaur enjoyed the status of a wife or not. In our view, if the donor is making a gift out of his own free will and volition and is the exclusive owner of the properties, it is nobody’s concern as to whom he gives the properties. What is most material is that all the Courts have found (i.e. three concurrent findings) that they are not ancestral properties.

The gift deed is a registered gift deed. The Court mentioned that it was really not concerned with the moralistic issue of whether Pritam Kaur was actually married to Gian Singh or she was living with him. There was undoubtedly companionship, and Gian Singh, in his wisdom, deemed it appropriate to hand over the properties through a registered gift deed to Pritam Kaur.

The Court observed that it was time that the Courts get out of this mindset, or possibly may have got out of this mindset by now on passing value judgments on relationships between parties in determining either a testamentary or non-testamentary disposition so long as the document executed is found to be validly executed. Some male chauvinistic approach appears to have coloured judgments passed by the trial Court and the First Appellate Court, which is of course, a reflection of the mindset of the appellants before us. The appeal was dismissed.

BCAJ Admin

CORPORATE LAW CORNER

PART A | COMPANY LAW

1 Usha Martin Telematics Ltd. & Anr. vs. Registrar of Companies, West Bengal
High Court of Calcutta
[2021] 165 CLA 133 (Cal.)
CRR No. 494 of 2019 with CRAN Nos. 1, 2 & 5 of 2019
Date of Order: 27th January, 2021

Typographical/inadvertent error in recording of minutes of meeting of the Board of Directors is rectified subsequently, that cannot be termed as an offence under the provisions of Sections 447 and 448 of the Companies Act, 2013, until there was any intent to deceive, gain undue advantage or injure the Company’s interest or any person connected.

FACTS
• M/s UMT had applied to the Reserve Bank of India vide application dated 28th March, 2014 for being registered as a Core Investment Company (‘CIC’) pursuant to the Core Investment Companies (Reserve Bank) Directions, 2011.

• Thereafter, the meeting of the Board of Directors of the company was held on 11th June, 2014 and in the course of preparing the minutes of the said meeting in compliance with section 118(1) of the Companies Act, 2013, it was erroneously recorded in item No. 12 of the minutes that the company had submitted an application to the Reserve Bank of India (‘RBI’) for its de-registration as an NBFC and registration as a CIC. Such recording was an inadvertent/typographical error as the company was not a registered non-banking financial company (‘NBFC’) at the relevant time, and the question of de-registration as NBFC did not arise. The said error was detected by the company subsequently and was rectified in a meeting of its Board of directors held on 9th September, 2015.

• In February 2016, the Registrar of Companies, West Bengal (‘RoC’) inspected the books of account and other relevant records of the company u/s 206(5) of the Act of 2013 and detected the erroneous recording in the minutes of the meeting dated 11th June, 2014 and the company was asked to show cause as to why prosecution should not be initiated against it under the provisions of sections 118(2) and (7) r.w.s. 447/448 of the Act for violation of the said provisions of law by the company, in a notice issued on 24th August, 2018.

• M/s UMT, in reply to the said notice, explained that it was an inadvertent mistake, and was rectified vide letter dated 20th September, 2018. However, RoC did not find the said explanation satisfactory and lodged a complaint against M/s UMT before the learned 2nd Special Court, Calcutta.

• Being aggrieved, M/s UMT moved the High Court under article 227 of the Constitution of India r.w.s. 401/482 of the Code of Criminal Procedure and prayed for quashing the entire proceedings pending before the learned 2nd Special Court, Calcutta, being Complaint Case No. 15 of 2018.

HELD
• The High Court of Calcutta observed that the key ingredient of an offence was the intent to deceive, gain undue advantage or injure the company’s interest or any person connected thereto. In the case in hand, the complaint lodged by the RoC did not prima facie reflect such intent on the part of the company and its manager.

• It was also inconceivable that the inspection by RoC was held sometime in 2018 and the notice to show cause signed on 24th August, 2018 whereas the instruction of the Ministry of Corporate Affairs (‘MCA’) to launch prosecution for such violation was issued on 7th December, 2017, i.e., preceding the inspection. The complaint did not prima facie make out an offence u/s 118(2) and (7) r.w.s. 447/448 of the Act.

• Further, it was held that typographical/inadvertent error in the recording of minutes rectified subsequently can under no stretch of imagination be termed as an offence, far less an offence under the provisions of the Act as alleged. That the company and its manager had acted with a mala fide intention to deceive, gain undue advantage or injure the company’s interest or any person connected thereto does not reflect in the four corners of the complaint.

• The High Court of Calcutta also observed that by allowing the proceeding before the learned 2nd Special Court, Calcutta would have been a futile exercise and abuse of the process of law in view of the fact that the inadvertent error had been sufficiently and adequately explained and it did not call for any prosecution.

• Upon consideration of the entire facts and circumstances of the case, the High Court of Calcutta held that the contents of the complaint itself as well as the law on the point, the court had no hesitation to hold that the proceeding in respect of the Complaint Case No. 15 of 2018 was liable to be quashed. Hence, the application and the proceedings in respect of the complaint pending before the learned 2nd Special Court, Calcutta were quashed.

2 Alice P M and Ors. vs. Vyapar Mandir Palarivattom (P.) Ltd. and Ors.
National Company Law Tribunal, Kochi Bench, Kerala
[2020] 158 CLA 276 (NCLT)
CA/35/KOB/2019
Date of Order: 5th March, 2020

A company has no right to exercise lien on shares for recovery of dues and cannot auction and allot shares to third parties ignoring the right of fully paid-up shareholders.

FACTS
• Mrs. Alice P M (Mrs. APM), Ms. Neethu Joy (Ms. Neethu) and Mr. Nithin Joy (Mr. NJ) were the legal heirs, i.e., wife, daughter and son respectively (collectively referred to as ‘legal heirs’) of late Mr. Antony Joy (Mr. AJ), the original shareholder holding 100 shares of Rs. 100 each of M/s VMPPL under Folio No. 50.

• The company’s paid-up capital was Rs.3,90,000 divided into 3,900 equity shares of Rs. 100 each. The company’s object was to carry on the business of acquiring land by purchase, lease or otherwise and constructing structures such as shopping complexes, hotel complexes or housing complexes to let out, lease or sell.

• The legal heirs were in possession of Shop Nos. 13 and 44, for which the rent was in arrears.

• The legal heirs had filed the above-said petition u/s 59(1) of the Companies Act, 2013 for seeking interim relief to restrain the respondent-company from holding the annual general meeting or extraordinary general meeting along with the main relief, i.e., the rectification of the register of members of the respondent-company.

The following was submitted by the legal heirs before NCLT, Kochi Bench:

• The legal heirs were entitled to be shareholders of the company by virtue of transmission of shares held by late Mr. AJ to the extent of 100 equity shares since Ms. Neethu and Mr. NJ have relinquished their rights over the shares, which belonged to their late father Mr. AJ. Mrs. APM had requested for transmission of shares in her favour on 27th April, 2018. On the company’s requisition dated 15th May, 2018, Mrs. APM had submitted necessary documents for transmission of shares of late Mr. AJ vide letter dated 26th June, 2018. But till that point in time, no transmission had been effected by M/s VMPP. On 28th June, 2019, M/s VMPPL issued a letter to all shareholders through Mr. KMB stating that out of the total 3,900 equity shares of Rs. 100 each, 1,650 equity shares constituting 34.61 per cent stand vested in the company on account of rental arrears and the same is offered for sale.

• The original share certificate was still with the legal heirs, and they had not executed any share transfer instrument for the purpose of transferring of shares to any third parties.

• The counsel further stated that the M/s VMPPL is governed by clause 6(2) and (3) of the articles of association where the lien can be exercised only on the dividends payable on the shares and cannot be extended or stretched beyond the scope of clauses 6(2) and (3).

• The legal heirs were in occupation of shop room Nos. 13 and 44 for the last 22 years and no lease agreement existed between the applicants and the respondent-company in respect of these shop rooms and no quantum of monthly or yearly rent has ever been fixed between the parties by any contract.

The following was submitted by M/s VMPPL, Mr. KMB and RoC before NCLT, Kochi Bench:

• The legal heirs are in default of arrears of rent for shop Nos. 13 and 44, which are in their possession. They were asked to pay arrears of rent by letter dated 23rd January, 2019, and the company had warned that the shares would have a first and paramount lien under clause 6(2) of the articles of association of M/s VMPPL.

• There is no fraud in the procedure adopted by M/s VMPPL as alleged, as the sale was affected after due deliberations in a Board meeting in the interest of M/s VMPPL.

HELD

1. The legal heirs were declared as the legitimate equity shareholders under Folio No. 50.

2. The Tribunal directed rectification of the register of members of M/s VMPPL by re-entering the total number of 100 equity shares belonging to legal heirs in the share register of the company and further ordering to restore the total shareholding of
the applicants as it existed prior to 8th February, 2019 forthwith.

3. M/s VMPPL was restrained from conducting a tender for the sale of 100 shares by allotting or effecting transfer of any shares to any members or non-members till the rectification of share register belonging to the legal heirs without their express consent.

4. M/s VMPPL was directed to file the register of members after carrying out the rectifications as per this order, with the Registrar of Companies within one month.

5. M/s VMPPL was directed to pay Rs. 25,000 to the petitioner towards the costs and damages sustained by the petitioner in this regard.

PART B | INSOLVENCY AND BANKRUPTCY LAW

1 63 Moons Technologies Limited vs. The Administrator of Dewan Housing Finance Corporation Limited
Company Appeal (AT) (Insolvency) No. 454, 455, 750 of 2021

Treatment of avoidance transaction application upon approval of resolution plan-Whether Commercial wisdom is above legal wisdom-NCLAT observed that Adjudicating Authority must decide whether the recoveries vested with the Corporate Debtor should be applied for the benefit of creditors of the corporate debtor, the successful resolution applicant or other stakeholders and remanded matter back to CoC for reconsideration on treatment of avoidance transactions.

FACTS
In accordance with the report submitted by M/s Grant Thornton, nine applications were filed before Hon’ble Adjudicating Authority under Sections 43 to 51 and 66 of the Insolvency and Bankruptcy Code, 2016 (‘IB Code’) for adjudication. The recovery estimated from such avoidance applications amounted to Rs. 45,050 Crores. As per the resolution plan submitted by Piramal Enterprises, any benefit arising from such avoidance transaction application shall go to Resolution Applicant as the amount recoverable from such applications is appropriated by the Resolution Applicant to stakeholders of the Corporate Debtor while considering Resolution Plan. In the Resolution Plan, CoC consciously decided that money realised through these avoidance transactions would accrue to the members of the CoC and at the same time, they have also consciously decided after a lot of deliberations, negotiations that the monies realised, if any, u/s 66 of IBC i.e. Fraudulent Transactions, CoC has ascribed the value of Rs. 1 and if any positive money recovery the same would go to the Resolution Applicant.

ISSUES
• Whether the stipulation in DHFL’s Resolution Plan of recoveries from various transactions in ensuring to the benefit of Resolution Applicant amounted to illegality or whether a Successful Resolution Applicant can appropriate recoveries from avoidance applications filed u/s 66 of the Code?

• Whether the same was within the commercial domain of the COC?

• Further, if there was illegality, could it be saved by any majority strength within the CoC voting in favour of the Resolution Plan or is it the domain of the Adjudicating Authority?

HELD
The Hon’ble Appellate Tribunal relied on the judgment of Venus Recruiters Private Limited vs. Union of India and Ors. (W.P.(C) 8705/2019 & CM Appl. 36026/2019), which states that an outcome of an avoidance application was meant to give benefit to the creditors of the Corporate Debtor, not for the Corporate Debtor in its new avatar. The judgment observed that the benefit of avoidance transactions is neither in favour of Resolution Applicant nor Corporate Debtor and further held that DHFL depositors who are also creditors are rightful beneficiaries of all the monies that have been siphoned off by the promoter/directors of the Corporate Debtor. Adjudicating Authorities are empowered to decide to whom the recoveries should go being Resolution Applicant, creditors or other stakeholders and therefore, any decision taken by CoC that strikes at the very heart of the Code cannot simply be upheld under the garb of commercial wisdom. However, with all such observations, Hon’ble NCLAT remanded back the matter to CoC after giving analysis of commercial wisdom as well treatment of avoidance transactions under the IB Code.

BCAJ Admin

CORPORATE LAW CORNER

16 Bank of Baroda vs. Aban Offshore Limited National Company Law Appellate Tribunal Company Appeal (AT) No. 35 of 2019 Date of Order: 29th January, 2020

Preference shareholders have locus standi for filing class action suit u/s 245 and application u/s 55(3) of Companies Act, 2013 in relation to the redemption of preference shares

FACTS
• M/s BOB had subscribed to Cumulative Redeemable Non-Convertible Preference Shares of M/s AOL aggregating to Rs. 30,00,00,000 at a varying coupon rate of 8% and 9% p.a. and had consented for its extension/roll over for three years from the original redemption date.

• However, M/s AOL did not redeem any preference shares and instead, they paid a 180% dividend to equity shareholders in the F.Y. ended 31st March, 2015. M/s AOL had defaulted on the redemption and payment of dividends to preference shareholders for the F.Y. ended 31st March, 2016 onwards. The said defaults continued till the date of the petition filed before National Company Law Tribunal (“NCLT”), Chennai Bench.

• NCLT, in its order, stated that the procedure laid down u/s 55(3) of the Companies Act, 2013 clearly provides a mandate to the Company to file the petition with the consent of the shareholders having 3/4th in value in relation to the preference shares. NCLT further stated that section 245 deals with Class Action Suit for seeking different remedies against the Company and its Directors. The same is not dealing with preference shareholders; hence, the holder of the preference shares has no locus standi to file such application. Therefore, NCLT held that the application was not maintainable and dismissed it.

Being aggrieved by NCLT order, M/s BOB preferred an appeal against it before the National Company Law Appellant Tribunal (NCLAT).

HELD
• The NCLAT had examined the legislature’s intention while promulgating Section 55 of the Companies Act, 2013 which was to compulsorily provide for the redemption of preference shares by doing away with the issue of irredeemable preference shares. Therefore, even though there was no specific provision stipulated under the said Act through which relief can be sought by preference shareholders in case of non-redemption by the company or consequent to non-filing of the petition u/s 55, the intention of the legislature being clear and absolute, Tribunal’s inherent power can be invoked to get an appropriate relief by an aggrieved preference shareholder(s).

• NCLAT observed that alternatively, preference shareholders coming within the definition of ‘member(s)’ under Section 2(55) r.w.s. 88 of the Companies Act, 2013, may file a petition u/s 245 of the Act, as a Class Action Suit, being aggrieved by the conduct of affairs of the company.

• NCLAT held that the preference shareholders were not without a remedy and for the redemption of preference shares, they can file an application u/s 55(3), or alternatively they may also file an application u/s 245 as a Class Action Suit and the NCLT while exercising the inherent power namely Rule 11 of NCLT Rules, 2016 can pass appropriate order.

• Hence, the NCLAT observed that M/s. BOB being a preference shareholder has no locus standi to file an application of Class Action Suit for the redemption of preference shares does not hold good. Thus, NCLT’s order was set aside, and the matter was remitted back to NCLT, Chennai Bench.

17 Universal Heat Exchangers Limited vs. K. Ramakrishnan National Company Law Appellate Tribunal, New Delhi Company Appeal (AT) No. 343 of 2018 Date of Order: 8th January, 2020

In a case where the minority shareholders of the company had the intent to exit from the company, the same would not provide any ground to deny them their right to subscribe to additional shares in proportion to their shareholding

FACTS
• Mr. K. Ramakrishnan (Mr. KR) and Others were residents of Singapore and Malaysia and had invested Rs.1,40,00,000 in M/s UHEL in a single tranche. They were allotted 4,00,000 equity shares of Rs.10 each at a premium of Rs. 25.

• Subsequently, M/s UHEL had made two allotments on a right-issue basis to existing shareholders, excluding Mr. KR and Others, i.e. the first allotment was of 20 Lakhs shares on 9th April, 2007 (at Rs.10 per share) and the second allotment was of 5,55,555 shares on 27th September, 2010 (at Rs.18 per share, including a premium of Rs.8 per share). It resulted in the dilution of shareholding of Mr. KR and Others from existing 27% to 9.86%.

• Thereafter Mr. KR and Others had filed an application before National Company Law Tribunal, Chennai Bench (NCLT) against the said right issue allotments made by M/s UHEL.

The following was submitted by Mr. KR and Others before NCLT, Chennai Bench:

• That the two allotments made in the year 2007 and 2010, where M/s UHEL being closely held Company had made right issue to existing shareholders but Mr. KR and Others were not offered the right issue nor they have received notices for the EGM.

• Further, they also submitted various oppression and mismanagement issues like:
a) In the year 2009-10, the Company had taken unsecured loans from Directors and Shareholders to the tune of Rs.8.96 Crores, but in the same year, the Company had granted loans to parties covered under Register maintained under Section 301 of the Act to the extent of Rs.4 Crores.

b) Similarly, in the year 2010-11, the Company had taken loans from interested parties to the tune of Rs.16.20 Crores and had diverted these funds. Mr. KR & Others alleged that the funds were siphoned by the Company and the Directors.

M/s UHEL submitted before NCLT, Chennai Bench that:

Mr. KR & Others were aware of the Extraordinary General Meeting (‘EGM’) and were also aware of valuation done by the M/s UHEL including Annual Returns filed in 2007 and 2010.

Further, the said application was filed before the Company Law Board, Chennai on 17th April, 2012 only, in spite of being aware of all the material facts. Mr. KR and Others had challenged the allotment made on 9th April, 2007.

NCLT after hearing:

• HELD that M/s UHEL had dispatched the notice but did not submit any proof that Mr. KR & Others have received such EGM notice. Hence, the notice in respect of the right issue needed to be annulled.

• Further, set aside the two allotments of shares made on 9th April, 2007 and 27th September, 2010 on right-basis and ordered to refund to the concerned allottees the amount received by M/s UHEL on account of the allotments that have been set aside and was further ordered to rectify the Register of Members after making refund of the amount received against the allotment.

M/s UHEL being aggrieved by NCLT order preferred an appeal before National Company Law Appellant Tribunal (NCLAT) u/s 421 of the Companies Act, 2013 against such impugned order passed by NCLT.

HELD
• NCLAT observed that the minority shareholders were requiring exit from the Company but that cannot provide a ground for denying their right to subscribe additional shares in proportion to their shareholding vis-à-vis that of the total paid-up capital of the Company as required under Section 81 of the Companies Act, 1956.

• NCLAT further observed that there were certain oppression and mismanagement and the relationship between the majority shareholders and minority shareholders were strained. Hence, there was a need for valuation report to be done by a Registered Valuer and the majority shareholders were free to buy the shares of the minority shareholders or otherwise.

• In view of the aforesaid findings, NCLAT upheld the impugned order dated 10th July, 2018 passed by the NCLT, Chennai Bench and M/s UHEL were directed to comply with the order of the NCLT as stated therein. Accordingly, the Appeal was dismissed.

18 Dheeraj Wadhawan vs. Administrator of DHFL & Ors. Company Appeal No. 785 of 2020 and 647 of 2021 NCLAT, Delhi Bench Date of Order: 27th January, 2022

Whether the Resolution plan can be given only to suspended directors and not superseded directors?

FACTS
The Appeal was filed by the erstwhile directors of the DHFL against the Administrator for not calling them to the Committee of Creditors (COC) meeting and providing the copy of resolution plan. The Corporate debtor was an NBFC and went under Insolvency of Financial Service Provider by an application made by RBI.

The company is a Housing Finance Company regulated by National Housing Bank Act,1987 and RBI Act, 1934. RBI superseded the company’s board on 20th November, 2019 in exercise of powers under Section 45-IE of the RBI Act by appointing Mr. R Subramniakumar as the Administrator. Further, RBI moved an application before the Adjudicating Authority (AA) and appointed the same Administrator under Financial Service Provider Rules, 2019.

The erstwhile directors wrote letters to the Administrator to invite them for COC meetings from time to time and also asked for a copy of the resolution plan. The request was not adhered to, and therefore the erstwhile directors moved an application before AA/NCLT, which came to be rejected. The reason which was given by Administrator and accepted by AA/NCLT was that RBI already superseded the directors and therefore they were not directors on the date of insolvency commencement. The rights of the suspended directors are recognized and not the superseded ones under law.

The issue came before NCLAT, wherein the appellants raised an important question of law that the superseded directors are akin to suspended directors. They emphasized that the law should be read as a whole and harmoniously. The appellants referred to Arcelor Mittal vs. Satish Gupta1 – interpretation of words should be based on the object, text, and context of the provision.

Further, it was also submitted that the RBI has only chosen to come under IBC and therefore the doctrine of election should be applied, and the words should be given logical meaning by allowing the appellants to participate and also get a copy of the resolution plan.

HELD
It was held that the superseded directors are not akin to suspended directors as the two are different. The superseded directors are those who are removed or deemed to be demitted office and who are not holding the office on the date of commencement of the Insolvency process. Therefore, the erstwhile directors are not entitled to documents/meetings which otherwise are available to suspended directors who are always on the board and continue to assist the IRP/RP. Further, it was clarified that once the plan is approved, it is not a confidential document and, therefore the same be provided to the appellants.

______________________________
1 (2019) 2 SCC 1

BCAJ Admin

ALLIED LAWS

22 Shiv Developers through its partner Sunil bhai Somabhai Ajmer vs. Aksharay Developers & Ors. Civil Appeal No. 785 of 2022 (SC) Date of order: 31st January, 2022 Bench: Dinesh Maheshwari J. and Vikram Nath J.

Partnership Firm – Unregistered Firm – Not barred to file a suit – Where contract in question is not related to business. [Indian Partnership Act, 1932, S. 69(2)]

FACTS
The Appellants, an unregistered partnership firm instituted a suit seeking perpetual injunction and declaration of a sale deed as null and void. The Trial Court rejected the application of the defendants which stated that the suit filed by and on behalf of an unregistered partnership firm which was barred by law.

On appeal, the High Court held that the plaintiff, being an unregistered firm, would be barred to enforce a right arising out of the contract in terms of Section 69(2) of the Partnership Act, 1932 (Act).

HELD
It was held that to attract the bar of Section 69(2) of the Act, the contract in question must be the one entered into by the unregistered partnership firm with a third party and must also be in the course of its business dealings.

Section 69(2) of the Act is not attracted to each and every contract. The sale transaction in question is not arising out of the business of the appellant firm.

The subject suit is one where the plaintiff seeks common law remedies with the allegations of fraud and misrepresentation as also of the statutory rights of injunction and declaration in terms of the provisions of the Specific Relief Act, 1963 as also the Transfer of Property Act, 1882 (while alleging want of the sale consideration). Therefore, the bar of Section 69(2) of the Act of 1932 does not apply to the present case.

The appeal was allowed.

23 V. Anantha Raju and another vs. T.M. Narasimhan and Ors. AIR 2021 Supreme Court 5342 Date of order: 26th October, 2021 Bench: L. Nageswara Rao J., Sanjiv Khanna J. and B. R. Gavai J.

Partnership Firm – Share of Profits – Disputed – Evidentiary value of Deed is above an oral testimony – Nothing precluded the Defendants from rectifying the deed between 1995 – 2004 – Clauses of Deed would prevail. [Indian Partnership Act, 1932, India Evidence Act, 1872, S. 17, 91 and 92]

FACTS
A Partnership Firm was constituted in the year 1986 vide Partnership Deed dated 30th October, 1992. According to the said deed, the Plaintiff No. 1 was entitled to 50 per cent of the profits provided he introduces a sum of Rs. 50 lakhs as his capital contribution on or before 31st March, 1993 otherwise the same would be only 10 per cent.

Subsequently, the deed was amended in 1995, where the Plaintiff No.1 and his son (Plaintiff No. 2) were both entitled to 25 per cent of the profits, inter alia. The Plaintiffs also filed their Income-tax returns wherein their share is shown as 25 per cent.

In 2004, a dispute arose between the Plaintiffs and the Defendants (Other partners of the Firm). It is the case of the Defendants that the Plaintiff did not bring the said amount of Rs. 50,00,000 on or before 31st March, 1993 and the deed of 1995 has mistakenly mentioned the share of the plaintiffs as 25 per cent each and they rely on their statement made under oath in the affidavit.

The Trial Court had held that the plaintiffs together were entitled to only 10 per cent share in the profits up to 2004, as subsequently they were expelled from the Firm. The appeal against the impugned order of the Trial Court was dismissed by the Hon’ble High Court of Karnataka.

HELD
It was held that the Defendants have not disputed about the reconstitution of the partnership firm by the 1995 Deed. They have also not disputed that in the 1995 Deed, the share of plaintiff Nos. 1 and 2 in the profits and losses of the partnership firm is mentioned as 25% each. The Defendants denying that they had received the requisite sum would have lesser evidentiary value than the Deed of 1995. The contention that the deed of 1995 has mistakenly mentioned the share of the Plaintiffs at 25 per cent each (Total of 50 per cent) cannot be accepted as nothing precluded the Defendants from rectifying the deed between 1995 to 2004.

The appeal was allowed on this point.

24 Ripudaman Singh vs. Tikka Maheshwar Chand (2021) 7 SCC 446 Date of order: 26th July, 2021 Bench: Sanjay Kishan Kaul J. and Hemant Gupta J.

Family Settlement – Exempt from compulsory registration – Where the same to pre-existing rights and no new right is created. [Registration Act, 1908. S. 17]

FACTS
The Plaintiff and Respondent were sons of one late Vijendra Singh. The Appellant-Plaintiff filed a suit for possession in the year 1978 disputing the Will dated 4th December, 1958 executed by Vijendra Singh in favour of the Defendant. The Appellant claimed half share of the land as described in the plaint. During the pendency of suit, a decree was passed on the basis of compromise arrived at between the parties.

In pursuance of the decree so passed, the Plaintiff sought mutation of the half share of the land vesting to him which was allowed by Tehsildar. However, an appeal against the said mutation was disposed of for fresh consideration without granting any opportunity of being heard to the Respondent

The Appellant-Plaintiff thereafter filed an appeal before the Divisional Commissioner. The appeal was dismissed on the ground that the compromise decree in the absence of registration was against the provisions of the Registration Act, 1908. The Appellant-Plaintiff subsequently filed a suit for declaration challenging such order passed by the Commissioner. The suit was dismissed by the Ld. Sub Judge. But the appeal preferred by the appellant was allowed by the Ld. District Judge.

This order was challenged before the High Court. The High Court set aside the judgment and decree passed by the first appellate court and the suit was dismissed on the ground that the land even though being subject-matter of compromise, was not the subject-matter of the suit and therefore the decree required registration under Section 17(2)(vi) of the Registration Act, 1908.

HELD
In the judgment in the case of Bhoop Singh vs. Ram Singh Major (1995) 5 SCC 709 it was held that a decree or order including compromise decree creating new right, title or interest in praesenti in immovable property of value of Rs.100 or above is compulsory for registration. It was also held that where the decree holder has a pre-existing right in the property, that decree does not require registration.

Therefore, the judgment and decree of the High Court holding that the decree requires compulsory registration is erroneous in law. The compromise was between the two brothers consequent to death of their father and no right was being created in praesenti for the first time, thus not requiring compulsory registration. Consequently, the appeal is allowed and the suit is decreed.

25 Moutushi Chakraborty vs. Manju Deb (Chakraborty) AIR 2021 Tripura 40 Date of order: 23rd April, 2021 Bench: S. Talapatra J. and S. G. Chattopadhay J.

Hindu Law – Maintenance – Daughter from second marriage entitled to share in pension of her deceased Father – ‘Estate’ includes pension. [Hindu Adoption and Maintenance Act, 1956, S. 22, 23]

FACTS
The Appellant is the daughter of Mr. Narayan Chakraborty from his second marriage with Smt. Karuna Chakraborty. The Respondent is the first wife of Mr. Narayan Chakraborty. The lower Court had held that Smt. Karuna Chakraborty cannot claim any maintenance as she was not legally married to Mr. Narayan Chakraborty. However, there cannot be any dispute that the appellant has a right over the property/estate of the deceased for all purposes.

The Appellant and her mother filed a petition seeking maintenance from the respondent who is in receipt of family pension for the death of Mr. Narayan Chakraborty.

HELD
The word ‘estate’ cannot be given a narrow definition for purpose of Hindu Adoption and Maintenance Act. The family pension is no doubt an ‘estate’, which has been acquired through the deceased as pension is an estate secured on putting the definite period of service. Thus, the dependents have the right to claim maintenance from the heirs of the deceased. The discretion to deny the maintenance under Section 23 of the Hindu Adoption and Maintenance Act, 1956 is confined to determining the quantum of the maintenance, not to whether the maintenance should be granted or not.

The appeal was allowed

26 Master M. Yashas (Minor) vs. Nil AIR 2021 Karnataka 198 Date of order: 23rd April, 2021 Bench: B. V. Nagarthna J. and J. M. Khazi J.

Property of Minor – Parents seeking permission to sell – Not for the minor’s necessity – Parents can’t dispose minor’s property to overcome their financial problems. [Hindu Minority and Guardianship Act, 1956, S. 8]

FACTS
The petition was filed by the appellant, mother of the minor child aged about twelve years under Section 8(2)(a) of the Hindu Minority and Guardian ship Act, 1956 (Act), seeking permission to sell the property standing in the name of her minor son and to use a portion of the sale proceeds to the tune of Rs. 15,00,000 for use of the minor son for the purpose of meeting his day-to-day expenses, school expenses, to tide over the financial crisis of the parents etc., and to deposit the balance sale proceeds in the name of her minor son. The trial Court by impugned order dated 28th January, 2021 has dismissed the petition.

HELD
As per Section 8(4) of the Act, the Court may grant permission to alienate the minor’s property only for his legal necessity or benefit to the estate.

In the present case, petitioner/appellant is seeking permission to sell the petition schedule property belonging to minor child not for his legal necessity or benefit to the estate, but to tide over the financial crisis faced by her and her husband.

Being the parents and natural guardians of the minor child, it is the duty and responsibility of petitioner/appellant and her husband to take care of him including his education and other expenses. In order to overcome their financial crisis, they cannot dispose of the minor’s property. The legal necessity of the minor does not include the necessity of the guardian or any other person even in the face of a pandemic like Covid-19. Certainly, the intended alienation of the property is not for the benefit to the estate of the minor.

The appeal was dismissed.

BCAJ Admin

CORPORATE LAW CORNER

13 Ateet Bansal vs. Unitech Ltd National Company Law Appellate Tribunal Company Appeal (AT) No. 216 of 2019 Date of order: 25th February, 2020

There should be no sympathy with the defaulting company and its directors. The National Company Law Appellate Tribunal (NCLAT) directed the Company to repay the amount to its Deposit Holders along with Interest pursuant to the provisions of Section 73(4) of Companies Act, 2013 read with Section 45Q of the Reserve Bank of India Act, 1934

FACTS
• Mr. AB was a depositor who had placed an amount of Rs. 1,00,000 as a Fixed Deposit with M/s. UL for three years and an amount of Rs. 1,45,217 was payable to the depositor (Mr. AB) upon maturity on 1st June, 2016.

• Through an application under Section 74(2) of the Companies Act, 2013, M/s. UL proposed to make payment to its depositors of matured amounts along with interest from the date of maturity till the date of payment through a rescheduled plan.

• Mr. AB approached M/s. UL several times since his Fixed Deposit got matured with them, but on all such occasions, the Company did not pay any attention to Mr. AB’s demand and never replied regarding the outstanding payment.

• Mr. AB filed a Company Petition in March, 2019 before Hon’ble NCLT, Delhi Bench under Section 73(4) of Companies Act, 2013 read with Section 45Q of the Reserve Bank of India Act, 1934 for repayment of maturity amount of the aforesaid deposit with 12.5% interest p.a. due thereon as per the terms and conditions of the deposit. The said petition was admitted by the Hon’ble NCLT, New Delhi Bench. Thereafter, no reply was filed by M/s UL and the order dated 30th May, 2019 was passed directing the Company to pay Rs. 1,45,217 to Mr. AB with pendent lite ( while the suit continues) and future interest @ 10% from the date of filing till the date of receipt.

• Mr. AB argued that NCLT, New Delhi Bench had erred in giving pendent lite and future interest @ 10% p.a. from the date of filing till receipt thereof instead of 12.5% p.a. as per the terms and conditions of the deposit and has also failed to appreciate that the interest should have been awarded from the date of maturity.

• Mr. AB further argued that National Company Law Tribunal, New Delhi Bench, has failed to award the interest amounting to Rs. 60,507, which was calculated at 12.5% p.a. from the maturity date on the matured amount for the delayed period till September 2019.

• Mr. AB stated that the NCLT order has failed to appreciate that Section 76A of the Companies Act, 2013 provides punishment for contravention of Section 73 or Section 76 of Companies Act 2013.

• Mr. AB, being aggrieved party, preferred an appeal before the National Company Law Appellant Tribunal (NCLAT) against the order passed by NCLT, Delhi Bench.

• Before NCLAT, M/s UL had submitted that with respect to certain ongoing disputes against the Respondents, the Managing Directors of the Respondent Company filed Special Leave Petitions under Article 136 of the Constitution of India where the Hon’ble Supreme Court has directed that no coercive steps should be taken against the company or directors, and Mr. AB has taken no coercive steps against M/s UL and its directors.

• Also, the Supreme Court further directed for the appointment of Amicus Curie (Friend of a Court) to create a portal where the persons who have invested with the Company by way of fixed deposits shall give the requisite information.

HELD
• NCLAT observed that M/s UL taking the shelter of Supreme Court order was creating hurdles in the process of law such as accepting notice and then not appearing/ postponing the hearing.

• NCLAT also observed that we should have no sympathy with the defaulting company and its directors. NCLT has reduced the rate of interest for which no justification has been given and also for not awarding interest from the maturity date to filing of the petition.

• NCLAT further noted that the NCLT order was a reward to the defaulting company and punishment to the honest depositor running from pillar to post to get his amount back with interest.

• NCLAT further observed that if M/s UL tries to get fresh deposits from the Public, the company will not get at cheaper rate but at a higher rate since the depositor will place fresh deposit seeing the risk factor of the deposit.

In view of the above observations the order of NCLT was set aside and the following order was passed:
• Mr. AB was entitled to a decree under his respective matured FDR. The amount was decreed in favour of the respective appellant together with pendent lite and future interest @ 12.5% p.a. from the date of maturity of the respective FDR until receipt thereof.

• M/s. UL was liable to pay Rs.50,000 towards cost of litigation, costs etc.

14 Brillio Technologies (P.) Ltd. vs. Registrar of Companies, Karnataka and Regional Director South Eastern Region, MCA [2021] 163 CLA 449 (NCLAT) National Company Law Appellate Tribunal Company Appeal (AT) No. 293 of 2019 Date of order: 19th April, 2021

Section 66 of the Companies Act, 2013 provides for the reduction of the share capital simpliciter without it being a part of any scheme of compromise and arrangement under Section 230-232 of the Companies Act, 2013 and Security Premium Account can be utilized for making payment to shareholders in respect of reduction in capital

FACTS
• The Board of Directors of M/s BTPL received a request from non-promoter shareholders to provide them with an opportunity to dispose of their shareholding in the Company. Board of M/s BTPL resolved on 24th January, 2019 to reduce the equity share capital from the existing Rs. 21,72,50,000 to Rs. 20,82,97,363 by reducing Rs. 89,52,637 equity shares from non-promoter equity shareholders. It proposed that the premium be paid out of the Securities Premium Account (SPA). Further, an Extraordinary General Meeting (EGM) was held on 4th February, 2019 wherein by special resolution duly passed by 100% members present, voted in favour of the resolution for the reduction of the Company’s share capital.

• M/s BTPL, thereafter filed a petition before National Company Law Tribunal (NCLT), Bengaluru bench in accordance with Section 66 (1) of the Companies Act, 2013 and NCLT directed M/s BTPL to issue notices to the Regional Director, Registrar of Companies and Creditors of the Company.

• Thereafter, the Regional Director, Ministry of Corporate Affairs, South-East Region, Hyderabad represented by Registrar of Companies, filed their observations before NCLT with respect to the proposed Scheme of Reduction of the capital of M/s BTPL.

• NCLT, based on the objections/observations submitted by the Office of Regional Director, held that as per Section 52 (2) of the Companies Act, 2013, SPA may be used only for the purpose specifically provided thereunder. Selective reduction in equity share capital to a particular group involving non-promoter shareholders, making the company as a wholly-owned subsidiary of its current holding company (M/s GCI Global Ventures), and also returning the excess of capital to them would tantamount to an arrangement between the company and shareholders or a class of them and hence, it is not covered under Section 66 of the Companies Act, 2013.

• NCLT further held that the case may be covered under Sections 230-232 of the Companies Act, 2013 wherein compromise or arrangement between the Company and its creditors or any class of them or its members or any class of them is permissible. Therefore, M/s BTPL failed to make out any case under Section 66, and thus, the petition was dismissed with the liberty to file an appropriate application in accordance with the law.

• M/s BTPL being aggrieved with NCLT order preferred an appeal against the said order before National Company Law Appellant Tribunal (NCLAT).

HELD
• NCLAT after hearing both the parties passed an order with following reasons as listed below:

Sr. No.

Objections raised by Regional
Director, Ministry of Corporate Affairs, South-East Region, Hyderabad before
NCLT

Responses to the objections and
Reasoning given by NCLAT

(i)

No proper genuine reason has been given for the reduction of
share capital.

NCLAT held that it cannot be said that M/s BTPL has not given any
genuine reasons for reduction of share capital as M/s BTPL had filed certain
emails received from the non-promoter shareholders with the request to provide
them with an opportunity to dispose of their shareholding in the petitioner
company.

(ii)

Consent affidavit from creditors has
not been obtained.

NCLAT held that NCLT had
erroneously stated that no consent affidavits from creditors have been
produced with regard to the reduction of share capital. M/s BTPL had provided
sufficient proof with respect to the delivery of notice to the unsecured
creditors. No representation was received from the creditors within three
months. Therefore, as per proviso to Section 66(2) of the Act, it shall be
presumed that they have no objection to the reduction.

(iii)

Security Premium Account cannot be utilized for making payment
to the non-promoter shareholders.

NCLAT was of the view that SPA can be
utilized for making payment to non-promoter shareholders, by taking into
consideration various Judgements and responses from M/s BTPL that SPA is
quasi-capital and section 52(1) specifically provides that SPA has to be
treated as if it was the paid-up share capital of the Company. Such Account
can be statutorily utilized for the purposes set out in Section 52(2) and (3)
of the Act and hence reduced without Tribunal’s approval, but for other
purposes, it can be utilized by resorting to the reduction of share capital.

(iv)

Consent from 171 non-promoter
shareholders who were not traceable has not been obtained, and the claim of
such shareholders has not been secured or determined.

NCLAT found no force in the argument
of the Regional Director as M/s BTPL had specifically mentioned that the
amount to be paid to the untraceable non-promoter shareholders would be kept
in an Escrow Account, and thereafter it would be transferred to Investor
Education and Protection Fund.

(v)

Selective reduction of shareholders is not permissible.

As per Section 66 of the Act, reduction of
share capital can be made in ‘any manner’. The proposed reduction is for the
whole non-promoter shareholders of the company. NCLAT held that
selective reduction is permissible if the non-promoter shareholders are being
paid the fair value of their shares. In the present case, none of the
non-promoter shareholders of the company have raised objection about the
valuation of their shares.

(vi)

The Petition for reduction of capital
under Section 66 of the Act, is not maintainable. However, it may be filed
under Section 230-232 of the Act.

NCLAT held
that Section 66 of the Companies Act, 2013 makes provision for the reduction
of share capital simpliciter without it being part of any scheme of
compromise and arrangement. The option of buyback of shares as provided in
Section 68 of the Companies Act, 2013 is less beneficial for the shareholders
who have requested the exit opportunity.

Therefore, NCLAT had set aside the order passed by the NCLT. Thus, the reduction of equity share capital resolved on 4th February, 2019 by the special resolution was confirmed.

15 Bank of Maharashtra vs. Videocon Ltd. & Ors Company Appeal (Ins.) No. 503, 505, 545, 529, 650 of 2021 National Company Law Appellate Tribunal Date of order: 5th January, 2022

FACTS
1. Videocon were repaying the agreed instalments to the consortium of lenders led by SBI till 2015. The VIL, along with 13 other companies of Videocon groups, were classified as ‘SMA – 2’ in the year 2016 onwards. Entities of Videocon group (along with its 12 Domestic subsidiaries) were under CIRP due action taken by SBI under Section 7 of the Code.

2. The Adjudicating Authority vide its order dated 8th August, 2019 passed the consolidation order and partially allowed SBI’s Application and directed the consolidation of the CDs out of the 15 Videocon Group companies.

3. Total claims of Rs. 72,078.5 crore has been filed, out of which claims of Rs. 64,637.6 crore had been verified and accepted for CIRP by the RP.

4. The plan provides a meagre amount of Rs. 2,962.02 crore against an admitted liability of approx. Rs.65,000 crore.
RULING IN CA NO. 545 OF 2021
1. This case is related to Trademark License Agreement (TLA) dated 7th July, 2005 between Electrolux Home products and Electrolux Kelvitor Limited, which got merged to the CD. The Appellant was entitled to terminate the
TLA if the CD underwent any event that resulted in the Dhoot family no longer being in control. The Appellants were entitled to terminate the TLA once CD is admitted to CIRP.

2. The Adjudicating Authority in IA 527 of 2019 held that the Agreement should continue for at least a year from the date of approval of the plan as per the existing Terms and Conditions as a transitional arrangement.

3. The NCLAT observed that: The Adjudicating Authority in IA No. 527/2019 has adjudged the agreement dispute. The Adjudicating Authority has made an error of judgment by permitting Agreement during transitional arrangement for a year or so and thereafter parties to decide as per their mutual understanding. Hence, it is prudent to remand the matter back to CoC for a review in accordance with the law.

RULING IN CA (INS.) NO. 650 OF 2021
1. It was filed to include all assets owned by Videocon group, particularly, foreign oil and gas assets are not included in the information memorandum as also no valuation thereof has been considered while the claim of lenders of foreign oil and gas assets of Rs. 23,120.90 crore being considered as claims without considering the corresponding assets – foreign oil and gas assets for which the borrowings were used.

2. The RP is submitted that explanation – b to Section 18 of the Code specifically excludes the assets of any Indian and foreign subsidiary of the CD from the purview of the terms Assets.

3. The NCLAT observed that: in ‘finance and accounts’ there is a matching concept of liability and its corresponding assets wherever liability is considered, the corresponding assets is supposed to exist in the form of the assets or the liability / borrowings which have been used to finance the losses. In any case, the commercial wisdom of CoC is non-justifiable as already laid down by multiple judgments of the Hon’ble Supreme Court. Hence, this appeal deserves to be dismissed and
is dismissed.

RULING IN CA (INS.) NO. 503, 505 AND 529 OF 2021
1. Resolution Plan does not provide ‘upfront’ payment in priority to the DFC as provided in Section 30 of the Code R/w IBBI Regulation 38. The plan proposes that NCD will be issued to the DFC redeemable after a significant period of around five years which does not qualify as ‘payment’ in terms of Section 30 (2)(b) of the Code.

2. NCLAT observed following:
a. Direction by the Adjudicating Authority to the SRA to pay the DFC by cash instead of NCD amounts to modification of the Resolution Plan. This is a domain of the CoC & not the Adjudicating Authority.

b. It is the CoC that has got the final decision-making authority. The Hon’ble Apex Court has already held in CoC of Essar Steel (supra) that the commercial wisdom of the CoC cannot be adjudicated by the Adjudicating Authority. As far as commercial decisions are concerned, they are the supreme authority. They have the full power to decide one way or other any resolution based on input provided to them or otherwise.

c. In the judicial forum, once an order is passed by a particular authority for, an example, by the Adjudicating Authority, it cannot review its order or judgment except as permitted under Section 420(2) of the Companies Act, 2013 r/w Rule 154 of the NCLT, Rules 2016. The same judicial authority can only rectify any mistake apparent from record, either on its own motion or brought to its notice by the parties. So, the power of review under the judicial arena lies with the higher judiciary.

d. The CoCs are the best judge to analyze, pick up and take prudent commercial decisions for the business, but they are also subjected to test of prudence to ensure fairness and transparency.

e. The Adjudicating Authority does not have the power to modify and change the plan as held by Hon’ble Apex Court in the case of K. Shasidhar and CoC of Essar Steel.

f. The CoC is not functus – officio on the approval of the Resolution plan, and accordingly, the judicial precedents clearly established that the Adjudicating Authority and this Tribunal is competent to send back the Resolution plan to the CoC for reconsideration

HELD
• Section 30 (2)(b) of the Code has not been complied with, and hence, the approval of the Resolution Plan is not as per Section 31 of the Code. Accordingly, the approval of Resolution Plan by the CoC as well as Adjudicating Authority is set aside, and the matter is remitted back to CoC for completion of the process relating to CIRP in accordance with the provisions of the Code.

BCAJ Admin

ALLIED LAWS

1 V. Prabhakrara vs. Basavaraj K. (Dead) by Lr. and another AIR 2021 Supreme Court 4830 Date of order: 7th October, 2021 Bench: Sanjay Kishan Kaul J. and M.M. Sundresh J.

Suit Property – Doubting genuineness of a registered will – factors such as existence of a forged unregistered will and severance of relationships to be kept in mind before raising suspicion on the registered will – Registered will is held to be valid. [Indian Evidence Act, 1872, S. 63, S.68]

FACTS
The Suit Property originally belonged to one Ms. Jessie Jayalakshmi (since deceased). The deceased Ms. Jessie Jayalakshmi, a spinster, was the maternal aunt of the Appellant/Plaintiff. Mr. Vijay Kumar and Ms. Kantha Lakshmi were his brother and sister, respectively. It is the case of the Appellant that the deceased, Ms. Jessie Jayalakshmi adopted him as her son and that he took care of her when she suffered an attack of paralysis.

A registered Will was executed by Ms. Jessie Jayalakshmi on signature in favour of the Appellant. The said Will was attested by Mr. Vijay Kumar, brother of the Appellant. Ms. Jessie Jayalakshmi was also brought to the office of the Sub-Registrar by none other than Ms. Kantha Lakshmi.

The relationship between Ms. Kantha Lakshmi and her husband (Respondent No. 1) got strained. She obtained a divorce decree on 26th March, 1988. It is the further case of the Appellant that Respondent No. 1 was permitted to reside in the Suit Property. The Respondent No. 1 refused to vacate the Suit Property, which is a residential house.

The Defendants/Respondents while acknowledging the factum of execution of the registered Will, introduced an unregistered Will, allegedly executed by Ms. Jessie Jayalakshmi in favour of the Respondent No. 2 (minor son of Respondent No.1).

The trial court held in favour of the Petitioner holding that the registered will had been proved. It gave exhaustive reasoning for doubting the genuineness of the unregistered will.

The High Court reaffirmed the findings of the Trial Court. However, the High Court did an exercise by entertaining a suspicion about the genuineness of the registered will and accordingly found that it has not been dispelled by the Appellant. On that basis, the suit was dismissed by allowing the appeal. The Appellant filed an appeal against the order of the High Court

HELD
A testamentary court is not a court of suspicion but that of conscience. It has to consider the relevant materials instead of adopting an ethical reasoning. A mere exclusion of either brother or sister per se would not create a suspicion unless it is surrounded by other circumstances creating an inference. In a case where a testatrix is accompanied by the sister of the beneficiary of the Will and the said document is attested by the brother, there is no room for any suspicion.

Both the Courts found that the unregistered will is a forged and fabricated document. The Appellate Court, in our considered view, has unnecessarily created a suspicion when there is none. That too, when the Trial Court did not find any. The factors such as the fabrication and severance of relationship between himself and his wife in pursuance of the decree for divorce, coupled with the status while squatting over the Suit Property being the relevant materials, ought to have weighed in its mind instead of questioning the registered Will.

Appeal was allowed.

2 Samruddhi Co-operative Housing Society Ltd. vs. Mumbai Mahalaxmi Construction Pvt. Ltd. Civil Appeal No. 4000 of 2019 (SC) Date of order: 11th January, 2022 Bench: Dr. D. Y. Chandrachud J. and A. S. Bopanna J.

Consumer – Deficiency in services – Real Estate – Not obtaining Occupation Certificate amounts to deficiency in services. [Consumer Protection Act, 1986, S. 2(1)(d), S. 2(1)(g)]

FACTS
The appellant is a co-operative housing society. The respondent constructed Wings ‘A’ and ‘B’ and entered into agreements to sell flats with individual purchasers in accordance with the Maharashtra Ownership Flats, 1963. The members of the appellant booked the flats in 1993 and were granted possession in 1997. According to the appellant, the respondent failed to take steps to obtain the occupation certificate from the municipal authorities. In the absence of the occupation certificate, individual flat owners were not eligible for electricity and water connections. Due to the efforts of the appellant, temporary water and electricity connections were granted by the authorities. However, the members of the appellant had to pay property tax at a rate 25 per cent higher than the normal rate and water charges at a rate which was 50 per cent higher than the normal charge.

HELD
The respondent was responsible for transferring the title to the flats to the society along with the occupancy certificate. The failure of the respondent to obtain the occupation certificate is a deficiency in service for which the respondent is liable. Thus, the members of the appellant society are well within their rights as ‘consumers’ to pray for compensation as a recompense for the consequent liability (such as payment of higher taxes and water charges by the owners) arising from the lack of an occupancy certificate.

Appeal is allowed.

3 Murthy & Ors vs. C. Saradambal & Ors Civil Appeal No. 4270 of 2010 (SC) Date of order: 10th December, 2021 Bench: L. Nageswara Rao J. and B.V. Nagarathna J.

Will – Sound and disposing state of mind – Onus on the propounder to discharge the suspicion pertaining to the execution – Letters of administration was not granted. [Indian Evidence Act, 1872, S. 68, Indian Succession Act, 1925, S. 63]

FACTS
E. Srinivasa Pillai, father-in-law of the 1st plaintiff, died on 19th January, 1978 leaving behind his last will and testament dated 4th January, 1978. The said will was said to be executed in the presence of two attestors. The testator E. Srinivasa Pillai had a son, named S. Damodaran, who died intestate on 3rd June, 1989 at Madras, leaving behind the plaintiff-wife C. Saradambal and his two daughters.

The testator, apart from his son, S. Damodaran, left behind two daughters.

The bequest was made in the name of testator’s son namely S. Damo viz., S. Damodaran to the exclusion of the testator’s daughters in respect of the house in which the testator and his family were residing. The daughters of the testator filed a suit in the City Civil Judge Court, Madras seeking partition of the said property and regarding the genuineness of the Will. Therefore, it had become necessary for the plaintiffs to file the petition seeking Letters of Administration. This was converted into suit.

The Trial court dismissed the suit. On appeal, the High Court allowed the appeal. Hence the present appeal.

HELD
On reading Section 63 of the Indian Succession Act, 1925 and Section 68 of the Evidence Act, 1872 it is clear that the propounder of the will must examine one or more attesting witnesses and the onus is placed on the propounder to remove all suspicious circumstances with regard to the execution of the will.

The respondents-plaintiffs have failed to prove the will in accordance with law inasmuch as they have not removed the suspicious circumstances, surrounding the execution of the will. Hence, not being a valid document in the eye of law, no Letters of Administration can be granted to the respondents-plaintiffs.

Appeal is allowed.

4 Beereddy Dasaratharami Reddy vs. V. Manjunath and another Civil Appeal No. 7037 of 2021 Date of order: 23rd December, 2021 Bench: M R Shah J. and Sanjiv Khanna J.

Hindu Undivided Family – Rights of Karta – Karta can sell HUF property – Signature of coparcener is not mandatory [Hindu Succession Act, 1956]

FACTS
Veluswamy, the Karta of the joint Hindu family executed an agreement to sell of the suit property and received advance from one Beereddy Dasaratharami Reddy (the Appellant). On 26th November, 2007, the Appellant instituted the suit for specific performance of the agreement to sell, impleading both Veluswamy, the Karta and his son V Manjunath (coparcener).

The Trial Court held that the Karta of the joint Hindu family property was entitled to execute the agreement to sell.

His son preferred the regular first appeal before the High Court of Karnataka wherein it was held that the agreement to sell is unenforceable as the suit property belonged to the joint Hindu family consisting of three persons, K. Veluswamy, his wife V. Manimegala and his son V. Manjunath and, therefore, could not have been executed without the signatures of V. Manjunath.

On appeal to the Supreme Court.

HELD
Right of the Karta to execute agreement to sell or sale deed of a joint Hindu family property is settled and is beyond cavil. Signatures of V. Manjunath, son of Karta – K. Veluswamy, on the agreement to sell were not required. K. Veluswamy being the Karta was entitled to execute the agreement to sell and even alienate the suit property. Absence of signatures of V. Manjunath would not matter and is inconsequential.

Appeal was allowed.

BCAJ Admin

CORPORATE LAW CORNER

10 Akhil R. Kothakota and Anr. vs. Tierra Farm Assets Co. (P) Ltd. [2021] 162 CLA 249 (NCLAT) Date of order: 9th November, 2021

Section 71(10) of the Companies Act, 2013 specifically empowers the Tribunal to direct, by order, a company to redeem the debentures forthwith on payment of principal and interest due thereon where a company has failed to pay interest on debentures when it was due

FACTS
* M/s TFA issued secured ‘non-convertible debentures’ on 17th December, 2015 and a debenture trust deed was executed between it and M/s VITCL, which was the debenture trustee to issue debentures against certain properties listed in Schedule II of the deed. M/s TFA was supposed to make interest payments to the debenture holders in March 2018, June 2018, September 2018, and December 2018. However, it failed and neglected to make such payments. Thereafter, the debenture holders kept diligently following up with M/s TFA and the various other entities involved regarding interest payments which had been defaulted on.

* The debenture holders had also been consistent in their demand for redemption of the debentures as stipulated under the terms of the trust deed and preferred to file a petition u/s 71(10) of the Companies Act, 2013 before the NCLT, Bengaluru Bench which sought the following directions:
(a) M/s TFA to make repayment of the aforesaid debenture(s) along with interest due thereon in accordance with the terms and conditions w.r.t. debenture amounts, which included the default of interest payable as well as the prepayment penalty which aggregated to Rs. 74,99,280 as on the date of filing the application.
(b) M/s TFA to be injuncted from dealing with the mortgaged properties as specified in the debenture trust deed dated 17th December, 2015 and a direction issued to the debenture trustee to enter into / take possession of the mortgaged properties as specified in the debenture trust deed, etc.

After hearing the case, NCLT passed an order dated 17th December, 2019 in exercise of the powers conferred on it u/s 71(10) of the Companies Act, 2013 read with rule 73 of the NCLT Rules, 2016. NCLT in its order disposed of the petition by granting six months’ time, provisionally from the date of the order, so as to explore all possibilities of settlement of claims of the debenture holders along with other similarly situated claimants.

However, the debenture holders being aggrieved by the NCLT order preferred an appeal before the National Company Law Appellate Tribunal (NCLAT) on the following grounds:

(a) NCLT did not specifically address ‘the prayer for repayment’ but rather gave a direction to explore all possibilities of settlement of claims of the petitioners and granted six months’ time, which is ultra vires of sections 71(8) and 71(10) of the Companies Act, 2013.

(b) NCLT had not focused on the reply submitted by M/s TFA which did show that there was a clear admission of default of payment of interest on the ‘non-convertible debentures’ and M/s TFA proposed to settle the dues and that the matter was under due process and averred that there was an arbitration proposal pending between the parties. However, the material on record did not give evidence of any such initiation of ‘arbitration proceedings’.

HELD
NCLAT observed that the NCLT Bengaluru Bench had taken into consideration the ‘financial status of the company’, the interest of all stake holders and had given a direction for settlement. However, the fact remained that M/s TFA did not make any effort to settle the matter nor was there any representation on its behalf before the NCLAT.

It further observed that section 71(10) of the Companies Act, 2013 provides a clear mechanism for issue and repayment of debentures, including the enforcement of repayment obligations and section 71(10) of the Companies Act, 2013 does not empower the Tribunal to ascertain the financial condition of the defaulting party or grant any other relief than the relief provided for under the said section.

NCLAT also noted that there was no arbitration clause in the debenture trust deed and ‘no consent’ was given by the debenture holders for initiation of any ‘arbitration proceedings’ till date.

NCLAT disposed of the appeal with a specific direction to M/s TFA to repay the amounts ‘due and payable’ to the debenture holders within a period of two months from the date of the order, failing which it was open to the debenture holders to take steps as deemed fit in accordance with the law.

11 M/s Mohindera Chemicals Private Limited vs. Registrar of Companies, NCT of Delhi & Haryana & Ors. National Company Law Appellate Tribunal, New Delhi Company Appeal (AT) No. 9 of 2020 Date of order: 9th September, 2020

In a case where company was functional, and the same can be seen from the content of the balance sheets, the name of the company needs to be restored in the Register of Companies

FACTS
M/s MCPL submitted that merely because the balance sheet remained to be filed the Registrar of Companies (RoC) presumed that it was not functional and its name was struck off with effect from 8th August, 2018.

It further submitted that if the reply of the Income-tax Department, Diary No. 19303 is pursued, the Department has also stated that the assessment for the year ended as on 31st March, 2012 was completed on 29th December, 2018 and there was an outstanding demand of Rs. 7,79,74,290 that was still pending for recovery.

If the name was not restored, M/s MCPL stated, it would seriously suffer as there were huge outstanding dues which the company had to receive; the debtors were ready to pay but were unable to do so because the name was struck off.

M/s MCPL was ready to go in for settlement in the case of the IT dues also and for all such reasons it was necessary to restore its name in the Register of Companies as maintained by the RoC.

But the RoC submitted that there was a lapse on the part of M/s MCPL and that the RoC had followed due procedure and the name was struck off as M/s MCPL did not respond to the Public Notice.

HELD
NCLAT held that M/s MCPL had been functional as could be seen from the content of the submitted balance sheets and directed the RoC to restore its name, subject to the conditions that M/s MCPL will pay the costs of Rs. 1,00,000 to the RoC and the company will file all the outstanding documents / balance sheets and returns within two months along with penalties and late payment charges, etc., as may be due and payable under Law.

12 In the High Court of Delhi at New Delhi W.P.(C) 3261/2021, CM Appls. 32220/2021, 41811/2021, 43360/2021, 43380/2021

Nitin Jain, Liquidator PSL Limited vs. Enforcement Directorate, through Raju Prasad Mahawar, Assistant Director, PMLA

FACTS OF THE CASE
Liquidation of the corporate debtor (CD) was commenced by the adjudicating authority vide order dated 11th September, 2020, with Nitin Jain being appointed as the Liquidator. On 15th January, 2021, the Liquidator received summons from the Enforcement Directorate (ED). The petitioner moved CM Application No. 32220/2021 before this Court disclosing that the sale of the CD as a going concern was conducted on 9th April, 2021, a bid of Rs. 425.50 crores was received from M/s Lucky Holdings Private Limited and a Letter of Intent came to be issued in favour of M/s Lucky Holdings Private Limited on 19th April, 2021. The sale as conducted by the Liquidator was approved by the adjudicating authority in terms of its order of 8th September, 2021. It has accordingly been prayed that the Liquidator be permitted to distribute the proceeds as received out of the liquidation sale and at present placed in an escrow in terms of the order of this Court of 17th March, 2021.

QUESTIONS OF LAW
Whether the authorities under the Prevention of Money Laundering Act, 2002, would retain the jurisdiction or authority to proceed against the properties of a corporate debtor once a liquidation measure has come to be approved in accordance with the provisions made in the Insolvency and Bankruptcy Code, 2016?

Whether there is in fact an element of irreconcilability and incompatibility in the operation of the two statutes which cannot be harmonised?

Whether the liquidation process is liable to proceed further during the pendency of proceedings under the PMLA and notwithstanding the issuance of an order of attachment?

RULING IN CASE
Irreconcilability and incompatibility in the operation of the two statutes
Viewed in that backdrop, it is evident that the two statutes essentially operate over distinct subjects and subserve separate legislative aims and policies. While the authorities under the IBC are concerned with timely resolution of the debts of a corporate debtor, those under the PMLA are concerned with the criminality attached to the offence of money laundering and to move towards confiscation of properties that may be acquired by commission of offences specified therein. The authorities under the aforementioned two statutes consequently must be accorded adequate and sufficient leeway to discharge their obligations and duties within the demarcated spheres of the two statutes.

Liquidation process is liable to proceed further during the pendency of proceedings under the PMLA
Section 32A legislatively places vital import upon the decision of the adjudicating authority when it approves the measure to be implemented in order to take the process of liquidation or resolution to its culmination. It is this momentous point in the statutory process that must be recognised as the defining moment for the bar created by section 32A coming into effect. If it were held to be otherwise, it would place the entire process of resolution and liquidation in jeopardy. Holding to the contrary would result in a right being recognised as inhering in the respondent to move against the properties of the CD even after their sale or transfer has been approved by the adjudicating authority. This would clearly militate against the very purpose and intent of section 32A.

Section 32A in unambiguous terms specifies the approval of the resolution plan in accordance with the procedure laid down in Chapter II as the seminal event for the bar created therein coming into effect. Drawing sustenance from the same, this Court comes to the conclusion that the approval of the measure to be implemented in the liquidation process by the adjudicating authority must be held to constitute the trigger event for the statutory bar enshrined in section 32A coming into effect. It must consequently be held that the power to attach as conferred by section 5 of the PMLA would cease to be exercisable once any one of the measures specified in Regulation 32 of the Liquidation Regulations, 2016 comes to be adopted and approved by the adjudicating authority.

PMLA jurisdiction or authority to proceed against the properties of a corporate debtor
The expression, sale of liquidation assets, must be construed accordingly. The power otherwise vested in the respondent under the PMLA to provisionally attach or move against the properties of the CD would stand foreclosed once the adjudicating authority comes to approve the mode selected in the course of liquidation. To this extent and upon the adjudicating authority approving the particular measure to be implemented, the PMLA must yield.

HELD
In any event, this Court is of the firm view that the issue of reconciliation between the IBC and the PMLA insofar as the present petition is concerned needs to be answered solely on the anvil of section 32A. Once the Legislature has chosen to step in and introduce a specific provision for cessation of liabilities and prosecution, it is that alone which must govern, resolve and determine the extent to which powers under the PMLA can be permitted in law to be exercised while a resolution or liquidation process is on-going.

From the date when the adjudicating authority came to approve the sale of the CD as a going concern, the cessation as contemplated u/s 32A did and would be deemed to have come into effect.

BCAJ Admin

Allied Laws

15 Rasool Mohammed (Dead) Thru. LRs. vs. Anees Khan and others
AIR 2023 (NOC) 315 (MP)
Date of order: 24th March, 2023

Power of Attorney – Legal Heir appointed – Permission to lead evidence – [Code of Civil Procedure, 1908, Order 3, Rule 2]

FACTS

The original Plaintiff filed a civil suit for declaration and permanent injunction before the Trial Court. During the pendency of the civil suit, the original Plaintiff Rasool Mohammad expired, and a legal representative, i.e., wife, was added as the legal heir. The Plaintiff petitioner executed a Power of Attorney on 1st September, 2016 and authorised Zaheer Qureshi to proceed on behalf of her in the said civil suit. The Trial Court allowed the objection of the Respondents that the Power of Attorney holder was not competent to exhibit the documents on his behalf and therefore was not allowed to lead evidence.

Hence, the appeal.

HELD

The Court held that after perusal of the provisions of Order 3 Rule 2 of the Code of Civil Procedure, it is evident that there is no provision for permitting the Power of Attorney holder to depose in place of the original plaintiff. The Petitioner being a lady aged about 55 years is duly competent to appear before the Court for deposition. In such circumstances, it is clear that the Power of Attorney holder cannot be permitted to depose if the Plaintiff is in a position to appear before the Court for deposition.

Even if it is ascertained that the Power of Attorney holder is aware of the facts and circumstances of the case, even then the Power of Attorney holder can only be permitted in exceptional circumstances.

The appeal was dismissed.

16 Shrimati Geeta Bai and Others vs. Ramavatar Agrawal
AIR 2023 (NOC) 325 (CHH)
Date of order: 3rd August, 2022

Gift – Gift deed – Unilateral cancellation deed by the donor is void and non-est. [Transfer of Property Act, 1882, S. 122]

FACTS

The Defendant is the original Plaintiff. It was the case of the Defendant that the property had been transferred by way of gift and possession had been handed over by the appellant. After the execution of the gift deed, the name of the donee was recorded in the revenue records. Thereafter, it was found that a cancellation deed had been unilaterally effected without notifying the donee. Therefore, an injunction was sought, praying that the defendant be declared the owner of the land and that his peaceful possession and enjoyment of the property shall not be disturbed. The trial Court decreed the suit.

Hence, the present appeal.

HELD

The Court held that the gift was valid in accordance with section 122 of the Transfer of Property Act, 1882. The gift was accepted by the donee, and after the execution of the gift, the name of the donee was recorded in the revenue records. The documents having been registered will have a presumptive value of correctness unless proven otherwise. Once the gift deed is executed in terms of Sections 122 and 123 of the Transfer of Property Act, then the unilateral cancellation of the deed by the donor is void and non-est. Such a cancellation deed could be ignored as invalid.

The Appeal was dismissed.

17 V. R. S. V. N. Sambasiva Rao vs. V. Rama Krishna
AIR 2023 (NOC) 259 (AP)
Date of order: 18th January, 2023

Civil Contempt – Wilful Disobedience of order – Regularisation – Tactics by Authorities – Action would amount to contempt of Court [Contempt of Courts Act, 1971, Ss. 2(b), 10, 12]

FACTS

The petitioner had filed a writ petition against the action of the respondents in not regularising his services, and the Court has passed an order directing the respondents to regularise the services. Despite the petitioner submitting several representations before the respondents seeking regularisation, the respondents neither passed any orders nor complied with the Orders of the Court in true spirit.

Hence, the present case.

HELD

The order of the Court is not complied with on the grounds that the writ appeal and review petition is pending. The Court held that this type of tactic by the respondents to avoid implementing the orders of the Court cannot be tolerated and that the action of the respondents would amount to contempt of court. Under these circumstances, the apology tendered by the respondents was found unacceptable and in the opinion of the court it was not bonafide.

Non-compliance with the Court’s order would amount to contempt of Court. The respondents in the present appeal had sought adjournments several times for compliance, and taking advantage of adjourning the cases, they preferred appeal and, after the dismissal of the appeal by the Division Bench, again sought time for compliance and again filed a review petition.

The Contempt Case is allowed, and the Contemnors are sentenced.

18 Amrik Singh (Dead) Through L.Rs. and another vs. Charan Singh (Dead) Through L.Rs. and others
AIR Online 2023 P&H 140
Date of order: 2nd February, 2023

Wills – Attesting witnesses – Ancestral and self-acquired land – Suspicious circumstances [Specific Relief Act, 1963, S.34; Indian Succession Act, 1925, S. 63]

FACTS

The first Will was executed by Kishan Singh on 18th July, 1980. This registered Will was in favor of the defendant-appellants (Amrik Singh and Mewa Singh). This was proved in Court by the attesting witnesses. The second Will was allegedly executed by Kishan Singh on 20th February, 1981. This Will is in favor of all the four sons of Kishan Singh, and they were to inherit in equal shares. The Trial Court dismissed the suit of the plaintiff-respondents and disbelieved the will dated 18th July, 1980. The lower Appellate Court declared that both the wills stood rejected and hence property would devolve by way of natural succession; therefore, partly decreed the suit for joint possession to the extent of 1/7th share each in the suit land as well as the compensation.

Hence the present appeal.

HELD

The Court held that it had no doubt that the Will executed by Kishan Singh, which is a duly registered document, is not surrounded by any suspicious circumstances of any kind and is proved to have been duly and properly executed. Mere deprivation of some of the natural heirs by itself is not a suspicious circumstance to discard a Will. Divesting of close relations being the purpose of execution of a Will, this is normally not a suspicious circumstance.

A Will has to be proved like any other document except as to the special requirements of attestation prescribed by Section 63 of the Indian Succession Act. The test to be applied would be the usual test of the satisfaction of the prudent mind in such matters.

The appeal is allowed.

19 Adityaraj Builders vs. State of Maharashtra
WP Nos. 4575 of 2022 dated 17th February, 2023 (Bom)(HC)

Stamp Duty – Redevelopment – Endorsement of instruments on which duty has been paid – Reference to re-development and homes are to be read to include garages, galas, commercial and industrial use and every form of society re-development – No stamp duty on permanent alternate accommodation agreement. [Maharashtra Stamp Act, 1958, Section 4]

FACTS

The petitioners raised a common question of law under the Maharashtra Stamp Act, 1958. It relates to Stamp Duty sought to be levied on what is called Permanent Alternate Accommodation Agreements (“PAAA”). The challenge was against two circulars issued by the Inspector General of Registration & Controller of Stamps, Maharashtra under the authority of the Chief Controlling Revenue Authority and the State Government of Maharashtra, dated 23rd June, 2015 and 30th March, 2017.

The first circular directed that any PAAAs between the society members and the developer is different from the (DA) between the society and the developer. The second circular which came out as a clarificatory circular specifies compliance and the criteria for such compliance to the PAAAs with individual society members. The Stamp authorities contended that on contentions of the payment of stamp duty in incidents where there is an increase of additional area or square footage after redevelopment and the question of members having to pay stamp duty on the acquisition of additional built-up area or carpet area derived from fungible FSI.

The question before the High Court was whether the demand by the Stamp Authority that the individual PAAAs for members must be stamped on a value reckoned at the cost of construction and a question of validity regarding the two circulars dated 23rd June, 2015 and 30th March, 2017?

HELD

Impugned Circulars dated 23rd June, 2015 and 30th March, 2017 were held to be beyond the jurisdictional remit of revenue authorities to dictate instruments what form the instruments should take. The court held as under:

a) A Development Agreement between a cooperative housing society and a developer for the development of the society’s property (land, building, apartments, flats, garages, godowns, galas) requires to be stamped.

b) The Development Agreement need not be signed by individual members of the society. That is optional Even if individual members do not sign, the DA controls the re-development and the rights of society members.

(c) A Permanent Alternative Accommodation Agreement between a developer and an individual society member does not require to be signed on behalf of the society. That, too, is optional, with the society as a confirming party.

d) Once the Development Agreement is stamped, the PAAA cannot be separately assessed to stamp beyond the Rs. 100 requirement of Section 4(1) if it relates to and only to rebuilt or reconstructed premises in lieu of the old premises used/occupied by the member, and even if the PAAA includes additional area available free to the member because it is not a purchase or a transfer but is in lieu of the member’s old premises. The stamp on the Development Agreement includes the reconstruction of every unit in the society building. The stamp cannot be levied twice.

e) To the extent that the PAAA is limited to the rebuilt premises without the actual purchase for consideration of any additional area, the PAAA is an incidental document within the meaning of Section 4(1) of the Stamp Act.

f) A PAAA between a developer and a society member is to be additionally stamped only to the extent that it provides for the purchase by the member for actually stated consideration and a purchase price of an additional area over and above any area that is made available to the member in lieu of the earlier premises.

g) The provision or stipulation for assessing stamp on the PAAA on the cost of construction of the new premises in lieu of the old premises cannot be sustained. Further, held that reference to re-development and homes is to be read to include garages, galas, commercial and industrial use and every form of society re-development.

The Court also held that these findings are not limited to the facts of the present cases before the court.

BCAJ Admin

Allied Laws

10 Indian Oil Corporation Ltd vs.

Sudera Realty Pvt Ltd

AIR 2023 SUPREME COURT 5077

Date of order: 6th September, 2022Lease – Tenancy after the expiry of lease – liable to Mesne profits [Code of Civil Procedure, 1908, S 2(12), O. 20, R. 12; Transfer of Property Act, 1882, Section 111(a)]

FACTS

The Defendant is the original Plaintiff. It was the case of the Defendant that the current Appellant was in wrongful possession of its property and thus claimed mesne profits. The Appellants on their reading of the lease agreements found that they were not illegally occupying the said property. The Ld. Single judge found the appellant entitled to pay mesne profits.Hence, the present appeal.

HELD

A tenant continuing in possession after the expiry of the lease may be treated as a tenant at sufferance, which status is a shade higher than that of a mere trespasser, as in the case of a tenant continuing after the expiry of the lease, his original entry was lawful. But a tenant at sufferance is not a tenant by holding over. While a tenant at sufferance cannot be forcibly dispossessed, that does not detract from the possession of the erstwhile tenant turning unlawful on the expiry of the lease. Thus, the appellant while continuing in possession after the expiry of the lease became liable to pay mesne profits.The appeal was dismissed.

11 Chhanda Choudhury and another vs.

Bimalendu Chakraborty and another

AIR 2023 TRIPURA 01

Date of order: 12th September, 2022Partnership – Dissolution of the firm – Dispute regarding the determination of shares – Chartered Accountant appointed by the Court – Report of the Chartered Accountant upheld. [Indian Partnership Act, 1932, Sections 43, 48]

FACTS

The Original plaintiff, a partner, sought for dissolution of the firm and rendering of accounts and approached the Civil Judge for the same. The Trial Court appointed a Chartered Accountancy firm for the determination of the shares and accordingly passed an order.The plaintiff preferred an appeal before the District Judge. The District Judge quashed the order of the trial court with respect to the determination of shares.

Hence, the present Appeal by the Original Respondents.

HELD

Section 48 of the Indian Partnership Act, 1932 prescribes the mode for settlement of accounts after the dissolution of the partnership and the same has to be followed. The order of the District Court is modified upholding the report filed by the Chartered Accountant.The Appeal was allowed.

12 Sasikala vs. Sub Collector and another

AIR 2022 MADRAS 323

Date of order: 2nd September, 2022

Sale Deed – Unilateral cancellation by the Registrar – Illegal [Constitution of India, Art. 226; Registration of Act, 1908, Section 22A]

FACTS

The Petitioner’s father settled some of his immovable property to his son and daughter. It is stated that the same was unconditional and out of love & affection. Later, he cancelled the settlement deed. The cancellation deed was registered unilaterally and not mutually agreed upon by the parties.A Writ Petition was filed challenging the cancellation.

HELD

After the insertion of section 22A of the Registration Act, 1908, in the State of Tamil Nadu, every sale deed and cancellation of the same has to be mutually entered into by the parties. Therefore, the registrar was not correct in unilaterally cancelling a transfer deed. A unilateral cancellation is only possible in cases of conditional gifts which was not the case in the present petition. The deed of cancellation was quashed.The Writ Petition was allowed.

13 Leelamma Eapen vs. Dist. Magistrate and others

AIR 2022 KERALA 151

Date of order: 28th March, 2022Maintenance – includes ensuring a life of dignity – not merely a monthly allowance. [Maintenance and Welfare of Parents and Senior Citizens Act, 2007, Sections 7, 9, 2(b), 5]

FACTS

The Petitioner’s husband executed a will whereby life interest in the properties was created in her favor and after her death, the property was to devolve absolutely in favor of her son.

The Petitioner filed an application before the Maintenance Tribunal complaining that her son and daughter-in-law were not permitting her to stay in the house or collect usufructs (benefits) from the property. The Tribunal passed an order in favor of the petitioner. However, the Petitioner again approached the Tribunal stating that the directions of the Tribunal were not enforced.

The enforceability of the order of the Tribunal is the issue in the Writ Petition.

HELD

A senior citizen including a parent who is unable to maintain himself from his own earning or out of the property owned by him alone is entitled to be maintained. When a Senior Citizen or parent who has earnings makes an application to the Maintenance Tribunal contending that her right to earning is obstructed by the son who has a statutory obligation to maintain the parent, the Maintenance Tribunal has to ensure that the Senior Citizen or parent is able to maintain herself from her earnings. The object of the Act is not only to provide financial support but also to prevent the financial exploitation of senior citizens and parents by relatives or children.It was further observed that technicalities should not be given importance in such cases.

The Writ petition was allowed.

14 Bondada Purushotham vs.

Satta Dandasi and others

AIR 2022 (NOC) 854 (AP)

Date of order: 27th January, 2022Registration – Validity of unregistered sale deed – No perpetual injunction. [Specific Relief Act, 1963, Section 38; Registration Act, 1908, Section 17]

FACTS

The appellant/original plaintiff filed a suit for perpetual injunction restraining the defendant from interfering and enjoying the property of the plaintiff. The claim is based on two unregistered sale deeds. On the other hand, the case of the defendant is that the said property belonged to his grandfather and he had only one child i.e., his mother. On the death of the grandfather, his mother being only daughter got the same. Upon her death, he, being the only son and legal heir continued to enjoy this land.

The trial court dismissed the suit for injunction. The Appeal Court confirmed the findings of the trial court and dismissed the appeal.

On the second appeal

HELD

The possession of these lands was claimed under documents which were unregistered sale deeds. There is no explanation offered by the plaintiffs as to why the same are unregistered. Being an integral part of the transaction whereby the appellant claimed the sale of these lands in their favor, it cannot be dissected and considered dehors right and interest to this property. Therefore, possession claimed under the said unregistered deeds cannot be deemed as a collateral factor which shields these transactions from the application of bar under Section 49 of the Indian Registration Act. Therefore, the documents are clearly inadmissible in evidence in terms of Section 17(1) of the Indian Registration Act.The Appeal was dismissed.

BCAJ Admin

Corporate Law Corner Part A : Company Law

3 Case law no. 01/May 2023
Shri Narayani Nidhi Ltd
ADJ/07/RD (SR)/2022-23
Office of the Regional Director
Appeal against Adjudication order
Date of Order: 19th January, 2023

Appeal against Adjudication order: Not furnishing the Director Identification Number and violating Section 158 of the Companies Act, 2013.

FACTS

SNNL had filed an application for seeking the status of Nidhi before the Ministry of Corporate Affairs (‘MCA’). However, while scrutinising the said form, the MCA had observed that the Directors signing the financial statements had not mentioned their Director Identification Number (‘DIN’) in the documents attached with the Form AOC-4 for the F.Ys.2014-15, 2016-17 and 2017-18 respectively. Thus, the provisions of Section 158(1) of the Companies Act, 2013 were violated.

Sec. 158(1) of the Companies Act, 2013 provides that: Every person or company, while furnishing any return, information or particulars as are required to be furnished under this Act shall mention the Director Identification Number in such return, information or particulars in case such return, information or particulars relate to the director or contain any reference of any director.

The Registrar of Companies, Chennai, Tamil Nadu examined the said default and passed the Adjudication Order (impugned order) under section 454(3) and (4) of the Companies Act, 2013 for default in compliance with the requirements of Section 158 of the Companies Act, 2013 and imposed a penalty of Rs. 1,50,000 on SNNL and Rs. 1,50,000 on SK, Managing Director of SNNL for the above default.

SNNL filed an appeal under section 454(5) of the Companies Act, 2013 against the Adjudication Order passed by the Registrar of Companies, Chennai, Tamil Nadu for default committed under section 158 of the Companies Act, 2013.

SNNL had contended the impugned order and pleaded that the non-compliance had occurred due to unavoidable circumstances, and the default was unintentional.

An opportunity of being heard was given to SNNL. The Authorised Representative PS, Practicing Company Secretary had appeared for SNNL and while reiterating the grounds taken in the appeal, stated that M/s SNNL had inadvertently omitted to mention the DIN of the signing directors in the financial statements for the F.Ys. 2014-15, 2016-17, and 2017-18. It was further submitted that the inadvertent omission to mention the DIN of signing directors was neither deliberate nor intentional and it was an unintentional clerical error that went unnoticed and hence prayed for a lenient view.

HELD

The Regional Director (‘RD’) stated that though there was a default committed, there was a ground for interfering with the impugned adjudication order of the Registrar of Companies to the extent of reducing the quantum of penalty. Accordingly, the penalties imposed were reduced as per the below-mentioned table:

Penalty as per Section	Penalty imposed on	No. of Years of Default	Penalty imposed by RoC	Penalty imposed by RD
Section 158(1) of the Companies Act, 2013	SNNL	2014-15, 2015-2016 and 2016-2017	Rs. 50,000 * 3 years = Rs. 1,50,000	Rs. 20,000 * 3 years = Rs. 60,000
Section 158(1) of the Companies Act, 2013	SK, Managing Director of SNNL	2014-15, 2015-2016 and 2016-2017	Rs. 50,000 * 3 years = Rs. 1,50,000	Rs. 20,000 * 3 years = Rs. 60,000

4 Case law no. 02/May 2023
Kudos Finance And Investments Pvt Ltd Ro CP/ADJ/ order/ 118/22-23/KUDOS/2418 to 2423
Office of Registrar of Companies Maharashtra, Pune
Adjudication order
Date of Order: 10th March, 2023

Adjudication order passed by the Registrar of Companies, Pune for default under Sub-section (10) and (11) of Section 118 of the Companies Act, 2013.

FACTS

Adjudicating Officer noticed that KFIPL had defaulted in observing the provisions of section 118(10) of the Companies Act, 2013 by not numbering its Board Meetings and the pages in the minute book of KFIPL. Further, the Minutes book was not signed by the Chairman and not numbered at all.

Section 118(10) of the Companies Act, 2013 provides that: “Every company shall observe secretarial standards with respect to general and Board meetings specified by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 (56 of 1980), and approved as such by the Central Government”.

Further, as per Section 118(11) of the Act provides that if any default is made in complying with the provisions of this section in respect of any meeting, the company shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who is in default shall be liable to a penalty of five thousand rupees.

Adjudicating Officer had issued an adjudication notice dated 10th February, 2023 under section 454(4) read with section 118 of the Companies Act, 2013 read with Rule 3(2) Of Companies (Adjudication of Penalties Rules), 2014 to KFIPL, PW, SJ, NV and AR, directors of KFIPL.

KFIPL in its reply to the adjudication notice submitted that owing to lack of knowledge on the part of KFIPL and lack of necessary professional guidance on the part of PW, SJ, NV and AR, the non-compliance of Section 118(10) of the Companies Act, 2013 read with Clause 7.1.4 of the Secretarial Standard-1 (SS-I) had occurred.

HELD

Adjudication Officer, after taking into account the various factors of the case mentioned above, imposed a penalty on KFIPL and its officers in default as per the below-mentioned table:

Sr. No.	Penalty imposed on:	Penalty Imposed (In Rs.)
1.	KFIPL	Rs. 25,000
2.	PW, Director	Rs. 5,000
3.	SJ, Director	Rs. 5,000
4.	NV, Director	Rs. 5,000
5.	AR, Director	Rs. 5,000

BCAJ Admin

Allied Laws

5. Jagadeesan and others vs. A. Logesh
AIR 2023 MADRAS 94
Date of order: 11th November, 2022

Registration – Unregistered agreement to sell – Non-registration is not a bar from specific performance [Registration Act, 1908, Section 17(1)(g), 49; Specific Relief Act, 1963, S. 20]

FACTS

The Plaintiff/Respondent filed a suit for the specific performance of a contract based on an unregistered agreement of sale before the District Court.

The Defendants/Petitioners challenged the maintainability of the said suit since the same was based on an unregistered sale agreement.

Hence the present petition.

HELD

In view of the express provision contained in section 49 of the Registration Act, the suit cannot be rejected on the grounds that the agreement is unregistered as per section 17 (1)(g) of the Registration Act and section 2(g) of the Contract Act. The Court referred to the decision in the case of D. Devarajan vs. Alphonse Marry & another reported in 2019 (2) CTC 290 in which it was held that the consequence of non-registration does not operate as a total bar to look into the contract. The Proviso to Section 49 of the Registration Act itself carves out two exceptions: (i) it can be used for any collateral purposes, and (ii) it can be used as an evidence in a suit for specific performance”.

In view of the above the petition was dismissed.

6. Parish Priest, Kanyakumari vs. State of Tamil Nadu
AIR 2023 MADRAS 70
Date of order: 3rd January, 2023

Gift deed – Absolute gift – failure to fulfil the purpose – In absence of revocation clause – Gift cannot return to the donor. [Transfer of Property Act, 1882, Section 126]

FACTS

The Petitioner-Church established a cooperative society in 1981 for the economic and social development of poor and gifted a piece of land to the Society. The State Government put up a shed on the said land with their own funds. The land continued to be in the possession of the church. However, with technical advancement in the field of textiles, society became redundant and was wound up in 2006.

After several requests to the State Government to reconvey the land, the Church filed a Writ in 2014. The Court directed the Respondents to consider the representation and pass orders. The Respondent rejected the application of the Church.

Hence the present Petition.

HELD

The Gift deed of 1981 was an absolute gift deed i.e., without any conditions. Therefore, the gift cannot be revoked on the objects becoming redundant. Further, the donor will not have any right to make a claim for the return of the gifted land on the failure of the purpose for which it was gifted.

The Petition was dismissed.

7. Union of India vs. Maheswari Builders, Rajasthan
AIR 2023 MADRAS 73
Date of order: 3rd January, 2022

Arbitration – Setting aside arbitral award – Award passed after considering all the facts – No interference required. [Arbitration and Conciliation Act, 1996, Section 34; Contract Act, 1872, 63]

FACTS

The Respondent was engaged by the Petitioner to carry out civil construction work. The Respondent requested an extension of time for completing certain phases of the project as per their contract and the same would be granted. An issue arose between them with respect to the claims made by the Respondent and the Respondent invoked the arbitration clause.

Before the Arbitration Tribunal, after making its claims, the Respondent vide an affidavit withdrew from the arbitration and submitted before the Arbitration Tribunal that the affidavit was submitted under the pressure of the Petitioner on a promise for an extension of time. The Tribunal on considering all the facts passed an order allowing some of the claims of the Respondent.

The award was challenged.

HELD

The award was challenged on the grounds that the Arbitration proceedings should not have proceeded when both the parties had withdrawn from the Arbitration. It was held that the Arbitrator was economical with reasons in support of the order. As the affidavit was not given under free consent, the same cannot be considered as it amounts to coercion. The award was passed after considering all the facts of the case.

The Application is dismissed.

8. Shri Ram Shridhar Chimurkar vs. Union of India and another
AIR 2023 SUPREME COURT 618
Date of order: 17th January, 2023

Succession – Pension – Government employee – Adoption after death by the spouse – Not a family member [Central Civil Services (Pension) Rules, 1972, R. 54, Constitution of India]

FACTS

In the instant case after the death of a retired government employee, his widow adopted a son. The adopted son claimed that they were entitled to family pension payable to the family of the deceased government employee. On the rejection of his plea, the appellant filed an application before the Central Appellate Tribunal. The Tribunal allowed the application and directed the Respondents to consider the Appellant’s claim for family pension by treating him as the adopted son of the deceased government employee directing the Respondents to consider the plea of the appellant.

On a Writ Petition, the Hon’ble High Court reversed the order of the Tribunal. Hence the present appeal.

HELD

The Supreme Court considered provisions of the Hindu Adoptions and Maintenance Act, 1956 (HAMA Act). It highlighted that the provisions of the HAMA Act determine the rights of a son adopted by a Hindu widow only vis-à-vis his adoptive family. Rights and entitlements of an adopted son of a Hindu widow, as available in Hindu Law, as against his adoptive family, cannot axiomatically be held to be available to such adopted son, as against the government, in a case specifically governed by extant pension rules. It held that Rule 54 (15)(b) of the Central Civil Services (Pension) Rules, 1972 states that a legally adopted son or daughter by a government servant would be entitled to a family pension. The phrase “in relation to” would be vis-à-vis the Government servant and not his widow.

The appeal is dismissed.

9 GM Heights LLP vs. Municipal Corporation of Greater Mumbai and Ors
WP No. 5303 of 2022 (Bom)(HC) (UR)
Date of order: 29th March, 2023

Tenancy – Tenants – limited rights – Cannot dictate the terms of redevelopment. [Mumbai Municipal Corporation Act, 1888, Section 354, Development Control and Promotion Regulations for Greater Mumbai, R. 33(19), 33(7)(A) ]

FACTS

The Petitioner is an LLP and the owner of the land. There was a building standing on the land, which had 21 tenants. The building had some commercial tenements and some residential tenements. The building had become dilapidated. A notice was issued by the respondent-Municipal Corporation of Greater Mumbai to the owners/occupants under Section 354 of the Mumbai Municipal Corporation Act, 1888. The building ultimately was demolished in August 2021.

The petitioner, in these circumstances, proposed to undertake redevelopment so as to construct a commercial building, which according to the petitioner was permissible as per the rules.

Out of 21 tenants, one tenant (respondent no. 3) objected to the permanent alternate accommodation. The petitioner approached the Court primarily on the grounds that respondent no.3 who is only one tenant out of the majority of the 21 tenants, cannot obstruct the redevelopment in such condition as inserted in the Intimation of Disapproval (IOD) by the Municipal Corporation.

HELD

Respondent no.3 is not entering into an agreement for an alternate accommodation with the petitioner and thereby is stalling the entire redevelopment. The approach of respondent no.3 in the present case is most unreasonable and adamant. Respondent no.3, in fact, by his obstinate conduct is stalling the entire redevelopment, which he certainly cannot do. Respondent no.3 in his capacity as a tenant has limited rights. Respondent No.3 within the ambit of such rights cannot dictate to the petitioner-owner, as to the nature of redevelopment. Recognising such rights would, in fact, take away and/or obliterate the legal rights of the owners of property to undertake redevelopment in a manner as may be permissible in law, including under the Development Control and Promotion Regulations. Thus, tenants cannot take a position to foist, dominate and/or dictate to the owner the nature and the course of redevelopment the owner desires to have. The rights of the owners of the property to undertake redevelopment of the manner and type they intend, cannot be taken away by the tenants, minority or majority. Tenancy rights cannot be stretched to such an extent that the course of redevelopment can be taken over by the tenants, so as to take away the basic corporeal rights of the owner of the property, to undertake redevelopment of the owner’s choice. The only rights the tenants have would be to be provided with an alternate accommodation of an equivalent area occupied by them before the building was demolished.

The Petition was allowed.

BCAJ Admin

Corporate Law Corner Part A : Company Law

1 Case law no. 01/April 2023

Sonasuman Constech Engineers Pvt Ltd

ROC/PAT/SCN/143/36124

Office of the Registrar of Companies, Bihar-Cum-Official Liquidator, High Court, Patna

Adjudication order

Date of order: 04th January, 2023

Adjudication order for penalty for violation of section 143 of the Companies Act, 2013 on Auditors for non-reporting of non-compliance by SCEPL in the Audit report.

FACTS

SCEPL was incorporated on 30th October, 2017 having its registered office at Patna.

RK – KV and Associates were the Auditors for the financial years ending 31st March, 2018, 31st March 2019 and BKJ – BJ and Associates for financial year ending 31st March, 2020 as per the MCA Portal and AOC-4 filed by SCEPL.

The Registrar of Companies, Bihar-Cum-Official Liquidator, High Court, Patna (‘RoC’) had issued a show cause notice to the abovementioned Auditors for default under section 143 of the Companies Act, 2013 for which no reply was received.

As per Section 129(1) of the Companies Act, 2013, the financial statements shall give a true and fair view of the state of affairs of the Company, comply with the accounting standards notified under section 133 and be in the form as provided in Schedule III.

The Auditors failed to comment on the following:

As per Schedule III of the Companies Act, 2013 for each class of share capital the number and amount of shares authorised; the number of shares issued, subscribed and fully paid, and subscribed but not fully paid; par value per share; a reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period in the notes to the accounts of the Company. However, the same was not disclosed by SCEPL.
SCEPL did not classify the loans and advances in F.Ys. 2017-2018, 2018-2019 and 2019-2020 as Secured / Unsecured as per Schedule III.
SCEPL in the balance sheet for F.Ys. 2017-2018 and 2018-2019 showed long term borrowings of Rs. 51,80,000 and Rs. 1,13,79,970, respectively, but failed to sub-classify them as Secured / Unsecured long-term borrowings.
SCEPL had shown advances from relatives and customers in F.Y. 2019-2020 but did not classify them separately as loans from relatives and others.
Disclosure is required as per AS-18 of transactions between related parties during the existence of a related party relationship, such as the following: the name of the transacting related party; description of the relationship between the parties; description of the nature of transactions; volume of the transactions either as an amount or as an appropriate proportion; any other elements of the related party transactions necessary for an understanding of the financial statements; the amounts or appropriate proportions of outstanding items pertaining to related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date; and amounts written off or written back in the period in respect of debts due from or to related parties. SCEPL did not disclose the name and nature of the Related Party Transactions as per AS-18.

Section 450 of the Companies Act, 2013 is a penal provision for any default/violation where no specific penalty is provided in the relevant section/rules;

Further SCEPL being a small company, applicability of Section 446B of the Companies Act, 2013 provides for lesser penalties for certain companies

HELD

The Adjudication Officer held that RK – KV and Associates and BK – JBJ and Associates were liable under section 450 for violation of section 143 of Companies Act, 2013. The penalty was levied as mentioned below:

Violation of section	Penalty imposed on Company / directors	Penalty specified under section 450 of the Companies Act, 2013	Penalty imposed by the Adjudicating Officer under section 454 read with section 446B of the Companies Act, 2013
Section 143 of Companies Act, 2013	RK – KV and Associates (F.Y. 2017-2018 and F.Y. 2018-2019)	Rs. 10,000*2 no. of years Rs. 20,000	Rs. 10,000
Section 143 of Companies Act, 2013	BK – JBJ and Associates (F.Y. 2019-2020)	Rs. 10,000	Rs. 5,000

Violation of section

Penalty imposed on Company
/ directors

Penalty specified under
section 450 of the Companies Act, 2013

Penalty imposed by the
Adjudicating Officer under section 454 read with section 446B of the
Companies Act, 2013

Section
143 of Companies Act, 2013

RK – KV
and Associates (F.Y. 2017-2018 and F.Y. 2018-2019)

Rs. 10,000*2

no. of years

Rs. 20,000

Rs. 10,000

Section
143 of Companies Act, 2013

BK – JBJ
and Associates (F.Y. 2019-2020)

Rs. 10,000

Rs. 5,000

2 Case law no. 02/April, 2023

Adani Transmission Step-One Ltd

ROC-Guj/Adj. Order/Adani/Section 117/7359 to 7363

Registrar of Companies, Gujarat, Dadra & Nagar Haveli

Adjudication order

Date of order: 09th February, 2023

Adjudication order for penalty under section 454 of the Companies Act, 2013 read with Companies (Adjudication of Penalties) Rules, 2014 for violation of Section 117(1) r.w.s 14(1) of the Companies Act, 2013.

FACTS

ATSOL was incorporated on 23rd September, 2020 having its registered office at Ahmedabad.

ATSOL had filed the E-Form MGT-14 for passing a Special Resolution relating to the issue and allotment of 25 crore Compulsorily Convertible Debentures of Rs. 100/- each to ATL which was approved by the meeting of members held on 27th September, 2022.

ATSOL should have filed the E-Form MGT-14 within 30 days from the date of passing such a resolution. However, the said resolution was filed with the office of the Registrar of Companies on 05th January, 2023 i.e. with a delay of 71 Days. Thus, the company and its director have committed default and violation of Section with 117(1) of the Companies Act, 2013.

Section 117(1) of the Companies Act, 2013 provides as under,

(1) Where…….

(a) a copy of every resolution or any agreement in respect of matters specified in sub-section (3) together with explanatory statement as per section 102 shall be filed with the Registrar within 30 days of the passing or making thereof.

As per section 117 (3) (a), section (3) shall apply to all the special resolutions to be filed by the company.

Further, as per provisions of Section 117(2) of the Companies Act, 2013, where any company fails to file the resolution or the agreement of sub-section (1), such a company and every officer who is in default shall be liable to a penalty of Rs. 10,000 and in case of continuing failure, with a further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 200,000 and every officer of the company who is in default including liquidator of the company, if any, shall be liable to a penalty of Rs. 10,000 who is in default and in case of continuing failure with a further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 50,000.

Whereas, RoC, Gujarat had a reasonable cause to believe that the provisions of section 117 of the Companies Act, 2013 had not been complied with within the time frame as prescribed under the provisions of section 117(1) of the Companies Act, 2013. Therefore, ATSOL and AKG, RS and RK, its officers in default had violated the provisions of section 117(1) of the Companies Act, 2013 which were under the purview of section 454(3) of the Companies Act, 2013 and were liable to be penalized under section 446 B of the Companies Act, 2013.

Further, the office of RoC, Gujarat, Dadra & Nagar Haveli had issued a show cause notice for default under section 117(1) of the Companies Act, 2013 dated 10th January, 2023 for which the practicing Company Secretary (CS) of ATSOL submitted that inadvertently the E-Form MGT-14 could not be filed within the time frame as prescribed under the provisions of section 117(1) of the Companies Act, 2013. CS further submitted that the penalty may not be imposed on the company and its officers in default.

HELD

While adjudging the quantum of penalty under section 117(3) of the Companies Act, 2013, the Adjudication Officer shall have due regard to the following factors, namely:

(a) The amount of disproportionate gain or unfair advantage, whenever quantifiable, made as result of default.

(b) The amount of loss caused to an investor or group of investors as a result of the default.

The adjudication officer based on the above-mentioned factors noted that the details of disproportionate gain or unfair advantage or loss caused to the investor, as a result of the delay to redress the investor grievance are not available on the record. Also, it was stated that it was difficult to quantify the unfair advantage or the loss caused to the investors in a default of this nature.

Hence, penalty was imposed on ATSOL and every officer in default as given in the below mentioned table:

Violation of section	Penalty imposed on Company / directors	Penalty calculated as per Section 117(2) of the Companies Act, 2013	Total Penalty (Rs)
Violation of Section 117(1)	On ATSOL	Rs. 10,000+71*100 = Rs. 17,100	Rs. 17,100
	AKG, Director	Rs. 10,000+71*100 = Rs. 17,100	Rs. 17,100
	RS, Director	Rs. 10,000+71*100 = Rs. 17,100	Rs. 17,100
	RK, Director	Rs. 10,000+71*100 = Rs. 17,100	Rs. 17,100

BCAJ Admin

Allied Laws

1 Senior Superintendent, Deptt. of Post and others vs. Bundu and Another
AIR 2023 Allahabad 33
Date of order: 30th November, 2022

Speed post – Lost articles – Department does not have immunity – Order of Lok Adalat awarding cost – valid. [Legal Services Authorities Act, 1987; Post Office Act, 1898, Section 6]

FACTS

The Department of Post preferred a Writ Petition against an order of the Lok Adalat where compensation of Rs. 4,500 was awarded on account of the loss of articles through speed post.

HELD

It was held that speed post services were introduced 88 years after the enactment of the Post Office Act, 1898 and hence weren’t covered within the ambit of immunity under section 6 of the Post Office Act, 1898.

It was also held that the Lok Adalat had valid jurisdiction to award such compensation. Further, it was remarked that the Department should refrain from litigating such small issues where the cost of litigation is higher than the amount involved.

2 Sridhar Balkrishna and others vs. Evaristo Pinto and others
AIR 2023 (NOC) 75 (BOM)
Date of order: 4th January, 2022

Registration – Compulsory registration – Non-mentioning of composition deed – Not exempted from registration. [Registration Act, 1908. Section 17 (1), 49]

FACTS

The Respondents/Original Plaintiffs, filed the suit in 1983 for partition of the suit property and praying for allotment of 1/3rd share in an immovable property. The Plaintiff had purchased an undivided 1/3rd share of the property from his vendor by a registered sale deed. In the plaint itself, it was stated that the Plaintiff,Original Defendant No.1 and his wife the Original Defendant No. 2, had agreed on the division of the property, but the said agreement was signed only by Original Defendant No 1, while his wife did not sign the same. It was also stated in the plaint that the said agreement was never presented for registration before the office of the Sub-Registrar. The said agreement was entered into on 17th July, 1980, but according to Plaintiff, it was never acted upon. On this basis, the Plaintiff sought the decree of partition and allotment of 1/3rd share in the property, which would include the residential house occupied by him.

The trial court allowed the decree to the plaintiffs. The appellate court dismissed the appeal of the appellants. On the second appeal.

HELD

A perusal of the agreement dated 17th July, 1980 shows that there is a reference made to the property in question and it is specifically recorded that from the date of the agreement, a specific division of the property shall stand exclusively allotted to the Original Plaintiffs and they shall be entitled to possession of the same. The said document did not reduce in writing any settlement or an arrangement arrived at in the past, to exempt it from the mandatory requirement of registration under the provisions of the Registration Act.

Once it is found that the said document was compulsorily registrable under section 17(1)(b) of the Registration Act, the effect of non-registration under section 49 of the said Act must follow. In this regard, the attempt made on behalf of the Appellants to wriggle out of the mandatory requirement of section 17(1)(b) of the Registration Act, by claiming that the agreement dated 17th July, 1980, was a composition deed, cannot be accepted. A perusal of the agreement dated 17th July, 1980, does not give any indication that it was a composition deed and that under section 17(2)(i) of the Registration Act, it could be said to be exempt from the applicability of section 17(1)(b) of the said Act.

The Appeal was dismissed.

3 D. T. Rajkapoor Sah thru LRs. and others vs. Kamakshi Bai and others
AIR 2023 (NOC) 78 (MAD)
Date of order: 30th November, 2022

Succession – Hindu Undivided Family – Daughters and sisters are coparceners – Entitled to an equal share in property and profits [Hindu Succession Act, 1956, Section 6A]

FACTS

The grandfather of the Plaintiffs and Defendants purchased the suit property. The father of the Plaintiffs and Defendants received the said property vide partition deed dated 7th March, 1964. The father died intestate on 30th May, 2000.. The four sisters (Plaintiffs) filed the present suit for partition for partitioning the suit property and allotment of 4/7th (1/7th each) shares to them against their three brothers (Defendants).

The trial court allowed the partition in favour of the sisters. On appeal.

HELD

The separate property once thrown into the coparcenary stock, then by virtue of Doctrine of Blending, it also becomes the coparcenary property. If self-acquired property was made available for partition along with joint family property, that itself is a proof of blending. By the doctrine of blending the suit property loses its characteristic as separate property and the coparcener loses his/her claim against it. In light of the amendment in the amendment in the Hindu Succession Act in 2005 and the decision of the Hon’ble Supreme Court in the case of Vineeta Sharma vs. Rakesh Sharma 19 (2020) 9 SCC 1, the rights of the daughters are made equivalent to that of the son. The amendment is held to be retroactive and by their birth, the Plaintiffs also got the same rights in the coparcenary property and since the property of the father was not partitioned until the suit was filed in 2013, the property will be available to all seven coparceners.

The appeal was dismissed.

4 Kavita Kanwar vs. Pamela Mehta and Others
(2021) 11 SCC 209
Date of order: 19th May, 2020

Will – Legitimate suspicion – Several instances of suspicion – Probate was denied. [Indian Succession Act, 1925, Sections 61, 62, 63, 73, 111; Evidence Act, 1872, S. 68]

FACTS

The Will of Amarjeet Mamik (mother) was dated 20th May, 2006, and she expired on 21st May, 2006, leaving behind two daughters and one son. The properties in question were received by her from her father vide Will dated 14th February, 2001.

The father during his lifetime on 25th January, 2001, gifted the ground floor of the property to Kavita Kanwar (The appellant) whereas the first floor and other portions came to the testatrix. Pamela Mehta (Respondent No. 1) was the elder and widowed daughter of the testatrix who was living with her unmarried daughter on the first floor and also taking care of the testatrix. The son of the testatrix, Col. (Retd.) Prithviraj Mamik (Respondent No. 2) was bequeathed the ‘credit balance’ lying in the bank accounts with a clarification that he shall not inherit any portion of the immovable assets of the testatrix.

The appellant being the executor, filed for probate which was challenged. The Trial Court declined to grant probate on the grounds of suspicion. The High Court upheld the views of the Trial Court.

HELD

The Supreme Court took into consideration facts such as the executor being a major beneficiary, the son and another widowed daughter not included in the execution of the will, only the presence of the appellant executor at the time of the execution of the will, unexplained unequal distribution of property, manner and language of the will, unreliable witnesses, etc..

Held that, before entering into the provisions of law and judgements it is important to understand the facts surrounding the will. Therefore, taking into consideration all the circumstances surrounding the Will, the order of the High Court refusing the probate was upheld.

The appeal was dismissed.

BCAJ Admin

Corporate Law Corner Part A : Company Law

17 Case Law no. 1/ March 2023

Raj Hospitality Pvt Ltd

RD(WR)/Sec. 454(5)/ Raj Hospitality /T35477447/2021/3397

Regional Director Western Region, Mumbai Date of Order: 26th November, 2021

Appeal order against Adjudication Order for delayed filing of Annual Returns and Financial Statements and violating Section 92(5) and 137(3) of the Companies Act, 2013

FACTS

Registrar of Companies, Goa (‘RoC’) had observed from the master data, that M/s RHPL had filed its financial statements and annual returns on 1st April, 2019 for the financial year ending 31st February, 2017 But returns for the financial year ending 31st March, 2018 were not filed and default continued. The RoC had issued a show cause notice to M/s RHPL and its directors seeking information and reply from M/s RHPL.

As per records maintained by the RoC, Mr. RM director was disqualified under section 164(2)(a) of the Companies Act, 2013 for the period 01st November, 2016 to 31st October, 2021. Therefore, penalty was not imposed on him.

An adjudication order was passed by the Registrar of Companies, Goa on 09th May, 2019 wherein the penalty was imposed as per table below:

Document required to be filed	No. of days of default	Penalty imposed on Company/ Director	First Default (In Rs.)	Continued Default (In Rs.)	Total (In Rs.)
Financial Statements under section 137(3) of the Companies Act, 2013	189 days	On M/s RHPL	1000X189 = 1,89,000		1,89,000
		Mr. ATM	1,00,000	100X189=18,900	1,18,900
		Mrs. JM	1,00,000	100X189= 18,900	1,18,900
		Mr. AM	1,00,000	100X189= 18,900	1,18,900
Annual Returns u/s 92(5) of the Companies Act, 2013	160 days	On M/s RHPL	50,000	100X160=16,000	66,000
		Mr. ATM	50,000	100X160= 16,000	66,000
		Mrs. JM	50,000	100X160= 16,000	66,000
		Mr. AM	50,000	.100X160= 16,000	66,000
			Total		8,09,700

*No. of days were calculated from November, 2018 and December 2018 for Financial Statement and Annual Return respectively till the date of order.

An appeal in Form ADJ (SRN T35477447) was filed on 13th August, 2021. On examination of the application/appeal it was observed that the said appeal was not filed within sixty days (60) from the date of passing of adjudication order by the RoC (i.e. 09th May, 2019). Hence, M/s RHPL filed an application for condonation of delay vide form CG-1 and order was received by M/s RHPL in this regard. Accordingly, the appeal was considered for further processing.

In Appeal, M/s RHPL had stated as under:

M/s RHPL had held its Annual General Meetings for the year ended 31st March, 2017 on 30th May, 2017 and for the year ended 31st March, 2018 on 29th September, 2018. Accordingly, the company was required to file Financial Statements and Annual Returns for the financial year ended 31st March, 2017 on or before 27th October, 2017 and 28th November, 2017 and for the year ended 31st March, 2018 on or before 27th October, 2018 and 27th November, 2018 respectively (extended up to 31st December, 2018 vide General Circular No. 10/2018 dated 29th October, 2018). M/s RHPL submitted that the financial statements for financial year ended 31st March, 2017 and 31st March, 2018 were filed on 1st April, 2019, 5th December, 2019 and 06th December, 2019 respectively.

M/s RHPL also submitted that M/s RHPL is a small company having paid-up share capital of Rs. 2,00,000. M/s RHPL admitted that the filing of the Annual Return was delayed due to reasons beyond the control of M/s RHPL. M/s RHPL prayed that the financial statements and annual returns filed be requested to be approved and taken on record and the delay be condoned and to withdraw the order of Adjudication of Penalty dated 09th May, 2019 as the amount of penalty awarded would put further financial burden on Mr. ATM, Mrs. JM, Mr. AM who are already facing financial problems due to the ongoing pandemic. Further, M/s RHPL had already filed delayed documents with the RoC by paying additional fees.

Appellate authorities provided hearing to M/s RHPL through Video Conference.

HELD

The appeal was allowed and directed to the representative of M/s RHPL that the revised penalty to be paid as under:

Sr. No.	Document required to be filed	No. of days of default	Penalty to be paid by Company/Director (Officer in default)	Penalty (Rs.)
1	Financial Statement under section 137(1) of the Companies Act, 2013	189 days	On M/s RHPL	47,250
			Mr. ATM	29,725
			Mrs. JM	29,725
			Mr. AM	29,725
2	Annual Returns under section 92(4) of the Companies Act, 2013	160 days	On M/s RHPL	16,500
			Mr. ATM	16,500
			Mrs. JM	16,500
			Mr. AM	16,500
Total Penalty Amount				2,02,425

M/s RHPL submitted the copies of challan/payment receipt for penalties paid to the MCA as directed in virtual hearing. On payment of the Penalty amount of Rs. 2,02,425 for the violation of Section 92(5) and 137(3) of the Companies Act, 2013, the Appeal was disposed of.

BCAJ Admin

Allied Laws

51 Mandira Paul and another vs.

Maya Rani Dev and another

AIR 2023 GAUHATI 4

Date of order: 11th November, 2022

Wills – Suspicious circumstances surrounding the Will – Propounder failed to establish the genuineness – Probate rejected. [S. 273, 270, 63, Indian Succession Act, 1925; S. 68 of Indian Evidence Act, 1872]

FACTS

The Plaintiff instituted a suit seeking probate of her mother’s will where she was appointed as the executor. A deity was impleaded as the Petitioner No. 2. Her two sisters were impleaded as opposite parties. According to the will, the three daughters and the deity were each entitled to 1/4th share in the property.

The District Court dismissed the suit on several grounds such as non-mentioning the date of death, tampering with the will and lack of confirmation if it was the last will.

On appeal to the High Court

HELD

The onus to prove the due execution of the will is on the propounder. The evidence brought on record must be credible and inspire confidence and the same cannot be assumed to be satisfied by mere mechanical compliance.

As there are several instances which bring doubt on the genuineness of the will, the same cannot be ignored by the Court. As the testatrix has failed to discharge the onus of proof regarding the genuineness of the will, the decision of the lower Court is upheld.

The appeal was dismissed.

52 Neeraj Garg vs. Sarita Rani and others

(2021) 9 SCC 92

Date of order: 2nd August, 2021

Judiciary – Cannot pass remarks on the counsel – The same has no bearing on the process of adjudication – Can affect the career and repute of counsels.

FACTS

The Appellant is a practicing lawyer before the High Court of Uttarakhand with around 17 years of experience. The High Court in its order passed certain remarks on the lawyer regarding his conduct without giving him an opportunity of being heard.

On an appeal to the Supreme Court on this limited issue.

HELD

The conduct of an advocate has no bearing on the process of adjudication. Further, no opportunity was given to the counsel for his explanation. Such remarks cast an apprehension on the professional integrity of the advocate and it will adversely impact his professional career. The offending remarks are to be recalled to avoid future harm.

The appeal was accordingly disposed of.

53 UOI vs. Manraj Enterprises

(2022) 2 SCC 331

Date of order: 18th November, 2021

Arbitrator – Creation of a contract – Powers – Cannot award interest which is contrary to the contract. [S. 31, 28, 34, Arbitration and Conciliation Act, 1996]

Appearing Counsels – Cannot provide concession which is contrary to law – No estoppel against the Law.

FACTS

On account of a dispute between the Union of India and a contractor, the issue was referred to Arbitration. The Sole Arbitrator passed an award wherein, pendente lite and future interest was also prescribed.

The Union of India preferred an appeal before the High Court (Single Bench) on the issue of interest. The Single judge of the High Court dismissed the appeal. The Division Bench also dismissed the appeal of the Union of India.

On an appeal to the Supreme Court.

HELD

The Arbitrator is a creation of a contract. The Arbitrator cannot award interest if the same is contrary to the terms of the contract between the parties.

Further, if any concession is proposed by the Counsel and the same is contrary to the law, it cannot bind the parties. There can be no estoppel against the law.

The appeal was accordingly allowed.

54 Sri Ganesh Sai Granites and Minerals vs. Commissioner and Inspector General

AIR 2023 (NOC) 14 (AP)

Date of order: 25th August, 2022

Partnership – Issue raised before the Registrar of Firms – Registrar is duty-bound to look into the complaint and act on it. [S. 64, Partnership Act, 1932]

FACTS

A dispute arose between the partners of a partnership firm. It was claimed that one of the partners had forged the signatures of the other partners and created a deed of reconstitution of the Firm. The said deed was registered before the Registrar of the Firms.

One of the partners filed a complaint before the Registrar of Firms explaining the details, requesting the registrar not to act on the reconstitution deed filed before it and to rectify the same.

There was no enquiry or rectification done by the Registrar of Firms.

On a Writ Petition.

HELD

As per section 64 of the Indian Contract Act, 1932 and State Rules thereof, the partners are entitled to approach the Registrar of Firms to ascertain the correct facts. The Registrar is duty-bound to conduct an enquiry and pass necessary orders. Refusal or inaction by the Registrar is not proper. The Registrar of Firms is directed to conduct an enquiry as per the complaint.

The petition was accordingly allowed.

55 Jagdish Gotam vs. State of Madhya Pradesh and others

AIR 2023 (NOC) 19 (MP)

Date of order: 22nd July, 2022

Senior Citizen – Seeking urgent relief – Right to live with dignity – Alternate Remedy not to be applied strictly – Writ Petition allowed. [Article 21, 226, Constitution of India]

FACTS

The Petitioner claimed to be the owner of a house situated at Jabalpur based on a registered sale deed. He was living with his wife. He allowed his son and daughter-in-law to live with him.

On account of matrimonial disputes between his son and his daughter-in-law, his son left the house. The daughter-in-law ousted the petitioner and his wife from the house.

On a Writ Petition for recovery of vacant possession of his self-acquired property.

HELD

The objections raised by the daughter-in-law (Respondent No. 4) are that there is an alternative remedy available under the provision of the Maintenance and Welfare of Parents and Senior Citizens Act, 2007 and she denied any harassment.

As per Article 21 of the Constitution, every citizen has the right to live with dignity. In such a case it would not be appropriate for a senior citizen to go through the statutorily prescribed alternate remedy. The rule of alternate remedies should not be strictly applied.

The daughter-in-law and her children are to be evicted from the premises and a vacant possession is to be handed over to the Petitioner.

The petition was accordingly allowed.

BCAJ Admin

Corporate Law Corner : Part A | Company Law

9 M/s. Bock Compressors India Pvt Ltd
ROC-Guj/Adj. Order/Bock Compressors/ Sec 134/ 3323-3326
Office of Registrar of Companies,
Gujarat Dadra & Nagar Haveli
Adjudication Order
Date of Order: 08th July, 2022

Order for penalty under section 454 of the Companies Act, 2013 read with Rule 5 of Companies (Adjudication of Penalties) Rule, 2014 for Violation of Section 134 of the Companies Act, 2013 read with Rule 8(3) of the Companies (Accounts) Rules, 2014.

FACTS

M/s BCIPL is registered under the provisions of the Companies Act, 1956 in the state of Gujarat.

M/s BCIPL had filed a suo-moto application through e-form GNL-1 for adjudicating the penalty for violation of Section 134 of the Companies Act, 2013 read with Rule 8 of the Companies (Accounts) Rules, 2014 towards non-disclosure related to the conservation of energy, technology absorption, foreign exchange earnings and outgo in the manner as prescribed under Rule 8 of the Companies (Accounts) Rules, 2014.

As per suo-moto application, the Board of Directors had at its meeting approved Board’s Report for the Financial Year ended on 31st March, 2015 under the provisions of section 134 of the Companies Act, 2013. Further, as per the requirements of the above provisions, M/s BCIPL was required to make disclosure in the said Board’s Report relating to the conservation of energy, technology absorption, foreign exchange earnings and outgo in the manner as prescribed under Rule 8 of the Companies (Accounts) Rules, 2014.

However, it was stated in the Board’s Report that due to the non-coverage of activities, disclosure is not required. Thus, M/s BCIPL had defaulted to comply with the requirement of the above provisions due to wrong interpretation while approving Board’s Report.

As per section 134(3)(m) of the Companies Act, 2013, the Board’s Report shall include, the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed.

Whereas, as per section 134(8) of the Companies Act, 2013, if a company is in default in complying with the provisions of this section, the company shall be liable to a penalty of Rs.3,00,000 and every officer of the company who is in default shall be liable to a penalty of Rs.50,000.

In view of the above facts, there was a reasonable cause to believe that the provision of Section 134 of the Companies Act, 2013 had not been complied with by M/s BCIPL and Mr DRS, Ms BMBB, directors of M/s BCIPL. Thus, M/s BCIPL, Mr DRS and Ms BMBB had rendered themselves liable for penal action as provided in sub-section (8) of section 134 of the Companies Act, 2013. As per section 134(8), there is a provision for penalty for which the ROC is empowered to adjudicate under section 454(3) of the Companies Act, 2013.

In response to the application dated 25th May, 2022, a notice dated 14th June, 2022 was issued to M/s BCIPL and its directors in default by giving an opportunity to be heard in the matter on 21st June, 2022. A meeting for adjudicating the penalty for the violations of section 134 of the Companies Act, 2013 was held on 21st June, 2022. During the meeting, Mr. DRS and Ms. BMBB, Mr. KS (PCS) were present and admitted to committing the above default and requested that a minimum penalty may be levied.

HELD

There was a reasonable cause to believe that M/s BCIPL had failed to comply with the provisions of section 134 of the Companies Act, 2013. Hence, penalty as stated below was levied and the matter was disposed of.

Penalty levied on M/s BCIPL: Rs.3,00,000 Penalty for officers in default: Mr DRS, Director: Rs.50,000 and Ms BMBB, Director: Rs.50,000.

10 Strong Infracon Pvt Ltd (now amalgamated with Elite Realcon Pvt Ltd)
No. ROC/LEGAL/ADJ/2023/138312/penalty order/2191-2195
Office of Registrar of Companies (West Bengal)
Adjudication Order
Date of order: 29th May, 2023

Adjudication order for violation of provisions of the Section 143 r.w.s 129 of the Companies Act, 2013 by the Auditors of the Companies in relation to various non-disclosures in the financial statements of the Company.

FACTS

During the inspection conducted under section 206(5) of the Companies Act, 2013 in the matter of merger of M/s SIPL (Transferor Company) with M/s. ERPL (Transferee Company) following violations were observed:

Non-disclosure of key management personnel, related parties, and related party transactions in the financial statements for the years 2010-11 to 2015-16.
Non-disclosure of details of investments in the financial statements for the years 2010-11 to 2015-16.
Non-disclosure of details of short-term loans and advances in the financial statements for the years 2011-12 to 2015-16.
Non-disclosure of details of shareholders holding more than 5 per cent shares in the financial statements for the years 2009-10 to 2015-16.
Non-disclosure of details of sundry creditors in the financial statements for the year 2015-16.

Adjudication notice was issued under section 454(4) read with Rule 3(2) of the Companies (Adjudication of Penalties), 2014 as amended by Amendment Rules, 2019, to M/s AU & Co and M/s AK & Co, Auditors of M/s SIPL for the violation of the provisions of the section 143 and section 129 of the Companies Act, 2013 and given an opportunity to submit their reply as to why the penalty should not be imposed under the provisions of section 450 of the Companies Act, 2013.

Thereafter a notice of hearing was issued scheduling a physical hearing.

“Section 143(3) states that, the auditor’s report shall also state—

(a) whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit;

(b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him;

(c) whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report;

(d) whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;

(e) whether, in his opinion, the financial statements comply with the accounting standards;

(f) the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;

(g) whether any director is disqualified from being appointed as a director under sub-section (2) of section 164;

(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;

(i) whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls;

(j) such other matters as may be prescribed.”

In reply to the adjudication notice submitted by M/s ERLP it was stated that:

M/s SIPL was non-existent as the same had been merged with ERLP w.e.f 1st April, 2015 by the order of the Hon’ble High Court, Calcutta dated 06th January, 2017 [CP No. 768 of 2016].

Ms CKJ, Advocate, being the Authorised Representative of Auditors attended the hearing physically and submitted that the enactment of Section 134 shall have prospective effect from the date of notification, relying upon the judgment of the apex court [SLP 459/2004] and not retrospective effect.

Further, it was stated that the Ld CJM, Special Court had also disposed of the cases directing the accused to take plea before the appropriate forum as the offence has been decriminalised.

Ms CKJ requested to drop the adjudication proceedings on the grounds that M/s SIPL was already amalgamated by virtue of the Hon’ble High Court, Calcutta in the year 2017 w.e.f. 1st April, 2015.

HELD

The auditors are liable to penalty under section 450 of the Companies Act, 2013 for their non-compliance with the provisions of section 143. Accordingly, a penalty of Rs.90,000 was imposed on the Auditors of the Company.

M/s AU & Co and M/s AK & Co, Auditors of M/s SIPL were required to comply with the order of adjudication within the prescribed time, and failure to do so may result in penal action without further intimation.

BCAJ Admin

Allied Laws

20 Jagrutiben Dharmeshbhai Suhagiya – Appellant
AIR 2023 Gujarat 86
Date of order: 13th January, 2023

Succession – Natural Guardian – to sell the property of minor – Property in question is an undivided share in the joint family property – Out of the purview – No permission of the Court required to sell. [S. 8, Hindu Minority and Guardianship Act, 1956 (Act)]

FACTS

The appellant (Jagrutiben Suhagiya) lost her husband. The appellant, being in dire need of the funds for the education of her children wished to sell the undivided share of the property of the minors. For this purpose, the appellant filed an application before the Additional Sessions Judge, wherein the appellant’s application was partly allowed, granting guardianship and rejecting the permission to sell the share in the joint family property. Aggrieved by the same, the appellant filed appeal before the Hon’ble Gujarat High Court. The fundamental question before the Bench was whether the restriction in section 8 of the Act, i.e., requirement of approval of the Court for alienating immovable property is applicable to a minor’s undivided share in a joint family property or not.

HELD

Relying on the case of Krishnakant Maganbhai vs. State of Gujarat (1961 FLR 108), the Court held that the requirement of obtaining permission before alienating the property of a minor would not apply in respect of an undivided interest in the joint family property. The Hon’ble Court further held that the concept of guardian is out of the purview of section 8 of the Act with respect to an undivided interest in a joint family property. The Manager or the Karta of the joint family could also alienate the property without acquiring any permission.

The appeal was allowed.

21 A. Wilson Prince v. Nazar and others
AIR 2023 Supreme Court 2384
Date of order: 15th May, 2023

Will – Probate granted on 29th July, 1972 – Application by an alleged beneficiary for the supply of a copy of the will in 2016 – Records either destroyed under the Destruction of Records Act, 1917 or returned to the executor – No dispute regarding bequeathment of the deceased’s property till date from anyone – Person allegedly claiming to be the beneficiary never saw the will – High Court justified in refusing to grant any relief. [Indian Succession Act, 1925]

FACTS

Rev. Salusbury Fynes Davenport (testator) executed a will in the year 1969. The executor had applied for probate which was granted in the year 1972. In 2016, Mary Brigit (original petitioner) allegedly claiming to be a beneficiary, applied for a copy of the probate. The District Court filed a counter affidavit in the High Court of Madras stating that it was an old matter and the record may have been destroyed under the Destruction of Records Act, 1917 or returned to the executor. The executor claimed to have not found any trace of the document. Subsequently, the petitioner Wilson Prince (successor of the original petitioner) filed an SLP in the Supreme Court.

HELD

The Hon’ble Supreme Court held that since the original writ petitioner had never seen the copy of the will and was not aware of the contents of the same, on mere guesswork, the Court could not grant any relief to the petitioner. Subsequently, the Hon’ble Court dismissed the Special Leave Petition with no costs.

22 Canara Bank, Mullakkal v. Sachin Shyam
2022 SCC OnLine Ker 6934
Date of order: 19th December, 2022

Possession of Secured Assets – The right of possession of the Tenant with respect to Secured Assets – Creditor entitled to possession. [Section 14, Section 17, and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI); Section 107, Transfer of Property Act, 1882]

FACTS

The petitioner, a secured creditor in respect of a loan availed by the 1st respondent, brought to sale an item of property in which the 3rd respondent claims to be a tenant under the provisions of the SARFAESI Act. The 4th respondent had purchased the property. The application filed by the petitioner under section 14 of the SARFAESI Act for obtaining vacant possession of the property was rejected by the learned Magistrate, finding inter alia that the provisions in the SARFAESI Act cannot defeat the rights of the tenant. The learned Magistrate had concluded that the tenancy had been created much before the creation of the mortgage, and therefore, such tenants cannot be evicted by resorting to proceedings under Section 14 of the SARFAESI Act.

Hence, the present appeal.

HELD

In light of the judgement of the Supreme Court in the case of Balkrishna Rama Tarle vs. Phoenix ARC Pvt. Ltd. [(2023) 1 SCC 662] the Court held that the order of the learned Magistrate cannot be sustained. The 3rd respondent has no case that any proceeding initiated by the petitioner under section 14 of the SARFAESI Act had been challenged by the 3rd respondent in proceedings before the Debts Recovery Tribunal under section 17 of the SARFAESI Act.

Court further held that in the absence of a registered document the tenant was not entitled to possession of secured assets for a period exceeding the limit prescribed under section 107 of the Transfer Property Act. The creditor had the right to take actual possession of the secured asset even after the transfer of title to an auction purchaser.

Order of the Chief Judicial Magistrate was quashed.

BCAJ Admin

Corporate Law Corner : Part A | Company Law

11. Case Law No. 01/September /2023
M/s. Port City Nidhi Limited
ROC-ROC/CHN/ADJ Order/PORT CITY/S. 118 (1) /2023
Office of Registrar of Companies,
TAMIL NADU
Adjudication Order
Date of Order: 15th June, 2023

Order for penalty under Section 454 of the Companies Act, 2013 read with Rule 3 of Companies (Adjudication of Penalties) Rule, 2014 for Violation of Section 118(1) of the Companies Act, 2013

FACTS
PCNL is registered under the provisions of the Companies Act, 1956 under the jurisdiction of ROC, Chennai. The company was taken up for inspection by an Officer authorized by the Central Government and Show Cause Notice was issued for violation of Section 118(1) of the Companies Act, 2013.

Section 118(1) reads as under: –

“Every company shall cause minutes of the proceedings of every general meeting of any class of shareholders or creditors, and every resolution passed by postal ballot and every meeting of its Board of Directors or of every committee of the Board, to be prepared and signed in such manner as may be prescribed and kept within thirty days of the conclusion of every such meeting concerned, or passing of resolution by postal ballot in books kept for that purpose with their pages consecutively numbered.

It was observed that:

“the minutes Book maintained by the Company was not paginated1 properly and some entries were without the signature of the chairman.

Thus, it was further observed that it is in violation of Section 118(1) of the Companies Act which mandates every company to maintain the minutes of meeting of all the General Meetings in a properly paginated2 manner. Hence the company and every officer of the company who is in default are liable for penal action for violating section 118 (11) of the Companies Act, 2013″.

However, the inspecting officer reported that while replying when the query was raised, company has admitted the same. It has rectified the mistakes and submitted the copies of the updated minutes book, and further sought for lenient view to be taken. However, the inspecting officer recommended to initiate penal action against the company and the officers in default to make sure that such defaults shall not be repeated in the future.

Based on the report of the inspecting officer, RD authorised issuance of adjudication notice to the company and its officers. Managing Director of the company appeared on behalf of Company and himself and accepted the violation subsequent to the Inspecting Officer’s observation that they have filed the updated Minutes Book.

HELD
In view of the above, upon examination and hearing arguments, the company has not complied with Section 118 (1) of the Companies Act, 2013. Hence, penalty was imposed as per Section 118(11) of the Companies Act, 2013.

Section 118(11) of the Companies Act, 2013 reads as under:
“If any default is made in complying with the provisions of this section in respect of any meeting, the company shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who is in default shall be liable to a penalty of five thousand rupees.”

Therefore, in view of the above said violation of Section 118 of the Companies Act, 2013, the adjudicating officer in exercise of the powers vested to him under Section 454(1) & (3) of the Companies Act, 2013, imposed a penalty of R25,000/- on the company and R5,000/- each on the officers in default.

12. Case Law No._02_/___2023
M/S. AT & T COMMUNICATION SERVICES INDIA PRIVATE LIMITED
ROC/D/ADJ/ORDER/AT&T/ 2924-2927
Registrar of Companies, NCT of Delhi & Haryana
Adjudication Order
Date of Order: 27th July, 2023

Adjudication Order for non-compliance of the provision of Rule 8(3) of the Companies (Registration Offices and Fees) Rules, 2014 with respect to incorrect certification of e-form by Authorized Signatory and Professional.

FACTS:
M/s AT & T CSIPL, had filed suo-moto application vide e-form GNL-1 dated 25th January, 2023 for the defect in filing of e-form AOC-4 XBRL dated 28th October, 2021. It was inter alia stated that M/s AT & T CSIPL had erroneously reported the total amount of turnover, from its principal product or services under the code 8517 (i.e. current line system), which came into the attention of the M/s AT &T CSIPL when it had received a Show Cause Notice (SCN) from the Cost Audit Branch of Ministry of Corporate Affairs (MCA) on 09th May, 2021.

Thereafter, in reply to the SCN received from MCA from M/s AT & T CSIPL including a certificate from CA Shri ABG who had certified HSN code-wise break up of Annual Turnover for the F.Y. 2020-21, it was observed that M/s AT & T CSIPL had erroneously reported the total amount of turnover from its principal product or services under the code 8517 in the said AOC-4 XBRL for F.Y. 2020-21, instead of reporting the same in the following manner:

SI No

HSN Codes/ ITC Codes

Description

9985

Support services

9973,9983,9984, 9985, 9987, 4907, 8302

Managed Network Services

On the basis of above observations Adjudicating Officer (AO) i.e. Registrar of Companies, NCT of Delhi & Haryana had issued a SCN to M/s AT & T CSIPL and Mr. AD, signatory i.e. signing director and CA SKK, the professional who had certified the e-form AOC-4 XBRL dated 31st May, 2023. The reply from M/s AT & T CSIPL to the SCN reiterated that M/s AT & T CSIPL had erroneously reported the total amount of turnover from its principal product or services (i.e. support services and managed network services) under the code 8517 in e-form AOC-4 XBRL for F.Y. 2020-21.

Rules 8(3) of the Companies (Registration Offices and Fees) Rules, 2014, stated that:-

“The authorised signatory and the professional, if any, who certify e-form shall be responsible for the correctness of the contents of e-form and correctness of the enclosures attached with the electronic form.”

Section 450 of the Companies Act, 2013 (Punishment where no specific penalty or punishment is provided), stated that:-

“If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.”

HELD:
AO after considering the facts of the case and submissions made, noted that Mr.AD (Director) and CA SKK (certifying professional) had filed e-form AOC-4 XBRL dated 28th October, 2021 with incorrect information. Further noted that Pursuant to Rule 8 of the Companies (Registration Offices and Fees) Rules, 2014 read with Section 450 of the Companies Act, 2013, signatories of E-form AOC-4 XBRL are liable for the correctness of the content of e-form AOC-4 XBRL.

Thereafter, AO imposed penalty as follows:

Violation of Section
and Rules

Penalty imposed on
Signatory(s)

Penalty specified under
section 450 of the Companies Act,2013

Rule 8(3) of the Companies (Registration Offices and Fees)
Rules, 2014

Mr.AD, Director (signatory of e-form AOC-4 XBRL.

Rs.10,000

Rule 8(3) of the Companies (Registration Offices and Fees)
Rules, 2014

CA SKK, signatory / Certifying Professional of e-form AOC4
XBRL.

Rs.10,000

Further, it was directed that the said amount of penalty shall be paid online through the website www.mca.gov.in (Misc. head) in favour of “Pay & Accounts Officer, Ministry of Corporate Affairs, New Delhi, within 90 days of receipt of this order, and intimation filed with proof of penalty paid.

BCAJ Admin

Allied Laws

23. Ashok Kumar Joshi vs. Achlaram Bhargava Joshi
AIR 2023 Rajasthan 97
27th March, 2023

Maintenance of parent — Father living on pension since 2008 — Father unable to maintain himself — Son bound to maintain. [Section 4, Maintenance and Welfare of Parents and Senior Citizens Act, 2007].

FACTS

The Petitioner (Ashok Kumar Joshi – son) was the eldest son of the Respondent (Achlaram Bhargava Joshi – father). The Respondent was working in the department of B.S.N.L. until his retirement in 2008. Thereafter, the Respondent was living off of pension and other rental income. The Petitioner and Respondent were staying together till 2013. The Respondent was unable to maintain himself, and hence, he filed an application for maintenance from his eldest son (the Petitioner) in 2018. The lower court held that the Petitioner was bound to maintain the Respondent and directed the Petitioner to maintain the Respondent by paying a monthly sum.

The Petitioner – Son preferred a Writ Petition before the High Court.

HELD

The Hon’ble Court observed that the Maintenance and Welfare of Parents and Senior Citizens Act, 2007, was a special legislation enacted to safeguard the rights and interests of a vulnerable section of the society, i.e., senior citizens. It held that the eldest son was bound to pay monthly maintenance to his aged father (Respondent) for expenses towards his food, medical and other requirements. Thus, the order of the lower court was upheld.

The Petition was dismissed.

24. Public Works Department, Chennai vs. East Coast Constructions & Industries Ltd
AIR 2023 Madras 188
2nd February, 2023

Arbitration — Powers to award compensation and interest by the Arbitral Tribunal [Sections 7 & 34, The Arbitration and Conciliation Act, 1996; Section 74, The Indian Contract Act, 1972].

FACTS

The Petitioner and the Respondent agreed to the construction of a new complex for the Tamil Nadu Legislative Assembly. The Respondent was unable to complete the construction in time due to the faults of the Petitioner. The Petitioner had granted an extension of time without any objections to the Respondent. Later on, the Petitioner denied a refund of liquidated damages and also consequential damages to the Respondent. The Petitioner denied payments towards consequential damages.

On Arbitration, the Arbitral Tribunal awarded compensation and interest. The Petitioner is aggrieved that the Arbitration Tribunal was not authorised to grant the same as there was no authorisation between the parties in the contract to decide any dispute ex aequo et bono (Section 28 of the Arbitration and Conciliation Act, 1996).

HELD
The Arbitral Tribunal is empowered to award interest in the form of compensation if such has been agreed by the parties. However, in the absence of such agreements, the Arbitral Tribunal can award interest to the extent of delay in payment of money in the form of compensation. Thus, the Court upheld the order of the Arbitration Tribunal awarding consequential damages.

The Petition was dismissed.

25. Mohan Sundaram vs. Punjab National Bank
AIR 2023 Kerala 110
12th December, 2022

Tenancy — Tenanted Property is mortgaged — Unable to repay — Tenanted property is a secured asset- Bank entitled to evict a tenant — Bank held as a public institution. [Section 8, Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970; Sections 5, 6 & 9, Banking Regulation Act, 1949;
Section 13, Securitisation and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 2002 (SARFAESI)] .

FACTS
The tenants of five premises facing eviction petitions under section 11 of the Kerala Buildings (Lease and Rent Control) Act, 1965, initiated by a single landlord (Respondent Bank) in a commercial complex, are the petitioners in the revision case. The Petitioners contested that the Respondent cannot be said to be a public institution within the scope of section 11(7) of the Kerala Buildings (Lease and Rent Control) Act, 1965. The second contention of the Petitioner was whether the Bank had locus standi as a landlord to seek eviction of tenants from a secured asset taken over by the bank for sale for realising its dues.

HELD
The Hon’ble Kerala High Court held that the Bank (Respondent) was established under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. The statute was enacted in the parliament for serving the needs of the development of the economy in conformity with the national policy and objectives and for matters connected therewith or incidental thereto. Thus, the Respondent Bank was a public institution within the scope of section 11(7) of the Kerala Buildings (Lease and Rent Control) Act, 1965. The court held that according to section 17 of the SARFAESI, the Respondent Bank is empowered to take possession of the secured assets including the right to transfer by way of lease, assignment or sale for realising the secured asset. The Hon’ble Court upheld the decision of the lower court; thereby, evicting tenants from the property.

The revision petition was dismissed.

26. K N Ravindran and another vs. G Venkatesh Suresh and others
AIR 2023 Madras 222
27th January, 2023

Suit for partition — Property purchased jointly by relatives for conducting business — Business conducted by a Firm — Retirement from the firm does not amount to relinquishment of interest in the property. [Section 34, Specific Relief Act, 1962; Sections 17 & 49, Registration Act, 1908; Section 35, Stamps Act, 1899].

FACTS
The Original Plaintiff (Respondent 1), the Appellants and other Respondents had purchased the suit property to start a business. The parties are relatives of one another. After some time of running the business through a firm, issues cropped up, which led to Defendants 3–5 (Respondents) and the Original Plaintiff (Respondent 1) retiring from the partnership firm. Defendants 1 and 2 (appellants) were the remaining partners of the firm.

The Original Plaintiff and the Defendants 3–5, relinquished all their shares of the firm to the Defendants 1 and 2. Later, the Original Plaintiff, as the co-sharer of the suit property, filed for a partition suit of the property in the Trial Court.

The Trial Court held the partition in favour of the Plaintiff. The Original Defendants 1 and 2 filed an appeal.

HELD
The Plaintiff and the Defendants 3–5 relinquished all their rights concerning shares in a firm in the deed. However, the rights and title of the suit property were not relinquished by the deed. Furthermore, the family agreement (relied on by appellants) was not properly stamped and registered. Thus, the same was invalid in the eyes of the law. Thus, the decree of the Ld Trial Court declaring the partition of property in the favour of the Plaintiff was confirmed. No costs.

BCAJ Admin

ALLIED LAWS

1 Dr. A. Parthasarathy and Ors. vs. E Springs Avenues Pvt. Ltd. and Ors.
SLP (C) Nos. 1805-1806 of 2022 (SC)
Date of order: 22nd February, 2022
Bench: M.R. Shah J. and B.V. Nagarathna J.Arbitration – High Court has no jurisdiction to remand matter to same Arbitrator – Unless consented by both parties. [Arbitration and Conciliation Act, 1996 S. 37]

FACTS

The Appellants challenged the judgment and order passed by the High Court in exercise of power u/s 37 of the Arbitration and Conciliation Act, 1996, wherein the High Court set aside the award passed by the Ld. Arbitrator and remanded the matter to the same Arbitrator for fresh decision.HELD

As per the law laid down in the case of Kinnari Mullick and Anr. vs. Ghanshyam Das Damani (2018) 11 SCC 328 and I-Pay Clearing Services Pvt. Ltd. vs. ICICI Bank Ltd. (2022) SCC OnLine SC 4, only two options are available to the Court considering the appeal u/s 37 of the Arbitration Act. The High Court either may relegate the parties for fresh arbitration or consider the appeal on merits on the basis of the material available on record within the scope and ambit of the jurisdiction u/s 37 of the Arbitration Act. However, the High Court has no jurisdiction to remand the matter to the same Arbitrator unless it is consented by both the parties that the matter be remanded to the same Arbitrator.The appeal was allowed.

2 Horticulture Experiment Station Gonikoppal, Coorg vs. The Regional Provident Fund Organization
Civil Appeal No. 2136 of 2012 (SC)
Date of order: 23rd February, 2022
Bench: Ajay Rastogi J. and Abhay S. Oka J.

Labour Laws – Compliance – Default or delay in payments – sine qua non for levy of penalty – mens rea or actus rea not essential. [Employees Provident Fund and Miscellaneous Provisions Act, 1952, (Act) S. 14B]

FACTS

The establishment of the Appellant(s) is covered under the Employees Provident Fund and Miscellaneous Provisions Act, 1952, (Act). The Appellant(s) failed to comply with the provisions of Act from 1st January, 1975 to 31st October, 1988. For non-compliance of the mandate of the Act, proceedings were initiated u/s 7A of the Act and dues towards the contribution of EPF for the intervening period were assessed by the competent authority, and after adjudication, that was paid by the Appellant to the office of EPF. Thereafter, the authorities issued a notice u/s 14B of the Act to charge damages for the delayed payment of the provident fund amounts which were levied for the said period.The High Court, under the impugned judgment, held that once the default in payment of contribution is admitted, the damages as being envisaged u/s 14B of the Act are consequential, and the employer is under an obligation to pay the damages for delay in payment of the contribution of EPF u/s 14B of the Act, which is the subject matter of challenge in the present appeals.

HELD

Taking note of three-Judge Bench judgment in the case of Union of India and Others vs. Dharmendra Textile Processors and others [2008] 306 ITR 277 (SC), the apex Court held that that any default or delay in the payment of EPF contribution by the employer under the Act is a sine qua non for imposition of levy of damages u/s 14B of the Act and mens rea or actus reus is not an essential element for imposing penalty/damages for breach of civil obligations/liabilities.The appeal was dismissed.

3 Arunachala Gounder (Dead) by Lrs. vs. Ponnusamy and Ors.
AIR 2022 Supreme Court 605
Date of order: 20th January, 2022
Bench: S. Abdul Nazeer J. and Krishna Murari J.

Succession – Intestate – Daughters of a Hindu male – Entitled to self-acquired and other properties obtained by their father in partition. [Hindu Succession Act, 1956, S. 14, S. 15]

FACTS

The property under consideration belonged to a person who had two sons, namely, Marappa and Ramasamy. Marappa had one daughter, namely, Kuppayee Ammal, who was issueless, and once she died, property devolved on legal heirs of Ramasamy, who predeceased his brother.The suit for partition was filed by one of the daughters of Ramasamy. Ramasamy had one son and four daughters, one of the daughters amongst these was deceased. The petitioner is the daughter claiming 1/5th share in the suit property on the basis that the plaintiff and defendants are sisters and brothers. All five of them being the children of Ramasamy Gounder, all the five are heirs in equal heirs and entitled to 1/5th share each.

HELD

The right of a widow or daughter to inherit the self-acquired property or share received in the partition of a coparcenary property of a Hindu male dying intestate is well recognized not only under the old customary Hindu Law but also by various judicial pronouncements.Thus, if a female Hindu dies intestate without leaving any issue, then the property inherited by her from her father or mother would go to the heirs of her father, whereas the property inherited from her husband or father-in-law would go to the heirs of the husband.

In the present case, since the succession of the suit properties opened in 1967 upon the death of Kupayee Ammal, the Hindu Succession Act,1956 shall apply, and thereby Ramasamy Gounder’s daughters being Class-I heirs of their father too shall be the heirs and shall be entitled to 1/5th share each in the suit properties.

The suit was decreed accordingly.

4 Bishnu Bhukta thru. Lrs. vs. Ananta Dehury and Anr.
AIR 2022 ORISSA 24
Date of order: 10th November, 2021
Bench: D. Dash J.

Gift – Donor having 1/5th interest in property – No partition of property – Interest of donor not covered under the definition of gift – Gift is invalid. [Transfer of Property Act, 1882, S. 122]

FACTS

Plaintiff’s case is that the land described in the schedule of the plaint belonged to one Barsana Bhukta who died, leaving his widow Sapura and four daughters, namely, Budhubari, Asha, Nirasa and Bilasa. Budhubari and Asha died issueless in 1970 and 1980 respectively. In 1983, Nirasa died, leaving as her heirs her two sons, the Plaintiffs. After the death of the daughters of Barsana, the Plaintiffs succeeded to the property.The Plaintiffs had filed Civil Suit for partition of the suit land, arraigning Bilasha as the Defendant. Defendant claimed exclusive right over the suit land on the strength of one registered deed of gift dated 2nd September, 1967 covering the entire property standing in favour of his wife, Bilasha, which he inherited upon Bilasha’s death.

The Appellant/Defendants filed the present Appeal challenging the judgment and decree passed by the Ld. District Court while dismissing the Appeal filed by the present Appellant.

HELD

Section 122 of the Transfer of Property Act, 1982 defines ‘gift’. It is the transfer of certain existing movable or immovable property, made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee. Such acceptance must be made during the lifetime of the donor and while he/she is still capable of giving.

Sapura was only having 1/5th interest over the property, and there was no partition amongst the five. So, Sapura cannot be said to be having any definite property. Thus, here the interest of the donor over the property would not get covered under the definition of a gift. Further, here in such a case, the acceptance of the same by the donee cannot be found out being faced with uncertainty as to which portion of the property the donee would be accepting to be the property gifted to her.

The registered deed of gift executed by Sapura on 12th September, 1967 gifting away the property in suit in favour of one of her daughters, namely, Bilasha is neither valid in its entirety nor can it be said to be valid up to the extent of her share over the entire property belonging to her and her four daughters.

Under the given circumstance, Sapura was neither competent nor had the authority to make a gift of the property inherited by her and her four daughters either in whole or even to the extent of her interest.

The appeal is dismissed.

5 Somuri Ravali vs. Somuri P. Roa and Ors.
AIR 2022 (NOC) 30 (TEL)
Date of order: 8th June, 2021
Bench: A. Rajasheker Reddy J.

Partnership – Original Partnership Deed contains an arbitration clause for disputes amongst partners – Amended deed did not have such a clause – Since firm is not re-registered after amended deed – original deed is valid – Dispute can be referred to Arbitration. [Indian Partnership Act, 1932 S. 43]

FACTS

Petitioner and Respondents No. 1 to 3 have established a Partnership Firm by the name M/s. Reliance Developers vide Partnership Deed dated 27th October, 2011. In 2014, vide Amendment Deed dated 18th September, 2014 they intended to amend the original Partnership Deed with regard to sharing pattern, inter alia. However, a dispute arose amongst the partners who tried to resort to arbitration.

The question arose on the applicability of the arbitration clause in the Original Deed after the termination of the contract on dissolution of the firm.

HELD

The purpose of the Arbitration and Conciliation Act, 1996 is to minimize the burden of the Courts so also to expedite the matters. Once the parties have intended to refer their disputes, if any, to the Arbitrator in the agreement, then any dispute pertaining to the contents of the agreement or touching the subject matter of the agreement is necessarily to be referred to the Arbitrator even though the agreement is mutually terminated by both the parties. Therefore, the arbitration clause in such a contract does not perish. Any dispute arising under the said contract is to be decided as stipulated in the arbitration clause.The arbitration agreement constitutes a “collateral term” in the contract, which relates to the resolution of disputes and not to the performance of the contract. Upon termination of the main contract, the arbitration agreement does not ipso facto come to an end. However, if the nature of the controversy is such that the main contract would itself be treated as non-est in the sense that it never came into existence or was void, the arbitration clause cannot operate, for along with the original contract, the arbitration agreement is also void.

Where a contract containing an arbitration clause is substituted by another contract, the arbitration clause perishes with the original contract unless there is anything in the new contract to show that the parties intended the arbitration clause in the original contract to survive. Even if a deed of transfer of immovable property is challenged as not valid or enforceable, the arbitration agreement would remain unaffected for the purpose of resolution of disputes arising with reference to the deed of transfer.

BCAJ Admin

Corporate Law Corner – Part A | Company Law

13. Case Law No. 01/October/ 2023

M/s. VINAYAK BUILDERS AND DEVELOPERS PRIVATE LIMITED

No. ROC/ PAT/ Inquiry/13665/834

Office of the Registrar of Companies,

Bihar-Cum-Official Liquidator,

High Court, Patna Adjudication Order

Date of Order: 18th August, 2023

Order for penalty for violation of section 143 of the Companies Act, 2013 read with Rule 11(d) of the Companies (Audit and Auditors) Rules, 2014 for non-disclosure in the Auditor’s Report by the Statutory Auditor.

FACTS

As per the documents available on MCA Portal, Mr SK was the auditor of the company for the financial year ending 31st March, 2017.

Registrar of Companies, Bihar (“RoC”) on inspection of the financial statements of M/s VBDPL for the financial year ending 31st March, 2017 observed that, in the column of details of Specified Bank Notes (SBNs) held and transacted during the period from 8th November, 2016 to 30th December, 2016 was mentioned as zero. However, the directors of M/s VBDPL in their reply dated 17th January, 2019 had enclosed a letter dated 16th January, 2019 from ICICI Bank in which the details of the deposit amount had been mentioned as follows:

Date	Amount	Denominations
14^th November, 2016	150,000	1000 x 150
15^th November, 2016	50,000	1000 x 50
24^th November, 2016	200,000	1000 x 200
02^nd December, 2016	150,000	1000 x 150

As per Ministry’s Notification No. G.S R. 307(E) dated 30th March, 2017, the following clause was inserted in rule 11 of the Companies (Audit and Auditors) Rules, 2014 after clause (c), namely:

“(d) Whether the company had provided requisite disclosure in its financial statements as to holdings as well as dealings in specified Bank Notes during the period from 8th November, 2016, to 30th December, 2016, and if so, whether these are in accordance with the books of accounts maintained by the company.”

Hence, it appeared that the provisions of Section 143(3) of the Companies Act, 2013 read with Rule 11(d) of the Companies (Audit and Auditors) Rules, 2014 had been contravened by the Auditor for the financial year 31st March, 2017 for Non-disclosure of Specified Bank Notes (SBN) held and transacted during the period from 8th November, 2016 to 30th December, 2016 and therefore he was liable for penalty under section 450 of the Companies Act, 2013.

Based on the above facts, RoC had issued a show cause notice for default under section 143 of the Companies Act, 2013. However, no reply was received to the show cause notice from Mr SK, Auditor.

Further, RoC had also issued a “Notice for Hearing” to M/s SK, Auditor in default to appear personally or through an authorised representative under Rule 3(3), Companies (Adjudication of Penalties) Rules, 2014 on 11th August, 2023 and also to submit their response, if any, one working day prior to the date of hearing.

On the date of the hearing, Mr SK neither appeared nor any submission was made regarding the aforesaid non-compliance. Hence, it was concluded that the provisions of Section 143 of the Companies Act, 2013 had been contravened by the auditor and therefore he was liable for penalty u/s 450 of the Companies Act, 2013 for the financial year ended 31st March, 2017.

HELD

Adjudication Officer (‘AO’) after considering the facts and circumstances of the case and after taking into account the provisions of Rule 11(d) of Companies (Audit and Auditors) Rules, 2014 (as amended), imposed a penalty on Mr SK, Chartered Accountants as per the below mentioned table:

Further, it was directed to pay the penalty within 90 days of the order.

#Final Penalty was imposed pursuant to the provision of section 446B of the Companies Act, 2013 since M/s VBDPL satisfied the criteria of being a Small Company where Mr SK was an auditor.

Nature of
default

Relevant section under the Companies Act, 2013

Name of

persons on whom the penalty is imposed

No. of

days of default

Penalty

for defaults as per Section 450 of the Companies Act, 2013 (₹.)

Total

penalty

(₹)

Final penalty imposed as per Section 446B of the Companies Act, 2013 (₹) #

Non-disclosure in Audit Report

Section 143(3) of the Companies Act, 2013 read with Rule 11(d) of the Companies (Audit and Auditors) Rules, 2014

Mr SK, Chartered Accountants

10,000

5,000

BCAJ Admin

SEBI Acts Tough against Market Manipulators

The Securities and Exchange Board of India (SEBI) on 16th September, 2022, passed a stiff order of penalty, on a case involving, among others, allegedly synchronised trades. By the other order, it also debarred some of the parties from the securities markets. Soon thereafter, in June 2023, the Securities Appellate Tribunal (“SAT”) rejected the appeals against the order in an almost dismissive way to the appeal. What is noteworthy is that SEBI has shown that it means serious business in such cases. The penalty levied is fairly large, considering the facts and figures involved, apart from the order to restrain persons from the markets. This should hopefully show that SEBI now means business in tackling this almost uniform feature in cases of market manipulation. If this approach continues, this should mean that the manipulators see a strong deterrent to engaging in such activities.

SYNCHRONISED MANIPULATIVE TRADING

Price manipulation is rarely carried out without involving synchronised trading. But, such cases have seemingly gotten away without strong deterrent penal measures. The use of synchronised trades has been a regular feature for decades.

The pattern is almost consistent in such cases. The manipulators, using blatant or camouflaged techniques, use this modus operandi with successful results. Small investors rarely carry out the most basic efforts and work to check up on the history of price and volume, or the fundamentals of the company. So while investors pile on by being attracted to the prospect of quick and handsome, the manipulators sell and exit.

COMMON PATTERNS OF SYNCHRONISED MANIPULATIVE TRADING

The method may vary in small details, but some features are common. There is a circular on trading amongst a group of persons who also steadily increase the quoted price. This artificial spurt in price and volume is meant to create an image that something good is about to happen which selected people know and anticipate.

Another common pattern has been to project that the company is engaged in a business that is the latest fad. At one time, for example, we had the dotcom boom, then internet-based services and apps, infrastructure, etc. The advantage of using such methods from the point of view of the manipulators was that past fundamentals become totally irrelevant. There may be occasional star performers and some genuine but failed attempts. But smart manipulators recognised that this front would attract investors. This included changing the name of the company, passing resolutions to start such a business, etc.

What allegedly happened in this particular case? (Till there is a finality in the form of a Supreme Court, one cannot consider the matter as closed for this particular case.) The price of the shares was hiked up by a slow increase with small synchronised trades at successively higher prices. SEBI has also stated that thereafter, even SMSes were circulated about the potential of the company. And hence, yet again, as public interest grew, those who held shares in the company sold them at a high price. And, yet again, the price slowly crashed to as low as almost 2 per cent of the highest price.

WHETHER THE LAW IS LACKING?

It is not as if the law is lacking in this regard. Multiple provisions in the SEBI PFUTP regulations deal with such manipulative practices. The transactions have been dissected into individual steps and portions and make each of them specifically an offence. This includes circular trading, artificially jacking up the price, the price, spreading false news, etc.

IMPLEMENTATION OF THE LAW

That is the law. Next comes the investigation which plays an important role. These days, SEBI carries out very meticulous analysis of the parties, the trades, the bank accounts, etc., of the parties. These days much of the data is available almost instantaneously thanks to electronic trading. SEBI then takes it to the next level by meticulously investigating the background of the parties, including their relations, personal or commercial, and study of their bank statement and internal transactions. The parties may not even realise that they are being investigated since such information is available from stock exchanges or other authorities directly. Of course, at a later stage, SEBI may summon some or all of the parties to question them independently. Often, the weakest persons in the group, including those who are mules, may break down and confess. But even otherwise, too, many of the facts, available from credible independent third parties like banks, brokers, etc., cannot be so easily countered or explained away.

LOW DETERRENT ACTION IN THE PAST

What was perhaps lacking was the final step of a strong deterrent step which would make the wrongdoers feel the loss and even realise that such acts are simply not profitable enough. Unfortunately, in too many cases, while the penalty has been levied, it has rarely been proportionate to the severity of the crime.

A recent example that can be taken is of the brazenness of false trading in illiquid options. It was found that thousands of persons engaged in circular trades in illiquid options. The objective did not seem to be enticing and cheating investors. Rather, it was very likely to pass on profits or loss for tax evasion. A person who had profits and did not want to pay tax traded in the options by buying high and then selling very low and that too with the same counterparty and also, often, within a gap of barely minutes. Though this may not harm investors directly, it violates multiple SEBI regulations and, worse, creates an impression of stock markets as being a lawless jungle. When SEBI initiated proceedings, it was prolonged by the need to serve notice, give hearings to each party, etc. Quite a few parties went in to appeal the clogging of the dockets of SAT, which requested SEBI to come with a scheme of settlement. SEBI did so but for various reasons including Covid, it did not get the required response. So the dockets of SAT clogged again, which yet again requested SEBI to make another attempt. The second scheme of 2022 got a better turnout. However, the moral here was that since the parties got away effectively with barely a rap on the knuckles, it did not have any real deterrent effect.

Hopefully, orders like this one, assuming they attain finality, will make parties think really hard before contemplating such acts. And even if there is some change in appeal, it will be a lesson in principle generally.

A SIMILAR FIRM APPROACH IS NEEDED IN OTHER OFFENCES

Going a step further, I think a similar firm hand is needed in other categories of market evils, including insider trading, front running, etc., where often there is no real deterrent action. Fortunately, here too, the data generated is quick and SEBI’s investigation is often thorough. Law is also helpful and empowers SEBI to disgorge the illicit profits, debar parties, etc. SEBI has powers to levy very stiff penalties. Here, too, if some examples are set, there can be a fear and also a sense of inevitability of getting caught. Granted that parties can be more sophisticated here using mules, underhand passing of profits, use of sophisticated technology, etc. So establishing guilt may not always be easy. But here again, SEBI often interviews the weakest links in the chain who may spill the beans. That said, perhaps some changes could help.

CLOSING NOTE: PROPOSAL OF SEBI TO DEEM CERTAIN SUSPICIOUS TRANSACTIONS AS VIOLATIONS UNLESS REBUTTED

Although discussed in great detail earlier in this column, it is worth mentioning that a group of radical proposals to deal comprehensively with the menace of insider trading, front running, etc., have been made by SEBI in a consultation paper issued in March 2023.

This aspect is worth mentioning since SEBI has proposed to deal particularly with those sophisticated manipulators where there is multiple evidence of crime committed all over but it is difficult to pinpoint the parties and find them guilty. Very specific examples of what had transpired in certain actual cases (names withheld in paper but not difficult to guess).

SEBI noted that while several Supreme Court rulings have generally supported the stand of SEBI in using circumstantial evidence of a clear pattern of suspicious transactions, it was also noted that this was not sufficient enough, and a generic set of enabling provisions was needed. The Supreme Court ruling allowed SEBI to use the lower benchmark of circumstantial evidence to indicate guilt. But that too required crossing certain hurdles which sophisticated market manipulators and legal technicalities could make the process difficult and delayed.

Hence, SEBI has proposed a set of provisions which would deem the parties involved as guilty if a certain pattern of suspicious trading is observed. This does not mean that this one-sided judgement of SEBI would close the matter. The parties would still get a chance to present their case and rebut the finding and allegation. In short, the onus shifts to the parties to rebut the allegations or be deemed guilty.

These provisions, if implemented, could certainly make the task of SEBI easier. But there is also a flip side to this. Presently, SEBI carries out extensive investigations to establish guilt. It is possible that these efforts may be diluted if such deeming provisions are available.

Also, such provisions are like putting a genie out of the bottle, which cannot be put back in. SEBI may be perceived to be exercising arbitrariness. While good benchmarks are provided before the provisions are applied, one would not know how they are applied in actual cases. Here again, considering the rewards, large sophisticated abusers of the law may continue to escape. Smaller parties on the other hand may find it difficult to hire expensive legal advice to present a credible and effective defence to shift the onus back.

It is also doubtful how courts would view such provisions, which almost give a one-sided power to SEBI to a large extent. Whether such provisions are held arbitrary and unconstitutional? This aspect becomes even more important when we consider that it is SEBI, who would make Regulations to implement this proposal and not Parliament made law or amendments. In the nearly six months after its introduction, there does not seem to be any indication from SEBI of whether and how it is going to implement these proposals. But, to conclude, a fair re-haul of the law is certainly needed to counter the brazen cases of market abuse.

BCAJ Admin

Hindu Law: Rights of an Illegitimate Child in Joint Property

INTRODUCTION

The codified and uncodified aspects of Hindu Law deal with several personal issues pertaining to a Hindu. One such issue relates to the rights of an illegitimate child, in relation to inheritance to ancestral property, self-acquired property of his parents, right to claim maintenance, etc. This feature has earlier (March 2021) examined the position of the rights of an illegitimate child. However, recently a larger bench of the Supreme Court in Revanasiddappa vs. Mallikarjun, C.A. No. 2844/2011, Order dated:1st September, 2023, has examined the position of such a child’s rights in respect of joint family / HUF property.

VOID / VOIDABLE MARRIAGE

The Hindu Marriage Act, 1955, applies to and codifies the law relating to marriages between Hindus. It states that an illegitimate child is one who is born out of a marriage which is not valid. S.16(1) of this Act provides that even if a marriage is null and void, any child born out of such marriage who would have been legitimate if the marriage had been valid, shall be considered to be a legitimate child. Hence, all children of void/voidable marriages under the Act are treated as legitimate. The Act also provides that such children would be entitled to rights in the property of their parents.

SUCCESSION TO PROPERTIES OF OTHER RELATIVES

However, while such a child born out of a void or voidable wedlock would be deemed to be legitimate, the Act does not confer any rights on the property of any person other than his parents. This is expressly provided in s.16(3) of the Hindu Marriage Act.

In JiniaKeotin&Ors. vs. Kumar SitaramManjhi&Ors. (2003) 1 SCC 730, the Supreme Court held that s.16 of the Act, while engrafting a rule of fiction in ordaining the children, though illegitimate, to be treated as legitimate, notwithstanding that the marriage was void or voidable chose also to confine its application, so far as succession or inheritance by such children is concerned to the properties of the parents only. It held that conferring any further rights upon such children would be going against the express mandate of the legislature.

This view was once again endorsed by the Supreme Court in Bharatha Matha & Anr vs. R. Vijaya Renganathan, AIR 2010 SC 2685 where it held that a child born of void or voidable marriage is not entitled to claim inheritance in ancestral coparcenary property but is entitled only to claim share in self-acquired properties, if any.

CONTROVERSY IN THE ISSUE

The above issue of whether illegitimate children can succeed in ancestral properties or claim a share in the HUF was given a new twist by the Supreme Court in 2011 in the case of Revanasiddappa vs. Mallikarjun (2011) 11 SCC 1. The question which was dealt with in that case was whether illegitimate children were entitled to a share in the coparcenary property or whether their share was limited only to the self-acquired property of their parents under s.16(3) of the Hindu Marriage Act? It disagreed with the earlier views taken by the Supreme Court in JiniaKeotin (supra), BharathaMatha (supra) and in Neelamma&Ors. vs. Sarojamma&Ors (2006) 9 SCC 612, wherein the Court held that illegitimate children would only be entitled to a share of the self-acquired property of the parents and not to the joint Hindu family property.

The Court observed that the Act uses the word “property” and had not qualified it with either self-acquired property or ancestral property. It has been kept broad and general. It explained that if they have been declared legitimate, then they cannot be discriminated against and they will be at par with other legitimate children, and be entitled to all the rights in the property of their parents, both self-acquired and ancestral. The prohibition contained in s. 16(3) will apply to such children only with respect to the property of any person other than their parents. Qua their parents, they can succeed in all properties! The Court held that there was a need for a progressive and dynamic interpretation of Hindu Law since Society was changing. It stressed the need to recognise the status of such children which had been legislatively declared legitimate and simultaneously recognisethe rights of such children in the property of their parents. This was a law to advance the socially beneficial purpose of removing the stigma of illegitimacy on such children who were as innocent as any other children.

The Supreme Court also explained the modus operandi of succession to ancestral property. Such children will be entitled only to a share in their parents’ property but they cannot claim it in their own right. Logically, on the partition of an ancestral property, the property falling in the share of the parents of such children would be regarded as their self-acquired and absolute property. In view of the Amendment, such illegitimate children will have a share in such property since such children were equated under the amended law with legitimate offspring of a valid marriage. The only limitation even after the Amendment was that during the lifetime of their parents such children could not ask for partition but they could exercise this right only after the death of their parents.

Hence, the Court in Revanasiddappa (supra) concluded that it was constrained to take a view different from the one taken earlier by it in JiniaKeotin (supra), Neelamma (supra) and Bharatha Matha (supra) on s. 16(3) of the Act. Nevertheless, since all these decisions were of Two-Member Benches, it requested the Chief Justice of India that the matter should be reconsidered by a Larger Bench.

CURRENT STATUS

After a long wait of more than 12 years, the Supreme Court Larger Bench has finally resolved the matter in the case of Revanasiddappa vs. Mallikarjun, C.A. No. 2844/2011, Order dated: 1st September, 2023.The issue for determination, as framed by the Supreme Court, was “Whether such an illegitimate child, who has been deemed to be legitimate by virtue of s.16 of the Act, can succeed only to the self-acquired properties of his parents or even to their ancestral properties?” The Court was also examining whether such a child could become a coparcener in the HUF.

LEGITIMACY UNDER SECTION 16

The first issue settled by the Apex Court was that legitimacy bestowed by s.16 of the Hindu Marriage Act was irrespective of whether (i) such a child was born before or after the commencement of the Amendment Act of 1976 which introduced s.16; (ii) a decree of nullity was granted in respect of that marriage under the Act and the marriage was held to be void. Further, where a voidable marriage has been annulled by a decree of nullity, a child ‘begotten or conceived’ before the decree has been made, is deemed to be their legitimate child, notwithstanding the decree.

HUF AND HINDU SUCCESSION ACT

The Court examined the meaning of an HUF and its genesis under the Hindu Law. It also examined the rights of coparceners to succeed to the share of their father in the HUF in light of the Hindu Succession Act, 1956. This could be by way of a Will or by intestate succession. In the case of intestate succession, the provisions of the Hindu Succession Act provide for Class I heirs to succeed to the property of a Hindu male. In this situation, the Court noted that the Hindu Succession Act did not distinguish between legitimate Class I heirs and illegitimate heirs. The fact that legitimacy has been bestowed upon the children of a void marriage by virtue of s.16 of the Hindu Marriage Act would mean that no distinction can be drawn between those children who were legitimate and those who are deemed to be legitimate.

INTESTATE PROPERTY INCLUDES SHARE IN HUF

All property of an intestate Hindu male was to be divided amongst his Class I heirs. The Apex Court observed that the phrase “all property” means all property belonging to the intestate and included the share in his HUF. The Hindu Succession Act also provided for a notional partition of the HUF to determine the share of the deceased in the HUF. The legislature had provided for the ascertainment of the share of the deceased on a notional basis. The expression ‘share in the property that would have been allotted to him if a partition of the property had taken place’ indicated that this share represented the property of the deceased. Where a person died intestate, the property would devolve in terms of the Hindu Succession Act. The Court held that in the distribution of the property of the deceased who had died intestate, a child who was recognised as legitimate under the Hindu Marriage Act would be entitled to a share. Since this was the property that would fall to the share of the intestate after the national partition, it belonged to the intestate. Hence, where the deceased had died intestate, the devolution of this property must be among the children – legitimate as well as those conferred with legitimacy by the Legislature. The Court gave an illustration of a HUF with 4 coparceners. Of these, C2, one coparcener dies and is survived by his wife and two children. One of the two children is illegitimate but deemed to be legitimate as above. A notional partition of the HUF would take place, and C2’s share would be determined as 1/4th and this 1/4th would be split equally amongst his widow, his legitimate child and his illegitimate child. Each of them would get a 1/3rd share in C2’s 1/4th share, i.e., a 1/12th share in the HUF.

ENTITLED TO SHARE BUT NOT A COPARCENER

However, the Court held that the illegitimate child would not ipso facto become a coparcener in the HUF. He would get a share in his deceased father’s HUF share but not directly become a coparcener in the HUF. This is because the HUF property is not the exclusive property of his father. S.16(3) of the Hindu Marriage Act has an express carve out that a deemed legitimate child cannot succeed to properties of other relatives. To make him a coparcener would violate s.16(3). It noted several amendments during the year to the Hindu Succession Act to remove gender biases. But the legislature has not stipulated that a child whose legitimacy is protected by s.16 of the Hindu Marriage Act, would become a coparcener by birth.

The very concept of a coparcener postulated the acquisition of an interest by birth. If a person born from a void or voidable marriage to whom legitimacy was conferred by s.16 were to have an interest by birth in a HUF, this would affect the rights of others apart from the parents of the child. Holding that the consequence of legitimacy under s.16 was to place such an individual on an equal footing as a coparcener in the coparcenary would be contrary to the provisions of s.16(3) of the Hindu Marriage Act.

CONCLUSION

The issue relating to HUF rights of illegitimate children has been quite contentious and litigation-prone. After a long wait, the issue has reached finality. The Court has aimed for a balancing approach by protecting the rights of the deemed legitimate child on the one hand and also preserving the rights of other HUF coparceners on the other hand!

BCAJ Admin

Alternative Investment Funds (AIFs) — Examining the Application of PARI-PASSU and PRO-RATA Concepts

Alternative Investment Funds (AIFs) play a vital role in India’s economy. They provide risk capital in the form of equity/quasi-equity capital for pre-revenue stage companies, early and late-stage ventures, growth companies that wish to scale their operations, and even companies facing distress.

The size of AIFs has grown to a significant amount over the years. There are around 1,100 AIFs registered with SEBI with over 8.44 trillion INR in commitments (as of 30th June, 2023), witnessing an annual growth rate of over 30 per cent.

Considering the need of the economy for such funds, its growth and the huge amount committed, SEBI, aptly supported by its policy advisory committee, is continuously making sincere attempts to ensure transparency and good governance. Recently in May 2023 SEBI, in its consultation paper titled “Consultation paper on proposal with respect to pro-rata and pari-passu rights of investors in Alternative Investment Funds (AIFs)”, has empathetically asserted:

“Considering that fair treatment of investors is a core and inherent principle for a pooled investment vehicle, as also evident from global references given above it is essential to expressly provide that AIFs shall not provide any differential treatment to investors which affects economic rights of other investors. Therefore, it is necessary to explicitly provide for fair treatment of all investors as a principle under the AIF Regulations, from the perspective of investor protection.” (para 31 — emphasis supplied)

The objective of this article is to critically examine the extant regulations on pari-passu and pro-rata rights of investors in AIF and the fair treatment of all investors as regards investors joining a fund at different points in time.

What is pari-passu?

Pari-passu is a Latin term that means “ranking equally and without preference.” Applied in the context of investments, pari-passu means that multiple parties to an investment joining an investment scheme at different points of time with varying amounts are treated the same, “ranking equally and without preference — in the sense that the assets or securities would be managed with equal preference or a preference weighted on the value or amount invested and when invested in either the asset or securities.”

Fundraising by an AIF scheme/ fund:

SEBI Regulations governing AIFs viz. SEBI (Alternative Investment Funds) Regulations, 2012, contemplate that a fund approved by SEBI may be able to attract investors to such a fund at different points of time, committing varying amounts (subject to the minimum prescribed). The terms used for investors joining at different points of time are (i) investors joining at the time of First Closing, (ii) investors joining at Subsequent Closing(s), and (iii) investors joining at the time of Final Closing. The Private Placement Memorandum (PPM — explained later) (in section VII) requires each scheme to specify indicative timelines for Initial closing, Subsequent closing(s), Final closing, Commitment Period and Term of the Fund/Scheme.

Considering the above, there is a need to place all these investors joining at different points of time with varying amounts on equal footing.

In mutual fund equity schemes where daily NAV based on the market prices is readily available, all subsequent investors join based on this daily NAV at the time of joining.

However, the investments by most AIFs are in private equity/ quasi equity. These investments have certain time frame depending on the period of nurturing required and success and growth of the ventures. They are illiquid investments and can’t have daily market value. Considering this limitation, the best way to put these investors joining at different points of time with varying amounts is by ensuring equal IRR (Internal Rate of Return) or equal RoI (Return on Investment) for all investors. The implementation of this system may be practically cumbersome and, therefore, in order to simplify the process, in cases of AIFs, this is ensured by what is popularly known as equalization method. In this method, there are three different types of contributions which investors joining during subsequent closing(s) and final closing have to pay — Catch-up Contribution, Compensatory Contribution and Management Fees Additional Contribution. The first two viz. Catch-up Contribution and Compensatory Contributions are meant to place subsequent investors on equal footing vis-à-vis earlier investors and therefore, are distributed by the fund amongst earlier investors on pro-rata basis.

In this article, I am making an attempt to specifically focus on the following:

• The precise nature of Catch-up Contribution and Compensatory Contribution.

• How they are quantified, collected from subsequent contributors (investors) and distributed pro-rata amongst original/ prior contributors.

In Annexure 1, I have brought out the key concepts and the regulatory framework that guides the functioning of AIFs.

The subject of the economic rights of investors during fundraising by AIF — specifically in the context of Category II AIF is very significant.

MODEL CONTRIBUTION AGREEMENT:

Every investor investing in an AIF has to enter into an agreement which is called a Contribution / Subscription Agreement.

The format of PPM provided by SEBI in Part A in Section VII titled ‘Principal Terms of the Fund/Scheme’ requires the Investment Manager to specify the indicative timeline for various closings, the payments unitholders participating in subsequent closings have to make (like catch-up contribution, compensatory contribution).

SIDBI, which manages Fund of Funds, on its website, provides a model contribution agreement.

https://www.sidbivcf.in/files/new_announcement/Model per cent20Contrubution per cent20Agreement per cent20for per cent20AIFs.pdf

The relevant definitions for the present subject are:

• “Catch-up Contribution”

• “Compensatory Contribution”

• “Final Closing”

• “First Closing”

• “Subsequent Closing”

• “Subsequent Contributor”

Clause 3 of this model agreement deals with the “Induction of new contributors and the issue of Units.”

For brevity, the same are not reproduced here.

On reading the above definitions and clause 3 of the model agreement and requirements of PPM, it conveys:

1. At every subsequent closing up to the Final Closing, subsequent contributors shall pay Catch-up Contribution as well as Compensatory Contribution.

2. Both these amounts collected by the Fund shall be distributed amongst the contributors who were admitted prior to such subsequent closing pro rata in proportion to their respective capital contributions.

Considering the above-stated provisions usually contained in all contribution/ subscription agreements and similar provisions contained in PPMs, it is evident that AIFs have to collect catch-up and compensatory contributions from subsequent investors and distribute the same pro-rata amongst prior/ earlier investors.

The next step is to understand how these two contributions are quantified, collected and distributed.

The methodology of quantifying, collecting and distributing Catch-up Contributions and Compensatory Contributions are explained using case studies.

CATCH-UP CONTRIBUTION:

Before a private equity fund is launched, the IM solicits commitments to invest from potential investors. These soft commitments are not legally binding and do not represent future subscriptions. They, however, indicate as to how much capital might be raised.

Once the IM decides to launch the fund, the PPM is published and circulated amongst potential/prospective investors. Thereafter, hard commitments are made by investors with whom contribution/subscription agreements are signed.

The IM can seek to raise additional commitments and capital at any time between the First Closing and the Final Closing.

The above is illustrated below by a hypothetical case of Rahul Fund as at First Closing on 30th November, 2018 (Table no. 1):

Investor	COMMITMENT(INR)	OWNERSHIP
The IM	5,00,00,000	10 per cent
Investor1	15,00,00,000	30 per cent
Investor 2	15,00,00,000	30 per cent
Investor 3	15,00,00,000	30 per cent
TOTAL	50,00,00,000	100 per cent

The Fund issues a drawdown notice dated 1st December, 2018 calling upon the investors to contribute 10 per cent aggregating to Rs. 5,00,00,000 and all investors send their contributions by 31st December, 2018. Accordingly, the above data will appear as under (Table no. 2):

INVESTOR	COMMITMENT	OWNERSHIP	DRAWDOWN 1
The IM	5,00,00,000	10 per cent	50,00,000
Investor1	15,00,00,000	30 per cent	1,50,00,000
Investor 2	15,00,00,000	30 per cent	1,50,00,000
Investor 3	15,00,00,000	30 per cent	1,50,00,000
TOTAL	50,00,00,000	100 per cent	5,00,00,000

One year after the Initial Closing, the IM decides to seek additional capital commitments and finds an investor (Investor 4 in the table below). Rahul Fund’s investor allocation will now be as under (Table no. 3):

INVESTOR	COMMITMENT	OWNERSHIP	DRAWDOWN 1
The IM	5,00,00,000	8.33 per cent	50,00,000
Investor1	15,00,00,000	25 per cent	1,50,00,000
Investor 2	15,00,00,000	25 per cent	1,50,00,000
Investor 3	15,00,00,000	25 per cent	1,50,00,000
Investor 4	10,00,00,000	16.67 per cent	NIL
TOTAL	60,00,00,000	100 per cent	5,00,00,000

With this additional investor’s commitment, the initial investors’ ownership has been diluted, yet the new investor hasn’t paid anything into the fund. Investor 4 could simply make the initial drawdown payment to balance things out, but this wouldn’t accurately compensate the initial investors and would eat into Fund’s IRRs.

Instead, an equalisation needs to be completed.

What is equalisation — catch-up contribution?

Equalisation is the process of truing up all investors as if they had all joined a fund on its initial closing date. The process of doing so is multi-pronged. This is called catch-up contribution.

First, Investor 4 pays in drawdown 1 on 31st December, 2019. But rather than making the payment to the fund, the payment is allocated across the initial investors, according to their percentage of ownership of the fund (Table no. 4).

INVESTOR	COMMITMENT	OWNERSHIP	DRAWDOWN 1	Returned/called	Adj.Drawdown1	Per cent drawdown
The IM	5,00,00,000	8.33%	50,00,000	(8,35,000)	41,65,000	8.33
Investor1	15,00,00,000	25%	1,50,00,000	(25,00,000)	1,25,00,000	25
Investor 2	15,00,00,000	25%	1,50,00,000	(25,00,000)	1,25,00,000	25
Investor 3	15,00,00,000	25%	1,50,00,000	(25,00,000)	1,25,00,000	25
Investor 4	10,00,00,000	16.67%	NIL	83,35,000	83,35,000	16.67
TOTAL	60,00,00,000	100%	5,00,00,000	NIL	5,00,00,00	100

The magic of equalisation is putting Investor 4 as if Investor 4 had joined the Fund at the time of initial closing — at par with the IM and other three Investors 1, 2 & 3.
Clause 3.1.of the model agreement also states:

“The Investment Manager shall promptly distribute Catch-up Contributions amongst the Contributors who were admitted prior to such Subsequent Closing pro rata in proportion to their respective Capital Contributions and such amounts distributed to the Contributors shall be added back to their Unpaid Capital Commitments, ……….”

This provision is illustrated as under (Table no. 5):

INVESTOR	COMMITMENT	DRAWDOWN 1	Unpaid capital commitment	Returned/called	Adj.Drawdown1	Adjusted unpaid capital
The IM	5,00,00,000	50,00,000	4,50,00,000	(8,35,000)	41,65,000	4,58,35,000
Investor1	15,00,00,000	1,50,00,000	13,50,00,000	(25,00,000)	1,25,00,000	13,75,00,000
Investor 2	15,00,00,000	1,50,00,000	13,50,00,000	(25,00,000)	1,25,00,000	13,75,00,000
Investor 3	15,00,00,000	1,50,00,000	13,50,00,000	(25,00,000)	1,25,00,000	13,75,00,000
Investor 4	10,00,00,000	NIL	nil	83,35,000	83,35,000	9,16,65,000
TOTAL	60,00,00,000	5,00,00,000	45,00,00,000	NIL	5,00,00,00	55,00,00,000

From this Table No. 5, it is evident that the share in catch-up contribution received by The IM and Investors 1, 2 and 3 adds up to unpaid capital commitment by all four of them. This, in essence, means that the share in the catch-up contribution received is part refund of the amount they had already paid. This is relevant in deciding the taxability, if any, of this share in catch-up contribution received by original/ prior investors.

The cardinal principle of an AIF is — All investors have to be treated at par — equally treated (barring a few issues like set-up fees, and management fee structure). This ‘catch-up contribution’ has the effect of putting all investors on an equal footing. The outcome should be that, having re-balanced contributed capital, the amount of uncalled capital for each partner is consistent with the percentage ownership of each partner after this subsequent closing.

A basic premise in the treatment of subsequent closings is that subsequent investors should be treated as if they had invested at the beginning.

Following this principle, the new/subsequent investors who join at a later date are put at par with original/ prior investors following this system of catch-up contribution and its pro rata distribution amongst prior/ original investors.

Note that, so far, it appears that the fund does not receive cash on 31st December, 2019; the net effect of the cash flows shown is zero as the flows simply re-balance the investor’s capital

COMPENSATORY CONTRIBUTION:

However, there is one more area where also, both these types of investors need to be put at par — time value of money.

In the given case, the original three investors and the IM had put their money by December, 2018. Whereas the new investor 4 puts his pro rata contribution in December, 2019 — after a lapse of a year. This issue is addressed by what is called Compensatory Contribution in India and Equalisation Interest abroad. The same is amplified as under.

What is Equalisation Interest — called Compensatory Contribution in India?

In the given case, the IM and 3 original investors paid their first drawdown on 31st December, 2018. Whereas, Investor 4 pays Rs. 83,35,000 only on 31st December, 2019 — after a time lapse of 1 year. To compensate for this, Investor 4 also pays compensatory contribution at a specified rate per annum. Normally, this rate is the Hurdle Rate provided in the Contribution/ Subscription Agreement. This compensatory contribution is also distributed amongst original/ prior investors pro-rata.

The collection of Compensatory Contribution from the new investor and distribution of the same amongst the IM and original three investors will put all investors at par vis-à-vis each other. Any drawdown(s) thereafter will be paid by all the 5 investors as per their respective shares of unpaid capital commitments.

The impact of Compensatory Contribution is illustrated on the following page:

INVESTORS	DATE	AMOUNT	Per cent HOLDING	Equalisation Interest
Original Investors:
Investment Manager	31-12-2018	2,00,00,000	7.41 per cent	1,95,09,000
Investor 1	31-12-2018	20,00,00,000	74.07 per cent	19,50,11,000
Investor 2	31-12-2018	5,00,00,000	18.52 per cent	4,87,60,000
Final Closing:
Investor 3	30-06-2021	94,00,00,000		-26,32,80,000

Investor 3 pays interest at 10 per cent p.a. (compounded quarterly), being hurdle rate, from 31st December, 2018 to 30th June, 2021.

The readers will notice the loss original investors would suffer (almost close to 100 per cent of the invested amount) if an investment manager decides to waive this equalisation interest.

These calculations look relatively easy and straightforward, but it is easy to imagine how they quickly become increasingly complex as factors multiply. Funds might have multiple capital calls that they need to track between the initial and subsequent closing, as well as multiple closings with different investors on-boarding at different times.

Whether Investment Manager has the right to waive Catch-up and/or Compensatory Contributions?

Clause 3 of the Model Contribution Agreement deals with the Induction of new contributors and issue of Units). This clause states — “The Investment Manager shall however, have the power to waive or increase/reduce, subject to the consent of the Advisory Committee, the Compensatory Contribution on Catch-up Contributions to be received and accepted at such Subsequent Closings.”

In this context, readers’ attention is invited to SEBI’s Consultation paper with respect to pro-rata and pari-passu rights of investors issued in May 2023¹. In this paper, inter alia, it is stated, “While the above principle is not explicitly stated in AIF Regulations, maintaining pro-rata rights of investors in each investment of the scheme of AIF, including while making distribution of investment proceeds, is an essential characteristic of the AIF structure.”

1. https://www.sebi.gov.in/reports-and-statistics/reports/may-2023/consultation-paper-on-proposal-with-respect-to-pro-rata-and-pari-passu-rights-of-investors-of-alternative-investment-funds-aifs-_71540.html

Considering the above, the right, if any, of the investment manager to waive catch-up and/ or compensatory contribution has to be subject to conditions, and the fund and the trustee are responsible for ensuring pari-passu rights of all investors — initial as well as subsequent — at all times.

As mentioned earlier, accounts of each fund have to be audited each year and the auditor may consider examining, during the course of audit, whether the fund has collected and distributed catch-up as well as compensatory contributions from subsequent investors or not. And, if not, the auditor needs to examine whether such an act affects the pro-rata and pari-passu rights of investors or not. If the auditor finds that it affects this essential characteristic of the AIF structure, it may be his responsibility to suitably report the same.

Taxation of Catch-Up Contribution & Compensatory Contribution:

Also, considering that category II AIF enjoys pass-through status, it is important to understand the income-tax implications of the catch-up contribution and compensatory contribution collected from subsequent contributors and distributed by the Fund amongst prior/ original contributors.

No attempt is made here to analyse income tax implications of these two amounts either in the hands of the Fund or in the hands of contributors (both original as well as subsequent contributors).

However, the potential tax issues are listed as under:

1. The Fund:

• Whether it is a business income and therefore liable to be taxed in the hands of the Fund,

• If not, whether, while passing on both these amounts to original/ prior investors, whether the Fund is required to deduct tax at source? If yes, whether on both the amounts or only on equalisation interest (compensatory contribution)?

2. Subsequent contributors (new investors):

• Whether catch-up contribution as well as compensatory contribution will be treated as ‘cost’ while computing their taxable capital gain? If not, does it mean that same will not give any tax relief in respect thereof to such subsequent investors?

• Whether compensatory contribution which is in the nature of equalization interest (and not actual interest) can be claimed as deduction while computing gross taxable income of such a subsequent contributor in the year of payment?

3. Original / prior contributors:

• Whether these amounts are ‘capital receipts’ or ‘revenue receipts’?

• Whether catch-up contribution received can be adjusted against the amounts paid against earlier drawdown(s) to reduce that amount?

• If not, whether the catch-up contribution is liable to be taxed as capital gain or as income from other sources?

• Whether compensatory contribution (which is in the nature of equalisation interest) liable to be taxed as ‘interest income’? Or, whether the same too will go to reduce the cost already incurred? [NOTE: It is important to note that these so called ‘subsequent investors’ too will qualify to receive both ‘catch-up contribution’ as well as ‘compensatory contribution’ whenever there is any fresh round of fund-raising post their investment.]

CONCLUSION

Considering the above, I submit that it is the responsibility of the Investment Managers, PPM Auditors and Investors to assess if the true principles of catch up and compensatory contributions have been followed.

i. The investment managers have to decide whether to adopt equalisation method at the times of each subsequent closing(s) and final closing.

ii. The AIF PPM Auditors (who can be internal/external auditors or legal professionals), while conducing audits of PPM and annual accounts, have the responsibility to examine the actions and decisions of the IM and, if required, to report on the same.

iii. The investors too need to be vigilant as to their rights to receive catch-up and compensatory contributions whenever they notice that the fund in which they have invested has raised fresh commitments.

The writer has come across an instance where the IM, using its discretionary power, waived these contributions even though such a waiver negatively impacted the investor’s economic rights in his regard.

The annual audit of PPM compliance is mandated in the interests of investors. Considering this, SEBI regulations must provide that this annual audit report should also be shared with each investor along with corrective action(s) taken by AIFs. Considering the automation in back-office systems, the time allowed for conducting such an audit too needs to be reduced to maximum 90 days. SEBI also needs to take initiative to form an investors forum which can, on an on-going basis, disseminate information to investors in the matter of their economic rights and representatives of such a forum are included in alternative investment policy advisory committee.

ANNEXURE 1

The background on AIFs is briefly stated for readers’ quick references and understanding.

What is an Alternative Investment Fund (“AIF”)?

Alternative Investment Fund or AIF means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy (stated in PPM) for the benefit of its investors.

AIF does not include funds covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities. Further, certain exemptions from registration are provided under the AIF Regulations to family trusts set up for the benefit of ‘relatives‘, employee welfare trusts or gratuity trusts set up for the benefit of employees, ‘holding companies‘ etc. [Ref. Regulation 2(1)(b)]

(source – SEBI FAQs)
https://www.sebi.gov.in/sebi_data/attachdocs/1471519155273.pdf

AIFs are regulated by the capital market regulator’s SEBI (Alternative Investment Funds) Regulations, 2012 as amended from time to time and circulars issued by SEBI.

https://www.sebi.gov.in/legal/regulations/apr-2017/sebi-alternative-investment-funds-regulations-2012-last-amended-on-march-6-2017-_34694.html

SEBI’s Master Circular dated 31st July, 2023 on AIFs:
https://www.sebi.gov.in/legal/master-circulars/jul-2023/master-circular-for-alternative-investment-funds-aifs-_74796.html

SEBI circulars on AIFs:
https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListingAll=yes&cid=25

SEBI also has formed Alternative Investment Policy Advisory Committee under the chairmanship of Mr N R. Narayana Murthy. This committee has published three reports which are available on SEBI’s website.

Report dated 31st December, 2015:

https://www.sebi.gov.in/sebi_data/attachdocs/1453278327759.pdf

Report dated 26th November, 2017:
https://www.sebi.gov.in/sebi_data/attachdocs/jan-2018/1516356419898.pdf

In terms of SEBI AIF Regulations it is mandatory to obtain certificate of registration from SEBI for enabling AIFs to operate under one of the following 3 categories:

• Category I — AIFs which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure. Includes venture capital funds, SME funds, social venture funds, infrastructure funds, angel funds, etc.

• Category II — AIFs, which do not fall in Category I or Category III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements. Includes private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other regulator.

• Category III — AIFs, which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. Includes hedge funds or funds, which trade for short term returns, or open-ended funds, for which no specific incentives or concessions are given by the government or any other regulator.

Private Placement Memorandum (PPM):

The PPM is a risk disclosure document (akin to a prospectus issued by a company making public issue) used for marketing a fund to its potential/ prospective investors.

In terms of Regulation 12, AIF has to, at least 30 days prior to the launch of a scheme, submit Placement Memorandum with the Board and the Board may communicate its comments which will have to be incorporated in the placement memorandum before it can be released to prospective investors. Circular dated 5th February, 2020 issued by SEBI has prescribed format for PPM.

The PPM is divided into two parts — Part A requiring minimum disclosures in respect of 15 sections listed in annexure I to the circular and Part B where any additional information in relation to the Fund/Scheme, Manager, investment team which does not form part of the standard disclosures and the section-wise supplementary section under the earlier sections, can be indicated. Considering a sizable amount invested by each investor and high risks associated with such investments, investors should read the PPM and understand the precise nature of the fund where the amount is being invested, particularly provisions which directly or indirectly affect investors’ economic and legal rights.

http://www.aibi.org.in/Circulars/Disclosure per cent20Standards per cent20for per cent20Alternative per cent20Investment per cent20Funds per cent20(AIFs).pdf

https://www.sebi.gov.in/sebi_data/commondocs/feb-2020/an_1_p.pdf

Economic rights:

The parity of economic rights between investors of AIFs is necessary as well as critical. It is observed that at times, the PPMs adopt different practices which provide differential benefits/rights to certain investors over others. Few such terms on which differential economic rights are provided by AIFs are Drawdown timeline, Hurdle rate of return/performance linked fee, Transfer rights, Information rights, Compensatory contribution for investors on-boarded in subsequent closings including catch-up contribution for maintaining pro-rata rights of investors, and Co-investment rights.

Even though PPMs may provide equal rights to investors in these matters, the IMs may, using their discretion, give such preferential rights to a select group of investors or waive catch-up as well as compensatory contributions. As the minimum investment amount prescribed is rupees one crore, general perception is that the investors are sophisticated and capable of taking decision to invest after properly studying PPM and understanding its contents. However, this perception in reality may not be correct.

AIFs and AUDIT REQUIREMENTS:

To complement the measures prescribed by SEBI, chartered accountants as auditors and consultants, also have an important role to play to ensure orderly growth of AIFs and protection of investors’ economic rights.

The accounts of each fund managed by a registered AIF have to be audited annually by a qualified auditor. Each AIF has to provide Annual Report to all its investors including financial information of investee companies and detailed risk profiles. The auditor’s report along with audited accounts are shared with the investors in each such fund along with the annual report. In order to further protect investors’ interests, SEBI circular has introduced a specific requirement that the terms of a contribution or subscription agreement (by any name it may be called) signed with each investor must be aligned with the terms of the Private Placement Memorandum (PPM — what is PPM is explained earlier) and contribution agreement cannot go beyond the terms of the PPM. The Investment Managers are required to ensure that they carry out all activities of the AIF in accordance with the PPM and that they should maintain fairness in ensuring that investors economic and legal rights are of paramount importance.
Also, with a view to ensure that the management team has complied with the terms of PPM, SEBI has introduced a requirement for annual audits of PPM. The results of the audit and any necessary corrective action must be shared with (i) the Trustee, Board, or Designated Partners of the AIF; (ii) the Board of the Manager; and (iii) SEBI within six months of the financial year’s end.

AIFs that have not received any funding from investors are exempt from the requirement of audit compliance. However, within six months of the end of the financial year, a Certificate from a Chartered Accountant declaring that no money has been raised must be provided to support this claim.

Considering SEBI’s persistent attempts to increase good governance and risks management in the management of AIFs through compliances and disclosures, management teams face number of challenges in their functioning and time is not far when large sized funds will need external audit firms to conduct internal audits to assist the management.
Considering the above, such high risk non-traditional investments present number of challenges to chartered accountants as auditors, tax experts & consultants to ensure that they discharge their expected obligations with due care and caution.

Considering the huge amount generated by AIFs, the responsibilities cast on auditors are enormous and, therefore, the auditors need to be familiar with various special features of AIFs, particularly economic rights of investors. One such important feature is — investors joining a fund at different points of time and ensuring they all stand in equal footing — paripassu.

In May 2023, SEBI had come out with several proposals for stricter regulations of AIFs. SEBI issued four consultation papers.

AIF Taxation:

Category I and Category II AIFs enjoy pass-through status. This subject is known to most tax practitioners.
Government’s role in AIF Funding:

Fund of Funds:

Government of India (GoI) created access to a large capital of funds for startups in India, through the scheme “Fund of Funds for Start-ups” to create a nation of job creators than job seekers. This Fund is operated by SIDBI. https://www.sidbivcf.in/en

Self-Reliant India (SRI) Fund — Mother-Daughters Fund:

MSME Sector is very important for the Indian economy in terms of contribution to GDP and employment generation. Considering that the GoI has set-up SRI Fund (Mother Fund) to assist MSME sector through Daughters Fund in the form of Category II Alternative Investment Fund (AIF) who are oriented towards providing funding support to MSMEs as growth capital, in the form of equity or quasi-equity. The details are available at https://dcmsme.gov.in/Final per cent20SRI per cent20Operating per cent20Guidelines per cent20 per cent20approved per cent20by per cent20Minister per cent20 per cent2017 per cent2008 per cent202021.pdf

The SRI Fund is managed by NSIC Venture Capital Fund. The details are available at http://www.nvcfl.co.in/AboutUs

BCAJ Admin

Corporate Law Corner : Part A | Company Law

7 M/s Assam Company India Ltd & Ors
vs. Union of India & Ors
The Gauhati High Court
High Court of Assam, Nagaland, Mizoram and Arunachal Pradesh
Case No. : WP(C) 2572/2018
Date of Order: 07th March, 2019The expression “Shell Company” had not been defined under any law in India. Therefore, before declaring any Company as a Shell Company, a notice or an opportunity of being heard shall be given having regard to its negative implications and serious consequences. FACTS

M/s ACIL was incorporated on 15th March, 1977 having its Registered Office at Assam, involved in the business of cultivation and manufacture of tea having several tea estates in the State of Assam.

M/s ACIL learned that respondent No.2, i.e., Securities and Exchange Board of India (‘SEBI’) had initiated proceedings against M/s ACIL by instructing the Bombay Stock Exchange, National Stock Exchange and Metropolitan Stock Exchange (collectively referred to as ‘Stock Exchanges’) to restrict and/or to suspend trading of shares of M/s ACIL. Further learned that, SEBI had initiated such proceedings on the basis of a letter dated 09th June, 2017 received from Government of India by the Ministry of Corporate Affairs (‘MCA’) forwarding the database of 331 listed shell companies for initiating necessary action. In the said list of 331 shell companies, M/s ACIL was listed at Serial No.2 with the source indicated as Income Tax Department.

M/s ACIL represented before SEBI on 07th August, 2017 contending that it was an on-going company and could not be included in the list of shell companies. It was pointed out that M/s. ACIL produces 11 million KGS of tea and employs about 20 thousand workers across the Tea Estates.

According to M/s ACIL, no steps were taken by SEBI on the representation by M/s ACIL. Therefore, an appeal was filed before the Securities Appellate Tribunal (‘SAT’), Mumbai which was registered as Appeal No.196/2017. The appeal was disposed of vide order dated 21st August, 2017 by directing the stock exchanges to reverse their decision expeditiously, while granting liberty to M/s ACIL to make a representation to SEBI, which was directed to be disposed of by SEBI in accordance with the law. It was further observed that the aforesaid order of appeal would not come in the way of SEBI as well as the stock exchanges from investigating the case of M/s ACIL and to initiate proceedings if deemed fit.

In compliance with the order of the SAT, M/s ACIL submitted several representations before SEBI and also sought for copies of documents on the basis of which M/s ACIL was declared as a shell company, which were handed over by SEBI on 25th January, 2018.

According to M/s. ACIL, based on the documents handed over, it was found that the aforesaid letter dated 09th June, 2017 was received from the Serious Fraud Investigation Office of Government of India, Ministry of Corporate Affairs (SFIO). The same included the database of 124 listed companies along with a Compact Disc received from the Income Tax Department, having been identified during various search/seizures.

From the database (Compact Disc) of the letter, it appeared that M/s ACIL was shown as a company controlled by Mr VKG against whom several Income Tax Proceedings were pending. A nexus was drawn between Mr VKG and M/s ACIL through Mr SK who was one of the Independent Directors of M/s ACIL and also a Director in one of such companies controlled by Mr VKG.

M/s. ACIL contended that the mere presence of Mr. SK as an Independent Director of M/s ACIL, who was also a Director in the companies controlled by Mr VKG, cannot be construed as there being any relationship between M/s ACIL and Mr VKG. Furthermore, Mr VKG had filed an affidavit before SEBI stating that he had no association with M/s ACIL in any manner.

In the meanwhile, SEBI passed an interim order dated 08th December, 2017. By the said order trading in securities of M/s ACIL was reverted to the status as it stood prior to issuance of the letter dated 07th August, 2017. It was ordered that Stock Exchanges would appoint Independent Auditors to verify misrepresentation of finance and business of M/s ACIL as well as misuse of funds/books of accounts. Also, the Promoters and Directors of M/s ACIL were permitted only to buy securities of M/s ACIL, prohibiting them from transferring the shares held by them.

Aggrieved by the order, present writ petition was been filed by M/s ACIL seeking the relief that passing of such order by SEBI was not justified and stated that M/s ACIL cannot be treated as a Shell Company.

The expression “Shell Company” had not been defined under any law in India. Therefore, there was no statutory definition of a Shell Company, be it in fiscal statutes or in penal statues. In addition, neither the Companies Act, 1956 nor the Companies Act, 2013 defines the expression shell company. In the interim order passed on 12th July, 2018, the Court observed that in the Concise Oxford English Dictionary, 11th Revised Edition, a Shell Company had been defined as a non-trading company used as a vehicle for various financial manoeuvres.

In popular parlance, a Shell Company was understood as having only a nominal existence; it exists only on paper without having any office and employee. It may be used as a deliberate financial arrangement providing service as a tool or vehicle of others without itself having any significant assets or operations i.e., acting as a front. Popularly Shell Companies are identified as companies that are used for tax evasion or money laundering, i.e., channelising crime tainted money or proceeds of crime into the formal economy.

The Organisation for Economic Cooperation and Development (OECD) has prepared a glossary of foreign direct investment terms and definitions. In the said glossary, a Shell Company has been defined as a company which is formally registered, incorporated or otherwise legally organised in an economy, but which does not conduct any operations in that economy other than in a pass-through capacity. Shell companies tend to be conduits or holding companies and are generally included in the description of special purpose entities.

Mr AB, Assistant Professor in Law, Nirma University, Ahmedabad had carried out a study and published an article on the subject ‘Tackling the Menace of Shell Companies in India’. He had stated that there had been a spurt in economic crimes, such as, money laundering, benami transactions, tax evasion, generation of black money, round tripping of black money, etc. which not only causes revenue and foreign exchange loss to the Government, but also creates economic inequality in the society. It may compromise economic sovereignty of the State. According to him, such illegal activities are committed through the incorporation of companies which have neither any asset nor liability nor any operational businesses. These companies exist only on paper to facilitate illegal financial transactions, such as, money laundering and tax evasion. According to him, these kinds of companies are called shell companies.

However, it is no offence to be a shell company per se. A corporate entity may be set up in such a fashion with the objective of carrying out corporate activities in future. That would not make it an illegal entity. The Registrar of Companies can strike off the name of such a company from the register of companies. But, if such Shell Company is/was involved in money laundering or tax evasion or for other illegal purposes, then relevant provisions of laws under the Prevention of Money Laundering Act, 2002, Prohibition of Benami Transactions Act, 2016, Income-tax Act, 1961 and the Companies Act, 2013 would be attracted.

As per the study, SEBI had proposed to the Government of India that there should be a legal definition of Shell Company as there was no law in India which defines a Shell Company. Such definition besides giving legal clarity, would also enable the investigative agencies to carry out investigation more swiftly and in a structured manner. The Committee was of the view that all Shell Companies may not have fraudulent intention. Therefore, the expression shell company needs to be defined as having fraudulent intent as one of the characteristic features of such a company.

HELD

The Honourable Judge based on the above, deduced that though Shell Company was defined in other jurisdictions, in India there was no statutory definition of the term. However, the general perception was that with presence of shell companies there can be a potential use for such Companies for illegal activities that threatens the very economic foundation of the country and severely compromises its economic foundation and ultimately sovereignty.Thus, there was a prima facie view that since declaration of M/s ACIL as a Shell Company by itself would entail adverse consequences, M/s. ACIL should have been at least served a notice before being branded as a Shell Company. It was recorded that M/s ACIL was an old and reputed company owning 14 tea estates in the State of Assam producing 11 million KGS of tea every year and having a labour force of 20 thousand of its own. Therefore, branding such a company as a Shell Company was not justified.

Principles of natural justice would require that before such branding, M/s ACIL should have been put on notice and being provided a reasonable opportunity of hearing as to why and on what grounds it was being suspected to be a Shell Company. Only if the response was found to be not satisfactory, then such a finding could have been recorded. Besides, initiating proceedings after branding M/s ACIL as a Shell Company virtually amounted to giving a finding first and thereafter initiating a proceeding to justify the finding like a post-decisional hearing. One cannot be declared guilty first and thereafter subjected to a trial to justify or uphold finding of such guilt. The letter dated 09th June, 2017 was very clear that M/s ACIL was a Shell company and not a suspected Shell company.

Therefore, upon thorough consideration of the matter, writ petition was not only maintainable but also deserved to be allowed.

Impugned letter dated 09th June, 2017 in respect of M/s ACIL was accordingly interfered with and was set aside.

8 M/s. Oscar FX Pvt Ltd
U72900TG2014PTC094237/Telangana/152 of 2013/2023/4139 to 4141
Adjudication Order
Registrar of Companies, Hyderabad
Date of Order: 24th January, 2023.

Order under section 454 read with Section 159 of the Companies Act, 2013 for the violation of section 152(3) of the Companies Act, 2013 i.e. in case of appointment of any person as director in the company who does not have a valid director identification number (DIN) at the time of his/her appointment.

FACTS

M/s OFPL (hereinafter referred as ‘Company’) is registered in the State of Telangana on 29th May, 2014, having its registered office in Telangana. M/s OFPL had filed an application in Form GNL-1 dated 16th January, 2023 along with its officers in default under section 159 for adjudication of violation of Section 152(3) read with Section 454 of the Companies Act, 2013 (the Act) seeking necessary orders.It was submitted that erstwhile Board of Directors of the Company comprising Mr. KKP (Managing Director) and Mr. RPK (Director) at its Board Meeting held on 30th March, 2021 had appointed Ms. VBP as an Additional Director with effect from 30th March, 2021. However, Ms. VBP did not have a valid Director Identification Number (DIN) at the time of appointment to become the director on the Board of the company, which was a violation of the provisions of Section 152(3) of the Companies Act, 2013; and liable for penalty under Section 159 of the Companies Act, 2013.

It was further submitted that such appointment of Ms. VBP was unintentional and inadvertent due to lack of knowledge of provisions of the Companies Act, 2013.. Immediately upon realisation, Ms VBP, had applied to the Ministry of Corporate Affairs (“MCA”) for allotment of DIN on 15th September, 2021 and was allotted DIN on the same day by MCA. Immediately upon allotment of DIN to Ms. VBP, M/s OFPL had filed e-form DIR-12 with the Registrar of Companies dated 28th September, 2021 to give effect to her appointment as additional director. Section 152(3) of the Companies Act, 2013 states the following:

(3) No person shall be appointed as a director of a company unless he has been allotted the Director Identification Number under section 154:”

Section 159 of the Companies Act, 2013 contemplates the following:

“If any individual or director of a company makes any default in complying with any of the provisions of section 152, section 155 and section 156 such individual or director of the company shall be liable to a penalty which may extend to fifty thousand rupees and where the default is a continuing one, with a further penalty which may extend to five hundred rupee for each day after the first during which such default continues “.

HELD

After considering the submissions made in the application made by M/s OFPL and the facts of the case it is proved beyond doubt that M/s OFPL and the officers of the company have defaulted in complying the provisions under Section 155(3) of the Act. In this regard, M/s OFPL being a small company, and its officers in default (within the meaning of section 2(60) of the Companies Act, 2013) are hereby directed to pay the following penalty from their own sources.

Name of the Company	Penalty under section 159 r/w s. 446B of the Act.
	On default	On continuous default, with a further penalty which may extend to R 500 for 169 days (date of allotment of DIN).	Total penalty
Oscar FX Private Limited	Rs. 25,000/-	169 @ 100 = 16,900/-	Rs. 41,900/- (Rupees Forty-One Thousand Nine Hundred only)

Officer in Default	Penalty as per Act.
	On default	On continuous default, with a further penalty which may extend to five hundred rupees for 169 days (date of allotment of DIN).	Total penalty
Mr. KKP (MD)	Rs. 25,000/	Rs. 169 @ 100 = Rs. 16,900/-	Rs. 41,900/- (Rupees Forty-One Thousand Nine Hundred only)

It was directed that the penalty be paid within 30 days from the date of issue of the order.

shailesh.kwebmaker

Updated FAQS on Insider Trading Throw Light on Many Complex Issues

BACKGROUND

The Securities and Exchange Board of India (SEBI) has recently issued (on 31st March, 2023) comprehensive Frequently Asked Questions (FAQs) on its regulations relating to insider trading – the SEBI (Prohibition of Insider Trading) Regulations, 2015 (the Regulations). It is good to see this practice continuing whereby, not just clarifications, even if not binding, are given on important and repetitive issues, but they are all updated and provided at one place. The Regulations are fairly complex with a series of deeming provisions. Insider trading violations are regularly caught through a fairly sophisticated data surveillance, coupled with good investigation and quick orders. Of course, some orders are found wanting on evidence or principles of law applied and do not stand up on appeal, but the fact that such Regulations exist and there is a close watch acts as a deterrent. Insider trading reduces the credibility of markets since investors would feel demoralised if, whether in purchase or in sale, the insiders are able to illegally profit from information they are entrusted with as fiduciaries.

The Regulations are also distinct, in the sense that many of the provisions have a note attached to them which explain the intention of the particular provision. The FAQs add further to this by explaining and clarifying many provisions.

BINDING NATURE OF FAQS

It would be axiomatic to say that the Act and the Regulations and even certain notifications/circulars have a binding effect but not the FAQs. Indeed, they bind not even the regulator, i.e., SEBI, as the FAQs themselves take pains to emphasise. Paragraph 4 of the FAQs, says that the FAQs “…are in the nature of providing guidance on the SEBI (PIT) Regulations, 2015 and any explanation/clarification provided herein should neither be regarded as an interpretation of law nor be treated as a binding opinion/decision of the Securities and Exchange Board of India”.

That said, the FAQs do reveal the mind of the regulator on certain provisions. They explain many concepts useful to the student, the compliance officer and practitioner. Often, the question may not be of technical interpretation but of understanding what a particular provision means to say. Importantly, the cautious compliance officer and companies may prefer to toe the line by following the interpretation given in the FAQs, since it is likely that SEBI may initiate proceedings. The appellate authorities, however, may not give more than a passing view to the FAQs, if at all.

There are 59 frequently raised questions that are answered in the FAQs. While it would not be possible to cover all of them, some of the important ones can be highlighted.

PLEDGE OF SHARES – THEIR CREATION, INVOCATION AND RELEASE

The concept of pledge of shares has to be seen, in context of the Regulations, from at least three perspectives. Firstly, what is pledge of shares and how it is created, invoked and released? Secondly, why is it relevant for these Regulations? Thirdly, who are the persons who have obligations when they pledge their shares or get the pledge released, etc?

Pledge of shares, as a concept is well understood. Shareholders may want to raise finance against the security of shares held by them. Such security may be in the form of hypothecation or pledge, with the latter being more preferred by lenders. Pledge is generally governed by the Indian Contract Act, 1872 but a detailed discussion on this would be beyond the scope of this article. Unlike earlier times when physical shares with duly executed transfer deeds were deposited with the lenders, the depository system requires a different method. The pledge has to be registered with the depository. Invocation of such pledge is easier. Some lenders may still want to go all the way and ask the borrower to actually transfer the shares to the lender’s DEMAT account. The implications of such a ‘pledge’ is a complex issue by itself and deserves a separate detailed discussion.

The Regulations deal with insider trading and the first reaction would be that pledge is not trading as commonly understood. However, the Regulations have learnt from history. A shareholder may pledge while being in possession of unpublished price sensitive information (UPSI) and realise a higher value of shares. Thus, the scope of the terms has been widened to include pledge, and therefore also their invocation and release. Note though that the Regulations provide for this widened meaning by way of a note to the definition of ‘trading’.

Thus, the Regulations require specified insiders not to carry out a pledge while being in possession of UPSI. In other words, the restrictions on trading also apply to the creation of a pledge.

DEALING IN SECURITIES OTHER THAN SHARES/CONTRA TRADES

Do the Regulations apply only to dealings in shares or do they apply to dealings in futures and options too? Do they apply to exercise of ESOPs and also to sale of shares arising on exercise of ESOPs?

To begin with, the Regulations make it clear that they apply to ‘securities’, the definition of which is wide enough to include futures and options. Since ESOPs are a form of options, it is clear that the Regulations apply to ESOPs too. The FAQs specifically deal with this issue to put this issue beyond any doubt.

The question then comes of contra trades. As a matter of principle, the Regulations prohibit trading while in possession of UPSI. However, in case of close insiders (i.e., ‘Designated Persons’ as identified by the company), a stricter rule is adopted. Trading by them at a short intervals, called contra trades, is banned altogether since such trading would typically be done only on basis of UPSI. But several questions arise.

Firstly, futures and options get reversed within a short period. The Regulations do not provide how to deal with this. The FAQs have provided a view as follows. If a person buys futures/options and then sells them (or vice versa) within the maturity period of less than six months, then it would be deemed to be a contra trade and hence prohibited. However, if such trades mature by physical settlement, then they will not be deemed to be contra trades and hence not banned.

Even entitlements to rights shares are treated as securities and hence trading in them would attract the contra trade ban.

As far as ESOPs are concerned, the view expressed is as follows. The first part relates to grant of ESOPs. These are not treated as ‘trading’ and hence grants can be made even when the trading window is closed. Similarly, exercise of ESOPs is also not treated, the FAQs say, as trading. Hence, the acquisition of shares on exercise of ESOPs can be done even while in possession of UPSI. There is yet another concession regarding ESOPs. If shares are acquired on exercise of ESOPs, they do not invite the six-month ban of contra trades and hence such shares can be sold within six months of acquiring the shares.

CHARTERED ACCOUNTANTS AND OTHER FIDUCIARIES AND THE REGULATIONS

Firms of Chartered Accountants render services to listed companies in many ways. They may act as auditors (statutory or internal or tax), they may act as advisors for many services. This is so also for other professionals such as company secretaries, lawyers, etc. They are very likely to have access to UPSI and hence would generally be deemed to be insiders.

However, they have a further and more elaborate role. They are required to frame a code of conduct which should contain at least the minimum requirements specified in the Model Code. This includes pre-clearance of trading in specified securities, ban on contra trades therein, etc.

Moreover, they are also required to maintain a structured database. Essentially, this is maintenance of prescribed details of persons to whom UPSI is shared with. And maintain such records for at least the minimum specified period. Such database “shall not be outsourced” and “shall be maintained internally”. On the question of keeping such a database on third party servers such as Amazon, Google, etc. which are also maintained outside India, the FAQs give a cryptic answer, instead of a clear ‘yes’ or ‘no’. The answer given merely reiterates the responsibilities of the Board and the Compliance Officer to ensure that all Regulations, laws, etc. are complied with. However, on the question whether the company can use the software provided by third party vendors, the FAQs state that such software and services are provided on a login basis. The vendor may have access to the data and this would be contrary to the requirements of the Regulations.

Professionals rendering services to listed companies and having access to UPSI may range from small proprietorship to a large multi-partner firm, but the requirements are the same.

The FAQs confirm that these requirements are to be complied with by all professionals who have an access to the UPSI.

RELATIVES OF INSIDERS

There is often a confusion on the extent to which persons connected with the insider are also covered by the Regulations. The FAQs speak about this on some aspects.

The term ‘insider’ is broadly defined to cover several groups of persons who may have access to the UPSI. However, apart from persons directly connected to the company, there may be persons who have connection with them. For example, there may be a CFO of a company. The question is whether the family members of such a CFO would also be deemed to be insiders. The Regulations have sought to strike a fair balance but in the process has created confusion. Apart from relatives, several entities connected with such persons are also covered as insiders unless proven otherwise. But we could focus on one term that creates some confusion and practical difficulties too.

‘Immediate relatives’ of specified insiders are also deemed to be insiders, unless proven otherwise. The term ‘immediate relatives’ is defined in a curious manner. It includes not only the spouse, but also parents, siblings and children of such a person or their spouse, but they should be either financially dependent on such a person or should consult such persons in taking decisions relating to trading in securities. On first part, identifying such relatives should be easy enough. The question is applying the two alternate conditions.

Firstly, the question is whether the relative is financially dependent on such a person. This should be generally easy in many circumstances such as a minor child or a non-working spouse, etc. However, there may be grey areas such as a relative who earns and contributes to the household. Whether such persons can be said to be financially dependent?

The other condition is easier to explain but difficult to prove. Does such a relative consult the insider for their decisions on trading in securities? Financial discussions in families are very likely to happen and it would be difficult to prove otherwise. This makes things particularly difficult when the relatives actually take an independent decision. Let us say one person is a partner in a firm of Chartered Accountants acting as statutory auditor and also an advisor to several listed companies. The spouse works in another company and manages their own investments without consulting or even informing the other spouse. If by chance, trading is done by such a spouse in securities of a company where the spouse has access to UPSI, it will be difficult to prove that there was no violation of the Regulations. Now take the matter further where the spouse is a lawyer rendering services to various listed companies. Now the difficulty becomes compounded.

CONCLUSION

The FAQs are welcome generally as they not only clarify several concepts but give a good starting point for taking a view. Many of the difficulties expressed above arise in spite of these FAQs and not because of them. And the Regulations are also complicated because insider trading is not only common, but is often done by while collar educated persons who can use many sophisticated methods including technology to evade the law. Caution then becomes the rule and applying the interpretation given by the FAQs can give a higher level of assurance that one is within the law, even if the clear fact is that they are not binding, not even on SEBI itself.

shailesh.kwebmaker

What’s In a Name? Immovable or Movable Could Be the Same

INTRODUCTION

Immovable property is the most ancient form of an asset which mankind has ever known. Its law and practice are multi-faceted, both from a legal and tax perspective.Different laws have defined the term ‘immovable property’ differently. These definitions are very relevant in determining whether or not a particular asset can be classified as an immovable property. For example, there is a difference in the rates of stamp duty on conveyance of a movable property and an immovable property. Similarly, GST is payable only in respect of sale of goods which are movable property and not on a completed immovable property. Recently, the Supreme Court in the case of the Sub Registrar, Amudalavalasa versus M/s Dankuni Steels Ltd., CA No. 3134-3135 of 2023, order dated 26th April, 2023 had an occasion to consider this issue in great detail. The Court analysed various definitions and propounded the settled principle that anything which is permanently affixed to land would also be immovable property. Let us examine this important proposition.

FACTS OF THE CASE

In the case of Dankuni (supra), under an auction, the assets of a company which consisted of land, building, civil works, plant and machinery and current assets, were declared to be sold to the highest bidder for a consideration of Rs. 8.35 cr. A sale deed was executed for this amount. Subsequent to the sale deed, a conveyance was executed for conveying the land, building and civil works. In the conveyance, the fact of the sale deed was mentioned and it was also stated that the market value of the land and building was Rs. 1.01 cr.Accordingly, the buyer tried to pay stamp duty on this amount of Rs.1.01 cr. and register the conveyance deed. The Sub-Registrar of Assurances did not agree with this value and held that the market value of the plant and machinery should also be included since it was immovable in nature. The matter reached the Division Bench of the Andhra Pradesh High Court, which held that the when the conveyance was only for the land and building, the Sub-Registrar could not force the buyer to pay stamp duty on the value of the plant when he does not seek its registration. The Court directed the registration of the conveyance deed as it stood and for the value recorded therein. Aggrieved by this decision, the Revenue appealed to the Supreme Court.

DEFINITIONS

The Registration Act, 1908 defines the term in an inclusive manner to include land, buildings, hereditary allowances, rights of ways, lights, ferries, fisheries or any other benefits to arise out of land, and things attached to earth or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops and grass.The General Clauses Act, 1897 defines the term to include land, benefits to arise out of land and things attached to the earth, or permanently fastened to anything attached to the earth.

The Transfer of Property Act, 1882, is the primary law dealing with immovable property. The Act merely defines immovable property as not including standing timber, growing crops and grass. However, it defines the phrase attached to the earth to mean-

“(i) rooted in the earth, as in the case of trees and shrubs;

(ii) imbedded in the earth, as in the case of walls or buildings; or

(iii) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached”.

Section2(ja) of the Maharashtra Stamp Act, 1958, defines the term immovable property as follows:

“Immovable property includes land, benefits to arise out of land, and things attached to the earth or permanently fastened to anything attached to the earth.”

The Goods and Services Tax Act, 2017 does not contain any definition of the term immovable property or land. However, the definition of the crucial term “goods” states that it not only includes every kind of movable property other than money and securities but also actionable claims, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. Thus, in this case the definition under the Transfer of Property Act would come in useful.

From the above definitions, it would be evident that the main issue whether an asset is an immovable property or not would arise in respect of plant and machinery, power transmission towers, cellular towers, and similar assets.

JUDICIAL HISTORY

Various landmark decisions of the Supreme Court and High Courts have dealt with what is an immovable property. Key decisions are discussed below.The Supreme Court in Sirpur Paper Mills (1998) 1 SCC 400 while examining whether or not a paper plant was an immovable property, held that the whole purpose behind attaching the machine to a concrete base was to prevent wobbling of the machine and to secure maximum operational efficiency and also for safety. It further held that paper-making machine was saleable as such by simply removing the machinery from its base. Hence, the machinery assembled and erected at its factory site was not an immovable property because it was not something attached to the earth like a building or a tree. The test laid down was, whether the machine can be sold in the market. Just because the plant and machinery is fixed in the earth for better functioning, it would not automatically become an immovable property.

Further, the decision of the Supreme Court in the case of Duncan’s Industries Ltd vs. State Of U. P. (2000) 1 SCC 633, dealing with a fertiliser plant, is also relevant in determining what is movable and what is immovable. In this case, the Supreme Court distinguished Sirpur’s case and held that whether machinery which is embedded in the earth is a movable property or an immovable property, depends upon the facts and circumstances of each case. Primarily, the court will have to take into consideration the intention of the party when it decided to embed the machinery: the key question is, whether such embedment was intended to be temporary or permanent? If the machineries which have been embedded in the earth permanently with a view to utilising the same as a plant, e.g., to operate a fertiliser plant, and the same was not embedded to be dismantled and removed for the purpose of sale as a machinery at any point of time, then it should be treated as an immovable property. In this case, a transfer took place on “as is where is” basis and “as a going concern” of a fertiliser business. This was preceded by an agreement which involved also expressly the transfer of plant and machinery. The Collector levied a stamp duty and penalty on the basis that since the transfer contemplated the sale of the unit as a going concern, the intention of the vendor was to transfer all properties in the fertiliser business in question.

Applying the above principles, the Apex Court agreed with the demand of the Collector. It was held that when the buyer contended that the possession of the plant and machinery were handed over separately to by the vendor, the machineries were not dismantled and given to the buyer, nor was it possible to visualise from the nature of the plant that such a possession de hors the land could be given by the buyer. Thus, it was an attempt to reduce the market value of the property the document by drafting it as a conveyance deed regarding the land only. The buyer had purported to transfer the possession of the plant and machinery separately and was contending now that this handing over possession of the machinery was de hors the conveyance deed. The Court relied on the conveyance deed itself to hold that what was conveyed was not only the land but the entire fertiliser business including plant and machinery.

In the case of Triveni Engineering & Indus. Ltd., 2000 (120) ELT 273 (SC), the Supreme Court held that generating sets consisting of the generator and its prime base mover are mounted together as one unit on a common base. Floors, concrete bases, walls, partitions, ceilings etc., even if specially fitted out to accommodate machines or appliances, cannot be regarded as a common base joining such machines or appliances to form a whole. The installation or erection of the turbo alternator on the concrete base specially constructed on the land could not be treated as a common base and, therefore, it followed that the installation or erection of turbo alternator on the platform constructed on the land would be immovable property.

The decision in the case of Mittal Engineering Works Pvt. Ltd. vs. CCE Meerut, 1996(88) ELT622 (SC) was on similar lines where it held that a mono vertical crystalliser, which had to be assembled, erected and attached to the earth by a foundation at the site of the sugar factory was not capable of being sold as it is, without anything more. Hence, the plant was not a movable property.

In Quality Steel Tubes (P) Ltd vs Collector of Central Excise, 1995 SCC (2) 372 it was held that goods which were attached to the earth became immovable, and did not satisfy the test of being goods within the meaning of the Excise Act nor could be said to be capable of being brought to the market for being bought or sold, fall within the definition of immovable. Therefore, a plant of tube mill and welding head was regarded as immovable.

The Delhi High Court in Inox Air Products Ltd vs. Rathi Ispat Ltd (2007) 136 DLT 101 (DB) dealt with machineries which have been embedded in the earth, to constitute Cryogenic Air Separation Plants for the production of oxygen and nitrogen to be used in the production of steel. The machinery was erected with civil and structural works, viz., foundation, piling, structural support and pipe support, etc. for the installation of the plant, and the same could not be shifted without first dismantling it and then re-erecting it at another site. These were held to be immovable in nature. On erection, the machinery, ceased to be movable property. The Court held the machinery did not answer the description of “goods” or “movable property”, which by its very nature envisaged mobility and marketability on an “as it is, where it is basis”. Even though, the plant and machinery after dismantling could have been sold as scrap, but that was also the case with steel recovered from the rubble of an edifice.

The Karnataka High Court in Shree Arcee Steel P Ltd vs. Bharat Overseas Bank Ltd, AIR 2005 Kant 287, held that the meaning of the word “immovable” means permanent, fixed, not liable to be removed. In other words, for a chattel to become immovable property, it must be attached to the immovable property permanently as a building or as a tree attached to earth. Though a moveable property was attached to earth permanently for beneficial use and enjoyment, it remained a movable property. The Court gave an illustration that though a sugar cane machine/or an oil engine was attached to earth, it was moveable property. The degree, manner, extent and strength of attachment of the chattel to the earth or building were the main features to be recorded. Thus, the Court concluded that a centerless bar turning machine measuring 80’ in length and 10’ in width and 5’ height embedded to the earth by mounting the same on a cement base and fastened to it with bolts and nuts could not be called as immovable property.

The Central Board of Excise and Customs had, under the erstwhile, Central Excise Act 1944, after considering several Court decisions (including some of those mentioned above), clarified vide Order No. 58/1/2002 – CX that:

(A) If items assembled or erected at site and attached by foundation to the earth cannot be dismantled without substantial damages to components and thus cannot be reassembled, then the items would not be considered as movables.

(B) If any goods installed at site (e.g., paper-making machine) are capable of being sold or shifted as such after removal from the base and without dismantling into its components/parts, the goods would be considered to be movable. If the goods, though capable of being sold or shifted without dismantling, are actually dismantled into their components/parts for ease of transportation etc., they will not cease to be movable merely because they are transported in dismantled condition.

(C) The intention of the party is also a factor to be taken into consideration to ascertain whether the embedment of machinery in the earth was to be temporary or permanent. This, in case of doubt, may help determine whether the goods are moveable or immovable.

The CBEC also issued clarifications for specific items:

(i) Turn key projects like Steel Plants, Cement plants, Power plants, etc. involving supply of large number of components, machinery, equipments, pipes and tubes, etc. for their assembly/installation/erection/integration/inter-connectivity on foundation/civil structure etc. at site, will not be considered as excisable goods.

(ii) Huge tanks made of metal for storage of petroleum products in oil refineries or installations: These tanks, though not embedded in the earth, are erected at site, stage by stage, and after completion they cannot be physically moved. On sale/disposal they have necessarily to be dismantled and sold as metal sheets/scrap. It is not possible to assemble the tank all over again. Such tanks are therefore not moveable.

(iii) Refrigeration/Air conditioning plants: These are basically systems comprising of compressors, ducting, pipings, insulators and sometimes cooling towers, etc. They are in the nature of systems and not machines as a whole. They come into existence only by assembly and connection of various components and parts. The refrigeration/air conditioning system as a whole cannot be considered to be goods.

(iv) Lifts and escalators: Lifts and escalators which are installed in buildings and permanently fitted into the civil structure cannot be considered to be goods.

DECISION IN DANKUNI’S CASE

The Supreme Court considered the various statutory definitions of the term immovable property as well as its own decision in Duncans (supra). It also considered the sale deed in the present case. Accordingly, it was clear from the sale deed itself, that the total sale consideration was Rs. 8.35 cr., for the land, building, civil works, plant and machinery and current assets, etc. However, what had been done was that an amount of Rs.1.01 cr. had been taken as the value of the land, building and civil works. The Court held that what was purported to be conveyed, was, the land as defined in the Sale Deed and land was immovable property. However, Immovable property was defined in the General Clauses Act, 1897 as ‘including land, benefits to arrive out of land and things attached to the earth or permanently fastened to anything attached to the earth’. When it came to the definition of ‘immovable property’ in the Transfer of Property Act, it is defined as ‘not including standing timber, growing crops or grass’. In the Registration Act, 1908, immovable property included, apart from land and buildings, things attached to the earth or permanently fastened to anything attached to the earth but not including standing timber, growing crops or grass. In this respect, the Supreme Court made a useful reference to section 8 of the Transfer of Property Act which declared that in the absence of an express or implied indication, a transfer of property passed to the transferee all the interests, which the transferor was capable of passing in the property and in the legal incidents thereof. Such incidents included, inter alia, where the property was land, all things attached to the earth. Accordingly, the Apex Court laid down a very important principle, that when the property was machinery attached to the earth, the movable parts thereof also were comprehended in the transfer.A proper reading of the Sale Deed, indicated that what was conveyed was rights over the scheduled property, which, no doubt, was the land but it also included all the rights, easements, interests, etc., i.e., the rights which ordinarily passed on such sale over the land. The Court held that it was from a reading of this deed in conjunction with section 8 of the Transfer of Property Act that the intention of the parties become self-evident that the vendor intended to convey, all things, which inter alia stood attached to the earth. The mere fact that there was no express reference to plant and machinery in the Sale Deed did not mean that the interest in the plant and machinery which stood attached to the land was not conveyed. It held that the buyer had only considered value of the land, building and civil works and this was done to tide over the liability to stamp duty for what was actually, in law, conveyed. Thus, the Court concluded that it was clear that the sale deed operated to convey the rights over the plant and machinery as well, which were comprised in the land mentioned in the sale deed. However, it added that as far as plant and machinery was concerned, it would be only that which was permanently embedded to the earth and answering the description of the immovable property as defined above. Accordingly, the stamp duty valuation should be recomputed on that basis.

EPILOGUE

Apparently, the quote “What’s in a Name?” would hold true in this case. Even if an asset is called movable property, if it answers the description of immovable property, then instruments dealing with it would be subject to stamp duty accordingly. In this case, a “Rose by any other name would smell as sweet!” Although one may hasten to add that here, the smell would be far from sweet due to the higher stamp duty incidence.

shailesh.kwebmaker

Corporate Law Corner Part A : Company Law

5 M/s Herballife Healthcare Pvt Ltd

No. ROC/D/Adj/2023/defective/HerbalLife/1622-1624

Office of Registrar of Companies, Delhi & Haryana

Adjudication order
Date of Order: 21st April, 2023

Adjudication Order for penalty pursuant Rule 8(3) of the Companies (Registration Offices and Fees) Rules, 2014

FACTS

M/s HHPL was incorporated at New Delhi. Registrar of Companies, Delhi & Haryana (“RoC”) received an application from Ms. SY, Director of M/s HHPL regarding adjudication of the defect in filing of E-form DIR-11. In this regard, it was observed that as per column 4 of the E-form, date of filing of resignation from M/s HHPL, was shown as 30th November, 2016 but in resignation letter attached therewith the date of submission of resignation to M/s. HHPL was mentioned as 9th September, 2020.

RoC on examination of the document/information submitted observed that a default /non-compliance of the provisions of Rule 8(3) of the Companies (Registration Offices and Fees) Rules, 2014 had been made and there was no specific penalty under relevant rule. Thus, provisions of section 450 of the Companies Act, 2013 get attracted.

Rule 8(3) of the Companies (Registration Offices and Fees) Rules, 2014 provides that:

The authorised signatory and the professional, if any, who certify e-form shall be responsible for the correctness of the contents of e-form and correctness of the enclosures attached with the electronic form.

RoC issued a show cause notice to M/s. HHPL and Ms. SY in response to which, Ms. SY submitted a reply vide email wherein it was admitted that default has occurred due to some inadvertent typographical error.

It was noted that E-Form DIR-11 had been filed with wrong date of resignation. M/s. HHPL fulfils the requirements of a small company as defined under section 2(85) of the Companies Act, 2013. Thus, the penalty would be governed by Section 446B of the Act.

HELD

RoC, in exercise of the powers conferred vide Notification dated 24th March, 2015 and having considered the reply submitted imposed the penalty of Rs. 5,000 on the signatory for defect in e-form DIR-11 pursuant to Rule 8(3) of the Companies (Registration Offices and Fees) Rules, 2014 read with relevant provisions of the Companies Act, 2013.

6 M/s Chaitanya India Fin Credit Pvt Ltd

9/23/ADJ/SEC.161/2013/KARNATAKA/RD(SER)/2022/5496

Office of the Regional Director (South East Region)

Appeal against Adjudication order

Date of Order: 29th December, 2022

Appeal against Adjudication order under section 454 passed by the Registrar of Companies, Karnataka for default in compliance with the requirements of Section 161 of the Companies Act, 2013.

FACTS

M/s CIFCPL had appointed Mr. SB as the Managing Director and CEO of the Company (KMP) vide its Board Resolution dated 27th February, 2020 for a period of five years from 6th March, 2020. However, by inadvertence, the Board omitted to co-opt him as Additional Director before appointing as Managing Director.

As a consequence of the Board having so omitted to appoint Mr. SB as Additional Director, the approval for the appointment by the shareholders (regularisation) at the annual general meeting of the company held on 18th August, 2020 was omitted to be obtained. Consequently, Mr. SB was deemed to have vacated the office with effect from 18th August, 2020 in terms of Section 161 of the Companies Act, 2013. However, M/s. CIFCPL did not notice this omission till 18th October, 2021 and took on record the cessation of the office of Mr. SB with effect from 18th August, 2020 in its Board Meeting held on 19th October, 2021. M/s. CIFCPL had thus violated the provisions of Section 161 of the Act from 06th March, 2020 to 18th October, 2021.

Registrar of Companies, Karnataka (‘RoC’) had levied a penalty on M/s CIFCPL of Rs. 3,00,000, Mr. AR, Managing Director, Mr. SB, CEO (KMP), Mr. SCV, CFO (KMP), Ms. DS, Company Secretary, Mr. AS, CFO (KMP), Mr. AA, Additional Director and Mr. AKG, Company Secretary of amounting to Rs.1,00,000 each. M/s CIFCPL filed an appeal under section 454(5) of the Companies Act, 2013 against the adjudication order passed by the Registrar of Companies, Karnataka for default in compliance with the requirements of Section 161 of the Companies Act, 2013.

An opportunity of being heard was given on 27th October, 2022. The authorised representative Mr. SR, Practicing Company Secretary appeared and reiterated the submissions made in the application and requested to reduce the quantum of penalty as levied by RoC.

HELD

The Regional Director, after considering the submissions made by Mr. SR, facts of the case and taking into consideration the Order of Adjudication of Penalty under section 454 of the Companies Act, 2013 issued by RoC, deemed that it would meet the ends of justice if the penalty levied by the Registrar of Companies, be appropriately reduced, as a mitigation.

The order of the RoC was modified and penalty was reduced for violation of section 161 of the Companies Act 2013, as mentioned below:

Penalty imposed on	Penalty imposed by Registrar of Companies, Karnataka	Penalty imposed by the Regional Director (South East Region)
M/s CIFCPL	Rs. 3,00,000	Rs. 1,00,000
Mr. AR, Managing Director, Mr. SB, CEO (KMP), Mr. SCV, CFO (KMP), Mr. AA, Additional Director Ms. DS, Company Secretary	Rs. 1,00,000 each * 5 = Rs. 5,00,000/-	Rs. 50,000 each * 5 = Rs. 2,50,000
Mr. AS, CFO (KMP) of M/s CIFCPL	Rs. 1,00,000	Rs. 5,000
Mr. AKG, CS of M/s CIFCPL	Rs. 1,00,000	Rs. 20,000
Total Penalty	Rs. 10,00,000	Rs. 3,75,000

shailesh.kwebmaker

SAT Dumps SEBI’S Pump-and-Dump Order in Bollywood Celebrity’s Case

BACKGROUND

A Bollywood celebrity and his family/associate were widely in the news recently because of a judgment SEBI made against them. SEBI held, in an interim and ex parte order, that they were allegedly involved in a pump-and-dump stock scam and made illicit profits. While this celebrity, Arshad Warsi (AW) and family/associate (together ‘AWS’), were alleged to have made Rs. 76 lakhs, the total profits made by the whole ‘group’ were about Rs. 41 crores. The 21 parties including AWS were debarred from stock markets, directed to impound these allegedly illicit profits in an escrow account and their bank accounts, and assets frozen in the interim.

This case is an example of how good intentions, and quick and extraordinary efforts can still result in serious injustice. While SEBI’s order shows quick action on all fronts including pursuing internet giants like YouTube for information and meticulously collating all information, it also shows how conclusions in law and facts ended up being flawed. The Securities Appellate Tribunal (‘SAT’) came down harshly on the order and even laid down several prerequisites for future orders. The parties, at least some of them, clearly suffered due to this order, for which SAT repeatedly said, it had no evidence whatsoever. However, hopefully, since SEBI will be required to follow the pre-requisites and prove the basic assertions, other parties may not suffer in the future and if they do, they have this precedent to cite and get quick justice (the order of SEBI is dated 2nd March, 2023 and the order of SAT is 27th March, 2023).

QUICK SUMMARY

At the outset, it may be stated that the whole matter is still under investigation. The SEBI order is interim in nature. Such interim and ex parte orders are passed to ensure that a wrong is not being continued and also parties are not able to take actions in the meantime to frustrate justice. Being ex parte, it also obviously means that the parties have not been given any prior opportunity to present their case. Thus, all the assertions and ‘facts’ and statements made here are provisional and need to be taken as allegations.

That said, this was one of the countless cases that, if the findings are true, are serious and daring, almost brash, scams. It is not as if they have started with the invention of the internet. But the internet has given more opportunities to reach a wider audience, to audio-visual techniques of psychological manipulation, and also use anonymity. On the other hand, using digital methods also means leaving digital footprints which can be speedily tracked, collected and collated. Instead of using laboured methods of investigation, making calls, going door to door, etc., SEBI too can use digital means to fight digital-based scams.

The findings/allegations of SEBI as per the order are as follows. There were two companies whose share prices were ‘pumped’ up by a barrage of false information and reports mainly through YouTube. Though the modus operandi and even some parties were common in both the cases, here, we are concerned with one of these companies – Sadhna Broadcast Ltd (SBL). The perpetrators uploaded several videos on YouTube in channels having a following of lakhs of people. Their reach was further widened by paying crores of rupees to Google Ad sense, which helped in reaching people interested in investing. This was also supplemented by creating artificial trading, leading to an impression that there are numerous people eagerly interested in buying the shares. Thus, the combination of targeted messaging of good prospects of the company accompanied by such false trades and rising prices created a rush amongst gullible investors looking for quick and easy profits, and who feared missing the proverbial bus.

The scam ended like all other scams. The perpetrators started selling their holding at the artificially raised prices, pocketed the profits of tens of crores of rupees, leaving investors holding the shares at the price which then crashed back.

ALLEGED INVOLVEMENT OF ARSHAD WARSI, FAMILY, ASSOCIATE (AWS)

SEBI found that, amongst others, AWS had also purchased shares at relatively low prices and sold them at higher prices, thus making, in all, net profits of about Rs. 76 lakhs (this was very likely an erroneous calculation by SEBI, as discussed later). SEBI held that AWS, like some others, was a party to the scam and thus the strictures were passed against them too. SEBI also pointed out that call data records showed that AW had telephonic contact with the person accused to be the primary perpetrator of the scam.

Accordingly, AWS were required to impound the profits so made in an escrow account with a lien in favor of SEBI. Till they did that, their bank accounts were frozen and they were barred from alienating any of their assets. Further, they were barred from dealing in securities markets and their demat accounts were also frozen.

SEBI NEGLECTING A FUNDAMENTAL ACCOUNTING CALCULATION OF PROFITS/LOSSES?

SEBI did show that AWS had purchased and sold shares of SBL. This made their profits, as alleged by SEBI, illegal. However, the SEBI order itself showed certain significant other information. While AWS did buy and sell these shares, they again purchased more shares. These purchases were made not only at a higher price but also of a larger quantity. These shares remained, it appears from SEBI’s order, with AWS. SEBI consciously ignored these shares in stock since it stated that it was concerned with the profits made.

To some extent, this approach by SEBI may be justified if other facts also pointed to intimate involvement in the scam. It is common for parties engaged in volume creation to buy and sell shares in a circular manner. Thereafter the group can sell most of the shares but some shares need to remain in their hands. For the purposes of the scam committed by the group as a whole, the fact that there were shares in hand in one or more of the parties, even out of their purchases, may not be material.

However, in case of AWS, no other factor was present showing intimate involvement. These shares that remained in hand were purchased at a high price, and if one considered the value of the shares at the post scam rates, AWS actually suffered a significant loss. The net loss even after adjusting the earlier profits was very likely at least Rs. 1 crore.

However, as stated earlier, SEBI ignored this aspect.

APPEAL TO SECURITIES APPELLATE TRIBUNAL (SAT) AND REVERSAL OF ORDER BY SAT

AWS filed an appeal with SAT. SAT went through the order and also heard both the sides. It noted several intriguing aspects. AWS was not involved at all in creation of the YouTube videos. Also, they did not feature in them. Neither did they recommend the shares to anyone. They had no connection (except one, discussed later) with either the main perpetrators or the other parties in terms of such scam. SAT repeatedly pointed out that there was not even an iota of evidence of guilt against AWS.

It was noted though that AW had a professional connection with the main alleged perpetrator. Such person, MS, had retained AW for a professional assignment in a film.

SAT noted yet another interesting aspect. AWS had purchased shares not from the public but from parties named in the order as being allegedly involved in the scam. Further, their sales too had counter parties named in the SEBI order. In other words, their profits were not made at all from any of the public investors.

Taking all the above into account, SAT ordered that the directions against AW and family to be reversed substantially. SAT repeatedly pointed out said that there was no evidence whatsoever against AWS of any involvement. However, it noted that considering the professional relation, even if this did not amount to any guilt, the fact remained that it did not totally rule out the guilty. SEBI had yet to complete the investigation and therefore it could not be ruled out that SEBI may find and present some evidence that would stand up, unlike the present situation where there was none. Accordingly, SAT ordered that AW and family should deposit 50 per cent of the profits in escrow and provide an undertaking to deposit the remaining 50 per cent in case of finding of confirmed guilt. As far as the associate of AW was concerned, there was no order of impounding of any profits. In view of this, all directions against her were reversed by SAT.

LESSONS AND CONCLUSIONS

In its order, SAT repeatedly pointed out the dangers of hastily placing restrictions such as freezing of bank accounts, demat accounts, debarring persons from trading, etc. in ad interim, ex parte orders. Even if such restrictions are provisional, there have to be a certain level of evidence which point out to guilt. In the present case, there was none against AWS. SAT cited copiously from the order of Supreme Court (in Radha Krishan Industries vs. State of Himachal Pradesh (2021) 6 SCC 771) which had made detailed observations on the preconditions of making provisional attachment of bank accounts. These were applied in this case too. These should help not only guide SEBI in making orders in the future but also would help parties who have faced such directions from SEBI.

Having said that, it is also notable that this case received wide publicity because of the celebrity name and hence this order received detailed attention and analysis which otherwise possibly may not have received. Also, the celebrities, possibly unlike ordinary persons, could afford competent legal advice and also file an urgent appeal. This obviously helped them get relief in barely a month. The fact is that SEBI often passes such orders and the parties find that much of the restrictions continue for a long time till SEBI finally completes the investigation, issues show cause notices, and final orders. Till that time, parties continue to suffer.

Further, freezing of bank accounts and directions to deposit in the escrow account, the alleged profits are often made on a group basis, imposing joint and several liability. Thus, each person suffers such restrictions unless the whole profit is deposited, even if the profit may not be with him.

All in all, the order of SAT is welcome and an important precedent for future application.

shailesh.kwebmaker

Cross-Border Succession : Foreign Assets Of An Indian Resident

INTRODUCTION

We continue with our theme of cross-border succession planning. Last month’s Feature, examined issues in the context of a foreign resident leaving behind Indian assets. This month we explore the reverse situation, i.e., succession issues of an Indian resident leaving behind foreign assets. In the age of the Liberalised Remittance Scheme (LRS) of the RBI, this has become a very important factor to be considered.

APPLICABLE LAW OF SUCCESSION

The first question to be addressed is which law of succession applies to such an Indian resident? Here the Indian Succession Act, 1925 would not be applicable. The relevant law of succession of the country where the assets are located would apply. It would have to be seen whether that country has a law similar to the Indian Succession Act which provides that succession to movables is governed by the law where the deceased was domiciled and succession to an immovable property is governed by the law of the land where the property is located. For instance, England has a law similar to India.

There are two basic legal systems in International Law ~ Civil Law and Common Law. Certain Civil Law jurisdiction countries, such as, France, Italy, Germany, Switzerland, Spain, Japan, etc., have forced heirship rules. Forced heirship means that a person does not have full freedom in selecting his beneficiaries under his Will. Certain close relatives must get a fixed share. This is a feature which is not found in Common Law countries, such as, the UK and India. Thus, an Indian has full freedom to prepare his Will as per his wishes and bequeath to whomsoever he wishes. This issue has been elaborated eloquently by the Supreme Court in its decision in Krishna Kumar Birla vs RS Lodha, (2008) 4 SCC 300 where it has held:

“Why an owner of the property executes a Will in favour of another is a matter of his/her choice. One may by a Will deprive his close family members including his sons and daughters. She had a right to do so. The court is concerned with the genuineness of the Will. If it is found to be valid, no further question as to why did she do so would be completely out of its domain. A Will may be executed even for the benefit of others including animals.”

Countries in the Middle East, such as, the UAE, follow the Sharia Law. According to the Sharia Law forced heirship rules apply, i.e., a person does not have complete freedom in bequeathing his assets under a Will. The Federal Law No. (28) of 2005 on Personal Status applies in the UAE for all inheritance issues. When a non-Muslim dies intestate, the Sharia Law as applicable in the UAE would apply to his assets located in the UAE. Sharia Law provides more rights to a son as opposed to a daughter. However, if the non-Muslim were to make a Will and follow the necessary procedure, such as, translation to Arabic, attestation by authorities, etc., then the Sharia Law would not apply. In addition, certain free trade zones e.g., the DIFC in Dubai, gives the option of getting the Will registered with Courts located within their zone. This registration also results in Sharia Law not applying to the UAE assets of the deceased.

Since January 2023, the forced heirship in Switzerland has reduced from 3/4th share in the estate to ½ share. Thus, a person can now make a Will according to his choice for ½ of his estate located in Switzerland and the rest must go according to the law to the spouse and parents of the deceased. Louisiana in the US is the only State which has forced heirship rules since it was at one time a French colony. Trusts could be a solution for avoiding forced heirship rules.

ONE INDIAN WILL OR SEPARATE WILLS?

Is it advisable to make one consolidated Indian Will for all assets, wherever they may be located or should a person make a separate Will for India and one for each country where the assets are situated? The International Institute for the Unification of Private Law or UNIDROIT has a Convention providing a Uniform Law on the Form of an International Will. Member signatories to this Convention would recognise an International Will if made as per this Format. Thus, a person can make one consolidated Will under this Convention which would be recognised in all its signatories. This would preclude the need for making separate Wills for different countries. However, only a handful of countries such as, Australia, Canada, Italy, France, Belgium, Cyrpus, Russia, etc., have accepted this Convention. Countries, which have a major Indian diaspora such as, UAE, Singapore, Hong Kong, Malaysia, etc., are not signatories. Further, in the US, only 20 states have ratified this Convention, with the major states being, California and Illinois. Conspicuous by their absence are key States such as, Texas, Florida, New York, New Jersey, etc. Considering the limited applicability of the UNIDROIT Convention, it is a better idea to have horses for courses approach, i.e., a distinct Will for each jurisdiction where assets are located. For example, an Indian with assets in Dubai, could get his Will prepared according to the format prescribed by the Dubai International Financial Centre and register it with the DIFC Courts to avoid the applicability of Sharia Law.

International Wills would require probates/succession certificates/inheritance certificates as per the laws of the country in which the assets are located. Some nations that require a Probate / Certificate of Inheritance ~ US, Singapore, UAE, France, Switzerland, Germany, Canada, Malaysia, South Africa, etc. Further, states in the US have their own Probate Laws and Probate Fees. For instance, Probate Costs are very high in the states of California and Connecticut. Thus, if a person dies leaving behind assets in these states, he would have to consider the costs as per the State Law.

Indian residents should examine whether their foreign Wills for foreign assets need to follow forced heirship rules if that country is governed by such rules.

FEMA AND FOREIGN ASSETS OF A RESIDENT

The Foreign Exchange Management Act, 1999 provides that a person residing in India may hold, own, transfer or invest in currency, security or any immovable property situated abroad, if such currency, security or property was acquired, held or owned by such person when he was a non-resident or inherited by him from a person who was a non-resident. Thus, a resident can own, hold and transfer such assets inherited by him.In addition, the Overseas Investment Rules, 2022 permit a person resident in India to acquire immovable property outside India by way of inheritance from a person resident in India who has acquired such property as per the foreign exchange provisions in force at the time of such acquisition. Hence, if a person has acquired a foreign property under LRS then his heirs can inherit the same from him. A person resident in India can also acquire foreign immovable property from a non-resident.

Further, a resident individual may, without any limit, acquire foreign securities by way of inheritance from a person resident in India who is holding such foreign securities in accordance with the provisions of the FEMA or from a person resident outside India. Again a person who has invested in shares under LRS can bequeath them to his legal heirs.

TAX PROVISIONS

Inheritance Tax / Estate Duty is applicable in several nations, such as, the US, UK, Germany, France, Japan, Netherlands, Switzerland, Thailand, South Africa, etc. These provisions apply to the global assets of a resident of these countries and should be carefully scrutinised to understand their implications. Belgium has the highest slab rate of estate duty with the peak duty touching 80 per cent! While there is no duty on movables located within Belgium, Belgian immovable property is subject to inheritance tax even for non-residents.Popular countries where Indians have assets and which do not levy estate duty include, UAE, Singapore, Hong Kong, Malaysia, Saudi Arabia, Mauritius, Australia, etc.

The US has the most complex and comprehensive Estate Duty Law. An Indian resident (who is neither a US citizen nor a Green Card holder) is subjected to estate duty on the US assets after a basic exemption limit of only US$60,000. On the other hand, a US citizen has a basic estate duty exemption limit of $12.92 million. However, the peak estate duty rate is the same for both at 40 per cent! Thus, consider an example of an Indian resident who has been regularly investing under the LRS in the shares of Apple Inc. His portfolio has now swelled up to a value of $3 million. On his demise, his estate would get an exemption of $60,000 and the balance sum of $2.94 million would be subject to US estate duty with the peak rate being 40 per cent. Add to this the US Probate costs and you could have a huge portion of the estate snipped off to taxes and duties.

Further, in the case of a US citizen who is living abroad, say, in India, while the basic exemption limit is $12.92 million, any inheritance to his estate by his non-US spouse is exempt only to the extent of $175,000. If it was a case of US citizen to US spouse estate transfer (even if both were residents of India), there would be no estate duty since marital transfers are exempt from duty.

The UK also levies Inheritance Tax @ 40 per cent after a basic exemption limit (known as the nil-rate band) of £325,000. In addition, one UK house up to £175,000 is also exempt. These limits apply also to foreigners owning assets in the UK. There are certain exemptions, such as, inter-spousal transfers. In addition, the UK and India have a Double Tax Avoidance Treaty in relation to Estate Duty. The UK also has look-back rules of up to 7 years and thus, in the case of certain gifts if the donor does not survive for 7 years after the gift, then the gift would also be subject to Inheritance Tax. Most countries, including the US, have a look back period of 3 years, the UK is quite unique in pegging this period at 7 years.

Switzerland has a unique system where the inheritance taxes are regulated by Cantons. Each Canton has the power to determine their own inheritance tax rate.

There is no Estate Duty/Inheritance tax in India on any inheritance/succession/transmission. Section 56(2)(x) of the Income-tax Act also exempts any receipt of an asset/money by Will/intestate succession. This exemption would also be available to receipt of foreign assets by Indian residents. There is no condition that the receipt under a Will/Succession/Inheritance must be from a relative. It could even be from a friend.

Residents who inherit any foreign assets must be careful and file Schedule FA in their income-tax Returns. They should also pay heed to whether the asset inherited by them consists of an undisclosed asset as per the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The decision of the Calcutta High Court in the case of Shrivardhan Mohta vs UOI, [2019] 102 taxmann.com 273 (Calcutta) is relevant in this respect. Four undisclosed offshore bank accounts were found during a search on the assessee and action under the Black Money Act was initiated against him for non-disclosure of these accounts. The explanation given by the assesse was one of inheritance. The Court held that “Inheritance did not prevent him from disclosing. It is just an unacceptable excuse.” Thus, it would be the responsibility of the beneficiary to include foreign assets within his disclosure on receiving the same.

CONCLUSION

Estate planning, per se, is a complex exercise. Throw in a cross-border element and one is faced with a very dynamic, multi-faceted scenario which requires due consideration of both Indian and foreign tax and regulatory provisions.

shailesh.kwebmaker

Major Changes in the Functioning of Listed Companies Imminent

BACKGROUND

SEBI has recently, on 21st February, 2023, circulated a consultation paper (“the Paper”) proposing amendments relating to topics that fall under what is commonly understood as corporate governance. These have also been approved by SEBI at its Board meeting on 29th March, 2023. The actual amendments have not yet been notified, and hence the text of the new provisions is awaited.

The amendments are proposed to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“the LODR Regulations”). These can be categorised into four broad areas:

a. Agreements binding the listed entity, directly or indirectly.

b. Special rights to certain shareholders.

c. Sale, disposal or lease of assets outside the “scheme of arrangement route.”

d. Certain directors having a tenure which does not require them to put themselves up for reappointment from time to time, which the Paper calls Board Permanency.

Other than (c), the remaining three effectively give some shareholders special rights, thus creating a category of shareholders that has more rights than others. This is against the principles of shareholder’s democracy where all the shareholders are equal in the sense of one share-one vote. The proposed amendments seek to correct this to some extent. The category in (c) is meant to place some checks on the transfer or lease of assets otherwise through the approval of NCLT under a scheme of arrangement.

It needs to be recollected and emphasised that these requirements will be over and above those contained in the Companies Act, 2013, for listed entities. Hence, the stricter of the two would apply in case of overlapping requirements.

As is generally the case, when SEBI decides to make amendments, it circulates a consultation paper for public comments, takes feedback, and then finalizes the amendment which SEBI has done this time too.

Some of the amendments proposed are far-reaching and have retrospective effect in the sense that they apply even to existing arrangements. These arrangements may end up being reversed if certain requirements are not complied with. Much also depends on the exact final wording of the new requirements in the law. In some cases, the wording proposed or otherwise used to describe changes, are capable of multiple interpretations. This could lead to confusion and possibly litigation.

Let us discuss each of the proposed amendments in detail as to their implications, if given effect to.

AGREEMENTS BINDING THE LISTED ENTITY, DIRECTLY OR INDIRECTLY

Agreements that bind the company and are not in the ordinary course of business, if they have material implications, are something shareholders and the general investor public would want to know about. Under certain circumstances, where required in law, these may even require approval of the shareholders. The LODR Regulations do contain certain disclosure requirements relating to shareholder agreements and similar or other agreements.

However, SEBI has realized that there may be many more categories of such agreements where the company is not even a party but yet there may be material implications on the company. The promoters, management, etc., for example, may enter into such agreements. SEBI has now desired that certain agreements where, even if the company is not a party but if there are certain specified implications on it, there should be disclosure, approvals, etc. This is required where such an agreement, for example, “impacts management or control, whether or not entered into in the normal course of business” or if they “intend to restrict or create any liability” on the listed entity.

SEBI is of the view that such agreements require screening as to whether they are in the interests of the company. For this purpose, three requirements are now being proposed to be made.

Firstly, it is required that there should be disclosure to the company and the stock exchanges of such agreements.

Secondly, the Board of the company should examine such agreements and give its opinion “along with detailed rationale’ whether the agreement is “in the economic interest of the company.”

Thirdly, the agreement would be subject to the approval of the shareholders, by a “majority of the minority”, and that too by a special resolution. It is not specifically made clear what is ‘minority’ here but, taking a cue from other SEBI Regulations, it may mean shareholders other than the promoters.

Importantly, these requirements will also have an effect on existing agreements. Thus, even agreements that continue to be in force will have to undergo such disclosure and screening requirements.

The proposed new provisions would obviously have far-reaching effects. The fact that they apply to subsisting agreements made in the past can create difficulties for the company, for the parties, particularly for the counterparties. The company may have benefitted from such agreements which in many cases would have brought in issue proceeds to the company. This may enable the company/promoters/management to back out of commitments after having enjoyed the gains. But this could lead to litigation since the affected parties may seek recourse in law.

The terms used in the Paper such as “intend to create”, “economic interest”, “impact management or control”, etc. are not defined and in any case, are not precise. The term “control” has already been the subject of past controversy and grey areas still remain. These uncertainties may further compound the difficulties.

It remains to be seen whether the actual text of the amendments resolve these issues, or adds to them!

SPECIAL RIGHTS TO CERTAIN SHAREHOLDERS

Very often, agreements are entered into with investors whereby certain rights are given to them. This may include a right to nominate one or more directors on the Board, consent/veto rights on important matters, etc. To give fuller binding effect to such clauses, they are usually incorporated in the Articles of Association of the company.

SEBI has pointed out, and to this extent rightly so, that such rights put certain shareholders on a pedestal. Though all the shareholders of the same class are meant to be equal, particularly in the sense of one share-one vote, these shareholders are more equal than the others and get special treatment. They get a right, for example, to nominate a director on the Board which otherwise only shareholders having a majority of the voting shareholders would have. They can block certain decisions proposed by the company that ordinary shareholders, even those holding relatively substantial holdings, may not have.

SEBI has now proposed that such special rights shall be subject to review by way of approval of shareholders once every five years. This proposal applies even to existing agreements, and companies would be bound to take such approval within five years of the notification of the amendments.

This requirement too is well intended. But it suffers from the same issues as the preceding proposal. It enables the company to take benefits from an investor but the rights may lapse after five years if the shareholders do not approve at the time of such renewal. Considering that the proposals apply even to existing arrangements, the impact is wider and again, like the preceding proposal, may create difficulties for the investors as also the company, promoters, etc.

SALE, DISPOSAL OR LEASE OF ASSETS OUTSIDE THE “SCHEME OF ARRANGEMENT” ROUTE

Disposal of substantial assets can be carried out either through the scheme of arrangement route through approval by the National Company Law Tribunal or by the shareholders, depending on the nature of the transaction. Certain disposal of assets may not attract either approval though, but in the present case, we are concerned with those that require such approval.

Where approval of the NCLT is required, SEBI has no further suggestions. However, in case of “slump sale” outside this NCLT route, SEBI has recommended that there should be a disclosure of “the objects and commercial rationale” for such transactions.

Moreover, it is required that there should be approval of the shareholders in the form of the majority of the minority. This is in addition to the requirement of special resolution under the Companies Act, 2013. SEBI believes that this would give a say to the minority shareholders and thus they would be able to reject a proposal that would affect their interests adversely.

END TO ‘PERMANENCY’ OF CERTAIN DIRECTORS

SEBI has noted that certain directors are not required by law, contractual arrangements, etc. to retire and hence, for all practical purposes, are ‘permanent’. What is effectively meant is that shareholders do not have an opportunity to consider from time to time whether they are giving worthwhile services on the Board and whether they should be continued. Other directors ‘retire by rotation’ and hence shareholders have a chance to deny them reappointment. The law itself permits part of the Board to be non-retiring. The articles may even provide that some directors are for ‘lifetime’. SEBI considers this position as not a desirable one. Hence, it has proposed that all directors should be required to present themselves for reappointment at least once in five years. This applies even to existing directors and those directors who would have completed tenure of five years as on 31st March, 2024 without having been subject to reappointment by shareholders, may be required to present themselves for reappointment at the first general meeting of the company after 1st April, 2024. However, since the amendments, as this article is being written, are still not notified, it is possible that this date may be extended.

Technically speaking and in law, no director is really ‘permanent’ and ordinarily any director can be removed by a simple/special majority. Hence, in this sense, the position may appear the same that if a majority of shareholders are required to approve the reappointment, the same majority can remove him or her.

However, this does not always solve the problem. Firstly, removal of the directors is not always easy since an attempt by shareholders to remove a director may be met with resistance and litigation and thus, at the very least, delays. Secondly, the articles may provide for a complex procedure including a supermajority to remove a particular director or directors. Whether such a provision is valid in law and also in due compliance with requirements, may become another point of litigation and hence yet another hurdle in the removal of a director. The new requirements of SEBI, if implemented, may effectively overcome such difficulties and thus every director may end up having to regularly present himself before shareholders for reappointment.

CONCLUSION

The recommendations are noteworthy, to say the least and could create difficulties for many listed companies, and may even be partly counterproductive. One also hopes that SEBI has received extensive feedback on this and that in the actual final amendments, there will be some relief.

shailesh.kwebmaker

Cross-Border Succession: Indian Assets Of A Foreign Resident

INTRODUCTION

We live in a global village and cross-border acquisition of assets has become an extremely common phenomenon. Cases of both, Indians acquiring assets abroad and foreign residents acquiring Indian assets, are increasing. With this come issues of cross-border succession and Wills. What happens when a person living abroad dies leaving behind Indian assets and when an Indian resident dies, leaving behind foreign assets? Which law should apply and which Wills would prevail? These are some of the myriad complex questions which one grapples with in such scenarios. Let us, in this month’s Feature, examine some such posers in the context of a foreign resident leaving behind Indian assets.

APPLICABLE LAW OF SUCCESSION

The first question to be addressed is which law of succession applies to such a foreign resident? The Indian Succession Act, 1925 (“the Act”) provides that succession to the immovable property in India, of a person deceased shall be regulated by the law of India, wherever such a person may have had his domicile at the time of his death. However, succession to his moveable property is regulated by the law of the country in which such person had his domicile at the time of his death. For example, A, having his domicile in England, dies in UK, leaving property, both moveable and immovable, in India. The succession to the immovable property would be regulated by the law of India but the succession to the moveable property is regulated by the English rules which govern the succession to the moveable property of an Englishman. The Act further provides that a person can have only one domicile for the purpose of the succession to his moveable property. If a person dies leaving the moveable property in India, then, in the absence of proof of any domicile elsewhere, succession to the property is regulated by the law of India.

The Act provides that the domicile of origin of every person of legitimate birth is in the country in which at the time of his birth his father was domiciled; or, if he was born after his father’s death, then in the country in which his father was domiciled at the time of the father’s death. However, the domicile of origin of an illegitimate child is in the country in which, at the time of his birth, his mother was domiciled. The domicile of a minor follows the domicile of the parent from whom he derived his domicile of origin. Except as provided by the Act, a person cannot, during minority, acquire a new domicile.

By marriage a woman acquires the domicile of her husband, if she had not the same domicile before. A wife’s domicile during her marriage follows the domicile of her husband.

The domicile of origin prevails until a new domicile has been acquired which can be done by taking up his fixed habitation in a country which is not that of his domicile of origin. The law further provides that a man is not to be deemed to have taken up his fixed habitation in India merely by reason of his residing in India or by carrying or the civil, military, naval or air force service of Government, or in the exercise of any profession or calling. Thus, a person who comes to India for business does not ipso facto acquire an Indian domicile. There must be intent to remain in India forever and for an uncertain period of time. The Act gives an example of A, whose domicile of origin is in England, comes to India, where he settles as a barrister or a merchant, intending to reside there during the remainder of his life. His domicile would now be in India.

However, if A, whose domicile is in England, goes to reside in India to wind up the affairs of a partnership which has been dissolved, and with the intention of returning to England as soon as that purpose is accomplished, then he does not by such residence acquire a domicile in India, however long the residence may last. But if in the same example, A, having gone to reside in India, afterwards alters his intention, and takes up his fixed habitation in India, then he has acquired a domicile in India.

The Act provides that any person may acquire a domicile in India by making and depositing before the State Government, a declaration of his desire to acquire such domicile; provided that he has been resident in India for one year immediately preceding the time of his making such declaration. A new domicile continues until the former has been resumed or another has been acquired.

The Act also provides that the above provisions pertaining to domicile would not apply to a Hindu / Buddhist / Sikh / Jain or to a Muslim since they are governed by their personal law of succession. Hence, the above provisions would apply mainly to Christians, Parsees, Jews, etc. However, even though the Act does not apply to these five communities, the Rules of Private International Law (on which the provisions of the Act are based) would apply to them.

ONE WILL OR SEPARATE INDIAN WILL?

Is it advisable to make one consolidated Will for all assets, wherever they may be located or should a person make a separate Will for each country where assets are situated? The International Institute for the Unification of Private Law or UNIDROIT has a Convention providing a Uniform Law on the Form of an International Will. Member signatories to this Convention would recognise an International Will if made as per this Format. Thus, a person can make one consolidated Will under this Convention which would be recognised in all its signatories. This would preclude the need for making separate Wills for different countries.

However, only a handful of countries such as, Australia, Canada, Italy, France, Belgium, Cyrpus, Russia, etc., have accepted this Convention. India is not a signatory to this Convention.

Considering the limited applicability of the UNIDROIT Convention, it is a better idea to have a ‘horses for courses’ approach, i.e., a distinct Will for each jurisdiction where assets are located. Thus, a foreign resident should make a separate Indian Will for his Indian assets.

PROBATE OF A FOREIGN WILL IN INDIA

International Wills

Consider a situation of a person who is domiciled in the UK but also has several immovable properties and assets in India. This individual dies in the UK and has prepared a Will for his UK estate. This also includes a bequest for his Indian properties. How would this Will be executed in India?

According to the Indian Succession Act, 1925, no right as an executor or a legatee of a Will can be established in any Court unless a Court has granted a probate of the Will under which the right is claimed.

A probate means the copy of the Will certified by the seal of a Court along with the list of assets. Probate of a Will establishes its authenticity and finality, and validates all the acts of the executors. It conclusively proves the validity of the Will and after a probate has been granted no claim can be raised about its genuineness.. This probate provision applies to all Christians and to those Hindus, Sikhs, Jains and Buddhists who are / whose immovable properties are situated within the territory of West Bengal or the Presidency Towns of Madras and Bombay (i.e., West Bengal or Tamil Nadu or Maharashtra). Thus, for Hindus, Sikhs, Jains and Buddhists who are / whose immovable properties are situated outside the territories of West Bengal or Tamil Nadu or Maharashtra, a probate is not required.

Section 228 of the Indian Succession Act deals with a case where the Will has been executed by a non-resident. It provides that where a Will has been proved in a foreign court and a properly authenticated copy of such Will is produced before a Court in India, then letters of administration may be granted by the Indian Court with a copy of such Will annexed to the same. A letters of administration is at par with a probate of a Will and it entitles the holder of the letters of administration to all rights belonging to the deceased as if the administration had been granted at the moment after his death. Basically, while a probate is granted for a testate succession (i.e., one where there is a will), a letters of administration is granted for an intestate succession (i.e., one where there is no will). However, in case of a foreign Will, instead of a probate, a letters of administration is granted.

FEMA AND INDIAN ASSETS OF A FOREIGN RESIDENT

Section6 (5) of the Foreign Exchange Management Act, 1999 provides that a person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India. Thus, a non-resident (whether of Indian origin or not) has been given express permission to inherit such Indian assets from a resident Indian.

Further, Rule 24 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 provides that an NRI or an OCI may acquire any immovable property in India by way of inheritance from a person resident outside India who had acquired such property:

(i) in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him; or

(ii) from a person resident in India.

When contrasted with Section 6(5), it would be evident that the general permission under Rule 24 is only for NRIs and Overseas Citizens of India, whereas Section 6(5) is for all persons resident outside India. Thus, a foreign citizen of Indian origin, who does is not an OCI, i.e., he is only a Person of Indian Origin, would not be eligible for automatic permission to inherit the property mentioned under Rule 24.

RBI’s Master Direction on Remittance of Assets provides that a Citizen of a foreign state may have inherited assets in India from a person resident outside India who acquired the assets (being immovable property, securities, cash, etc.) when he was an Indian resident or is a spouse of a deceased Indian national and has inherited assets from such Indian spouse. Such a Foreign Citizen can remit an amount not exceeding US$ 1 million per year if he produces documentary proof in support of the legacy, e.g., a Will. “Assets” for this purpose include, funds representing a deposit with a bank or a firm or a company, provident fund balance or superannuation benefits, amount of claim or maturity proceeds of insurance policies, sale proceeds of shares, securities, immovable properties or any other asset held in accordance with the FEMA Regulations.

Further, a Non-Resident Indian or a Person of Indian Origin, who has received a legacy under a Will, can remit from his Non-Resident Ordinary (NRO) Account an amount not exceeding US$ 1 million per year if he produces documentary proof in support of the legacy, e.g., a Will. The meaning of the term “Assets” is the same as that above. In addition, a similar amount is also allowed to be repatriated in respect of assets acquired by the NRI / PIO under a deed of settlement made by either of his/ her parents or a relative as defined in Companies Act, 2013. The settlement should take effect on the death of the settler. Relative for this purpose means, spouse, siblings, children, daughter-in-law and son-in-law. Further, step-parents, step-children and step-siblings are also included within the definition. There is no express mention about adoptive parents. However, various Supreme Court decisions have held that once all formalities of adoption are validly completed, the adopted child becomes as good as the biological child of the adoptive parents. The term settlement is not defined under the FEMA Regulations and hence, one may refer to definitions under other laws. The Indian Stamp Act, 1899 defines a settlement to mean any non-testamentary disposition (i.e., not by Will), in writing, of moveable or immovable property made–

(a) in consideration of marriage,

(b) for the purpose of distributing property of the settler among his family or those for whom he desires to provide, or for the purpose of providing for some person dependent on him, or

and includes an agreement in writing to make such a disposition.

The Specific Relief Act, 1963 defines a settlement to mean an instrument (other than a Will or codicil as defined by the Indian Succession Act, 1925), whereby the destination or devolution of successive interests in movable or immovable property is disposed of or is agreed to be disposed of.

A declaration of Trust has also been held to be a settlement in the case of Sita Ram vs. Board of Revenue, AIR 1979 All 301. In the case of Chief Controlling Revenue Authority vs P.A. Muthukumar, AIR 1979 Mad 5, the Full Bench examined the question of whether a deed was a settlement or a trust? The Court held that the quintessence of the definition of the word ‘settlement’ in Section 2(24)(b) of the Indian Stamp Act was that the property should be distributed among the members of the family of the author of the trust or should be ordained to be given to those near and dear to him. In the absence of any such clause express or implied to be culled out by necessary implication from out of the instrument to conclude about distribution of property, either movable or immovable among the settlor’s heirs or relatives, it would be difficult to hold that an instrument should be treated as a settlement.

In case of a remittance exceeding the above limits, an application for prior permission can be made to the Reserve Bank of India.

TAX PROVISIONS

Inheritance Tax / Estate Duty is applicable in several nations, such as, the USA, UK, Germany, France, etc. These provisions apply to the global assets of a resident of these countries.

The USA has the most complex and comprehensive Estate Duty Law. A US Resident leaving behind Indian assets would be subject to US Estate Duty on the Indian Assets. Currently, the US has a Federal Estate Duty exemption of US$12.92 million which can be utilized by the estate of a person even for foreign assets. In addition, there is no estate duty on marital transfers, i.e., between US spouses. Hence, if a US person leaves his global assets to his Wife (who should also be a US person), then there is no estate duty. However, if the spouse is a non-US person, then the estate duty exemption is only US$175,000. US Federal Estate duty rates are as high as 40 per cent above the exemption limit.

Further, several US States, such as, NY, Illinois, Washington, etc., levy a State Estate Duty for its residents who die leaving behind estate. Key states which do not levy Estate Duty, include, Texas, Florida, etc.

In addition, six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania) levy a State Inheritance Tax, i.e., a tax paid by the recipient on the assets received from a deceased. Thus, for recipients staying in these six states, the estate of the deceased would be subject to a Federal Estate Tax, may have to pay a State Estate Duty and then the recipients would also pay State Inheritance Tax.

There is no Estate Duty / Inheritance tax in India on any inheritance/succession/transmission. Section 56 (2) (x) of the Income-tax Act, 1961 also exempts any receipt of an asset / money by Will / intestate succession. This exemption would also be available to receipt by non-residents in cases covered by Section 9 (1) of the Income-tax Act, 1961, i.e., receipt of sum of money by a non-resident from a resident.

CONCLUSION

Estate planning, per se, is a complex exercise. In a cross-border element, one is faced with a very dynamic, multi-faceted scenario which requires due consideration of both Indian and foreign tax and regulatory provisions.

shailesh.kwebmaker

SEBI Acts against Pump-N-Dump Operations through Telegram Channels

BACKGROUND

SEBI, on 25th January, 2023, passed a detailed interim order (in the matter of Superior Finlease Ltd) against persons allegedly involved in market manipulation through the popular messaging app, Telegram. This followed several search and seizure operations conducted about a year ago at multiple locations where SEBI seized, amongst other things, mobiles, hard disks, etc. SEBI found that a well-organized scam using the age-old “pump and dump” method was being carried out with illicit gains of Rs. 3.89 crores generated. SEBI carried out an elaborate and methodical investigation to join the various dots together. This revealed several interesting facts and issues, legal and otherwise. While such scams are regularly seen and even predictable now in their pattern, this was perhaps one unique case where the bare bones of the modus operandi were exposed in detail. SEBI carried out searches that enabled it to get its hands on mobile devices which contained lurid and explicit details of the scam.

At the outset, though, it must be emphasised that this was an interim order. Interim orders are usually passed in cases where the regulator cannot wait for the investigation and further proceedings to be wholly completed and only final orders are passed. Waiting a long time may not only mean that the scam could go on, but the illicit profits may also be diverted and the evidence destroyed, etc. However, this also means that the order lays down findings of SEBI to which the parties may have had no opportunity of presenting their side. Thus, it would be a one-sided case at that stage. Often, such orders are appealed against particularly if it is found that they contain grave errors and charges, and would result in injustice and even besmirching of the names of innocent parties. Appellate authorities do give relief in case of obvious errors or if it is found that the losses caused to parties may be irreversible and more than the benefit obtained by such order. Hence, the findings and conclusions in this order (and the discussion here) should be treated as mere allegations at this point.

Nonetheless, SEBI deserves due credit not just for the elaborate investigation and detective work including of technical aspects, but also for expressing its findings well in the order with graphs, transcripts of conversations and even sharing their recordings.

WHAT IS PUMP-AND-DUMP?

Pump and dump operations are age-old. And, sadly, they work again and again. Even SEBI has recognized the human psychology involved, where, the public and particularly lay investors, get a Fear of Missing Out (FOMO, as how this has become part of today’s popular slang) and act. This is partly because of greed which blinds them to rational and skeptical analysis and partly because of the sense of urgency created by the operators.

Pump and dump involve, as is obvious from the term, two parts. One is the initial part of pumping up the price. This involves two aspects. One is, of course, the steady raising of the price of the shares of the concerned company. This is done by a group of operators trading amongst themselves at a successively higher price. The second is creating volumes, though this may not always be the case. Nevertheless, high volumes create an appearance of credibility that there are many buyers even at higher prices.

Usually, most of the shares of the company are in the hands of this group of persons since otherwise, the public shareholders who see the price rising may sell their holding which could not only result in a fall in prices but also increase the cost of the operations. Thus, such operations are often carried out in companies that have little operations. Having said that, such operations are also seen in fully functioning companies where the idea is to pump up the price to enable a further issue of shares/securities at a higher price or simply to offload holdings to raise funds.

The second part involves dumping the shares at the higher price to the unsuspecting and expectant public who are eager to acquire these shares since they are promised a much higher price later. At this stage, the operators are selling and the public is buying. Of course, as was actually seen in this case too, the operators may have to step in if the price falls due to reasons such as some sellers coming in. Shares are thus offloaded within a price range and then the operators pack their bags and leave the investors high and dry.

SUMMARY OF THE INVESTIGATION AND FINDING IN THIS CASE INCLUDING INTERESTING ASPECTS

SEBI received complaints that certain telegram channels were giving out tips for dealings in shares through telegram channels. Telegram, as is well known, is a popular messaging application with others including WhatsApp, Signal, etc., and of course, the regular SMS services. Interestingly, action has already been taken in respect of stock manipulation scams through SMS messages by restricting messages with the use ‘buy’, ‘sell’, etc. However, acting against apps is more difficult as they are privately owned and also have secrecy features built in. Telegram has become more popular since it has many more features including anonymity, larger size of groups, etc.

SEBI followed such channels and noted that they did engage in giving out tips. Importantly, it was found that just the two channels put together had a subscriber base of more than 23 lakh persons. This was the ready audience the operators had and, as SEBI notes, even if a minuscule number of these people fell to the scam, it was enough for it to succeed and illicit gains of crores be made.

What is more, the channels also had paid subscribers. For getting periodic tips in various ranges, the subscribers paid periodic (weekly/fortnightly/monthly) subscriptions of Rs. 5000-10000. This by itself was a money-making operation. It may be noted that several SEBI regulations deal with such giving of tips, whether for money or otherwise, and if these are given by unregistered persons or against regulations, they are illegal. SEBI has, in recent times, passed numerous orders against such unregistered persons making recommendations.

SEBI found that there was an alleged mastermind who controlled a listed company and a broking firm. He approached certain intermediaries who in turn involved other persons including those who operated such telegram channels. SEBI found that the mobiles they seized had actual recordings of telephonic conversations between the parties where they summarized how broadly the scam would be managed and how they would share the profits. SEBI found that the parties had agreed that the portion of the price above Rs. 100 would be paid as a commission by the sellers to the other persons involved. There was discussion of even how a certain percentage of this commission would be retained for contingencies. The alleged mastermind was said to have even stated in this regard, justifying the retention, that “Mein beimaan aadmi nahi hu lekin…” (“I am not a cheat but…”). Considering that the whole operation was allegedly for making fraudulent profits from unsuspecting lay public investors, the irony cannot be missed.

Then there were messages of the actual working of the profits made and the amounts to be shared along with how they were paid or to be paid.

SEBI investigated methodically several things in this regard. It tracked the movement of the prices of the shares, their volumes and the persons who engaged in the trading leading to D-day when the offloading was to happen. It gave findings of a connection between these parties including how the trading was financed by the alleged mastermind. Thereafter, screenshots of the recommendations through messages in the telegram channel to buy such shares with the high target prices (and also the stop loss price) were found and given in the order. SEBI also not only tracked the number of calls between the parties including the total time of such calls, but it also traced the mobile locations to further support its case of connections between the parties. The bank account statements of some of the parties were analysed to show the flow of funds which were then linked with the agreed plan of financing and also sharing of the illicit profits.

Statements of parties were taken, and certain parties were said to have confessed and also explained the modus operandi and the role of various parties.

At the end, in this 93-page long order, SEBI concluded that multiple violations of law appeared to have taken place and also there was a need for immediate interim order giving directions. Accordingly, SEBI gave certain directions against 19 parties. It required that the total illicit profits of about Rs. 3.89 crores be impounded and incidental directions to banks, etc. not to permit debits to accounts till the money was paid, were given. It directed the parties not to buy or sell, such securities till further orders. Finally, the interim order was also to be treated as a show cause notice to parties asking them to give their responses as to why final adverse directions such as that of disgorgement, debarment, penalty, etc. not be passed.

SOME LEGAL ISSUES

As stated, the order is interim and comprises a set of allegations that do not give parties an opportunity to present their case. SEBI may also carry out further investigations and place them before the parties. It is thus possible that as the case progresses, perhaps also in appeals, there may be changes in the stated findings, conclusions, allegations, etc. Nonetheless, several legal questions can be considered at this stage itself that may be raised and ultimately resolved either by SEBI or by appellate authorities. Hence, the progress of this order would be worth tracking to see how such a case, perhaps the first of its kind in many aspects such as use of messaging apps, search and seizure, telephone recording, etc., progresses.

One issue is that the order is a combined one against 19 parties, who may be placed in unequal positions. Though SEBI has divided the roles of certain groups of parties, the law would require that each person’s guilt be individually established. An important aspect here is placing joint and several liabilities on a group of persons who are alleged to have jointly acted – and profited – from a part of the alleged scam. This has been questioned in the past and rightly so.

Then there are alleged confessions and statements. These may be retracted, possibly on grounds that they were made under duress, and the question of their validity would thus arise. In any case, other parties may seek cross-examination particularly if these statements are implicating them.

There are voice recordings taken from the mobile. There may be questions raised whether they are indeed of the persons that SEBI claims they were. And whether there would be a need under the law of expert voice analysis.

The transactions in the bank have been alleged to be for financing the trades, sharing illicit gains, etc. While there may be other corroborating evidences, the question in law would be whether other explanations may be plausible.

Also open to challenge are the reasons for mobile calls between the parties. Since, except for the recording found on the mobile itself, there are no details of what was discussed in the call, whether allegations that these show connections between parties would stand in law.

There are many other issues. Having said that, the Supreme Court (in Rakhi Trading ((2018) 143 CLA 15)) and Kishore R. Ajmera ((2016) 131 CLA 187) has created strong precedents to enable SEBI to apply lower benchmarks of proof in civil proceedings. However, if SEBI also initiates prosecution against these parties, the higher benchmark of proof may be applied, and hence the aforesaid issues may need stronger countering.

Finally, there is the issue of disgorgement of the illicit profits. These profits clearly correspond to the losses incurred by investors who fell prey to the scam. However, there are no explicit provisions in law to enable return of these profits to these investors.

CONCLUSION

While there is no solution to the greed amongst the public, which will regularly result in cases of cheating, it is also true that new technologies have made it even easier to reach a larger populace, anonymously and cheaply. Even right now, a simple search on telegram or even google, shows up multiple telegram channels, Twitter handles, etc. which claim to give ‘hot tips’ for stocks, futures and options. Close down one, and many more may crop up. However, SEBI’s making an example of a few may lead not only to a strong disincentive to others, but also awareness amongst the public. However, in practice, pursuing such cases could take longer and require evidence that stands up in law.

shailesh.kwebmaker

IBC & SC in Vidarbha Industries: NCLT May or Should Admit a Financial Creditor’s Application?

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (“the Code”) provides for the insolvency resolution process of corporate debtors. The Code gets triggered when a corporate debtor commits a default in payment of a debt, which could be financial or operational. The initiation (or starting) of the corporate insolvency resolution process under the Code, may be done by a financial creditor (in respect of default in respect of financial debt) or an operational creditor (in respect of default in respect of an operational debt) or by the corporate itself (in respect of any default).

An interesting question has arisen as to whether the National Company Law Tribunal (NCLT) is bound to admit a plea for a Corporate Insolvency Resolution Process (“CIRP”) filed by a financial creditor against a corporate debtor or does it have the discretion to refuse to admit it, if the debtor is otherwise financially healthy? The Supreme Court in the case of Vidarbha Industries Power Ltd vs. Axis Bank Ltd, [2022] 140 taxmann.com 252 (SC) has given a very interesting reply to this very crucial question. A subsequent review petition has upheld the earlier decision of the Apex Court. Now, once again in an appeal filed before the Supreme Court, this decision has been questioned. This shows the importance of this decision to matters under the Code. Let us examine the issue at hand.

FINANCIAL CREDITOR’S APPLICATION

To refresh, the following terms are important under the Code:

a) A corporate debtor is a corporate person (company, LLP, etc.,) who owes a debt to any person. Here it is interesting to note that defined financial service providers are not covered by the purview of the Code. Thus, insolvency and bankruptcy of NBFCs, banks, insurance companies, mutual funds, etc., are not covered by this Code. However, if these financial service providers are creditors of any corporate debtor, they can seek recourse under the Code.

b) A debt means a liability or an obligation in respect of a claim and could be a financial debt or an operational debt. Financial debt is defined as a debt along with an interest, if any, which is disbursed against the consideration for the time value of money. An operational debt is defined as a claim for the provision of goods or services or employment dues or Government dues.

c) It is also relevant to note the meaning of the term default which is defined as non-payment of debt when the whole or any part has become due and payable and is not repaid by the debtor.

The process for a CIRP filed by a financial creditor is as follows:

(a) Financial creditors can file an application before the NCLT once a default (for a financial debt) occurs for initiating a corporate insolvency resolution process against a corporate debtor.

(b) The NCLT would decide within 14 days whether or not a default has occurred.

(c) Section7 (5)(a) of the Code provides that -if the NCLT is satisfied that a default has occurred and the application filed by the financial creditor is complete, it may, by order, admit such an application.

SUPREME COURT’S VERDICT IN VIDARBHA

In the case of Vidarbha (supra), the corporate debtor was a power-generating company which due to a fund crunch defaulted in its dues to a bank. It had however, received an Order from the Appellate Tribunal for Electricity in its favour which when implemented would result in an inflow of Rs.1,730 crores and would take care of its liquidity position. The NCLT admitted the application of the bank and held that all that was required to check whether there was a default of debt and whether the application, was complete. This Order was upheld by the Appellate Tribunal (NCLAT). Both the forums held that they were not concerned with the abovementioned favourable order which the debtor had received.

A Two-Judge Bench of the Supreme Court observed that the objective of the Code was to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals, in a time-bound manner, inter alia, for maximization of the value of the assets of such persons, promoting entrepreneurship and availability of credit, balancing the interest of all the stakeholders and matters connected therewith or incidental thereto.

It held that both, the NCLT and the NCLAT proceeded on the premises that an application must necessarily be entertained under section7(5)(a) of the Code, if a debt existed and the corporate debtor was in default of payment of debt. In other words, the NCLT found section 7(5)(a) of the IBC to be mandatory.

Thus, the Supreme Court framed the question before it as whether section 7(5)(a) was a mandatory or a discretionary provision. In other words, could the expression ‘may’ be construed as ‘shall’?

It proceeded to answer the question by holding that there was no doubt that a corporate debtor who was in the red should be resolved expeditiously, following the timelines in the IBC. No extraneous matter should come in the way. However, the viability and overall financial health of the Corporate Debtor were not extraneous matters. When the corporate debtor had an Award of Rs. 1,730 crores in its favour, such a factor could not be ignored by the NCLT in considering its financial health. It laid down a principle that the existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP. The Adjudicating Authority (NCLT) was required to apply its mind to relevant factors and the overall financial health and viability of the Corporate Debtor under its existing management.

It strongly relied upon the fact that the Legislature had, in its wisdom, chosen to use the expression “may” in section 7(5)(a) of the IBC and had it been the legislative intent that section 7(5)(a) of the IBC should be a mandatory provision, the Legislature would have used the word ‘shall’ and not the word ‘may’.

It compared the position of a financial creditor with that of an operational creditor. Section 8 of the Code provided for the initiation of a resolution by an operational creditor. There were noticeable differences between the procedure by which a financial creditor could initiate resolution and the procedure by which an operational creditor could do so. The operational creditor, on occurrence of a default, was required to serve on the corporate debtor, a demand notice of the unpaid operational debt. If payment is not received within 10 days of this Notice, the operational creditor could file a petition before the NCLT. The Supreme Court observed the wordings of s.9(5)(i) of the Code in this respect

“9(5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order

(i) admit the application……………..”

The Court concluded that the Legislature had used the word ‘may’ in section 7(5)(a) of the Code in respect of an application initiated by a financial creditor against a corporate debtor but had used the expression ‘shall’ in an otherwise almost identical provision of section 9(5) relating to the initiation of insolvency by an operational creditor. The Court gave an explanation on when the word “may” could be construed as “shall” and when it remained “may”.

The Legislature intended section 9(5)(a) to be mandatory but section 7(5)(a) to be discretionary. The rationale for this dichotomy was explained and it held that the law consciously differentiated between financial creditors and operational creditors, as there was an innate difference between financial creditors, in the business of investment and financing, and operational creditors in the business of supply of goods and services. Financial credit was usually secured and of much longer duration. Such credits, which were often long-term credits, on which the operation of the corporate debtor depends, could not be equated to operational debts which were usually unsecured, of shorter duration and of a lesser amount.

The financial strength and nature of business of a financial creditor were not comparable with that of an operational creditor, engaged in the supply of goods and services. The impact of the non-payment of admitted dues could be far more serious on an operational creditor than on a financial creditor.

In the case of financial debt, there was flexibility. The NCLT was conferred the discretion to admit the application of the financial creditor. If facts and circumstances so warranted, it could keep the admission in abeyance or even reject the application. A very telling statement was that it was certainly not the object of the Code to penalise solvent companies, temporarily defaulting in repayment of their financial debts, by the initiation of insolvency.

It however, concluded that the discretionary power of the NCLT could not be exercised arbitrarily or capriciously.

REVIEW PETITION

A review petition was filed before the Supreme Court in the case of Axis Bank Ltd vs. Vidarbha Industries Power Ltd, Review Petition (Civil) No. 1043 of 2022. It was contended that the above judgment was rendered per incuriam since it ignored an earlier Two-Judge Decision in E. S. Krishnamurthy vs. Bharath Hi-Tech Builders Pvt Ltd (2022) 3 SCC 161. In that case, the Court had held that NCLT must either admit or reject an application. These were the only two courses of action which were open to the NCLT in accordance with s. 7(5).

The NCLT could not compel a party to the proceedings before it to settle a dispute. Thus, it was contended that the NCLT had no discretionary power. The Supreme Court rejected the Review Application by holding that the question of whether section7(5)(a) was mandatory or discretionary was not an issue in the above judgment. The only issue was whether the NCLT could foist a settlement on unwilling parties. That issue was answered in the negative.

In the Review Application, the Solicitor General also contended that Vidarbha’s decision could be interpreted in a manner that might be contrary to the aims and objects of the Code and could render the law infructuous. The Apex Court held that such an apprehension appeared to be misconceived. Hence, the review petition was dismissed.

FOLLOWED BY NCLAT

Subsequently, Vidarbha’s decision was followed by the NCLAT in Jag Mohan Daga vs Bimal Kanti Chowdhary, CA (AT) (Insolvency) No. 848 of 2022. The NCLAT held that the dispute was a family dispute which was given the colour of a financial creditor’s dues.

The NCLAT set aside the admission of the plea by the NCLT on the grounds that the Supreme Court in Vidarbha has clearly laid down that it was not mandatory that s. 7 applications were to be admitted merely on proof of debt and default. Petitions should not be allowed to continue when the financial creditor proceeded under the Code not for the purposes of resolution of insolvency of the corporate debtor but for other purposes with some other agenda. The NCLAT held that the NCLT should not permit such an insolvency petition to go on which had been initiated to settle an internal family business dispute.

APPEAL AGAINST NCLAT / VIDARBHA AGAIN QUESTIONED

An appeal was filed before the Supreme Court (Maganlal Daga HUF vs. Jag Mohan Daga, CA 38798/2022) against the above-mentioned NCLAT decision. The matter was heard by a Three-Judge Bench and it noted that the NCLAT relied on Vidarbha’s decision against which the review petition was rejected. Once again the Petitioners contended that Vidarbha’s decision ran contrary to the settled position of law. The Solicitor General again pleaded that the principle which was enunciated in Vidarbha was liable to dilute the substratum of the Code. This appeal is still pending.

MCA’S DISCUSSION PAPER

Realising the gravity of the decision in Vidarbha’s case, the Ministry of Corporate Affairs (MCA) issued a Discussion Paper on 18th January, 2023 highlighting the proposed changes to the Code. One of the key changes is a proposed amendment to s. 7(5)(a) making it mandatory to admit the application if other conditions are met. Thus, the disparity between section 7(5) and section 9(5) is sought to be removed.

The MCA has stated that Vidarbha’s decision has created confusion and hence, to alleviate any doubts, it was proposed that section 7 may be amended to clarify that while considering an application for initiation of the insolvency process by the financial creditors, the NCLT was only required to be satisfied about the occurrence of a default and fulfilment of procedural requirements for this specific purpose (and nothing more). Where a default was established, it would be mandatory for the NCLT to admit the application and initiate the insolvency process.

CRITIQUE

It is submitted that the Supreme Court’s analysis in Vidarbha’s case is spot on and cannot be faulted. The objective of the Code must be to create and enhance value for all stakeholders and not merely send an otherwise sound company to the gallows. A discretionary power to the NCLT would empower it to provide for other remedial measures in case of a default on a debt. Rather than making the powers mandatory under section7(5)(a), the MCA could provide for alternative remedies which the NCLT can suggest in case of a default. It is true that several unscrupulous promoters have hoodwinked the financial system under the earlier laws, but it is also true that an overzealous law may in fact harm otherwise good companies.

If the MCA proposals are implemented then this discretionary power would be taken away from the NCLT. Also, the outcome of the Supreme Court appeal would be interesting. It could impact several NCLT cases, including the recent insolvency plea of IndusInd Bank against Zee Entertainment Ltd.

In conclusion, the words of the Supreme Court sum up the situation aptly ~ “It is certainly not the object of the IBC to penalize solvent companies, temporarily defaulting in repayment of its financial debts, by initiation of CIRP.”

shailesh.kwebmaker

Corporate Law Corner Part B: Insolvency and Bankruptcy Law

9. NCLAT, Principal Bench

New Delhi

Company Appeal (AT) (Insolvency) No. 241 of 2022

Arising out of order dated 10th February, 2021 passed by the National Company Law Tribunal, Guwahati Bench, Guwahati in IA No. 32 of 2020 in C.P. (IB) No. 20/GB/2017.

1. Principal Commissioner of Income Tax,

2. Assistant Commissioner of Income Tax,

…Appellants.

vs.

M/s Assam Company India Ltd …Respondent.

FACTS

Corporate Insolvancy Resolution Process (CIRP) under Section 7 was admitted against the Assam Company/Corporate Debtor (“CD”) on 20th September, 2018. Appellants filed their claim under Form B and claimed the Income Tax for the A.Y. 2013-14 for Rs. 6,69,84,657 and A.Y. 2014-15 for Rs. 9,50,41,296 totalling Rs. 16,20,25,953 before the Resolution Professional (RP). RP via email informed that the NCLT, Guwahati Bench may consider payment of Rs. 1,97,92,084 being 15 per cent of the outstanding dues owed to the Appellants since the Respondent had filed petition for stay of demand before the AO. RP made a payment of Rs. 1,20,23,691 as a tranche payment to the Appellants and told that the rest of the amount would be contingent on the outcome of the appeal filed before the IT appellate authority.

The appellants filed an application for review of the order of the Hon’ble NCLT dated 20th September, 2018 with necessary directions to the Resolution Professional for submission of the revised resolution plan incorporating the entire amount alleged to be due to the Appellants. NCLT, in its order dated 22nd October, 2019 stated that since the RP intimated the Department that the demand after finalization of appeal by CIT(A) would be payable by the new promoter, such a written intimation of the RP is to be read with the new resolution plan and the demand of the Appellants is duly considered and they have a right to lay their claim before the new promoter of the Respondent Company. NCLT dismissed the claims of the Appellants vide its order dated 10th February, 2021.

QUESTION OF LAW

This appeal lies against the order dated 10th February, 2021 with respect to extinguishment of appellants claim. In that order, the Hon’ble NCLT, failed to take into consideration that vide its earlier order dated 22nd October, 2019 it had stated that since the RP intimated the Appellants that the demand after finalisation of appeal by CIT(A) would be payable by the new promoter, such written intimation of the RP is to be read with the new resolution plan; and the demand of the Appellants is duly considered and the Appellants have a right to lay their claim before the new promoter of the Respondent Company.

RULING IN CASE

NCLAT held that as per the judgment passed by the Hon’ble Supreme Court in the case of “State Tax Officer (1) vs. Rainbow Papers Ltd, Civil Appeal No. 1661 of 2020 dated 06th September, 2022”, the dues of the Appellants are ‘Government dues’ and they are Secured Creditors.

HELD

That the impugned order dated 10th February, 2021 passed by the Adjudicating Authority (National Company Law Tribunal, Guwahati Bench, Guwahati) in IA No. 32 of 2020 in C.P. (IB) No. 20/GB/2017 is hereby set aside and the matter is remitted back to the Adjudicating Authority (National Company Law Tribunal, Guwahati Bench, Guwahati) with a request to hear the parties (Appellants and Respondent herein) considering the aforesaid facts and also judgment passed by the Hon’ble Supreme Court in the case of ‘Rainbow Papers Ltd Case (supra)’ and pass fresh orders as expeditiously as possible.

shailesh.kwebmaker

Of Mules and Securities Laws

BACKGROUND

Mules, in common parlance, are understood as beasts of burden. They mindlessly carry out severe labor work often for relatively small rewards. In the narcotic drug business, mules are those who carry/smuggle drugs from one place to another. In securities laws too, now, the term ‘mules’ has acquired a similar meaning. They refer to persons who do illegal work under the instructions of another mastermind. Theyget small rewards for doing such work or allowing their names to be used. The question is how they are treated in securities laws since the violations are carried out in their names?

USE OF MULES TO CARRY OUT NUMEROUS TYPES OF SECURITIES LAWS VIOLATIONS

The typical use of mules is to use their names to carry out certain acts, which if carried out in one’s own name, would be illegal or otherwise help links to be established whereby the acts would be held to be illegal. A corrupt person, for example, would take bribes and build wealth in the name of another person, and thus himself being free of scrutiny. Having wealth in one’s own name could be a presumption of having acquired it through corrupt means. In securities laws, there are similar reasons. An insider having Unpublished Price Sensitive Information (UPSI), for example, may use mules to carry out trades with benefit of such information and make illicit profits. Similarly, a front runner, who has information of impending large orders of clients/employers, may use these mules to carry out transactions in such scrips. Since it is expected that on account of the large orders of his client/employer, there would be significant movement in price, he would use these mules to enter into transactions first and then reverse these transactions when the orders of his employer/client are put through.

Then, there are those who engage in price manipulation. Often a group of persons are needed to carry out such acts. Such group of persons may engage in trades and counter trades, often in a circular manner whereby, at least initially, there may be no movement of shares outside such the group. If the intent is ‘pump and dump’, then, after the price is pumped up to higher levels, there would be off loading of the shares by the master mind to unsuspecting investors. At a later date, when there are complaints and investigations, the master mind may claim to have had no knowledge or connection with the various mules. The mules, assuming they are traceable or appear before SEBI against summons, too may claim having no connection.

Then there were the classic cases of share subscriptions in public issues to take the benefit of reservations for retail investors. It was alleged that share applications in large numbers were made in the names of thousands of such mules, and these were financed by a small group of people. These cases, which came to be popularly referred by one of the alleged persons, Roopalben Panchal, led to investigations and multiple proceedings that lasted for a long time. It was alleged that share applications were made in the name of such mules and shares allotted to such persons were sold and the profits/sale proceeds transferred back to the alleged financiers.

DETECTION/DEMONSTRATING VIOLATIONS OF SECURITIES LAWS USING MULES

The use of mules present a challenge to the regulator in proving and punishing violations of securities laws. The mules and their mastermind may claim no connection with each other and thus argue that there were no violations.

In case of insider trading, the work of SEBI is thus relatively easier as there are deeming provisions that hold several connected persons as insiders. Further, well settled principles of law (as laid down by the Supreme Court and as discussed later herein) help SEBI in using circumstantial evidence. Thus, several such orders are seen to be regularly passed from time to time.

That said, sophisticated capital market operators may use means that make detection and punishment difficult. Digital tools, messengers, etc. may also be used. In some cases, SEBI has meticulously traced mobile calls and established links between persons based on such connections. However, there are just too many ways to pass messages/make calls unless such messages remain on record. Here too, there are sporadic cases where SEBI has even used web archives to excavate deleted websites. But the technical challenges remain formidable.

SEBI does come to know of suspicious transactions through market surveillance. Financial transactions between the parties, introducing such mules in bank or broker accounts, etc. also help establish guilt. SEBI had, in one case, shown extraordinary initiative to track the movement of an alleged front runner through his mobile phone and found that the person used to withdraw cash through ATM from the account of such a mule. However, such cases are one off and do not help wider prevention, detection and punishment of securities laws violations.

SEBI’S ENFORCEMENT ACTION AGAINST SUCH MULES – DIFFICULTIES AND INJUSTICE

Even if detected, the unresolved issue is what action should be treated against mules? The dilemma particularly here is this. The ‘mastermind’ may claim that he has done no wrong, the transactions are not done by him and the rewards of the misdeeds are also not with him. It is the other person, the alleged mule, who has done everything. The mule may claim a similar story of innocence, the counter part. He may say he is just an uneducated person, maybe in the employment of the mastermind at a lower hierarchy earning a small salary or otherwise in a similar job elsewhere and who is recruited. He may claim that the rewards of the misdeeds have been transmitted to the real culprit, either by the way of ‘loans’ or through cash. In some cases, he may admit to have signed various documents on the basis of some small remuneration. It may be difficult for SEBI to ascribe/allocate blame to the “real culprit”. This is more so if it is admitted, or otherwise easily demonstrated, that the mule was aware that wrongful transactions were being done in his name.

Typically, SEBI has been punishing all the persons equally. They may all be debarred from capital markets. A common penalty be levied on them, payable jointly and severally and this stance is particularly justified if the money may be lying with the mule or if SEBI is unable to find out where it has landed.

The difficulties in taking such a uniform stand are several. Firstly, the mule gets punished as an equal to the main person, despite his role being less, maybe a name-lender. Secondly, levying the penalty as fully recoverable from the mule (even if on a joint and several basis) creates far more difficulties on the mule. His bank account and his meagre savings and properties may get attached/recovered. Even if he bears guilt in this regard, such a punishment is clearly disproportionate and unjust. The mastermind may also have bigger resources to fight the matter.

Recently, however, SEBI has been changing its stand for the better. For one, if it is possible to trace how much of the ill-gotten gains went to whom, the recovery is made accordingly from such persons, instead of recovering on a joint basis. Further, in several cases, even if not on a consistent basis with general principles laid down, SEBI has levied penalty/punishment on the basis of demonstrated involvement in the violation. The backgrounds of the parties too have been considered for this purpose. Hence, while some punishment may still be meted out, it may be proportionate to the guilt and involvement.

Admittedly, if it is not easy to find the culprits, then, demonstrate the violations and then go even further and allocate blame. However, SEBI has the benefit of at least two Supreme Court decisions (SEBI vs. Kishore R. Ajmera (2016) 3 Comp. LJ 198 (SC) & SEBI vs. Rakhi Trading (P.) Ltd. ((2018) 207 Comp Cas 443 (SC)) which have made deciding of the guilty easier on the principles of “preponderance of probability.” This principle does not require a proof of beyond reasonable doubt but a lower one based on what is more probable than not. SEBI could see the facts of the case, see the level of sophistication and resources of the persons involved, the cooperation given, etc. and ascribe blame and punishment accordingly.

VISHWANATHAN COMMITTEE REPORT

The SEBI Committee chaired by T. K. Vishwanathan had in August 2018 made certain recommendations on this topic. A method of detecting mule accounts was suggested. For this purpose, a formula was provided that lays down the volumes of trades based on income/net worth of the investor. If the broker finds that the volumes are beyond an “affordability index”, then the broker should exercise special diligence for such client. If the volumes are beyond this and even beyond prescribed levels, the account could be suspected as a mule account. However, though amendments to the Regulations were suggested, they have not yet been made.

SOME CASES

An interesting investigation was carried out by SEBI which culminated in an interim order dated 1st October, 2020. While a detailed analysis of this order could be a separate subject, it is seen that SEBI traced the mobile records and even the location of parties as available from such records. Based on these investigations, it alleged that mule accounts were created for carrying out front running and the primary person withdrew the cash from the bank accounts of such mules. However, SEBI ordered that the profits made be deposited by all the parties including the alleged mules and this liability for deposit was made joint and several. Till this was done, the assets, bank accounts, etc. were required not to be disposed off. Effectively, this meant that the alleged mules too suffered such embargo.

In an order dated 24th December, 2020, in the matter of Viji Finance Ltd, SEBI alleged that 78 parties were ‘mules’ or ‘name lenders’. They were low income/unskilled/uneducated people whose occupations included being a vegetable vendor, house painter, auto drivers, etc. For alleged violation of the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations, a penalty of Rs. 15 lakhs was levied jointly and severally on them. The result is that the full amount could be recovered from even any one of them and there would be no mechanism for them to share it between them. It is possible that they may not even know each other.

In an order dated 13th January, 2021, SEBI elaborated the concept of “Family and Friends” mule accounts. It was stated, “Before proceeding to deal with the circumstances, it will be appropriate to elaborate on the concept of “Family and Friends” mule accounts. These are trading accounts which are “lent” by persons known to the person who is effectively controlling / placing the orders in the trading account. For example, family members, extended family members, friends, acquaintances, etc. The person who is controlling the account / placing the orders gets access to the trading accounts based on trust or on the strength of relationship between him and the registered owner of the trading account.” Using this principle, the family members were held equally responsible for the alleged violations. They all were required to deposit the impounded amount their banks.

CONCLUSION

While legal issues of proving and apportioning guilt are difficult enough, the unorganized economy in India where transactions in cash may be made, adds to the difficulties. It is quite possible that the SEBI’s attempt may be barely scratching the surface.

shailesh.kwebmaker

The Retroactive Application of Special Criminal Laws – Recent Supreme Court Decisions

“The entire Community is aggrieved if the economic offenders who ruin the economy of the State are not brought to books. A murder may be committed in the heat of moment upon passions being aroused. An economic offence is committed with cool calculation and deliberate design with an eye on personal profit regardless of the consequence to the Community. A disregard for the interest of the Community can be manifested only at the cost of forfeiting the trust and faith of the Community in the system to administer justice in an even handed manner without fear of criticism from the quarters which view white collar crimes with a permissive eye unmindful of the damage done to the National Economy and National Interest.”

– State of Gujarat v. Mohanlal Jitamalji Porwal & Ors. (1987) 2 SCC 364

The above quote of the Supreme Court (SC) may seem general – but it puts the importance given to economic offenses in context. In the never-ending game of cat and mouse, it is always the law enforcement that seems to play catch up with the offenders. The last decade has seen an increased focus on special laws with the aim of curbing economic offenses. These laws are special – they have special agencies with special powers for investigation, special courts for prosecution and special procedures – for specific offenses, all justified to prevent economic offenders from escaping punishment. However, some of the amendments brought about to these Acts have raised a peculiar problem that gives the public a cause for concern. Can I be punished for an act that was not an offence at the time of its commission? Can criminal liability be fastened upon me by a retrospective amendment? What repercussions does this have for the concept of mens rea?

The SC has examined two different Acts in two different judgments, both in 2022. Both these judgments are considered a landmark in their own field and the legislations that they consider are of particular interest to Chartered Accountants – The Prohibition of Benami Transactions Act, 1988 (the Benami Act) and the Prevention of Money Laundering Act, 2002 (the PMLA). The issue, however, is still live – very recently, the Bombay High Court issued notice on a petition that challenges what it considers the retrospective application of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 and contends that this Act should not penalize transactions that were entered into before it came into force.

The words “retrospective” and “retroactive” have different meanings in law. However, often these terms work in tandem like in the two SC judgments covered in this article. The SC in the case of Vineeta Sharma v. Rakesh Sharma, 2020 (9) SCC 1, described the nature of prospective, retrospective, and retroactive laws as follows: “The prospective statute operates from the date of its enactment conferring new rights. The retrospective statute operates backwards and takes away or impairs vested rights acquired under existing laws. A retroactive statute is the one that does not operate retrospectively. It operates in futuro. However, its operation is based upon the character or status that arose earlier. Characteristic or event which happened in the past or requisites which had been drawn from antecedent events.”

Readers may read this article and interpret these terms accordingly.

A. THE PROHIBITION OF BENAMI TRANSACTIONS ACT, 1988

The Benami Act was one of those Acts that stood quietly on the sidelines waiting to fulfill its avowed objectives. In 2016, sweeping changes were made to the Act in line with the government’s objective to crack down on economic offences and undesirable practices. The Benami Act has been the subject of much debate and discussion especially as benami transactions in India are neither new nor rare. Traditional civil remedies were often exercised in those transactions that were benami in nature. The courts had dealt with various civil disputes with regard to benami properties. Though the Benami Act was brought out in order to prohibit benami transactions, it was widely considered toothless and was rarely invoked.

Post-2016 amendments, however, the Benami Act is looked upon as having the colour of being criminal legislation. This is primarily because though entering a benami transaction was prohibited even prior to 2016, the criminal provisions lacked teeth. In recent years a variety of legislations have been enacted for special purposes and these are an amalgam of both civil and criminal provisions. The name of the Benami Act is self-explanatory, it seeks prohibition of benami transactions. This is a clear indication that the Act does not exist merely to punish, its raison d’être is to prohibit them altogether. It cannot, however, be doubted that the amending Act brought in wide-ranging changes to the original Act.

The judgment of the SC in UOI v. Ganpati Dealcom Pvt. Ltd. (2023) 3 SCC 315 is a watershed moment for many reasons. The judgment reaffirms the basic principle of the criminal law of not imposing criminality retroactively. How can it be that an act that is not an offence at the time of its commission be considered an offence subsequently? While this may seem like common sense, the manner in which the SC arrives at this conclusion while considering Sections 3 and 5 of the Benami Act warrants consideration.

What is a Benami Transaction?

Post the 2016 amendment, the definition of ‘benami transaction’ given in section 2(9) of the Benami Act is as follows:

“benami transaction” means,—

(A) a transaction or an arrangement—

(a) where a property is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person; and

(b) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration,

except when the property is held by—

(i) a Karta, or a member of a Hindu undivided family, as the case may be, and the property is held for his benefit or benefit of other members in the family and the consideration for such property has been provided or paid out of the known sources of the Hindu undivided family;

(ii) a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of a depository under the Depositories Act, 1996 (22 of 1996) and any other person as may be notified by the Central Government for this purpose;

(iii) any person being an individual in the name of his spouse or in the name of any child of such individual and the consideration for such property has been provided or paid out of the known sources of the individual;

(iv) any person in the name of his brother or sister or lineal ascendant or descendant, where the names of brother or sister or lineal ascendant or descendent and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the known sources of the individual; or

(B) a transaction or an arrangement in respect of a property carried out or made in a fictitious name; or

(C) a transaction or an arrangement in respect of a property where the owner of the property is not aware of, or, denies knowledge of, such ownership;

(D) a transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious.

Explanation.—For the removal of doubts, it is hereby declared that benami transaction shall not include any transaction involving the allowing of possession of any property to be taken or retained in part performance of a contract referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), if, under any law for the time being in force,—

(i) consideration for such property has been provided by the person to whom possession of property has been allowed but the person who has granted possession thereof continues to hold ownership of such property;

(ii) stamp duty on such transaction or arrangement has been paid; and

(iii) the contract has been registered;”

What are the broad repercussions of entering into a Benami Transaction?

Chapter II of the Benami Act deals with the prohibitions of benami transactions. Section 3 and Section 5 deal with the repercussions of entering into a benami transaction as amended in 2016 while Sections 4 and 6 deal with certain consequences with regard to civil remedies. Section 5 is punitive in nature while Section 3(2) and 3(3) make entering into a benami transaction a criminal offense.

Sections 3 and 5 are reproduced below:

“Section 3 – Prohibition of benami transactions.

3. (1) No person shall enter into any benami transaction.

(2) Whoever enters into any benami transaction shall be punishable with imprisonment for a term which may extend to three years or with fine or with both.

(3) Whoever enters into any benami transaction on and after the date of commencement of the Benami Transactions (Prohibition) Amendment Act, 2016, shall, notwithstanding anything contained in sub-section (2), be punishable in accordance with the provisions contained in Chapter VII.

“Section 5 – Property held benami liable to confiscation.

5. Any property, which is subject matter of benami transaction, shall be liable to be confiscated by the Central Government.”

The case for Retroactive Application

Though the amendments were carried out in 2016, the effect of the 2016 amendment Act to the Benami Act (amending Act) was that transactions that could be captured under the definition of ‘Benami Transaction’ entered into before the year 2016 were also liable for prosecution. The stand of the Union of India, in this case, was clear – the 2016 amendments, according to the Union of India, only clarified the unamended 1988 Act (unamended Act) and were made to give effect to the older Act. It was in a sense enacted to fill up certain lacunae in the unamended Act and therefore could be given a retroactive application. It was the case of the Union of India that the 1988 Act had already created substantial law for criminalising the offence of entering into a benami transaction and therefore the 2016 amendments were merely clarificatory and procedural.

The SC’s Judgement with regard to retroactive Application

As the basic argument advanced on behalf of the Union of India was that the amending Act was merely clarificatory in nature, the SC decided to first consider the provisions of Section 3 of the Benami Act as it stood prior to its amendment. It is reproduced for ready reference as hereunder –

“3. Prohibition of benami transactions.—

(1) No person shall enter into any benami transaction.

(2) Nothing in sub-section (1) shall apply to—

(a) the purchase of property by any person in the name of his wife or unmarried daughter and it shall be presumed, unless the contrary is proved, that the said property had been purchased for the benefit of the wife or the unmarried daughter;

(b) the securities held by a—

(i) depository as registered owner under sub-section (1) of section 10 of the Depositories Act, 1996

(ii) participant as an agent of a depository.

Explanation.—The expressions “depository” and “Participants shall have the meanings respectively assigned to them in clauses (e) and (g) of sub-section (1) of section 2 of the Depositories Act, 1996.

(3) Whoever enters into any benami transaction shall be punishable with imprisonment for a term which may extend to three years or with fine or with both.

(4) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), an offence under this section shall be non-cognizable and bailable.”

The SC observed that the criminal provisions envisaged under the unamended Section 3(2)(a) along with Section 3(3) did not expressly contemplate mens rea and that mens rea is an essential ingredient of a criminal offense.

This observation is interesting because it was the cornerstone for the SC to strike down the retrospective criminality put in place by this act. The importance of the existence of the ‘mental intention’ to be convicted in criminal proceedings is the fundamental cornerstone of criminal law. An individual cannot be said to commit a crime without intent, and where the requirement of intent is whittled down, without knowledge (As in the cases of the second part of Section 304 of the Indian Penal Code – culpable homicide not amounting to murder).

The SC found that the absence of mens rea creates the harsh result of imposing strict liability. The Court further found that ignoring the essential ingredient of beneficial ownership exercised by the real owner also contributes to making the law stringent and disproportionate with respect to benami transactions that are tri-partite in nature and that Section 3 as it stood prior to the amendment was susceptible to arbitrariness. The Court alluded to Article 20(1) of the Constitution of India to emphasise that a law needs to be clear, not vague and should not have incurable gaps that were “yet to be legislated/ filled in by judicial process”. The SC also held that a reading of Section 3(1) with Section 2(a) of the unamended Act would have created overly broad laws susceptible to being challenged as manifestly arbitrary.

It was also considered by the Court that the Union of India fairly conceded that the criminal provision had never been utilised as there was a significant hiatus in enabling the function of the provision.

Having considered the above four broad factors – the SC concluded that Section 3 which contained the criminal proceedings with regard to the unamended benami Act was unconstitutional. The Court held that the criminal provisions in the unamended Act had serious lacunae which could not have been cured by judicial forums, even through harmonious forms of interpretation. Regarding Section 5 of the unamended Act, the Court observed that the acquisition proceedings contemplated therein were in rem against the property itself – and that such rem proceedings transfer the guilt from the person who utilised a property which is a general harm to the society on to the property itself.

The SC held that Section 3 (and Section 5) of the unamended Act did not suffer from gaps that were merely procedural but that the gaps were essential and substantive. In absence of such substantive positions, the omissions in the unamended Act created a law which was both fanciful and oppressive at the same time and that such an overly broad structure would be ‘manifestly arbitrary’ as it did not incorporate sufficient safeguards. The Court held that as the Sections were stillborn (never utilised) in the first place, the said Section 3 was unconstitutional right from the inception.

As a natural corollary to Section 3 (and 5) of the unamended Act being held to be unconstitutional, the SC held that the 2016 amendments are in effect, creating new provisions and offences. The Court held that the law cannot retroactively reinvigorate a still-born criminal offence and therefore, “There was no question of retroactive application of the 2016 Act.”

The Fundamental take away from Ganpati Dealcom

The fundamental takeaway from the judgment of the SC in the case of Ganpati Dealcom with regard to the retroactive application of criminal statutes is that the retroactive application of the amended Section 3 of the Act was struck down not merely on the broadly accepted principles that criminal statutes cannot operate retroactively, but the reasoning was deeper. The primary reason of why the statute could not operate retroactively was that the provisions of the Act prior to the 2016 amendments were held to be unconstitutional and void ab initio. This automatically meant that the 2016 amendment could not claim to be merely ‘procedural or clarificatory’ but gave rise to substantial new offences – for the first time. Given the peculiar nature of the factual matrix of this statute, the retroactive operation of the amended Section 3 was held to be bad in law.

However, the Ganpati Dealcom Judgement is significant for another important reason – the SC had just a few months earlier passed another landmark Judgement in the case of Vijay Madanlal Choudhary & Ors. v. Union of India & Ors. 2022 SCC OnLine SC 92.

The Indian SC does not sit en banc – as a whole, but as a combination of various ‘divisions’ and benches of various strengths. That is the reason why it’s often been called ‘Many Supreme Courts in one.’ Within a few months of the Vijay Choudhary Judgment, some apprehensions were already being cast upon its veracity – one such apprehension has been explicitly mentioned in Ganpati Dealcom.

B. THE PREVENTION OF MONEY LAUNDERING ACT, 2002

The PMLA also seemed to wait in the wings for fulfilling its objectives until post-2014, when it started being invoked in earnest to curb the menace of money laundering. The PMLA, its provisions and its applications have all been criticised in the recent past for their draconian nature. A preventive law rather than a prohibitive one like the Benami Act, it was not ‘still born’. It had been amended from time to time in line with India’s global commitments. The Scheme of the PMLA clearly shows that it does not seek only to punish the offence of money laundering but also to prevent it. A substantive part of the legislation is dedicated to compliance and preventive powers given to the authorities under the PMLA.

While benami transactions were primarily a problem in India (and perhaps in the Indian sub-continent), PMLA is global in its outreach. Primarily set up to combat some of the greatest evils in the form of drug trade, arms trade and flesh trade, today the framework covers a very wide variety of subjects, each perhaps not as dire as the other. The PMLA, however, has the most motley assortment of legislations included in its Schedule. Various offences under the Indian Penal Code, Narcotic Drugs and Psychotropic Substances Act, Explosive Substances Act, Unlawful Activities Prevention Act, Arms Act, Companies Act, Wildlife Protection Act, Immoral Traffic (Prevention) Act, Prevention of Corruption Act, Explosives Act, Antiques and Art Treasures Act, Customs Act, Bonded Labour Law, Child Labour Law, Juvenile Justice Law, Emigration, Passports, Foreigners, Copyrights, Trademarks, Biological Diversity, Protection of plant varieties and farmer’s rights, Environment Protection Act, Water / Air Pollution Control law, Unlawful Acts against safety of Maritime Navigation and fixed platforms on Continental Shelf, etc.

What is Money Laundering according to the PMLA?

Section 3 of the PMLA defines the offence of money laundering –

“3. Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the [proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming] it as untainted property shall be guilty of offence of money-laundering.

Explanation.—For the removal of doubts, it is hereby clarified that,—

(i) a person shall be guilty of offence of money-laundering if such person is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved in one or more of the following processes or activities connected with proceeds of crime, namely:—

(a) concealment; or

(b) possession; or

(c) acquisition; or

(d) use; or

(e) projecting as untainted property; or

(f) claiming as untainted property,
in any manner whatsoever,

(ii) the process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.”

But this definition is incomplete without considering the definition of proceeds of crime as laid out in Section 2(1)(u) of the PMLA:

Proceeds of crime is defined u/s 2(1)(u) of PMLA as under:

“(u) “proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property [or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad.

Explanation. —For the removal of doubts, it is hereby clarified that “proceeds of crime” include property not only derived or obtained from the scheduled offence but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the scheduled offence;”

It would be incorrect to assume that the offence of money laundering would be triggered upon the laundering of money. In fact, Section 3 of the PMLA makes even the possession of proceeds of crime a part of the offence of money laundering. If the section as reproduced above are read, it can be observed that both of them contain ‘explanations’. The retrospective application of these explanations were some of the issues that were brought up before the SC.

What are the broad repercussions of the offence of money laundering?

The broad repercussions of money laundering activity are laid down in Section 4 of the PMLA.

What is the most troublesome though is that the maximum punishment for money laundering that may arise out of all the above-assorted activities is the same – up to seven years (not less than three years) and a fine of five lakh rupees, with a single exception of Narcotic Drugs and Psychotropic Substances Act – the money laundering relating to which attracts a sentence of up to ten years (not less than three years) and a fine of up to five lakh rupees. This punishment is not graded based upon the severity of the scheduled offense.

The case for Retroactive/Retrospective Application

The landmark case on the PMLA is Vijay Madanlal Choudhary & Ors. v. Union of India & Ors. 2022 SCC OnLine SC 92. In this, the case for retrospective/retroactive application of the amendments made in 2019 made to Sections 3 and 2(1)(u) was fairly simple – what was inserted were merely explanations as a part of the statute. It was contended, inter alia, that these explanations were clarificatory in nature and did not increase the width of the definition itself.

What is important is that the constitutional validity of the provisions of Section 3 prior to the insertion of the explanation was not in doubt. What contended was that this amendment was merely clarificatory. It is trite law that the parliament is empowered to make laws that operate retroactively and retrospectively, and such action cannot be challenged especially if the changes are merely clarificatory and/or procedural in nature.

The Supreme Court’s Judgement with regard to Retroactive Application

In Vijay Madanlal Choudhary the SC held that the Explanation as inserted in 2019 in Section 3 of the PMLA (making the offence of money laundering a continuous one) did not entail expanding its purport as it stood prior to 2019. It held that the amendment is only clarificatory in nature in as much as Section 3 is widely worded with a view to not only investigate the offence of money laundering but also to prevent and regulate that offence. This provision (even de hors explanation) plainly indicates that any (every) process or activity connected with the proceeds of crime results in offence of money laundering. The Court held that projecting or claiming the proceeds of crime as untainted property is in itself an attempt to indulge in or being involved in money laundering, just as knowingly concealing, possessing, acquiring, or using of proceeds of crime, directly or indirectly. The Court held the inclusion of Clause (ii) in the Explanation inserted in 2019 was of no consequence as it does not alter or enlarge the scope of Section 3 at all as the existing provisions of Section 3 of the PMLA as amended until 2013 which were in force till 31.7.2019, have been merely explained and clarified by it.

Similarly, for the changes in the definition of ‘proceeds of crime’ and ‘property’ it was held that the Explanation added in 2019, did not travel beyond that intent of tracking and reaching upto the property derived or obtained directly or indirectly as a result of criminal activity relating to a scheduled offence. Therefore, the Explanation was in the nature of a clarification and not to increase the width of the main definition of “proceeds of crime”. The Court held that the Explanation inserted in 2019 was merely clarificatory and restatement of the position emerging from the principal provision i.e., Section 2(1)(u) of the PMLA.

There is a stark difference in the approach of the SC in both cases. However, it cannot be challenged that the statutory matrix and the circumstances of the application of both laws were also very different. The PMLA was hardly in a state of stasis before the 2019 amendment. The constitutional validity of the sections sought to be amended was not in doubt, the challenge was limited to the amendment itself. However, it would be curious to see if the ‘continuing nature’ of the offence of PMLA will stand up to judicial scrutiny if dissected in a manner similar to the way it has been done in Ganpati Dealcom.

The Fundamental take-away from Vijay Madanlal Choudhary

The key take-away from the Vijay Madanlal Choudhary Judgment with regards to retrospective/retroactive application of criminal statutes is that the manner in which such amendments are brought about in the statute book does matter. Though the law as interpreted by the apex court now states that the explanations are merely clarificatory, the repercussion of making the offence of money laundering a continuing activity is far more sinister.

Though money laundering is an offence by itself, it is what can be termed as a predicate offence, it does not exist in the absence of a primary offence. That primary offence may be any of the offences that have been included in the schedule to the PMLA. By making the offence of money laundering a continuing one, however, the statute has empowered itself to virtually prosecute those accused of offences that may have been committed not only before their insertion into the schedule to the PMLA, but also before the PMLA ever came into force. It is possible that someone may be prosecuted for the offence of money laundering decades after the primary offence is committed, even though such an accused may not have been involved in the commission of the primary offence. This aspect of the retroactive application of the PMLA has been the subject of much litigation before various High Courts. The Vijay Madanlal Choudhary Judgment paves the way for such prosecutions at will, by upholding the explanation that states that the offence of money laundering never ends and also by upholding the explanation that makes proceeds of crime include any property ‘directly or indirectly’ obtained as a result of any criminal activity related to the scheduled offence.

It is not that the concept of manifest arbitrariness of various provisions of the PMLA has not been considered. Those claims however, have been dismissed.

C. CONCLUSION

The retrospective/retroactive application of criminal provisions of special laws cannot be countered by a broad sweeping observation that ‘Criminal legislation does not have retrospective application’. The approach of the Courts is always nuanced. Though certain amendments to the criminal provisions of the Benami Act were held to be prospective and certain amendments to the criminal provisions of the PMLA were considered retroactive/retrospective, this was done given due weightage to the type of amendment contemplated in the amending Act and the sort of lacunae that were sought to be filled by the amendments. The two judgments are harmonious in law, but a view can be taken that there is a difference in the approach and the jurisprudential philosophy between the both of them. It’s telling that just a few months after the Vijay Madanlal Choudhary judgment, in Ganpati Dealcom with regard to the principles regarding confiscation / forfeiture provisions the SC observed:

“In Vijay Madanlal Choudhary v. Union of India 2022 SCC OnLine SC 929, this Court dealt with confiscation proceedings under Section 8 of the Prevention of Money Laundering Act, 2002 (“PMLA”) and limited the application of Section 8(4) of PMLA concerning interim possession by the authority before conclusion of final trial to exceptional cases. The Court distinguished the earlier cases in view of the unique scheme under the impugned legislation therein. Having perused the said judgment, we are of the opinion that the aforesaid ratio requires further expounding in an appropriate case, without which, much scope is left for arbitrary application”.

Justice YK Sabharwal (the then Chief Justice of India) is said to have said in 2006 “We are final not necessarily because we are always right – no institution is infallible – but because we are final.”

The Supreme Court may be final – but that may not hold necessarily true for its judgments. Both these Judgments have come out in 2022. Review Petitions by aggrieved parties were filed against them and the Apex Court has already agreed (albeit separately) to consider the review of both of them, though such a review may take place well into the future.

shailesh.kwebmaker

Liberalised Remittance Scheme – How Liberal It Is? (An Overview And The Recent Amendments)

This article looks at recent amendments in the
Liberalised Remittance Scheme (LRS) under Foreign Exchange Management
Act (FEMA) and in the provisions of Tax Collection at Source (TCS) on
remittances under LRS under the Income-tax Act. The changes are
significant and people should be aware of these issues. Along with the
recent amendments, we have dealt with some important & practical
issues also.

A. FOREIGN EXCHANGE MANAGEMENT ACT:

1. Background:

1.1 In February 2004, RBI introduced the LRS with a small limit (vide A.P.
Circular No. 64 dated 4.2.2004). Any Indian individual resident could
remit up to US$ 25,000 or its equivalent abroad per year from his own
funds. It was introduced to provide exposure to individuals to foreign
exchange markets. Dr. Y. V. Reddy, ex-Governor of RBI in his book titled
“Advice & Dissent” on Page 352 mentions that the funds could be
used for almost any purpose. It was supposed to be a “No questions asked” window and was in addition to all existing facilities. Late Finance Minister Mr. Jaswant Singh in a gathering said “Go conquer the world, we will be your supporters”. That was the underlying theme of the LRS.

1.2 There was a small negative list of purposes for which remittance could
not be made. The negative list included payments prescribed under
Schedule I and restricted under Schedule II of Current Account
Transaction Rules such as lotteries and sweepstakes; and payments to
persons engaged in acts of terrorism. Remittances also could not be made
to some countries. Later in 2007 remittance under LRS for margin
trading was also prohibited.

1.3 Over the years, the scheme has been modified. The limits have been increased periodically
(except for a brief period from 2013 to 2015). Today the limit is US$
2,50,000 per year per person. Thus, every individual Indian resident can
remit US$ 2,50,000 per year for any permitted purpose. At the same
time, restrictions have been introduced on current account transactions
and investments under LRS and such restrictions have kept on increasing.
The spirit of the original theme has been diluted to a significant extent. Let us see the current provisions of LRS including its main issues.

2. The present LRS:

2.1 The present LRS is dealt with by the following rules, regulations and circulars. FAQs provide some more clarifications.

i) Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 (FEMA Notification no. 1).

ii) Foreign Exchange Management (Permissible Current Account Transactions) Rules, 2000.

iii) Foreign Exchange Management (Overseas Investment) Rules, 2022 (hereinafter referred to as “OI Rules”).

iv) Foreign Exchange Management (Overseas Investment) Directions, 2022
vide AP circular no. 12 dated 22.8.2022 (hereinafter referred to as “OI
Directions”).

v) Master Direction No. 7 on LRS updated up to 24.8.2022.

vi) FAQs updated up to 21.10.2021 (these have not been updated with the
rules and regulations of August 2022. However, these contain some
important clarifications.)

The statutory documents are the first
three documents – Rules and Regulations. The fourth and fifth documents
are essentially directions to Authorised Persons – i.e. Banks for
implementation of the rules and regulations. The sixth document – FAQs –
doesn’t have a binding effect. These are clarifications and wherever
helpful, these can be used.

However, if one reads only the
statutory documents, one does not get the full picture. One has to read
all the documents together to understand the entire scheme with its
nuances. At times, A.P. Circulars and Master Directions contain
additional provisions which are nowhere covered in the statutory
documents. Hence it is necessary to consider all the documents.

Also,
as is the case with several rules and regulations under FEMA, one
cannot get the entire picture merely by reading the documents. Some
things go by practice. Many such issues and practical problems will be
dealt with subsequently. Needless to say, it will not be possible to
deal with all issues. The focus is on important issues and issues arising out of amendments to LRS in August 2022 and TCS provisions in Finance Act 2023.

2.2 The present LRS in brief:

2.2.1
Under the present scheme, an Indian resident individual (including a
minor) can remit up to US$ 2,50,000 or its equivalent per financial
year. This limit has been there since May 2015. The remittance can be
made for any “permitted” Current Account Transaction or a “permitted”
Capital Account Transaction. The word “permitted” is a later addition.
As per the 2004 circular, the LRS was overriding all restrictions
(except those stated in the circular itself).

For remittance
under LRS, the simple compliance is the submission of Form A2 with some
basic details. [No form is required for making a rupee gift or a loan.
However, the person must keep a track to see that aggregate of such
rupee payments (discussed later) and foreign exchange remitted during a
year are within the LRS limit.]

Remittances during one year have to be made through one bank only.

2.2.2 Remittance has to be made out of person’s own funds.
In a family, one member can gift (not loan) the funds to another family
member and all the relatives can remit the funds under LRS. This has
been an accepted position.

Source of funds:

Loans: A person cannot borrow funds in India and remit them abroad for capital account transactions.
The restriction on taking loans continues right from the beginning
(i.e., February 2004). One can refer to these provisions in Paragraphs 8
and 10 in Section B of the present Master Direction on LRS.

A person also cannot borrow funds from a non-resident to invest. Thus,
buying a home abroad with a foreign loan is not permitted even if the
loan repayment is within the LRS limit. Foreign builders offer schemes
where the person can get a completed house, but payment can be made over
the next few years after completion. This will clearly be a violation
as the payment option over a few years is a loan.

Primarily a loan also cannot be taken for current account transactions. However, in the FAQs dated 21st October 2021, FAQ 16 clarifies that banks can provide loans or guarantees for current account transactions
only. Here, FAQ is being relied upon. Strictly, FAQs have no legal
authority. In practice, it goes on. Thus, a loan can be taken from a
bank for education and funds can be remitted abroad. However, no loans
can be taken from anyone else even for a current account transaction.

Other prohibited sources:

Remittances out of “lottery winnings, racing, riding or any other
hobby” are prohibited. These are stated in Schedule I of the Current
Account Rules. Hence even if the person has his own funds but earned
from these sources, he cannot remit the same under LRS. This is an issue
that is missed by many people. Further, ‘hobby’ is a broad term. What
seems to be prohibited is income from hobbies which involve gambling and
chance income.

LRS covers both Current and Capital Account Transactions.

2.2.3 Current Account Transactions –

Under clause 1 of Schedule III of Foreign Exchange Management (Current
Account Transactions) Rules, 2000, the following purposes are specified
for which remittance can be made:

i) Private visits to any country (except Nepal and Bhutan).

ii) Gift or donation.

iii) Going abroad for employment.

iv) Emigration.

v) Maintenance of close relatives abroad.

vi) Travel for business or attending a conference or specialised
training or for meeting medical expenses, or check-up abroad, or for accompanying
as an attendant to a patient going abroad for medical treatment/check-up.

vii) Expenses in connection with medical treatment abroad.

viii) Studies abroad.

ix) Any other current account transaction.

Prior to May 2015, there was no limit on remittance for
Current Account transaction. Since May 2015, the limit has been brought
in. Item (ix) above seems to be a misplacement in the Current Account
Transaction rules. This raises some difficulties. Import of goods is a
Current Account transaction. An individual who is doing trading business
in his individual name could import goods worth crores of rupees. Now
can he import above the LRS limit? The view is that for Import, there is
a separate Master Direction laying down procedures and compliances.
Under that Master Direction, there is no limit for imports. Hence
whatever is covered under the Master Direction on Imports, can be
undertaken freely. All other expenses are restricted by the LRS limit.
Thus, expenses for services, travel, etc. will be restricted by the LRS
limit. It would be helpful if Central Government could come out with a
clarification.

We would like to state that India has accepted
Article VIII of the IMF agreement. Under the agreement, a country cannot
impose restrictions on Current Account transactions. However, some
reasonable restrictions can be placed. This is the stand adopted by
India also (refer Section 5 of FEMA). Under this section, a person is
allowed to draw foreign exchange for a Current Account Transaction.
However, the Government can impose some “reasonable restrictions”. This
can mean restrictions on some kinds of transactions or imposition of
some conditions. However, a blanket ban above US$ 2,50,000 on all
current account transactions may not come within the purview of
“reasonable restrictions”. A business entity owned by an individual can
remit any amount for a Current Account Transaction. But the same
individual cannot, if he is doing business in his individual name
(except import of goods and services). In our view, this is not logical.

Specified current account transactions allowed without any limit:

i) Expenses for emigration are permitted without limit. However,
remittances for making an investment or for earning points for the
purpose of an emigration visa are not permitted beyond the LRS limit.

ii)
For medical expenses and studies abroad also, one can incur expenses
more than the LRS limit subject to an estimate given by the hospital/
doctor or the educational institution.

2.2.4 Capital Account Transactions

– The permitted Capital Account transactions can be referred to in
Clause 6 – Part A of the Master Direction on LRS dated 24th August 2022.
Earlier the list was a little more elaborate. Now the list is truncated
after the Overseas Investment Rules have been enacted. The permitted
transactions are:

i) opening of foreign currency account abroad with a bank.

ii) acquisition of immovable property abroad, Overseas Direct
Investment (ODI) and Overseas Portfolio Investment (OPI), in accordance with
the provisions contained in OI Rules, 2022; OI Regulations, 2022 and OI
Directions, 2022.

iii) extending loans including loans in Indian Rupees to
Non-resident Indians (NRIs) who are relatives as defined in the Companies
Act, 2013.

The LRS is primarily used for opening bank accounts, portfolio
investment, acquiring immovable property and giving loans abroad. Prior
to 24th August 2022, the circular referred to specific kinds of
securities – listed and unlisted shares, debt instruments, etc. Now the
reference has been made to Overseas Portfolio Investment (OPI)
and Overseas Direct Investment (ODI) under the New Overseas Investment
regime. This is discussed more in detail in para 2.2.5 below.

It may be noted that a foreign currency account cannot be opened in a bank
in India or an Offshore Banking Unit. The bank account should be outside
India.

2.2.5 Overseas Portfolio Investment (OPI) – OPI has been defined in Rule 2(s) of OI Rules to mean “investment, other than ODI, in foreign securities, but not in any unlisted debt instruments or any security issued by a person resident in India who is not in an IFSC”.
(It has been clarified that even after the delisting of securities, the
investment in such securities shall continue to be treated as OPI until
any further investment is made in the entity.)

Basically, OPI
means investment in foreign securities. Then, there are exclusions to
the same – ODI, unlisted debt instruments and securities issued by a
resident [except by a person in the International Financial Services
Centre (IFSC)].

ODI includes investment in the unlisted equity capital
of a foreign entity. Equity Capital includes equity shares and other
fully convertible instruments as explained under Rule 2(e) of OI Rules.
Thus, now it is clear that investment even in a single unlisted share of
a foreign entity falls under ODI and it requires separate compliance.

Listed foreign securities have not been defined. However, “listed foreign
entity” has been defined in Rule 2(m) of OI Rules to mean “a foreign
entity whose equity shares or any other fully and compulsorily convertible instrument is listed on a recognised stock exchange outside India.”

Para
1(ix)(a) of OI Directions provides further prohibitions under OPI which
are not covered under the OI Rules. It provides that OPI is not
permitted in derivatives and commodities.

This brings out the following:

OPI means Investment in foreign securities. However, investment in the following are not covered under OPI:

i) Investments considered as ODI:

a) Investment in unlisted equity capital;

b) Subscription to Memorandum of Association;

c) Investment in 10% or more of listed equity capital;

d) Investment of less than 10% of listed equity capital but with control in the foreign entity.

ii) Unlisted debt instruments.

iii) Security issued by a person resident in India (excluding a person in an IFSC).

iv) Derivatives unless specifically permitted by RBI.

v) Commodities including Bullion Depository Receipts.

Debt instruments are defined in clause (A) of Rule 5 of OI Rules. These mean:

i) Government bonds.

ii) Corporate bonds.

iii) All tranches of securitisation structure which are not equity tranches.

iv) Borrowings by firms through loans.

v) Depository receipts whose underlying securities are debt securities.

Other investments:
Apart
from listed securities, investment is permitted in units of mutual
funds, venture funds and other funds which can be considered as “foreign
securities”.

Investment in Gold (precious metal) bonds is not permitted as it amounts to a corporate bond.

Buying physical gold or other precious metals outside India is also not permitted under LRS.
Also, see para 2.2.12 for more prohibitions under LRS.

2.2.6 Bank fixed deposits

– Is investment in fixed deposits of banks permitted? Can these be
considered as loans? Extending loans is specifically permitted under
LRS. What is prohibited is borrowing by firms. Banks are not firms.
These are companies.

Bank FDs are also not corporate bonds.
Bonds have a specific meaning. It means a security or an instrument
which can be transferred. A bank FD cannot be transferred.

However,
OPI means investment in foreign securities. A Bank Fixed Deposit is not
a “security”. Hence in our view, keeping funds in Bank FDs is not
considered as OPI.

One view is that bank fixed deposit is like a bank balance. Hence funds remitted under LRS may be kept in bank fixed deposits.
However, funds remitted abroad have to be used within 180 days. (See
para 3 for more discussion). Hence such FDs cannot be held beyond 180
days and should be used for some permitted purpose within 180 days.

2.2.7 Unlisted shares of a foreign company – A background:

From 2004 till 22nd August 2022, the Master Directions were abundantly clear that investment under LRS could be made in unlisted and listed equity shares. However, vide A.P. Circular 57 dated 8th May 2007, the RBI introduced the sentence – “All other transactions which are otherwise not permissible under FEMA …… are not allowed under the Scheme.”
Under this clause, RBI took a view that investment in unlisted shares
was not permitted. According to RBI, investment in unlisted shares was
permitted only as per ODI rules applicable at that time (Old ODI Regime
under FEMA Notification 120 which was in effect before 22nd August
2022). Under those rules, individuals were not permitted to make
business investments outside India. Hence, investments made by resident
individuals in unlisted foreign companies to undertake business were
considered as a violation. With due respect, the stand taken by RBI does
not go in line with the language of the Master Directions – right till
22nd August 2022. All penalties imposed for investment in unlisted
shares by resident individuals – are not in keeping with the law – FEMA.

The phrase “which are otherwise not permissible” applies
to all investments. For example, investment in immovable property
abroad is otherwise not permissible. But under LRS it is permissible.
Loans abroad are otherwise not permissible. But under LRS they are
permissible. The LRS was supposed to apply in addition to all existing facilities.
In Master Circular on Miscellaneous Remittances from India – Facilities
for Residents dated 1st July 2008, the phrase was amended to “The facility under the Scheme is in addition to those already included in Schedule III of Foreign Exchange Management (Current Account Transactions) Rules, 2000”. From May 2015, the Current Account Rules were changed and from Master Circular dated 1st July 2015 onwards, the phrase “in addition to”
has been dropped. However, the fact remains that till 22nd August 2022
investment in unlisted shares was permitted as per Master Direction.
From 23rd August 2022, the phrase “unlisted shares” was dropped in the
Master Direction.

On representation, RBI formally introduced the
scheme of ODI for resident individuals from August 2013 (generally
called “LRS-ODI”). It permitted individuals to invest in unlisted shares
of a foreign company having bonafide business subject to compliances
pertaining to ODI. However, RBI considered investments made prior to
August 2013 as a violation which required compounding. This did leave a
bad taste for Indian investors.

Thus, now the investment in
unlisted securities is covered under the ODI route and has a separate
set of rules and compliances. This was the position since August 2013
under the Old ODI regime as well as under the New OI regime notified on
22nd August 2022. It is not dealt with more in this article as that is a
subject by itself.

2.2.8 Listed securities abroad of Indian companies – Up to Master Circular dated 1st July 2015, the language was that investment could be made under “assets” outside India.
It did not specifically state that investment could be only in
securities of foreign entities. Hence investment made in say GDRs or
securities of Indian companies listed abroad was possible. Later, Master
Circulars were replaced with Master Directions. From Master Direction
dated 1st January 2016, it was provided that investment could be in “shares of overseas company”. Hence, it should be noted that under LRS, an individual can invest in listed securities of a foreign entity.
One cannot invest in securities of an Indian company which are listed
abroad. Some people have invested in bonds of Indian companies listed
abroad. Such investments are not permitted under LRS. One should sell
such investments and apply for compounding of offence. Under the OI
Rules as well, investment in securities issued by a person resident in
India is not permitted under OPI. There is only one exclusion to the
prohibition – investment in securities issued by an entity in IFSC is
allowed.

2.2.9 Investment in permissible security of an entity in IFSC is permitted under LRS. Under the Notification No. 339 dated 2.3.2015, any entity in an IFSC is treated as a non-resident.

OPI as discussed in para 2.2.5 above means investment …. in foreign securities, but not in any unlisted debt instruments or any security issued by a person resident in India who is not in an IFSC”.
This language creates some confusion. Investment is not permitted in
any security issued by an Indian resident which is not in IFSC. Does it
mean that investment in any security such as “unlisted debt instrument”
issued by an entity in IFSC is permissible? We would not take such a
view. One has to equate an IFSC entity with a foreign entity. Whatever
security of a foreign entity one can invest in, similar security of an
IFSC entity can be invested in. Thus, investment should be in assets
discussed in paras 2.2.4 and 2.2.5.

2.2.10 Extending Loans:
Under LRS, extending loans to non-residents is allowed. However, this
is allowed in the case of outright loans to third parties. For instance,
Mr. A (an Indian resident) can give a loan to his friend Mr. B (a US
Resident) or to B Inc (a US company).

However, if Mr. A has made
ODI in the USA (whether in his individual capacity or through an Indian
Entity), then a loan by Mr. A to the investee entity in the USA is not
considered under LRS. Mr. A will have to comply with the ODI Rules in
such a case. Under ODI Rules, only equity investment can be made by
individuals. One cannot take a view that investment in equity of a
foreign entity will be under ODI and loan to that entity will be under
LRS. If there is any equity investment in a foreign entity as ODI, then
all conditions of the ODI route shall be fulfilled. Hence, no loan can
be given.

2.2.11 Transactions in Indian rupees – Indian
residents are allowed to give gifts and loans to NRI/ PIO relatives (as
defined under the Companies Act 2013) in rupees in their NRO account.

Para
6(iii) of the Master Direction initially refers to NRIs. Later, it has
been clarified that gifts and loans can be given to PIOs also (i.e.,
foreign citizens but Persons of Indian Origin).

It was represented to RBI that under LRS, foreign exchange can be remitted
outside India to anyone. However, if payment has to be made in rupees in
India, it is not permitted! RBI has since then permitted gifts and
loans in rupees in India but only to NRI/PIO relatives within the
overall LRS limit.

2.2.12 Prohibited transactions – Apart from restrictions discussed in para 2.2.5, the following transactions are prohibited:

i) Transactions specified in Schedule I and Schedule II of Current
Account Transactions Rules. This includes remittances for lottery
tickets, banned magazines, etc.

ii) Remittances to countries identified by FATF as non-co-operative countries.

iii) Remittance for margin trading. Thus, dealing in derivatives and options is not permitted.

iv) Trading in foreign exchange. (This is stated in FAQs updated up to 21.10.2021. No other document states this.)

3. Retaining funds abroad:

3.1 Background: This is the most important change in the LRS.

The individual who has remitted funds under LRS can primarily retain
the same abroad, reinvest the funds and retain the income earned from
such investments abroad. This has now undergone a change with effect
from 24th August 2022. The change has been carried out without any
specific announcement.

The Overseas Investment rules and
regulations were notified on 22nd August 2022. The Master Direction on
LRS was amended on 23rd August 2022 to factor in the changes in capital
account transactions as per the OI Rules as explained in paras 2.2.4 and
2.2.5 above. Paragraph 16 of the Master Direction amended on 23rd
August 2022 stated that – “Investor, who has remitted funds under LRS
can retain, reinvest the income earned on the investments. At present,
the resident individual is not required to repatriate the funds or
income generated out of investments made under the Scheme.” Till
23rd August 2022 funds remitted under LRS and income from the same could
be retained and used abroad without any restrictions.

The Master
Direction on LRS was amended again on 24th August 2022 (just one day
later). This amendment includes an important change in the scheme and
has been dealt with in the next para 3.2.

3.2 Main amendment: Under the LRS Master Direction amended on 24th August 2022, Paragraph 16 provides the following:

“Investor, who has remitted funds under LRS can retain, reinvest the income earned on the investments. The received/realised/unspent/unused foreign exchange, unless reinvested, shall be repatriated and surrendered to an authorised person within a period of 180 days
from the date of such receipt/ realisation/ purchase/ acquisition or
date of return to India, as the case may be, in accordance with
Regulation 7 of Foreign Exchange Management (Realisation, repatriation
and surrender of foreign exchange) Regulations, 2015 [Notification No.
FEMA 9(R)/2015-RB]”.

It is provided that the received or
realised or unspent or unused foreign exchange should be repatriated to
India, unless it is reinvested. The time limit of 180 days is provided.
This condition of repatriating the unused or uninvested funds back to
India within 180 days is a major change. No specific announcement was
made. It was simply brought in the Master Direction on 24th August 2022.

The language is broad. The terms “received” and “realised” can
refer to the amount received on sale of investment, or income on
investment. The terms “unspent” and “unused” can refer to amount
received on sale of investments, or income on investment, or amount remitted from India under the LRS. The amounts have to be reinvested within 180 days from the date of receipt, realisation, acquisition or purchase of foreign exchange.

While the word “reinvested” is used, it cannot be mandatory that the funds
should only be “reinvested”. The intention seems to be that funds should
not be parked idle. They should be “reinvested” or “used” within 180
days. Let us assume a person makes an investment under LRS, then sells
the same and receives the sale proceeds. These proceeds can be used for
any permitted Current Account Transaction (expenditure) or Capital
Account Transaction (investment) within 180 days. That is the purpose of
LRS. Here also it will be helpful if RBI could provide a clarification.

3.3 Retrospective amendment: The requirement to
repatriate the idle funds within 180 days applies not only to fresh
remittances but also to the existing funds lying abroad which were
remitted before 24th August 2022. It is effectively a retrospective amendment. Many people are not aware of this.

Let
us take a case where funds were remitted under LRS since 2018 and funds
were lying idle in the bank account since then. These are unspent funds
and the amendment made on 24th August 2022 applies to such funds as
well. Hence, the person will have 180 days to invest the funds from 24th
August 2022. If it is not done, the funds should be repatriated.

Thus, by 19th Feb 2023 the funds remitted prior to 24th Aug 2022 had to be
utilised, if they were lying unspent or unutilised. If the funds are not
used by then and are still lying abroad, it is a contravention of FEMA.

3.4 Issues: This will cause difficulties for several people. Let us consider some issues.

3.4.1 Small amounts to be tracked and invested: The
income earned on investments abroad should also be invested abroad
within 180 days, or these should be remitted back to India. The income
on LRS funds could be small. Let us take a case where funds are remitted
to a brokerage account in the USA and investment is made in listed
shares. A small amount of income is received and lying in the brokerage
account. Or some funds are kept in the brokerage account to pay an
annual fee. One will have to keep track of all these incomes and
reinvest them. Keeping such a track and investing small funds is
difficult. Further remittance of funds to India also costs money by way
of bank charges, etc.

3.4.2 Time-consuming investments: Let
us consider another case. Let us say the person has purchased a flat
and after few years, he sells the same. He would like to buy another
flat abroad. The sale proceeds of the first flat should be used within
180 days. Either he should buy the flat or invest the funds in permitted
investments. At times, to finalise the transaction for a flat takes lot
of time. Therefore, one will have to plan to invest within 180 days
from the sale of flat.

3.4.3 Consolidation of funds over multiple years for high-value investments:

Some people have sent funds over a few years to buy an immovable property
abroad as one year’s limit under LRS may not be sufficient. However,
with the 180 days’ time limit, the accumulation of funds is not
possible. In such cases, the funds remitted abroad should be invested in
portfolio investment. And when the funds are sufficient to buy the
property, the securities can be sold. This however means that the person
undertakes risks associated with the securities. A fall in prices of
the securities will jeopardise the purchase of property.

3.5 Can the person invest the funds in bank fixed deposits?

See
para 2.2.6 above where it is stated that Bank FDs do not fall within
the definition of OPI. Remitting funds under LRS and keeping them in
Bank FDs for up to 180 days is all right. However, bank fixed deposits
are not securities and can be considered equivalent to funds in a bank
account. Hence, in our view, placing funds in bank fixed deposits will
not be considered an “investment” of funds. It will be ideal if RBI
comes out with a clarification on the same.

3.6 Some cases where the 180-day limit will not apply:

As mentioned in para 2.2.4, Indian residents can give loans and gifts
to NRI relatives. Here, there is no question of utilising foreign
exchange. Hence there is no limit of 180 days or any other time period.
The limit of 180 days applies only for foreign exchange remitted abroad
or lying abroad.

Let us take another illustration. A student
remits funds under LRS for education purposes to his foreign bank
account. Before leaving India, he is an Indian resident. All funds may
not be utilised within 180 days. Some funds may be lying for ongoing and
future expenses. However, when the student leaves India for education
abroad, he becomes a non-resident. In such a case, the 180-day limit
will not apply. Once a person is a non-resident, the funds outside India
are not liable to FEMA restrictions. Hence, the condition of
repatriating the funds within 180 days will not apply.

3.7 Consequences of violation:

What are the consequences of a violation of not using the funds within
180 days? The person concerned has to apply for compounding. Compounding
is a process under which the person concerned admits to the violation.
RBI then levies a penalty for the violation. There is no option to pay
Late Submission Fee (LSF) and regularise the matter. LSF is for delays
in submitting the documents/forms.

There is however, a hitch. Before applying for compounding, the transactions have to be regularised. How does one regularise?

Regularising
means doing something now, which should have been done earlier. In our
view, the violation can be regularised in two manners – one is by
remitting the funds back to India. The other is to invest/use the funds
abroad as permitted – although with a delay. It is however doubtful
whether utilising the funds after the 180-days’ period will be
considered as regularisation. It will be better for the funds to be
repatriated to India. Once the funds are repatriated, a Compounding
Application should be filed with RBI.

3.8 Alternate views:

3.8.1
There is a view that the provision of use of funds within 180 days
applies to an “investor” only (see para 16 of Master Direction). Thus,
if funds are remitted by an investor for investment, one has to use the funds within 180 days. Whereas, if a person has remitted the funds for expenses
such as education, one can use the funds beyond 180 days also. However,
the language does not suggest such an intention. While the provision
starts with the term “investor”, the provision goes on further to add
that the funds have to be surrendered to the bank “in accordance with
Regulation 7 of Foreign Exchange Management (Realisation, repatriation
and surrender of foreign exchange) Regulations, 2015 [Notification No.
FEMA 9(R)/2015-RB]”. Regulation 7 of Notification 9(R) provides as under:

“A person being an individual resident in India shall surrender the
received/realised/unspent/unused foreign exchange whether in the form of
currency notes, coins and travellers cheques, etc. to an authorised
person within a period of 180 days from the date of such
receipt/realisation/purchase/acquisition or date of his return to India,
as the case may be.”

Regulation 7 applies to all individual
Indian residents and for all purposes. Hence even if the funds have been
remitted for expenses, they have to be utilised within 180 days.
Otherwise, the same should be remitted to India.

3.8.2 There is
another view as to when is the amount to be considered as unused/
unspent. The view is that once the amount is remitted abroad, it has to
be used on the first day. If it is not used on the first day, then it is
unused/unspent. If it unused/unspent, it has to be remitted back to
India. The time of 180 days is only to remit the funds back to India.

While
literal reading suggests this – in our view, this is neither the
correct interpretation, nor the intention. One cannot use the funds on
day one. It takes time for the funds to be used. If the funds are not
used within 180 days, then they have to be remitted back to India.

4. Some more issues:

4.1 Purpose Codes: At
the time of remittance, one has to state the purpose code in the form.
For example, one mentions the purpose code as S0023 (remittance for
opening a bank account abroad). After remittance, can the funds be used
for investment in shares? Or the purpose code stated is investment in
real estate (S0005) and one is not able to invest in real estate within
180 days, and hence invested in shares. Can it be done? Technically it
could be considered an incorrect purpose code. However, if one considers
the substance of LRS, remittance for any permitted purpose is allowed.
One may have the original intention for one purpose, but then the
purpose has changed, and it should be all right. After the remittance of
funds, change of use has always been permitted. Assume that a person
has remitted the funds to open a bank account abroad. Under the present
LRS scheme, funds have to be used within 180 days. To comply this
condition, funds are invested. This means the “use of funds” has changed
from keeping funds in bank account to investment. Or the funds are sent
for investment in shares, and then the shares are sold. Does it mean
the sale proceeds have to be reinvested only in shares? No. The funds
have to be used or reinvested for any permissible purpose.

It
will be better that after remitting the funds for the first time, if
there is a change in the use, one should write to the bank and inform
the change of use. This is however out of abundant caution. In substance
after sending the funds, the same can be used for any permitted
purpose. Also see para 3.2 of Part B on TCS provisions.

4.2 Joint holding:

There are people who open bank accounts and make investments in joint
names. Investment is made by one person (say the first holder). Funds
belong to the first holder. That is how it is declared in the income tax
returns. However, to take care of situations where the investor dies or
becomes incapacitated, the account or the investment is held in the
joint name. Otherwise, the funds may be blocked. The process of
producing a Will or succession document is a time-consuming process. So,
the second name is added for the sake of convenience. Hence in our
view, holding an investment or bank account in a joint name is all
right. It is a prudent step. There cannot be any objection to this.

5. Co-ownership and Consolidation of funds:

5.1 Co-ownership

– Assume that funds are sent by two or more relatives in one bank
account. From there investment has to be made. It is necessary that the
investment should be made in the proportion in which the funds are
remitted. Assume that Mr. A remits US$ 1,00,000 and Mrs. A remits US$
50,000, and together they invest US$ 1,50,000 in shares. The holding
ratio in the shares should be 2:1 between Mr. A and Mrs. A. If the
investment holding is 50:50, it means Mr. A has given a gift to Mrs. B.
Gift outside India from one resident to another resident is an
impermissible transaction. It will become a violation.

5.2 Consolidation of funds

– Master Direction prior to 23rd August 2022 permitted consolidation of
remittances by the family members. It further provided that clubbing is
not permitted by family members if they are not the co-owners of bank account/ investment/ immovable property. Here, the condition for co-ownership does not mean being just a co-owner. It means that ownership ratio in the asset should be commensurate with the ratio in which payment is made.
This is prima facie in line with the LRS that the owner should remit
the funds. If another person becomes the owner without remitting the
funds it is as good as a gift from the person who has remitted the
funds. This is different from being a joint holder (without remittance
or payment) for the sake of convenience discussed in para 4.2 above.

It may be noted that “family members” have not been explained. It should
be considered as a family comprising relatives under the Companies Act
2013.

5.3 Consolidation of funds for acquiring immovable property

– The amended Master Direction on LRS has retained the above-mentioned
condition of consolidation of funds and co-ownership. However, the
reference to the immovable property has been removed. The Master
Direction has stated that remittances for the immovable property should
be in accordance with OI rules.

Under the OI rules, an Indian
resident can acquire immovable property by remitting funds under LRS.
Further, an Indian resident can acquire property as a gift from another
resident also, subject to the condition that the donor should have
acquired such property in line with FEMA provisions applicable at the
time of acquisition.

Further, proviso to Rule 21(2)(ii)(c) of OI Rules states that “such
remittances under the Liberalised Remittance Scheme may be consolidated
in respect of relatives if such relatives, being persons resident in
India, comply with the terms and conditions of the Scheme”.

Does this mean that relatives can consolidate/ club the remittances, but
property can be owned by one person? As discussed above, an Indian
resident cannot gift funds to another Indian resident outside India.
When consolidated funds are remitted, purchase by one person actually
amounts to a gift of funds – which is not permitted. If the property is
acquired and then later the share in the property is gifted, it is
permissible.

However, if one considers the draft rules on Overseas investment published in 2021 for public consultation, it
provided that if funds were consolidated, the immovable property has to
be co-owned. In the final OI rules notified by Central Government and
the amended Master Direction, the language is different. The condition
of co-ownership is not present for the purchase of immovable property
abroad. While it seems like a specific amendment to relax the condition
for co-ownership, it does not come out clearly that funds can be
remitted by relatives but property can be purchased by one person.

At present, where remittances are consolidated amongst relatives, one
should avoid purchasing immovable property without complying with the
condition of co-ownership. It will be helpful if RBI can provide a
specific clarification.

5.4 In some cases, banks have permitted remittance under LRS from one account of an individual for say
4 different people by obtaining PAN of all 4 people. This is incorrect.
Remittance is not based on PAN. It is per person. One individual
can remit only up to the LRS limit and that too for himself/ herself.
If funds have to be remitted by other Indian resident family members,
then the account holder should first gift the funds to others and then
others may remit the funds from their account. Of course, if the bank
account is a joint account and funds in that account belong to all joint
holders, then each joint holder can remit up to the balance available
under his ownership. Consolidated funds can be remitted subject to what
has been discussed in para 5 above. In such cases, one should keep a
proper account of the funds, ownership and remittances.

Summary:

LRS was started in the year 2004 as the first step towards capital account
convertibility of the rupee. Subsequent amendments have imposed too many
conditions and restrictions. This clearly goes back from
liberalisation.

B. INCOME-TAX ACT – TAX COLLECTION AT SOURCE ON REMITTANCES UNDER LRS:

1. Provisions in force till 30th June 2023:

1.1 Basic provision:

Sub-section (1G) was introduced in Section 206C vide Finance Act, 2020
w.e.f. 1st October 2020. It provides for Tax Collection at Source (TCS)
at the rate of 5% on remittances out of India under LRS. There is
a threshold of INR 7,00,000 for the same, i.e., there is no TCS on
remittances up to INR 7,00,000. The rate of 5% is applicable for amount
in excess of Rs. 7,00,000. It should be noted that TCS is applicable per
person per financial year.

Thus, the bank which sells foreign exchange to the individual for remittance under LRS, will collect tax @
5% over and above the rupee amount required for sale of foreign
exchange. This TCS is like an advance tax. The individual can claim the
TCS as tax paid while filing his income-tax return. Many laymen are
under the impression that this is a straight loss. However, that is not
the case. The issue is that the funds of the person get blocked for some
time.

1.2 Non-applicability of TCS:

1.2.1 Remittance not covered under LRS: TCS applies only where remittance is made under the LRS. For instance – if
an NRI remits funds from his NRO/ NRE Account, TCS will not apply in
such case. It is because this is not a remittance under LRS. Similarly,
TCS is not applicable to remittances by persons other than individuals.

1.2.2 Remitter liable to TDS: It has been provided that if the remitter is liable to deduct tax at
source under any provisions of the Income-tax Act, and has deducted such
tax, then this TCS provision will not apply. The intention seems that
TCS is not applicable only if the remitter is liable to deduct tax at
source on the “concerned LRS remittance” and has deducted the same.

However, the language is not clear whether the remitter should be liable to
deduct tax at source on “the concerned remittance under LRS” or “any
transaction”. The literal reading suggests that it is not necessary that
TDS should be applicable on the concerned LRS remittance. The person
may be liable to deduct tax at source on any payment. Consider some
examples. Some individuals have to deduct tax at source where the
turnover or gross receipts from business/profession exceeds the
prescribed thresholds; or on purchase of immovable property u/s. 194-IA;
or on payment of rent u/s. 194-IB. These transactions on which TDS is
deductible are unrelated to the LRS remittance. The language suggests
that TCS is not applicable where the person has deducted tax at source
under any provisions. In our view, this is not the intention. It would
be better if the Government brings clarity in respect of the provision.

1.3. Concessional rate in case of loan taken for education:

A concessional rate of TCS @ 0.5% is applicable instead of 5% where:

the remittance is for the purpose of pursuing education; and
the amount being remitted is from loan funds obtained from a financial institution as defined u/s 80E.

In other words, if the remittance under LRS is made for the purpose of
education out of own funds then the concessional rate of TCS will not be
applicable and one needs to pay TCS @ 5 per cent.

1.4. Overseas Tour Program Package:

While the threshold of INR 7 Lakhs is prescribed for all purposes, such a
threshold is not applicable where the remittance is for the purpose of
an overseas tour program package. Hence, in such cases, TCS @ 5% is applicable without any threshold.

This is the position of TCS on remittances under LRS as of now. Let us take a look at the amendments proposed in Budget 2023.

2. Amendment vide Finance Act 2023 as passed by the Lok Sabha on 24.3.2023 – TCS rate to be increased to 20%:

2.1 Vide Finance Act 2023, the rate of TCS has been increased from the
existing 5% to 20% for remittances made under LRS w.e.f. 1st July 2023.

2.2 Further, the threshold of INR 7,00,000 has been restricted only to
cases where remittance is for the purpose of education or medical
treatment.

2.3 Consequently, the rate of TCS will now be 20% without any threshold for all purposes except education and medical treatment.

2.4 One more amendment is that the phrase “out of India” has been removed
for the purpose of TCS. Under the original provision, TCS was applicable
only where remittance was done “out of India” under LRS. As discussed
above in Para 2.2.11, LRS can be used for giving gift or loan in rupees
to NRI/ PIO relatives in their NRO account as well. In such case, TCS
was not applicable as per existing provision.

From 1st July 2023, TCS will be applicable on such rupee transfers as well. It is not
required that there is remittance out of India. It should be noted that
for rupee payments discussed in para 2.2.11 of Part A, there is no
mechanism to report to the bank. The remitter has to keep track of rupee
payments and see that all payments in rupees and foreign exchange
should be within the limits of LRS. For remittance abroad, formal
reporting must be made to the bank and thus bank will know that the
funds are being remitted under LRS. In the case of rupee payments, RBI
should work out a mechanism for reporting. Alternatively, the remitter
should himself provide the details to the bank and the bank should
collect TCS.

2.5 The concessional rate of 0.5% where remittance
is out of educational loan (discussed in Para 1.3 above) remains the
same after amendment.

The table below summarises the TCS rate for various transactions before and after the proposed amendment.

Particulars	Vide Finance Act 2020 1^st October 2020 to 30^th June 2023	Vide Finance Act 20231^st July 2023 onwards
Remittance out of educational loan taken from financial institution defined u/s 80E	0.50% on amount exceeding INR 7,00,000
Education & medical treatment	5% on amount exceeding INR 7,00,000
Overseas tour program package	5% without any threshold	20% without any threshold
All other purposes	5% on amount exceeding INR 7,00,000	20% without any threshold

3. Other issues:

3.1 Payment through International Credit Cards:

It should also be noted that payments made by International Credit Card
(ICCs) for foreign tours or any other Current Account Transaction are
not captured within the purview of LRS. The limit of LRS, of course,
applies whether payment is made through bank transfer or through ICC.
There is however no mechanism to collect TCS when payment is made by
ICC.

Finance Minister – Smt. Nirmala Sitharaman, while passing
the Finance Bill in Lok Sabha on 24th March 2023 has made a statement on
this. The Central Government has requested the RBI to develop a
mechanism to capture payment for foreign tours and TCS by ICC.

3.2 Change in use of funds – As mentioned in para 4.1 of Part A, the purpose can be changed after remitting the funds. This can have some issues.

Normally the TCS rate is 20%. If the purpose of remittance is changed to
education, the TCS should have been lower at 5%. As excess tax is
collected, there is no difficulty. In any case, TCS is like advance tax.
It will be claimed as such in the income tax return.

However, let us assume that funds are remitted for education and TCS is 5%. Later
the use is changed to investment, then there is a shortfall in the TCS.
Banks would of course have collected the tax based on declaration and
documents provided by the remitter. The change in use would not cause
any liability on the bank. Will it cause any liability on the remitter?
There should be no implication for a bonafide case. For example, The
original remittance was for education purpose but some funds could not
be used within 180 days. In order to comply with the condition of
investing the funds within 180 days, the funds were invested.
Subsequently the investments were sold and funds were used for
education. This should not be an issue. Even otherwise there is no
specific provision for change of use. Please note that we are discussing
bonafide change in use and not false declarations. Out of abundant
caution, the remitter may inform the bank on change of use and if
necessary, ask the bank to collect additional tax from him and pay the
same to the Government. It may even collect interest. The remitter will
in any case claim the additional TCS in his tax return.

Summary:

20% is a very high rate for TCS. There are no thresholds. The threshold of
INR 7 Lakhs has also been removed. Sometimes, remittances are made for
pure expenses or gift to relatives which do not lead to any potential
incomes. However, with the steep hike in its rate, it appears that the
government does not wish to encourage remittances under LRS. Hence it is
making remittances costlier.

Conclusion:

There are significant changes in the LRS in terms of inserting some
restrictions and disincentives. Before making remittances under the LRS,
one should carefully understand the implications and then go ahead with
the remittance.

(Authors acknowledge contributions from CA Rutvik Sanghvi, Ms. Ishita Sharma and CA Nidhi Shah.)

shailesh.kwebmaker

Conditional Gifts Vs. Senior Citizens Act

INTRODUCTION

A gift is a transfer of property, movable or immovable, made voluntarily and without any consideration from a donor to a donee. This feature, in the past, has examined whether a gift which has been made, can be taken back by the donor? In other words, can a gift be revoked? There have been several instances where parents have gifted their house to their children and then the children have either not taken care of their parents or ill-treated them. In such cases, the parents wonder whether they can take back the gift on grounds of ill-treatment? The position in this respect is not so simple and the law is clear on when a gift can be revoked. Recently, the Supreme Court faced an interesting issue of whether a gift made by a senior citizen can be revoked by having resort to the Maintenance and Welfare of Parents and Senior Citizens Act, 2007 (“Senior Citizens Act”)?

LAW ON GIFTS

The Transfer of Property Act, 1882 (‘the Act’) deals with gifts of property, both immovable and movable. Section122 of the Act defines a gift as the transfer of certain existing movable or immovable property made voluntarily and without consideration, by a donor, to a donee. The gift must be accepted by or on behalf of the donee during the lifetime of the donor and while he is still capable of giving. If the donee dies before acceptance, then the gift is void. In Asokan vs. Lakshmikutty, CA 5942/2007 (SC), the Supreme Court held that in order to constitute a valid gift, acceptance thereof is essential. The Act does not prescribe any particular mode of acceptance. It is the circumstances of the transaction which would be relevant for determining the question. There may be various means to prove acceptance of a gift. The gift may be handed over to a donee, which in a given situation may also amount to a valid acceptance. The fact that possession had been given to the donee also raises a presumption of acceptance.

This section is also clear that it applies to gifts of movable properties also. A gift is also a transfer of property and hence, all the provisions pertaining to transfer of property under the Act are applicable to it. Further, the absence of consideration is the hall mark of a gift. What is consideration has not been defined under this Act, and hence, one would have to refer to the Indian Contract Act, 1872. Section 2(d) of that Act defines ‘consideration’ as follows: ~ “when, at the desire of one person, the other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”

HOW ARE GIFTS TO BE MADE?

Section 123 of the Act answers this question in two parts. The first part deals with gifts of immovable property while the second part deals with gifts of movable property. Insofar as the gifts of immovable property are concerned, section 123 makes transfer by a registered instrument mandatory. This is evident from the use of word “transfer must be effected”. However, the second part of section 123 dealing with gifts of movable property, simply requires that gift of movable property may be effected either by a registered instrument signed as aforesaid or “by delivery”. The difference in the two provisions lies in the fact that in so far as the transfer of movable property by way of gift is concerned the same can be effected by a registered instrument or by delivery. Such transfer in the case of immovable property requires a registered instrument but the provision does not make delivery of possession of the immovable property gifted as an additional requirement for the gift to be valid and effective. This view has been upheld by the Supreme Court in Renikuntla Rajamma (D) By Lr vs. K.Sarwanamma (2014) 9 SCC 456.

CONDITIONAL GIFTS

In Narmadaben Maganlal Thakker vs. Pranjivandas Maganlal Thakker, (1997) 2 SCC 255 a conditional gift of an immovable property was made by the donor without delivering possession and there was no acceptance of the gift by the donee. There was no absolute transfer of ownership by the donor in favor of the donee. The gift deed conferred only limited right upon the donee and was to become operative after the death of the donor. The donor permanently reserved his rights to collect the mesne profit of the property throughout his lifetime. After the gift deed was executed, the donee violated certain conditions under the deed. Hence, the Supreme Court held that the donor had executed a conditional gift deed and retained the possession and enjoyment of the property during his lifetime. Since the donee did not satisfy the conditions of the gift deed, the gift was void.

In K. Balakrishnan vs. K Kamalam, (2004) 1 SCC 581 the donor gifted her share in land and a school building. However, the gift deed provided that the management of the school and income from the property remained with the donor during her lifetime and thereafter would be vested in the donee. The Supreme Court upheld the gift without possession and held that it was open to the donor to transfer by gift title and ownership in the property and at the same time reserve its possession and enjoyment to herself during her lifetime. There is no prohibition in law that ownership in a property cannot be gifted without its possession and right of enjoyment. It examined section 6(d) of the Transfer of Property Act, 1882 which states that an interest in property restricted in its enjoyment to the owner personally cannot be transferred by him. However, the Supreme Court held that Clause (d) of section 6 was not attracted to the terms of the gift deed being considered by the Court because it was not merely an interest in a property, the enjoyment of which was restricted to the owner personally. The donor, in this case, was the absolute owner of the property gifted and the subject matter of the gift was not an interest restricted in its enjoyment to herself. The Court held that the gift deed was valid even though the donor had reserved to herself the possession and enjoyment of the property gifted.

However, the Larger Bench of the Supreme Court settled the above issue by the decision in the case of Renikuntla Rajamma vs. K. Sarwanamma, (2014) 9 SCC 445. In this case, the donor made a gift of an immovable property by way of a registered gift deed, which was duly attested. However, the donor retained the possession of the gifted property for enjoyment during her life time, and also the right to receive the rents of the property. The question before the Court was that since the donor had retained the right to use the property and receive rents during her life time, whether such a reservation or retention or absence of possession rendered the gift invalid?

The Supreme Court upheld the validity of the gift. It held that a conjoint reading of sections 122 and 123 of the Transfer of Property, 1882 Act made it abundantly clear that “transfer of possession” of the property covered by the registered instrument of the gift duly signed by the donor and attested as required, was not a sine qua non for the making of a valid gift under the provisions of the Transfer of Property Act, 1882. Section 123 has overruled the erstwhile requirement under the Hindu Law/Buddhist Law of delivery of possession as a condition for making of a valid gift. Transfer by the way of gift of immovable property requires a registered instrument but the provision does not make delivery of possession of the immovable property gifted as an additional requirement for the gift to be valid and effective. Absence of any such requirement led the Court to conclude that the delivery of possession was not essential for a valid gift in the case of immovable property. The Court also distinguished on facts, its earlier decision in the case of Narmadaben Maganlal Thakker. It held that in that case, the issue was of a conditional gift whereas the current case dealt with an absolute gift. It accepted the ratio laid down in the latter case of K. Balakrishnan. Thus, the Supreme Court established an important principle of law that a donor can retain possession and enjoyment of a gifted property during his lifetime and provide that the donee would be in a position to enjoy the same after the donor’s lifetime.

REVOCATION OF GIFTS

Section 126 of the Act provides that a gift may be revoked in certain circumstances. The donor and the donee may agree that on the happening of certain specified event that does not depend on the will of the donor, the gift shall be revoked. Further, it is necessary that the condition should be expressed and specified at the time of making the gift. A condition cannot be imposed subsequent to giving the gift. In Asokan vs. Lakshmikutty, supra, the Supreme Court held that once a gift is complete, the same cannot be rescinded. For any reason whatsoever, the subsequent conduct of a donee cannot be a ground for rescission of a valid gift.

However, it is necessary that the event for revocation is not dependent upon the wishes of the donor. Thus, revocation cannot be on the mere whims and fancies of the donor. For instance, after gifting, the donor cannot say that he made a mistake, and now he has a change of mind and wants to revoke the gift. A gift is a completed contract and hence, unless there are specific conditions precedent which have been expressly specified there cannot be a revocation. It is quite interesting to note that while a gift is a completed contract, there cannot be a contract for making a gift since it would be void for absence of consideration. For instance, a donor cannot enter into an agreement with a donee under which he agrees to make a gift but he can execute a gift deed stating that he has made a gift. The distinction is indeed fine! It needs to be noted that a gift which has been obtained by fraud, misrepresentation, coercion, duress, etc., would not be a gift since it is not a contract at all. It is void ab initio.

DECISIONS ON THIS ISSUE

In Jagmeet Kaur Pannu, Jammu vs. Ranjit Kaur Pannu AIR 2016 P&H 210, the Punjab & Haryana High Court considered whether a mother could revoke a gift of her house in favor of her daughter on the grounds of misbehaviour and abusive language. The mother had filed a petition with the Tribunal under the Maintenance and Welfare of Parents and Senior Citizens Act, 2007 which had set aside the gift deed executed by the mother. It held that the deed was voidable at the mother’s instance. The daughter appealed to the High Court which set aside the Tribunal’s Order. The High Court considered the gift deed which stated that the gift was made voluntarily, without any pressure and out of natural love and affection which the mother bore towards the daughter. There were no preconditions attached to the gift. The High Court held that the provisions of s.126 of the Act would apply since this was an important provision which laid down a rule of public policy that a person who transferred a right to the property could not set down his own volition as a basis for his revocation. If there was any condition allowing for a document to be revoked or cancelled at the donor’s own will, then that condition would be treated as void. The Court held that there have been decisions of several courts which have held that if a gift deed was clear and operated to transfer the right of property to another but it also contained an expression of desire by the donor that the donee will maintain the donor, then such an expression in the gift deed must be treated as a pious wish of the donor and the sheer fact that the donee did not fulfil the condition could not vitiate the gift.

Again, in the case of Syamala Raja Kumari vs. Alla Seetharavamma 2017 AIR (Hyd) 86 a similar issue before the High Court was whether a gift which was made without any preconditions could be subsequently revoked? The donor executed a gift deed in favor of his daughters out of love and affection. He retained a life interest benefit and after him, his wife retained a life interest under the said document. However, there were no conditions imposed by the donor for gifting the property in favor of the donees. All it mentioned was that he and his wife would have a life-interest benefit. Subsequently, the donor executed a revocation deed stating that he wanted to cancel the gift since his daughters were not taking care of him and his wife, and were not even visiting them. The Court set aside the revocation of the gift. It held that once a valid unconditional gift was given by the donor and accepted by donees, the same could not be revoked for any reason. The Court held that the donees would get absolute rights in respect of the property. By executing the gift deed, the donor had divested his right in the property and now he could not unilaterally execute any revocation deed for revoking the gift deed executed by him in favor of the plaintiffs.

Similarly, in the case of Sheel Arora vs. Madan Mohan Bajaj, 2007 (6) BomCR 633, the donor executed a registered gift deed of a flat in favor of a donee. Subsequently, the donor unilaterally executed a revocation deed cancelling the gift. The Bombay High Court held that after lodging the duly executed gift deed for registration, there was an unilateral attempt on the part of the donor to revoke the said gift deed. Section 126 of the Act, provides that revocation of gift can be only in cases specified under the section and the same requires participation of the donee. In the case in hand, there was no participation of the donee in an effort on the part of the donor to revoke the said gift deed. On the contrary, an unilateral effort on the part of the donor by execution of a deed of revocation itself disclosed that the donor had clearly accepted the legal consequences which were to follow on account of execution of a valid gift deed, and presentation of the same for registration.

However, in the case of S. Sarojini Amma vs. Velayudhan Pillai Sreekumar 2018 (14) SCALE 339, the Supreme Court considered a gift, where in expectation that the donee would look after the donor and her husband, she executed a gift deed. The gift deed clearly stated that, gift would take effect after the death of the donor and her husband. Subsequently, the donor filed a Deed of Cancellation of the Gift Deed. The Supreme Court observed that a conditional gift became complete on the compliance of the conditions mentioned in the deed. Hence, it allowed the revocation.

CANCELLATION VS. SENIOR CITIZENS ACT

Recently, the Supreme Court in the case of Sudesh Chhikara vs. Ramti Devi, Civil Appeal No. 174 of 2021; Order dated 6th December, 2022 was faced with a very interesting issue as to whether a senior citizen can cancel a gift of lands made to her children on grounds that their relationship was strained. Accordingly, she filed a petition under section 23 of the Senior Citizens Act for the cancellation of the gift. The Maintenance Tribunal constituted under the Act (which adjudicates all matters for maintenance, including provision for food, clothing, residence and medical attendance and treatment) upheld the cancellation on the grounds that her children were not taking care of her.

Section 23 of this Act contains an interesting provision. If any senior citizen has transferred by way of gift or otherwise, his property, on the condition that the transferee shall provide the basic amenities and basic physical needs to the transferor and such transferee refuses or fails to provide such amenities and physical needs, then the transfer of property shall be deemed to have been made by fraud or coercion or under undue influence and shall at the option of the transferor be declared void by the Tribunal. This negates every conditional transfer if the conditions subsequent are not fulfilled by the transferee. Property has been defined under the Act to include any right or interest in any property, whether movable/immovable, ancestral/self-acquired, tangible/intangible.

The Supreme Court in Sudesh Chhikara (supra) held that the Senior Citizens Act was enacted for making effective provisions for the maintenance and welfare of parents and senior citizens guaranteed and recognized under the Constitution of India. The Maintenance Tribunal was established to exercise various powers under this Act. This Act provided that the Maintenance Tribunal, had to adopt such summary procedure while holding inquiry, as it deemed fit. The Court held that the Tribunal exercised important jurisdiction under Section 23 of the Senior Citizens Act and for attracting Section 23, the following two conditions must be fulfilled:

a) The transfer must have been made subject to the condition that the donee / transferee shall provide the basic amenities and basic physical needs to the senior citizen transferor; and

b) the transferee refuses or fails to provide such amenities and physical needs to the transferor.

The Apex Court concluded that if both the aforesaid conditions are satisfied, the transfer shall be deemed to have been made by fraud or coercion or undue influence. Such a transfer then became voidable at the instance of the transferor and the Maintenance Tribunal has the jurisdiction to declare the transfer as void.

The Court held that when a senior citizen parted with his property by executing a gift deed / release deed in favor of his relatives, the senior citizen does not make it conditional to taking care of him. On the contrary, very often, such transfers were made out of natural love and affection without any expectations in return. Therefore, the Court laid down an important proposition that when it was alleged that the conditions mentioned in section 23 were attached to a transfer, existence of a conditional gift deed must be clearly brought out before the Maintenance Tribunal. If a gift was to be set aside under section 23, it was essential that a conditional gift deed / release deed was executed, and in the absence of any such conditions, section 23 could not be attracted. A transfer subject to a condition of providing the basic amenities and basic physical needs of the senior citizen transferor was a sine qua non (essential condition) for applicability of section 23. Since in this case, there was no such conditional deed, the Apex Court did not set aside the release deed executed by the senior citizen.

CONCLUSION

Donor beware of how you gift, for gift once given cannot be easily revoked! If there are any doubts or concerns in the mind of the donor then he should refrain from making an absolute unconditional gift or consider whether to avoid the gift at all! This is all the more true in the case of old parents who gift away their family homes and then try to claim the same back since they are being ill-treated by their children. They should be forewarned that it would not be easy to revoke such a gift. Remember a non-conditional gift / release is like a bullet which once fired cannot be recalled!!

shailesh.kwebmaker

The Risks Posed to Chartered Accountants by the Prevention of Money Laundering Act, 2002

INTRODUCTION

The role of Chartered Accountants has increased exponentially in the modern-day business environment. Gone are the days when the question of whether a Chartered Accountant conducting an audit was expected to be a watchdog or a bloodhound. The enlarged scope of audit/ compliance and the multifaceted advisory services rendered in today’s complex business environment by Chartered Accountants have opened them up to numerous regulatory and compliance-related challenges. We can see that Chartered Accountants are being called in for questioning by investigating agencies when a client’s affairs are the subject matter of investigation. Much unlike a Lawyer, the communication between a client and a Chartered Accountant does not get covered within the ambit of ‘legal privilege/privileged communication’ even though modern-day Chartered Accountants render a raft of quasi-legal services. With mushrooming of various tribunals before which Chartered Accountants has the right to represent, the risks they are exposed to in dispensing quasi-legal services need to be looked into given the numerous statutory laws that can cause an individual or professional firm to land in hot waters.

The last decade has witnessed sea changes in the regulation of economic activities. A number of legislations have now granted mandates to specialized agencies to detect and prevent economic offences. Much water may have flown under the bridge since the judgment of the Supreme Court in the State of Gujarat v. Mohanlal Jitmalji Porwal (1987) 2 SCC 364 wherein economic offences were compared with even a crime as unforgivable as murder. However, the judiciary still considers economic offences very seriously. It has now been established without a doubt that economic offences are to be regarded as a class unto themselves. The Serious Fraud Investigations Office, the Directorate of Enforcement, and the Income Tax authorities as mandated by the Prohibition of Benami Transaction Law in addition to other investigating agencies including the local police all operate in the field of investigating economic offences. Economic offences do not exist in silos. There is always the possibility of an overlap or an interplay. Investigation of economic offences invariably involves, inter alia, following the trail of money. Consulting and accounting professionals thus suddenly may find themselves in the epicenter of these investigations. No matter what the final verdict is, the taint of being accused of an economic offence often leaves an indelible mark on a person.

While studying for Master’s degree in law, a curious question was posed by a professor: “What can be done about bad advice?” This question was raised over a decade ago, and much water has flown under the bridge since then. Advice no longer needs to be bad to land a professional in hot water. In the Indian context, we have seen auditors hauled onto the coals for mistakes and frauds perpetuated by clients. It may very well be that in some cases professionals are complicit in those crimes due to professional pressure, however, more often than not it is likely that an auditor or a consultant from this august profession has unwittingly and unfortunately been dragged into controversy for no fault of his. This begs the question, “What can be done if good advice has unintended consequences? What can be done if a client does not follow the advice? What is the extent of the advisor’s liability? Chartered Accountants being arrested under the provisions of the Prevention of Money Laundering Act, 2002 (PMLA) (“Act”) are no longer unheard of. Though much has already been discussed about this harsh law with a client-centric focus, today this article shifts the focus onto professionals.

THE RELEVANT PROVISIONS OF THE ACT

One of the most important sections in any Act is the section that contains definitions. More often than not these definitions are contained in section 2 of an Act. The PMLA is no exception and defines proceeds of crime in section 2(1)(u) of the Act while section 3 itself defines the offence of money laundering. Both are reproduced below for clarity.

Section 2(1)(u) – “proceeds of crime means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property [or where such property is taken or held outside the country, then the property equivalent in value held within the country [or abroad].

[Explanation – For the removal of doubts, it is hereby clarified that “proceeds of crime” include property not only derived or obtained from the scheduled offence but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the scheduled offence.]”

Section 3 reads as follows-

“Whoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the [proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming] it as untainted property shall be guilty of offence of money-laundering.

Explanation- For the removal of doubts, it is hereby clarified that, –

(a) concealment; or

(b) possession; or

(c) acquisition; or

(d) use; or

(e) projecting as untainted property; or

(f) claiming as untainted property,

in any manner whatsoever,

(ii) the process or activity connected with the proceeds of crime is a continuing activity and continues till such time as a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.]”

ANALYSING THE RISK

A conjoint reading of both sections clearly shows that the Act casts an extremely wide net. This seems to be deliberate and by design. An immediate red flag for Chartered Accountants can be the term ‘knowingly assisted’ which can be easily imported to both, the act of commission as well as an omission by professionals. Some solace therefore can be sought from the inclusion of the word ‘knowingly’ before ‘assisted’, as it establishes the requirement of mens rea for an offence to be made out. The absence of mens rea will certainly be invoked as a defense if any accusations are made under the act, however, mens rea itself is not very easy to prove at the outset and often requires evidence to be lead which equates to one being subject to the rigors of an ignominious criminal trial. It is incredibly difficult to prove the absence of criminal intent before the trial commences unless it is apparent from the face of the record that the accused professional may indeed ex-facie have no criminal intent. A complication that one encounters is the fact that the Economic Case Information Report (ECIR) is not a public document and does not need to be handed over to the accused at the time of the arrest. It may be produced before the special court that shall conduct the trial if required as held in Vijay Madanlal Choudhary v. Union of India 2022 SCC Online SC 929; [2022] 140 Taxmann.com 610 (SC). The Court has held that the ECIR is an internal document of the Directorate and not equivalent to the First Information Report (FIR) which is provided for in the Criminal Procedure Code. This poses a significant increase in the challenge of drafting a bail application. Be that as it may, obtaining bail in PMLA prosecutions is whole together a different challenge by itself, even if the ECIR copy is supplied to the accused. The infamous twin conditions (of the court being satisfied that there are reasonable grounds for believing that the accused is not guilty of the offence and that he is not likely to commit any offence while on bail) fulfill the same role that the mythological Cerberus did when it comes to the grant of bail for those accused under the PMLA. The jurisprudence regarding bail under PMLA has been a roller coaster ride much akin to the plot of a gripping thriller novel, what with the Supreme Court in Nikesh Tarachand Shah v. Union of India (2018) 11 SCC 1 striking down the twin conditions, just for Vijay Madanlal Choudhary v. Union of India (supra) to uphold their revival post the 2018 amendment to the Act. Just like any other movie as of today, the story ends on a cliffhanger with the Supreme Court agreeing to review aspects of the Vijay Madanlal Choudhary judgment. That being said, as of today, the twin conditions are good law.

The red flag is not merely knowingly assisted. The explanation to section 3 lists out the processes or activities which shall constitute the offence of money laundering in wide terms such as ‘concealment, possession, acquisition, use, projecting as untainted property, or claiming as untainted property in any manner whatsoever’. This gamut of activities, despite the standard caveat of mens rea, is enough to cause considerable headaches to Chartered Accountants who are regularly called upon to assist in structuring transactions, helping out in complex business decisions, or auditing books of accounts. To precipitate matters, the definition includes the phrase “actually involved in any process or activity connected with the proceeds of crime.” It is incredibly easy for a Chartered Accountant to be accused of the crime of money laundering. The activity of money laundering, being a continuous activity, also leaves one susceptible to the wrath of the law long after one’s association with the clients concerned may have ceased. Yes, it is true that there are various defenses that may be available to a Chartered Accountant, but a defense is not the same as immunity. I’m sure many will agree that in this particular context, prevention is infinitely better than cure.

The definition of ‘proceeds of crime’ is also amorphous enough to cause sufficient headaches for a Chartered Accountant. Technically, a fee that is received from a client who is involved in the process of money laundering could easily fall within the four corners of the definition of proceeds of crime. This is due to the broad language employed by section 2(1)(u) where property derived even indirectly by a person as a result of criminal activity is to be considered as proceeds of crime, even though it may not by itself be derived or obtained from the scheduled offence. If a client is involved in the commission of a scheduled offence and he pays a fee to a Chartered Accountant, who is unaware of the occurrence of such a scheduled offence, arguably, the fee received could still be claimed to be proceeds of crime even though the offence of money laundering may not be made out. The Supreme Court in Vijay Madanlal Choudhary v. Union of India (supra) has held that the offence of money laundering is an independent offence and that the involvement of a person in any one of the processes or activities provided for in section 3 would constitute the offence of money laundering which would otherwise have nothing to do with the criminal activity relating to a scheduled offence except that the proceeds of crime may be derived or obtained as a result of that crime.

The Appellate Tribunal set up under the PMLA in the case of Vinod Kumar Gupta v. Joint Director, Directorate of Enforcement 2018 SCC On Line ATPMLA 27 has decided an appeal where the Appellant received consultation fees from a party accused of offences under the PMLA and the Appellant took up a defense that he had no way of knowing that he had received consultation fees which may be part of proceeds of crime. The Tribunal observed that all professionals such as Advocates, Solicitors, Consultants, Chartered Accountants, Doctors, and Surgeons receive their professional charges from their respective clients against the service provided. Neither can the presumption under section 5(1)(a) of the PMLA (section 5 deals with provisional attachment of proceeds of crime) be drawn ipso facto that they have the proceeds of crime received as professional charges in their possession nor on the basis of presumption can their movable and immovable properties be attached unless a link and nexus directly or indirectly towards the accused or the crime is established within the meaning of section 2(1)(u) of the Act. In the absence of such a link, the professionals are to be treated as innocent persons as unless a link and nexus of proceed of crime are established under section 2(1)(u), the proceeding under the Act cannot be initiated. A caveat here is advisable, the orders of the Adjudicating Authority and Appellate Tribunal are only with respect to Attachment – these orders are not binding upon the special court that actually tries the offence of money laundering. The Special Court is neither bound, governed nor influenced by any order passed by the Enforcement Authorities and has to act independently on the basis of evidence led before it. Various other High courts have held that the decisions of the Adjudicating Authorities are not binding upon the Special Court where the Special Court has independently applied its mind.

There are various ways in which a professional may be pulled into an investigation under the PMLA by the Directorate of Enforcement some examples that come to mind are:

(i) Chartered Accountants are privy to sensitive information about their clients and therefore may find themselves receiving summons during an investigation.

Section 50 of the PMLA grants certain authorities of the Directorate the power to summon any person whose attendance they consider necessary to give evidence or to produce any records during the course of any investigation or proceeding under the PMLA. All the persons so summoned shall be bound to attend in person or through authorized agents, as such officer may direct, and shall be bound to state the truth upon any subject respecting which they are examined or make statements and produce such documents as may be required. This would not be a cause of concern for most Chartered Accountants as their role would be confined to assisting the Directorate with their investigation and as such, giving evidence. As mentioned earlier Chartered Accountants do not enjoy the protection of privilege as is enjoyed by lawyers under section 126 of the Indian Evidence Act, 1872. That being said, in Nalini Chidambaram v. Directorate of Enforcement 2018 SCC Online Mad 5924, the Madras High Court, where the concerned Senior Advocate had appeared through an authorized representative before the Directorate of Enforcement, permitted the Directorate to issue fresh summons to the Senior Advocate.

(ii) Chartered Accountants may find themselves involved in strategizing/planning company structures etc. and may find themselves being entangled in the offence of money laundering.

It would considerably be riskier for a Chartered Accountant if a transaction that he has consulted upon attracts the offence of money laundering. A blanket stand that this was done unknowingly or without mens rea may not be sustainable at the outset, because both commissions and omissions of the Chartered Accountant would need to be considered and the Directorate can always take the stand that this would be a subject matter of evidence to be considered at trial. The directorate may also always take a stand that evidence would need to be led to establish the lack of mens rea or the innocence of the Chartered Accountant. Professionals may need to increase their due diligence with regard to the transactions that they consult upon with their client in order to avoid being unwittingly pulled into this web and ensure proper documentation.

(iii) Chartered Accountants may find themselves certifying documents or statements and may find themselves being entangled in the offence of money laundering.

In Murali Krishna Chakrala v. The Deputy Director Criminal Revision Case No. 1354 of 2022 and Crl. M. P. No. 14972 of 2022, dated 23rd November 2022, the High Court of Madras held that when issuing certain certificates, a Chartered Accountant is not required to go into the genuineness or otherwise of the documents submitted by his clients and he cannot be prosecuted for granting the certificate based on the documents furnished by the clients.

However, the Madras High Court decision may not come to the aid of Chartered Accountants when they are required to exercise due care while issuing certificates without taking the same at face value. This judgment arguably may not aid auditors who are required to report whether the books of accounts reflect a true and fair view of the financial condition of the audited entity and to what extent an Auditor or a Chartered Accountant certifying a particular document is required to go into the accuracy of the data provided to them (which takes us back to the watchdog versus the bloodhound debate). The risk could always be higher for the internal auditors of an entity. There can be no clear-cut answers as to which commissions and the omissions of a certifying Chartered Accountant would entail scrutiny. It would be advisable to have an iron-fist adherence to the relevant auditing standards and checklists while also ensuring that the client similarly adheres to the relevant accounting standards. It may be tempting to make qualifications when undecided, if for no other reason than to cover one’s own risk. This may be an additional factor in the mind of an auditor or a Chartered Accountant issuing a certificate. It is always preferable to err on the side of caution when risk is involved. One may not need to be actually involved in any dubious activity to incur the wrath of this draconian law.

CONCLUSIONS

This article by itself cannot be considered to be exhaustive. It is meant to be indicative and to inform the Chartered Accountant fraternity that their roles are now under more scrutiny than ever before and so is the risk associated with it. As the business environment and transactions get increasingly complex while some of the scheduled offences remain by and large generic, it may prove impossible for a Chartered Accountant to mitigate all risks. The offences included in the schedule are wide-ranging, spanning from legislation regarding drug trade and human trafficking to offences under certain intellectual property legislations! The most dangerous are the generic offences under the India Penal Code for example -cheating – something that can be invoked easily and is generic enough to include a variety. This takes us back once again to the watchdog and bloodhound conundrum. In today’s modern world perhaps, the bloodhound side shall weigh heavily in the mind of a Chartered Accountant.

The diligence with regard to the documentation needs to start right at the start – from the engagement letter itself. A clearly defined scope of work can help mitigate risk as far as the question of the authorities as to why a specific issue has not been dealt with. Checklists can specify the depth of the scrutiny. An exhaustive and complete audit file for auditors is more important than ever. It may clearly need to be made out and disclaimers may be made out to the effect that the scope of the certification/audit or advice is limited to the commercials involved and that the client must ensure adherence to all relevant local and central laws. The scope of preventive documentation is not exhaustive. It is meant to ensure that the scope of engagement of Chartered Accountants as well as the actual work carried out by them are well defined in order to ensure that no aspersions can be cast upon the role of professionals in any manner. It is not possible for a Chartered Accountant to ensure that the client has not indulged in any of the scheduled offence, indeed, that is not their function unless they come across them while fulfilling the scope of their work. Increased diligence, erring on the side of caution, and extensive documentation are the key to mitigating risk. The margin of discretion in audit qualification has reduced drastically. Going through the schedule of the PMLA is highly recommended, you may be surprised at certain offences that are included therein!

shailesh.kwebmaker

CORPORATE LAW CORNER PART B : INSOLVENCY AND BANKRUPTCY LAW

8 Shekhar Resorts Ltd (Unit Hotel Orient Taj) vs. Union of India & Ors (CIVIL APPEAL NO.8957 OF 2022)

FACTS

The corporate debtor was engaged in the business of proving hospitality services and therefore was registered with Service Tax Department. On evasion of taxes by the Corporate Debtor, show cause notices were issued by the Service Iax Department. In interregnum, one Financial Creditor had filed an application under section 7 of the Code and vide order dated 11th September, 2018 and therefore moratorium kicked in which got over on 24th July, 2020 when plan of a resolution applicant was approved by the Adjudicating Authority. The Corporate Debtor had filed an application through Form 1 under the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 within the due date as prescribed and the application was accepted and necessary forms were issued for payment of the tax due by Designation Committee i.e. Rs. 1,24,28500. However, due to moratorium imposed under section 14 of the Code, the corporate debtor was unable to deposit the tax within the due date. When he approached the Joint Commissioner CGST, he was told that as the payment was not made within the due date, the benefit of scheme could not be availed. Aggrieved by the order, the corporate debtor approached the Allahabad High Court but the Court refused to entertain the writ as the Designation Committee was not in existence.

Question of law

a) Whether it was impossible for the corporate debtor to deposit the settlement amount due to restrictions under the IB Code and whether the corporate debtor can be punished for no fault of his?

b) Whether the High Court was right in quashing the petition on the basis of non-existence of the Designation Committee?

HELD

It was evident from the backdrop that the Corporate Debtor cannot e deposit the sum due to the operation of law in place. The Corporate Debtor was unable to make the payment due to the legal impediment and the bar to make the payment during the period of moratorium. Even if the Corporate Debtor wanted to deposit the sum before 30th June, 2020,, it would be against the provisions of the Insolvency and Bankruptcy Code because of the calm period in action. Once a moratorium is kicked in, any existing proceeding against the Corporate Debtor shall stand prohibited and it is a well-settled law that IBC shall have precedence over any inconsistent legislations. When the Form No.3 was issued under the Scheme 2019, the Corporate Debtor was subjected to the rigors of process of IBC by virtue of the moratorium. In such a scenario, the Corporate Debtor cannot be rendered remediless and should not be made to suffer due to a legal impediment which was the reason for it and/or not doing the act within the prescribed time. The Corporate Debtor could not make the payment due to legal disability and no one can be expected to do the impossible.

It was also held that the High Court shall grant relief to the Corporate Debtor when there are valid reasons or causes for his inability to make the payment. The High Court cannot extend the time period of the Scheme under section 226 of Constitution of India but it can consider extra ordinary circumstances where there is a legal disability on the part of the Corporate Debtor for the interest of justice. The Designated Committee under the Scheme had been constituted on a need basis to comply with the orders of the courts across the country and in many cases they have rejected the applications under the Scheme, 2019 erroneously.

The Apex Court is of the view that the corporate debtor cannot be remediless just because he is restrained by law. It is a pity if a person is accused wrongly when he is willing to not do that wrong thing. The orporate Debtor cannot make the payment due to legal disability and therefore, he is entitled to claim benefits under the Scheme.

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