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Category: Corporate Law Corner

Company Law

1. Jayaben Shantilal Doshi vs. Ronak Dyeing Ltd.

183 taxmann.com 186 (NCLT – Mumbai Bench)

CP No. 200(MB) of 2023 | Decided: 4th February, 2026

Non-service of notices of general meetings to shareholders and sale of company property at an undervalued price both independently constitute acts of oppression and mismanagement under Section 241 of the Companies Act, 2013. Further, offer letters for a rights issue must be served on each shareholder individually, a director’s deemed knowledge cannot substitute personal service on other shareholders.

Background: RDL was originally promoted by SDD, Kirti Kumar Vasa (KV), and the Sharma Group, each holding equal stakes. SDD died on 30.03.2013 and his shareholding was transmitted to the Petitioner in FY 2018–19. KV’s group subsequently exited by transferring their shares to the Sharma Group, leaving the Petitioners as the only minority shareholders with 10.79% of the capital.

FACTS

The Petitioners filed a petition under Sections 241–242 of the Companies Act, 2013 alleging four distinct acts of oppression and mismanagement:

  1. Undervalued Sale of Bhuleshwar Property: RDL sold an immovable property at Bhuleshwar, Mumbai vide Deed of Conveyance to M/s Asteya Properties for ₹64.80 lakhs. The Petitioners’ IBBI-registered valuer determined the ready reckoner value at ₹1.25 crore and the fair market value at ₹3.41 crore. The conveyance deed described the property as “open vacant land” with a demolished structure, which contradicted even the photograph filed by the Company itself, showing a two-storeyed structure.
  2. Dilution of Shareholding via 2011 Rights Issue: In March 2011, RDL issued 5,00,000 new equity shares on a rights basis. These shares were allotted exclusively to the Sharma Group and 11 of their relatives (including non-shareholders), with no offer letter served on the Petitioners, SDD, or KV. As a result, the combined shareholding of the SDD group was diluted from 21.56% to 10.79%.
  3. Excessive Director Remuneration: The Respondents and their family members (including daughters of Respondent No. 2 and newly inducted directors Respondents No. 4 & 5) were alleged to be drawing disproportionate remuneration without the requisite qualifications or participation in business activities.
  4. Non-Service of Notices of General Meetings: The Petitioners alleged that they were never served notices of General Meetings or Annual Audited Financial Statements, except for the AGM pertaining to FY 2022–23. This excluded them from any participation in the Company’s affairs after SDD’s demise.

Arguments by the Petitioners

  •  The Bhuleshwar property was sold without a special resolution, as required under Section 180(1)(a) of the Companies Act, 2013, and at a grossly undervalued price — just ₹64.80 lakhs against a fair market value of ₹3.41 crore.
  •  The 2011 rights issue was an oppressive act, as no offer letter was ever served on the Petitioners or SDD; the allotment of a large portion to non-shareholders was illegal under Section 81 of the Companies Act, 1956. The petition was not time-barred because limitation should run from the discovery of fraud in 2023 and the wrong was a “continuing wrong.”
  • Remuneration paid to family members of the Respondents was excessive and unjustified, particularly to those without qualifications or business involvement, and possibly in excess of limits under Section 197 read with Schedule V.
  •  Non-service of meeting notices to shareholders constitutes a continuing act of oppression, depriving them of their statutory rights.
  •  Relief sought included cancellation of the conveyance deed, restoration of shareholding to 21.56%, removal of respondents from the board, forensic audit, appointment of an independent administrator, and, alternatively, winding up.

Arguments by the Respondents

  •  The petition was barred by limitation and delay & laches, particularly the challenge to the 2011 rights issue, which was over 12 years old. SDD had signed Annual Returns for FY 2010–11 and FY 2011–12 showing the changed shareholding, constituting his implied acquiescence.
  • The Bhuleshwar property’s conveyance deed described it as vacant land after demolition of the shed, and a photograph taken in May 2023 could not be used to impute the property’s condition in July 2022. No special resolution was required since the property did not qualify as an “undertaking” under the Explanation to Section 180(1)(a).
  • The Sharma Group submitted that since SDD himself served as a director, the Petitioners cannot solely blame the Respondents for non-service of notices; the Petitioners’ long silence belied their claims.
  • The remuneration to Respondents No. 2 & 3 was commensurate with the company’s growth. Revenue grew 228%, and Plant & Machinery investment grew 260% over 10 years. Remuneration to the daughters (approx. ₹60,000/month) was not excessive. No Income Tax disallowance had been reported in the tax audit report.
  • Respondents were willing to buy out the Petitioners, and a court-appointed valuer determined the share value at ₹178.46 per share.

Decision

The NCLT allowed the petition and made the following key findings and directions:

Sale of Bhuleshwar Property

  • The property did not require a special resolution since its book value was zero and it generated no income — it did not qualify as an “undertaking” under the Section 180(1)(a) explanation. This ground of challenge was rejected.
  • However, the sale was held to be at an undervalued price. The conveyance deed’s description of it as vacant land contradicted both the company’s own photograph and the IBBI valuer’s report. The Respondents filed no counter-valuation report. The sale was declared an act of oppression and mismanagement prejudicial to the members’ interests.

2011 Rights Issue

  •  The challenge qua SDD’s shares was held barred by limitation, as SDD had signed Annual Returns reflecting the changed shareholding and was actively involved in the company — he was expected to have noticed the dilution with reasonable diligence.

  • However, the challenge qua the Petitioners’ direct shareholding was not barred, as the Respondents could not prove service of offer letters to the Petitioners specifically. Notices and offer letters must be served on each shareholder individually, and SDD’s knowledge cannot be imputed to the Petitioners without evidence of authorisation. The allotment to the exclusion of the Petitioners was held to be a continuing wrong and bad in law under Section 81 of the Companies Act, 1956.

Director Remuneration

  • The remuneration to Respondents No. 2 & 3 was found reasonable given the Company’s growth trajectory and no Income Tax disallowance.
  • However, the Tribunal directed the Registrar of Companies to examine whether the total managerial remuneration exceeded the limits prescribed under Section 197 read with Schedule V, and any excess amount is to be factored into the share buyout price.

Non-Service of Notices

  •  Non-service of meeting notices was squarely held to be an act of oppression. The Respondents offered no evidence of dispatch; a bare assertion was insufficient.

Directions

  • Respondents directed to buy out the Petitioners’ shares at the value determined by Valuer, (adjusted upward for items below) within 60 days, failing which interest at 10% p.a.
  • The difference between fair market value (₹3.41 crore) and actual sale consideration (₹64.80 lakhs) of the Bhuleshwar Property, along with interest @ 12% p.a., to be added to the share value.
  • Remuneration in excess of Section 197 limits, if determined by RoC, is to be added to the share buyout value.
  • Petitioners’ shareholding to be adjusted to include the rights shares they were individually entitled to in the 2011 issue.
  • An independent IBBI valuer (Ms. Manisha Satej Dharia) appointed to re-value the Kalyan industrial property, with the revised value to be substituted in the valuer’s report.
  • Alternatively, the company may buy back the Petitioners’ shares.

2. Yerram Vijay Kumar vs. The State of Telangana

Before Supreme Court (SLP (Crl.) No. 11530 OF 2024)

Date of Order: 09th January, 2026

The Supreme Court held that for offences relating to fraud under Section 447 of the Companies Act, 2013, for which prosecution can be initiated only on a complaint filed by Serious Fraud Investigation Office (SFIO) or with its authorization, and a private complaint is not maintainable under Section 212 of the Companies Act, 2013.

FACT

The Special Court for Economic Offences had taken cognizance of “fraud-related” offences under Section 448 Companies Act, 2013 based on a private complaint and the appellant had raised a jurisdictional objection that the Special Court could not take cognizance of “fraud” under the provisions of the Companies Act because Section 212 (6) requires that such complaints to be filed by the Serious Fraud Investigation Office (SFIO) or the Central Government, not by a private individual.

The Charges on the appellant based on a private compliant taken by the Special Court, were under following provisions:

i) Offences under the Companies Act, 2013

  • Section 448 (False Statement): Relates to intentionally making false statements in any return, report, certificate, or document required under the Act.
  • Section 451 (Punishment for Repeated Default): Relates to enhanced penalties for those who commit the same offence twice within three years.

ii) Offences under the Indian Penal Code (IPC)

The complaint also alleges traditional criminal acts:

  • Section 420: Cheating and dishonestly inducing delivery of property.
  • Section 406: Punishment for criminal breach of trust.
  • Section 468 & 471: Forgery for the purpose of cheating and using forged documents as genuine.
  • Section 120B: Criminal conspiracy.

The Core Legal Interpretation/Question before Supreme Court was:

Whether a Special Court could take cognizance of offences under Section 448 (punishment for false statements) and Section 451 (punishment for repeated defaults) based on a private complaint?

ORDER

The Supreme Court observed that Section 448 does not prescribe an independent punishment. Instead, it mandates that a person found guilty “shall be liable under Section 447.” Consequently, any proceeding under Section 448 is functionally an “offence covered under Section 447”.

Supreme Court held that the mandatory safeguard in the second proviso of Section 212(6) applies and a Special Court cannot take cognizance of these offences except upon a written complaint by the Director of the Serious Fraud Investigation Office (SFIO) or an authorized Central Government officer. Accordingly, the Court quashed the proceedings before Special Court specifically to the extent of Sections 448 and 451 of the Companies Act, as they were initiated via a private complaint without SFIO/Government authorisation.

The Court further stated that a person alleging corporate fraud is not remediless but should follow the statutory route, by filing an application under Section 213 before the National Company Law Tribunal (NCLT) to trigger an investigation.

Company Law

24. Abhishek Maheshchand Khandelwal vs. Khandelwal Finstock (P.) Ltd.

Before, National Company Law Tribunal,

Ahmedabad Bench

Date of Order: 19th January, 2026

Where legal heirs of the deceased had produced death certificate of their late father and other required documents, the requirements under Section 56 of the Companies Act 2013 (CA 2013) were substantially complied with and, thus, the company was to be directed to transmit shares to the legal heirs of the deceased shareholder without insisting on probate.

FACTS:

  • The appellants were the legal heirs of late M who originally held 25 per cent shares in KFPL. The appellants and R were family members of the Khandelwal Family. Disputes arose among the family members. An arbitrator was appointed to resolve the disputes among four factions of the Khandelwal Family. The arbitrator passed an award which revised the shareholding of the family in KFPL and reduced the shareholding of M to 21 per cent.
  • M died on 13th October, 2020. After the death of M, there was no representation from his faction in the company. Only R was managing the affairs of the company. The appellants sent representation requesting transmission. The daughter gave no objection for transmission of shares in equal proportion to the appellants.
  • The company replied and acknowledged the 25 per cent holding but stated that no probate or legal document was received. In Gujarat, no probate was required for transmission of shares in a private company. The appellants stated that the company had not transmitted the shares despite intimation under section 56 and the company acted in breach of section 56 of CA 2013.
  • The appellants filed present appeal under section 59 seeking direction to the company to transmit the shares held by their late father in favour of the appellants and for rectification of its Register of Members.

HELD:

  • The Appellants produced the death certificate of their late father, no-objection affidavit of the daughter, and indemnity/affidavits as directed by the Tribunal. KFPL acknowledged the Appellants and their sister as legal heirs in proceedings arising out of the arbitral award. The identity of the legal heirs was not disputed before the Tribunal.
  • The objections regarding absence of Form SH-4 or allegations of fraud do not pertain to transmission by operation of law. Transmission on death does not require execution of a transfer deed. KFPL has failed to show any legal impediment which could justify refusal or delay in transmission of shares after receipt of complete documents.
  • Once it is established that late Maheshchand Khandelwal had shareholding in the company, and he died intestate, the legal heirs are entitled to transmission of the said shares, and their names are required to be entered in the register of members. There is no dispute on facts. As transmission occurs by operation of law under section 56(2) of CA 2013, no instrument of transfer (Form SH-4) is required, distinguishing it from voluntary transfers under section 56(1) of CA 2013.
  • It is also noted that the audited balance sheet of the Respondent Company reflects the shareholding of the deceased shareholder. Allegations regarding irregularities in filings are pending before statutory authorities and do not bar lawful transmission of shares. Such issues cannot be used to deny statutory rights of legal heirs under the CA 2013.
  • In view of the above discussion, it was found that the Appellants have established unnecessary delay and default on the part of KFPL in registering the transmission of shares. The requirements under section 56 were substantially complied with by the Appellants. The jurisdiction of the Tribunal under section 59 is clearly attracted and appeal filed by the aggrieved persons, the legal heir of the deceased, is maintainable.
  • Accordingly, Tribunal held that the Appellants were entitled to transmission of 21 percent shares standing in the name of Late Shri Maheshchand Radhakishan Khandelwal, as per the arbitral award dated 6th November 2018, and to rectification of the Register of Members of KFPL. This realignment as per the arbitral award overrides the original 25% holding reflected in the balance sheet, as the award, being enforceable, must be given effect under section 59 of CA 2013.

Therefore, in the light of above observations and findings, this Tribunal ordered as under: –

  • KFPL was directed to register the transmission of the said 21 percent shares to the Appellants, namely Abhishek Maheshchand Khandelwal and Apoorva Maheshchand Khandelwal, in equal proportion of 10.5 percent each, within 30 days from the date of receipt of a certified copy of the order, after verification of the documents already submitted, without requiring probate or original share certificates (as none were issued).
  • KFPL was further directed to rectify its Register of Members accordingly within the said period.

25. Shree Radhe Tea Plantation Private Limited & Anr. vs. Registrar of Companies, West Bengal & Ors. WPA 23115 of 2022

IN THE HIGH COURT AT CALCUTTA

Date of Order: 18th November 2022

The Calcutta High Court, upheld the powers of the Registrar of Companies (ROC) to conduct multiple inquiries under Section 206 to 210 of the Companies Act, 2013, specifically relating to the inspection, inquiry, and investigation provisions.

The Court implicitly upheld the ROC’s ability to initiate subsequent inquiries as part of its statutory duties.
The Key Upholding in the Case by Calcutta High Court are as follows:

  • The Court ruled that Sections 206-210 of the Companies Act, 2013, do not impose any bar on the Registrar to initiate subsequent proceedings under Section 206 as this is permissible if the Registrar comes across additional material warranting a second inquiry.
  • The High Court dismissed the petition, emphasizing that the petitioners had an Alternate Forum (NCLT, Kolkata) to contest the ROC’s inquiry report. The report was already part of the evidence in the ongoing winding-up proceedings under Section 271 of the Companies Act, 2013.
  • The Court noted that the Tribunal (NCLT) has wide powers under Section 273 of the Companies Act, 2013 to pass any orders as it may deem fit. This power is sufficient to ensure that the petitioners get an opportunity to seek appropriate relief regarding the impugned inquiry report in the winding-up proceedings.

In conclusion, the High Court ultimately decided not to stop the Registrar of Companies (ROC) from continuing its investigation and clarified that Section 206 of the Companies Act, 2013 is an ongoing supervisory power with ROC. If the ROC discovers further irregularities or additional documents, it is legally obligated to initiate a subsequent proceeding.

Corporate Law Corner

22. Tictok Skill Games Private Limited

Petition No: CP -83 / ND/2021

Before, National Company Law Tribunal,

New Delhi Bench

Date of Order: 18th December, 2025

Capital Reduction must fall under four corners of Section 66(1) of the Companies Act, 2013

Facts

1. Parties and proposal

  •  Petitioner: Tictok Skill Games Pvt Ltd (now WinZO Games Pvt Ltd), an e-sports gaming platform company, incorporated in 2016, later renamed in 2022.
  • Relief sought: Confirmation under section 66 of the reduction of issued, subscribed and paid-up equity capital from 3,00,000 equity shares of ₹100 each (₹3 crore) to 3,00,000 equity shares of ₹10 each (₹30 lakh) by paying ₹90 per share (total ₹2.7 crore) to certain equity shareholders.
  • Basis stated: The company wanted to bring the face value of all equity shares at par and claimed to have sufficient funds, invoking section 66(1)(b)(ii) (payment of paid-up capital in excess of the wants of the company).

2. Key facts and procedural history

  • Board resolution dated 28.01.2021 and special resolution in EGM on 19.02.2021 approved the capital reduction and authorised necessary steps, including NCLT petition and deposit of payout amounts.
  • Auditor’s certificate dated 17.03.2021 filed, stating that accounting treatment for the reduction conforms with the Companies Act and Ind AS.
  • Petition originally proceeded on a particular capital structure. However, during pendency, the supplementary affidavit (July 2021) disclosed significant changes, namely additional funding, entry of a new shareholder, altered authorised and paid-up share capital and multiple series of CCPS.
  • NCLT issued notices to ROC, Regional Director (RD), and Income Tax Department. The IT Department reported nil outstanding demand and no objection.
  • NCLT directed notice to all creditors in Form RSC 3 and publication in English and vernacular newspapers (Financial Express and Jansatta), which was done.

3. Objections of ROC/RD and the company’s response

ROC/RD filed reports pointing out, inter alia:

  •  Mismatch between authorised/paid-up capital figures in the petition and MCA master data. Petitioner explained that subsequent allotments (including CCPS and ESOP equity) after the supplementary affidavit caused differences and termed the mismatch as inadvertent oversight.

  • Existence of active/open charges created on 23.03.2022 despite the petition stating nil secured creditors. The company stated these were bank guarantees backed by fixed deposits, treated by the bank as charges and later satisfied, with CHG‑4 filed.

  •  Auditor’s “Emphasis of Matter” on Covid 19 and minor delays in statutory dues. These were flagged but not treated as determinative by NCLT.

  • FEMA compliance in relation to payout to foreign shareholder, The Stuart Partners LLC. Company undertook that it has been and will remain FEMA-compliant for any outflow under the scheme
  • Creditor protection: RD noted substantial current and non-current liabilities and the absence of “no objection” letters from creditors. The company argued that the statutory regime only requires notice and opportunity to object (RSC 3/RSC 4 and RSC 5 affidavit), not individual NOCs, and claimed full procedural compliance.

Critically, RD also objected on a substantive ground, stating that financials for FY 2019 20 did not indicate excess capital/free reserves, and the proposed reduction did not fall within section 66(1)(b)(ii). RD thus sought rejection of the scheme.

Conclusion of the Tribunal and reasoning

1. No proof of “excess capital” at the relevant time

  •  The reduction was anchored in the February 2021 special resolution, so the relevant time to test the availability of surplus/excess capital was when the scheme was conceived and approved.
  •  Although later balance sheets for FY 2021 22 and 2022 23 were filed, NCLT held that subsequent financials cannot cure a foundational defect regarding the absence of demonstrable excess capital or free reserves at the time of the resolution.
  • NCLT accepted RD’s objection that the financial statements did not show surplus capital/free reserves sufficient to justify a pay off to shareholders under section 66(1)(b)(ii), holding that in the absence of “clear and cogent material” of such surplus, the proposal was not in conformity with that provision.

2. Defective creditor notice compliance

  •  The company had 66 unsecured creditors and claimed to have served RSC 3 notices and published RSC 4 notices. Affidavit in Form RSC 5 was filed.
  • On examining dispatch proofs, NCLT noted a discrepancy (65 names vs 66 creditors) and the absence of tracking/delivery reports for all creditors.
  • NCLT held that compliance with section 66(2) and the 2016 Rules is mandatory. The notice mechanism is to ensure creditors have a real opportunity to object.
  • Without conclusive proof of service, the Tribunal refused to presume compliance or accept that creditors’ interests were adequately safeguarded, particularly in the light of sizeable current and non‑current liabilities.

3. Unstable capital and shareholding structure

  •  During pendency, the company undertook multiple capital actions, i.e. issue of new preference shares, ESOP equity, induction of new shareholders and changes to capital structure versus the position at the time of the original resolution.
  •  NCLT held that such changes “materially alter” the factual matrix on which the scheme was premised, emphasising that a capital reduction scheme must be evaluated against a clear and stable capital structure.
  •  Repeated changes were seen as undermining the transparency and certainty required for confirmation under section 66.

Decision :

• NCLT concluded that the petitioner had failed to:

  • Show that the reduction falls squarely under section 66(1)(b)(ii) of CA 2013
  • Satisfactorily demonstrate financial capacity at the relevant time to effect the payout.
  • Prove mandatory procedural compliance regarding notice to all creditors; and
  •  Adequately safeguard creditors’ interests.

• Accepting the RD’s objections, NCLT rejected confirmation of the proposed reduction and dismissed the company petition with no order as to costs.

23. Biju Scaria & Tessy Scaria vs.

Media Team Solutions (I) Pvt. Ltd. and others

Company Appeal (AT) (CH) No.123/2025

(IA Nos. 1365 & 1366/2025)

National Company Law Appellate Tribunal (Chennai)

Date of Order: 13th October, 2025

NCLAT upheld the exercise of power/ decision taken by Majority Shareholders, which reflects Corporate Democracy with regard to the right to remove a Director under Section 169 of the Companies Act, 2013, which is absolute and cannot be diluted by judicial interference, unless there is illegality or malicious intent.

FACTS

Mr. BJ and Ms. TS, had filed Petition before National Company Law Tribunal (NCLT) Kochi under Sections 241–242 alleging oppression and mismanagement in M/s MTSPL and also sought various interim reliefs, including to stay an Extraordinary General Meeting (EGM) scheduled on 01st July, 2025 which proposed removal of Whole Time Director by resolution under Section 169 of the Companies Act, 2013 and to restrain M/s MTSPL from taking corporate actions in the matter and also status quo be maintained with respect to the management and operations of the Company.

After hearing, NCLT in its order had declined to stay the EGM, observing there was no procedural anomaly or legal lapse in calling the EGM and also held that staying the EGM would interfere in the company’s day-to-day functioning as the motion carried under Section 169 of the Companies Act, 2013 Shareholders holding more than 66.64% voting power had floated the special notice with regards to removal of director.

Further, NCLT observed that the shareholders’ right to remove a director under Section 169 of the Companies Act, 2013, is absolute and cannot be diluted by judicial interference on equity, unless there is illegality or mala fide intent.

Thereafter, EGM was held on 01st July, 2025, where Ms. TS was removed as Whole-Time Director under Section 169 of the Companies Act, 2013. An appeal against the order of NCLT was filed before the National Company Law Appellate Tribunal (Chennai), NCLAT.

ORDER

The NCLAT upheld the NCLT order and affirmed that the Right to remove a Director under Section 169 of the Companies Act, 2013 is absolute and cannot be diluted by judicial interference, unless there is illegality or mala fide intent and as the action taken was within the statutory framework of the Companies Act, 2013.

Further, the nature of the interim relief sought in the IA has been rendered redundant because the EGM has already been held.

Then NCLAT dismissed the appeal, holdingthat the NCLT’s refusal to grant interimrelief was correct, and no interference waswarranted.

Company Law

20. *S M & Co (Chartered Accountants) vs. Track Infoline Pvt Ltd & Ors

COMPANY APPEAL (AT) NO.214/2025

Before NCLAT, Principal Bench, New Delhi

Date of Order: 2nd December, 2025

Auditor not to render prohibited services.

Facts

  •  RT Global Infosolutions Pvt. Ltd. (the “Company”) was the subject of a petition under sections 241 and 242 of the Companies Act, 2013 (CA 2013) filed by Track Infoline Pvt. Ltd., one of its shareholders, alleging fraud, mismanagement, and oppression by the management. S M & Co., a partnership firm of chartered accountants, was the statutory auditor of the Company and was implicated as a respondent in the NCLT proceedings.
  •  A significant factual allegation was that the Company’s registered office was located at New Delhi, which was the residential premises of members of the M family, who were also partners in S M & Co. This was relied upon to suggest that the auditors were not independent and were acting in concert with the management (RG Group) in the alleged mismanagement. After this issue was specifically raised in the petition, the Company passed a board resolution, shortly after an earlier NCLT order, shifting its registered office from the M family residence to a commercial premises adjacent to the registered office of another related company.
  •  The NCLT noted that the Company’s management had made inconsistent and false statements, including in board resolution extracts issued on the Company’s letterhead, which mentioned a different registered office address for a board meeting that did not match the earlier factual position. More crucially, the NCLT examined the audited financial statements and filings (AOC 4) for FYs 2016–17 and 2017–18, which were signed by S M & Co. and formed part of the proceedings. These balance sheets disclosed that the auditor had charged “management fees” and other amounts beyond the statutory audit fee, indicating that services other than audit were being rendered to the Company.
  •  Section 144 of the Companies Act, 2013, which was quoted in the NCLT order, prohibits auditors from rendering certain services, including management services, whether directly or indirectly, to the company, its holding or subsidiary. The petitioner contended that not only had the auditor charged management fees in violation of section 144(h) of CA 2013, but that later balance sheets for FY 2018–19, 2019–20 and subsequent years had been tampered with to show a flat audit fee of ₹2,00,000, thereby removing or altering earlier disclosures of management fees. To support this, reliance was placed on a certificate, issued after arguments had progressed, which purported to explain that certain payments were for ROC filing, tax audit, ITR filing, GST and TDS returns, while omitting any reference to management services.
  •  The NCLT concluded that the certificate referred to above demonstrated that the auditor was acting under specific instructions from the Company and was attempting to regularise or cover up prohibited payments that were earlier reflected in management fees. On these facts, the NCLT held that the auditor was guilty of tampering with records, accepting remuneration for prohibited services, and issuing a certificate contrary to the audited financial statements, and accordingly removed S M & Co. as auditor of the Company.
  •  S M & Co. filed an appeal before the NCLAT challenging the NCLT’s order removing them as auditor. Alongside the appeal, several applications were filed including for condonation of delay in filing the appeal due to the illness (cancer) of the appellant’s father; these interlocutory applications were allowed, and the delay was condoned.

Arguments

  •  Before the NCLT, petitioner therein argued that the auditor’s close connection with the Company’s management, evidenced by the common address and family relationship, showed a lack of independence and collusion in mismanagement. It was contended that the auditors not only failed in their duty to report wrongdoing but actively participated in it by receiving management fees and rendering prohibited services, contrary to section 144 of CA 2013. The petitioner highlighted that the audited balance sheets for FY 2016–17 and 2017–18 clearly reflected payments for “management services” to the auditor, attracting the bar under section 144(h), and giving rise to penal consequences under sections 141 and 147.
  •  The petitioner further submitted that there was a deliberate attempt to cover up the violation and fraud by subsequently altering the financial statements for FY 2018–19, 2019–20 and later years. According to them, the later financials were modified to show a uniform audit fee of ₹2,00,000 without separately disclosing management fees, thereby removing evidence of prohibited services. The certificate issued on behalf of the Company and relied upon by the auditor, was argued to be an afterthought, issued during the pendency of proceedings to recast the nature of payments as being for ROC filings, tax audit, ITR, GST and TDS returns, and not for management services. This, the petitioner contended, demonstrated that the auditor was acting at the behest of the management and tampering with records.
  •  On this basis, the petitioner urged that the auditor had breached statutory duties, independence, and ethical obligations, and therefore should be removed and held guilty of serious professional misconduct and contravention of the CA 2013. It was also argued that the auditor’s conduct facilitated or aided the alleged fraud and oppression, making their removal a necessary step in the reliefs under sections 241–242.
  •  In the appeal before NCLAT, S M & Co. challenged the NCLT’s findings and the direction of removing them as auditors of the Company. The essence of the appeal was that the NCLT had erred in concluding that they had rendered prohibited services and tampered with records, and that there was no basis to hold that section 144 had been violated. The appellant sought to rely on the records and certificates to contend that the services and fees were properly accounted for and that they had not breached their statutory obligations. They also implicitly questioned whether the NCLT could, in a 241/242 petition, remove an auditor based on such findings.
  •  The respondent (Track Infoline) opposed the appeal, supporting the NCLT’s factual findings and emphasising that the audited balance sheets themselves, as placed on record, clearly showed the charging of management fees by the auditor in earlier years, and that the later attempt to generalize the audit fee and issue a clarificatory certificate only strengthened the inference of tampering and collusion.

Conclusion of the Tribunal and the basis

  •  The NCLAT first dealt with the interlocutory applications and allowed those, and condoned the delay in filing the appeal.
  •  The NCLAT noted that there were audited balance sheets for FY 2016–17 and 2017–18, at specified pages of the appeal paper book, duly audited and signed by S M & Co., which showed that the appellant had charged management fees in those years. The appellate order further recorded that even in later years, the appellant continued to charge such fees, thereby contravening section 144(h) of the CA 2013, which prohibits auditors from rendering management services. Having examined the records annexed, the NCLAT agreed with the NCLT’s conclusion that the auditor had provided services other than auditing in violation of section 144 and that the findings in the NCLT’s order did not suffer from any error.
  •  On this basis, the NCLAT held that it found no error in the impugned order. The appeal was accordingly dismissed at the admission stage, thereby affirming the removal of S M & Co. as auditors of the Company and implicitly endorsing the NCLT’s observations on tampering of records, receipt of remuneration for prohibited services, and issuance of contradictory certificates.

Principle Emanating from the Judgement

  •  Auditor’s independence and prohibited services under section 144

The judgement reinforces that a statutory auditor must maintain strict independence and cannot render services that fall within the prohibited categories under section 144, particularly “management services” under clause (h), whether directly or indirectly to the company, its holding or subsidiary. Charging management fees or undertaking management type engagements while simultaneously acting as statutory auditor is a clear violation that can attract both regulatory and judicial consequences, including removal in proceedings under sections 241–242.

  •  Scope of relief in oppression–mismanagement proceedings:

The case illustrates that in an oppression–mismanagement petition under sections 241–242, the NCLT’s remedial jurisdiction extends to examining the role of the statutory auditor and directing removal where the auditor’s conduct is intertwined with the alleged fraud or mismanagement. An auditor found to be non independent can thus be removed as part of the broader relief necessary to bring an end to the matters complained about.

* (Name changed)

21. The Kolhapur Steel Ltd. vs. Karad Projects and Motors Ltd.

C.P.(CAA)/76(MB)2025

NCLT – Mumbai Bench (Court IV)

Date of Order: 3rd November, 2025

The National Company Law Tribunal, Mumbai Bench (NCLT), approved the Scheme of Amalgamation between the Holding and Subsidiary companies, highlighting a bona fide business purpose—such as strategic business and financial planning, including reviving a company, preventing production losses, preserving employment, and safeguarding capital—cannot be invalidated merely because it results in a tax benefit under Section 72A of the Income-tax Act, 1961. Accordingly, the Tribunal rejected the objections raised by the Income Tax Department against the amalgamation scheme.

The key findings and upholding by the Tribunal are as follows:

The NCLT held that the Scheme complies with Sections 230–232, does not violate any law, and does not contradict the public policy. No objections from shareholders or creditors remained unresolved, and regulatory directions were complied with.

However, the Income Tax Department objected to the Scheme on the ground that it was structured to obtain a tax benefit under Section 72A of the Income-tax Act, 1961, and therefore constituted a tax avoidance arrangement.

The Tribunal held that strategic business restructuring resulting in lawful tax benefits does not amount to a colourable device.

Section 72A permits carry-forward of losses subject to stringent conditions.

NCLT accepted the applicants’ clarification that revival of the Transferor’s business, protection of employment, and operational efficiency were the objectives of the merger and not tax evasion.

NCLT also recorded that Income Tax authorities are free to examine tax liability and to take necessary action as possible under the Income-Tax Act, 1961.

The NCLT held that GAAR can be invoked only through statutory procedure under Section 144BA and cannot be used to block sanction of a merger scheme. Therefore, allegations of “impermissible avoidance arrangement” were not sustained.

Conclusion

The NCLT rejected the objections, holding that it is a well-settled principle that any benefit legitimately available to an assessee within the framework of law cannot be denied merely because it may result in a loss of revenue to the Department. The Bench further observed that strategic business and financial restructuring through mergers among group entities—undertaken to revive the business of the transferor company and to safeguard production, employment, and capital—cannot be presumed to be a colourable device merely because
such restructuring results in a tax benefit to the transferee company in accordance with statutory provisions.

Accordingly, the NCLT dismissed the objections of the Income Tax Department and approved the Scheme.

Company Law

18. Satyanarayan Gupta vs. Shivangan Real Estate Pvt Ltd & Ors

Before NCLAT, Principal Bench, New Delhi

Date of Order: 9th October 2025

Failure to declare beneficial ownership, not oppression / mismanagement.

FACTS

  •  Appellant claimed to be beneficial owner of 5,000 equity shares in Shivangan Real Estate Pvt. Ltd.
  •  Respondents: Shivangan Real Estate Pvt. Ltd. (company), and two other individuals (Respondent Nos. 2 & 3). The main dispute relates to the ownership and control of equity shares and a valuable company property in Jaipur.
  •  In 2017, the appellant transferred his shares to Respondent No. 3, and this transfer was reflected in company records.
  •  A Memorandum of Understanding (MoU) dated 01.01.2022 confirmed loans provided by Respondent Nos. 2 & 3 to the appellant, with properties jointly invested and registered with the company as a security. The MoU provided that, after repayment of dues, shares/directorships would revert to the appellant, and the sale proceeds of land at Jaipur would be shared equally.

Procedural History

  • The appellant filed a company petition before the NCLT, seeking a declaration of beneficial ownership, rectification of the register of members, and various other orders under Section 89 of the Companies Act, 2013.
  •  The NCLT, Jaipur, dismissed the petition at the threshold, stating that the appellant is not a shareholder/member, and non-compliance with Section 89 does not amount to oppression and mismanagement.
  •  The appellant then challenged this decision before the NCLAT under Section 421 of the Companies Act, 2013.

Appellants’ Arguments

  •  Claimed to be a beneficial owner of shares, alleging wrongful acquisition and oppression by Respondent Nos. 2 & 3.
  •  Sought declaration and rectification of shareholding, relying on MoU and Section 89.
  •  Argued that the respondents, as beneficial owners, failed to declare their interest as required by Section 89, and this should be treated as oppression/mismanagement.

Respondents’ Arguments

  •  Asserted appellant was neither a member nor a shareholder at the time of petition and he had voluntarily transferred shares.
  •  The company was not a party to the MoU, and the petition was intended to execute a private contract and not a corporate dispute.
  •  Noted that the appellant had failed to pay dues under the MoU, and that the relevant civil suit (No. 93/2025) had already been dismissed. Appellant’s claims relating to property rights must await settlement of liabilities.

Findings and Reasoning:

  •  The NCLAT recorded that all parties acknowledged the share transfer, and that the appellant’s rights are conditional upon repayment of loans as agreed in the MoU.
  • The tribunal found that the company petition was not maintainable, as the appellant was not on the register as a shareholder at the relevant time, nor was the company party to the MoU.
  •  Payment and other obligations under the MoU remained unfulfilled by the appellant.
  •  Since property at Jaipur is owned by the company (not individuals), the petition was unrelated to company affairs and was more in the nature of an MoU execution.
  •  The NCLAT agreed with NCLT that Section 89 requires declaration of beneficial interests in shares, imposing only financial penalty for default, not a cause of oppression / mismanagement actionable under Section 241/242 of the Act.

Judgement and Orders

The appeal was dismissed, upholding the NCLT order. The court specifically held:

  •  Non-compliance with Section 89 leads to penalties, not a finding of oppression or mismanagement.
  •  The transfer of shares and dismissal of the related civil suit further nullified appellant’s claims to shareholder rights.
  •  The appellant’s share in sale proceeds from company property must be settled only after the deduction of his outstanding dues and interest as acknowledged in the MoU.
  •  No interim relief or status quo order was granted and all other pending applications were also closed.

Conclusion:

  •  The decision reinforces that Section 89 of the Companies Act, 2013 is a compliance provision with penal consequences for nondisclosure, but not a civil / corporate governance claim for minority oppression or mismanagement.
  •  Petitions for corporate relief must establish shareholder / member status and focus on governance, not private contractual issues.

19. Union of India and Another vs. Deloitte Haskins and Sells LLP & Anr.

CRIMINAL APPEAL NOS. 2305-2307 OF 2022

SUPREME COURT OF INDIA

Date of Order: 03rd May, 2023

Supreme Court upheld the constitutional validity and scope of Section 140(5) of the Companies Act, 2013 which is not discriminatory, arbitrary, or violative of Articles 14 and 19(1)(g) of the Constitution of India.

The key upholding in the case by Supreme Court are as follows:

  •  The Court held that allowing resignation to end proceedings would defeat the legislative intent, as auditors could simply resign to evade scrutiny for alleged fraudulent acts. Hence the resignation of an auditor does not terminate or end proceedings initiated against them under Section 140(5) which are maintainable even after the resignation of the concerned auditors.
  •  Restore the NCLT and Criminal Proceedings by setting aside the Bombay High Court’s order that had quashed the maintainability of the Section 140(5) petition against former auditors M/s Deloitte and M/s BSR on the ground of their resignation.
  •  Held that the application/proceedings under Section 140(5) have directed the NCLT to pass a final order after holding an inquiry, as proceedings initiated under Section 140(5) must be taken to their “logical end” for the Tribunal (NCLT) to pass a final order on whether the auditor acted fraudulently or colluded in any fraud.
  • Quashed the Bombay High Court’s decision to set aside the SFIO’s Criminal Complaint (CC No. 20/2019), directing the concerned Trial Court to proceed with the criminal case in accordance with law and on its own merits.

In conclusion, the Supreme Court ruled that the legislative intent behind Section 140(5) is to allow the NCLT to determine allegations of fraud and collusion against auditors, and this quasi-judicial power can’t be curtailed by the auditor’s subsequent resignation.

Company Law

16. In the matter of:

Naman Gurumurthi Joshi

Before NCLAT PRINCIPAL BENCH,

NEW DELHI

Company Appeal No. 155 of 2025

Date of Order: 26th September 2025

Selective Reduction of Capital is valid if fair value is paid: NCLAT reiterates that the list given in Section 66 (1) (a) and (b) are merely examples and not the only ways share capital may be decreased.

FACTS 

  • This appeal is filed against an impugned order dated 5th January 2024 passed by NCLT under Section 66 of the Companies Act, 2013.
  • The appellant is a shareholder of RR Ltd: The Respondent and held 129 shares, constituting 0.0000014% of the issued paid up capital of the Company. He as an intervenor had objected to the reduction of share capital alleging inter alia such reduction is against the minority interest and is not permitted under Section 66 of the Companies Act, 2013 since the Respondent company is forcefully removing its shareholders and that the promoters are increasing their stakes by using this process.
  • It is argued that on 4th July 2023 the Board of Directors of RRL, by a special resolution had approved the proposal to reduce and cancel 78,65,423 equity shares of Respondent company, being the shares held by the shareholders, other than the promoters/holding company of the Respondent company.
  • The special resolution for reduction of the share capital was passed with 99.99% approval. The summary of the voting as set out says that the percentage of identified shareholders voting in favour of the reduction was to an extent of 84.65%.
  • Admittedly under the Scheme, the Respondent is paying a consideration of r1,380/- per share, which is at a premium of 56% to its fair value as is determined by two independent valuers. Admittedly, NCLT while approving the scheme categorically held the scheme to be fair and reasonable and in the interest of minority shareholders.
  • The impugned order notes the rational for capital reduction as under:

Rationale for Capital Reduction: (a) The equity shares of the Petitioner Company are not listed on any stock exchanges and there is no recognised market available to the shareholders of the Petitioner Company to buy and sell the shares held by them in the Petitioner Company. The Petitioner Company submits that its equity shares are being traded privately at random prices quoted by some brokers/ intermediaries on their websites without any fair price discovery and that, the number of equity shares traded are increasing month-on month viz. 2,45,229 equity shares in June 2023 as against 43,740 equity shares traded in January 2023 , with new investors becoming shareholders of the Applicant Company month-on-month by purchasing equity shares of the Applicant Company. The Petitioner Company therefore contends that such trading, without fair price discovery, is not in the interest of the investors in securities market and is thus detrimental to their interests. (b) The Petitioner Company does not have any plan to list its equity shares on the stock exchanges. The Petitioner Company thereby contends that, at a certain stage the said equity shares will lose their marketability and liquidity pursuant to which the Identified Shareholders, majority of whom are small shareholders holding less than 100 equity shares, will not be able to monetise their investment(s) effectively. (c) Further the Petitioner company contends that the proposed capital reduction will help structure the Petitioner Company’s business in compliance with the requirements under the Act, it becomes a 100% subsidiary of RRVL.

  • Admittedly the Regional Director and ROC have not objected to the reduction of share capital, though the Regional Director remarked, that the proposed reduction is a selective reduction. The NCLT found that selective capital reduction allowable under Section 66 of the Act and held that the shareholders are getting consideration of ₹1,380/- per share i.e. at a premium of 56% of the fair value, hence determined the reduction appears to be fair and reasonable and in the interest of minority shareholders.
  • In appeal too, the appellant had raised an objection that the reduction is not in the manner as suggested in Section 66(1) of the Companies Act, 2013 and it has not been proved by the Respondent company that it had the paid up share capital in excess of wants of the company.

EXTRACT FROM THE RELATED PROVISIONS OF THE ACT IN BRIEF:

Section 66(1) of the Companies Act, 2013 read as under: –

(1) 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 and in particular, may— (a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or (b) either with or without extinguishing or reducing liability on any of its shares,— (i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or (ii)pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly:

Provided that no such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable thereon.

FINDINGS:

  •  The crux of the argument of the appellant is that since there is no proof on record that the paid-up capital is in excess of the want of the company, there cannot be a selective reduction. However, a bare reading of clauses (a) and (b) of sub-section (1) of Section 66, it was noted that these are merely few instances of reduction of shares. The section itself suggests the company may reduce its share capital in any manner though in particular, as suggested by Clauses (a) and (b) of sub-section (1) of Section 66 (Supra).
  • Moreso, admittedly the appellant held mere 129 shares, constituting 0.0000014% of the shareholding of the Respondent company. Admittedly no other shareholder has filed any appeal against the impugned order. Admittedly the argument that reduction is against the minority interest, has since been rejected by the NCLT, in its impugned order. Further, admittedly the appellant has raised no grievance to the value given viz an amount of ₹1,380/- per share, being offered is either unfair or unreasonable. The only ground alleged by him is that the reduction is against the purpose envisaged under Section 66 of the Companies Act. This argument has been dealt with above by mentioning that the list given in clauses (a) and (b) of sub-section 1 of section 66 of the Companies Act, 2013 is not exhaustive.
  •  Further, it is settled law that the question of reduction of share capital is treated as a matter of domestic concern, i.e., it is the decision of the majority which prevails. In considering a petition for reduction of share capital, the Tribunal has to be satisfied the transaction is fair and reasonable. In any case the selective reduction is permissible if objecting shareholders are paid a fair value of their shares, as held in Reckitt Benckiser (India) Ltd, (2005) 122 DLT 612, Brillio Technologies P Ltd Registrar of Companies and Anr, 2021 SCC Online NCLAT 508 and Elpro International Ltd. In Re: 2007 SCC Online Bom 1268.
  •  Thus, once it is established that non-promoter shareholders are being paid a fair value of their shares and at no point of time it was suggested that the amount paid was less and where an overwhelming majority voted in favour of resolution, there is no reason to upset a reasoned order passed by the NCLT.

CONCLUSION:

In view of the above there was no ground to accept the appeal and accordingly it was dismissed.

17. Mr. Dilipraj Pukkella & Mr. Muhammed Imthiyaz vs. Union of India &

Regional Director (South East Region) & Registrar of Companies

High Court of Karnataka at Bengaluru

Writ Petition No. 3465 of 2021 (under Article 226 & 227 of Constitution of India)

Date of Order: 25th July,2025

The High Court upheld provisions of Sections 164 and 167 of the Companies Act, 2013 with regards to Disqualification as Directors and also stated that provisions do not violate the “fundamental right to practice any profession or carry on any occupation, trade or business” guaranteed by Article 19(1)(g) of the Constitution of India.

The court’s decision was revolved around interpretation of Sections 164 read with Section 167 of the Companies Act, 2013 on a question:

“Whether a director, disqualified under Section 164 of the Companies Act, 2013, can be disqualified from the defaulting company and any other company in which they are a director”?

The High Court had responded to the question raised via Writ Petition and states the followings in its order:

  •  The court held that the Disqualification under Section 164(2) (for failures like not filing financial statements or annual return for three continuous years or failing to repay deposits) are depended on the Director’s actions or inactions and not just the company.
  •  Section 167(1)(a), read with its proviso, clarifies that if a director incurs a disqualification under Section 164(2), their office becomes vacant in all other companies except on the Company or Companies in which default occurred i.e. Director office does not become vacant in the defaulting company. This is with intent that the director who remains in the Company are liable for the violation and to prevent the Company from easily appointing a new director in place of defaulting directors, while the default continues.
  • The court found that Sections 164 and 167 are reasonable restrictions on the fundamental right under Article 19(1)(g) and are therefore within the constitutional framework.

Company Law

14. In the matter of:

Modern Hi-Rise Private Limited 

Before Nclt Kolkata Bench, Court-Ii, Kolkata    

C.P. No. 238/KB/2024 

Date of Order: 9.9.2025

Reduction of Capital in any manner for the time being authorised by law: Does it allow transfer of amounts standing to the credit of Securities Premium to the Retained Earnings of the Company?

Held: No 

FACTS

  • Capital Reduction Petition was filed by the Petitioner Company pursuant to the NCLT Order dated 1.03.2019. NCLT had approved the Composite Scheme of Arrangement in the case of Himadri Dyes & Intermediates Limited (‘Transferor Company 1’), Himadri Industries Limited (‘Transferor Company 2’) and Himadri Coke & Petrol Limited (‘Transferor Company 3°) with Modern Hi – Rise Private Limited rans ‘MHPL’) i.e. the Petitioner Company (Company). As per the terms of the Scheme, the Company had issued 1,41,34,192 1% Non-Cumulative Redeemable Preference Shares (“PS”) of ₹10 each, allotted on 28.03.2019 and outstanding as on 31.03.2024.
  •  PS are redeemable at par anytime within 20 years from the date of allotment. However, considering the fact that Company has performed exceedingly well, the management in consultation of PS has revised the redemption value to ₹120 i.e., the fair value at the time of issuance of such PS. The above-mentioned variation in terms of the PS of the Company is being carried out in accordance with the provisions of Section 48 of the Companies Act, 2013 (CA 2013) A Board Resolution was passed by the Company on 1.08.2024. The Company has obtained the consent of the PS holders for the proposed variation in terms as per Section 48 and 66 of the Act.
  • According to the provisions of Section 55 read with Section 52 of the Act, whenever the redemption of PS is made at a premium, the Company shall provide for such Premium on Redemption of PS (i.e., the amount paid over and above the face value of the PS at the time of redemption) out of profits available for dividend distribution, i.e., Retained Earnings of the Company.
  • As per the latest audited financial statements of the Company as on 31.03.2024, the Company has substantial amount of Securities Premium but there is not enough credit balance in the Retained Earnings to meet the Premium on Redemption of PS.
  • The Company was of the view that the funds represented by the Securities Premium are in excess of the Company’s anticipated operational and business needs in the foreseeable future. Thus, these reserves could be utilised to create future shareholder’s value in such a manner and to such extent, as the Board of Directors of the Company in its sole discretion, may decide from time to time and in accordance with the provisions of the Act and other Applicable Laws.
  • The Company wanted to transfer amounts standing to the credit of Securities Premium Reserves to the Retained Earnings of the Company.
  • The Regional Director (RD) report dated 22.11.2024 was filed with the NCLT Kolkata, Bench. RD made some observations, which inter alia, stated that the proposed reduction of share capital is not in consonance with the provisions of section 66 of the CA and not permit reclassification of Share Premium Account and transfer the same to Retained Earnings.
  • ROC further observed that Section 55(2)(a) reads as “No such shares shall be redeemed except out of the profits of the company which would otherwise be available for dividends or out of the proceeds of a fresh issue of shares made for the purposes of such redemption.” In the present case, the company is proposing to utilize its Securities Premium instead of Retained Earnings. Further, it is proposing to reclassify its Securities Premium into Retained Earnings. Both the aforesaid proposals cannot be allowed as they are not permissible under the provision of section 55 read with Section 48, 52 of the CA 2013.

EXTRACT FROM THE RELATED PROVISIONS OF THE ACT IN BRIEF:

(2) Notwithstanding anything contained in sub-section (1), the securities premium account may be applied by the company—

(a) towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares;

(b) in writing off the preliminary expenses of the company;

(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debenture of the company;

(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or

(e) for the purchase of its own shares or other securities under section 68.

FINDINGS: 

  • The Doctrine of Ejusdem Generis and its Application to Section 52: The doctrine of ejusdem generis (Latin for “of the same kind”) is a fundamental rule of statutory interpretation. It dictates that when general words in a statute follow a list of specific words, the meaning of those general words is confined to the same class or category established by the specific words. The purpose is to ensure that legislative intent is upheld by giving effect to every word in a statute, preventing general terms from being interpreted in a way that is overly broad or inconsistent with the specific terms. For the doctrine to be applicable, several conditions must be met:

 

  • The statute must contain an enumeration of specific words.
  • The enumerated words must constitute a distinct class or genus.
  • General words must follow the specific enumeration.
  • There must be no contrary legislative intent.

 

  • Applying the Doctrine to Section 52: Section 52(2) and 52(3) provide a closed and specific list of the purposes for which a company’s securities premium account may be used. These purposes form a distinct “class” of capital-related adjustments, such as:

 

  • Issuing fully paid bonus shares.
  • Writing off preliminary expenses.
  • Writing off share or debenture issue expenses.
  • Funding the premium on the redemption of preference shares or debentures.
  • Financing the buy-back of a company’s own shares.

The phrase “may be applied by the company” is therefore not an open-ended permission; it is limited by the specific list that immediately follows. The doctrine of ejusdem generis restricts the application of the securities premium account solely to the enumerated purposes, which are all capital in nature.

  • Securities Premium vs. Retained Earnings: they are not of a similar kind. Securities premium and retained earnings are fundamentally different, and their accounting treatment confirms this.
  • Distinct Nature: A securities premium is contributed capital— a capital receipt arising from shareholders paying more than the par value for shares. Retained earnings are earned profits, representing accumulated operational profits not yet distributed as dividends and it is revenue in nature. The specific list in Section 52 cannot be stretched to allow the securities premium to be used as retained earnings. Since, security premium is of capital nature, the legal principle of ejusdem generis and the distinct accounting classifications both confirm that they belong to different categories.
  •  The Article of Association (AOA) itself must be consistent with the Companies Act. Therefore, even if the AOA contains a specific clause, its legality is subject to the higher laws, and it cannot contradict them.
  • The moot point here is that whether such an Accounting Treatment can be allowed under the Proviso to Section 66(3) of the CA  2013. For ready reference the Proviso of Section 66(3) is reproduced hereunder:
    “Provided that no application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such reduction is in conformity with the accounting standard specified in section 133 or any other provision of this Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal.”
  • The ROC vide its letter dated 22.11.2024 has pointed out to Regional Director (ER), MCA that Auditor has given a certificate where he has not pointed out that the transfer of amount from ‘Security Premium Account’ to ‘Retained Earning’ is not in consonance with the provision of section 52 of Companies Act, 2013. Hence this matter may be referred to ICAI for professional misconduct.
  • Deviating from standard accounting principles by using non-GAAP (Generally Accepted Accounting Principles) financial measures carries the risk of presenting a misleading picture of an entity’s financial health. The CA 2013 and its predecessors have consistently required companies to prepare financial statements that provide a true and fair view of their financial position.
  • Consequently, the transfer of funds from the securities premium account to retained earnings is impermissible under the CA 2013, and is a clear violation of the Generally Accepted Accounting Principles (GAAP) in India as this may lead to misrepresentation of the financial statement.

CONCLUSION: 

On perusal of the records and, upon consideration of all relevant factors the Tribunal was of the opinion that the transaction recorded by the Company were not in conformity with the provisions of CA 2013 and Generally Accepted Accounting Principles. Accordingly, the Tribunal concluded that the Application filed under Section 66 seeking for reduction of the capital along with variation of terms of PS under section 48, 52 and 55 of the CA 2013 cannot be allowed in view of the Regional Director’s observation and non-fulfilment of the condition given under the Proviso to Section 66(3) of the CA 2013. Therefore, this application for Capital Reduction was rejected.

15. In the Matter of 

MILCENT APPLIANCES PRIVATE LIMITED

Registrar of Companies, Ahmedabad

Adjudication Order No. PO/ADJ/08-2025/AD/00583

Date of Order: 12.08.2025

Adjudication Order for violation regarding failure to inform ROC regarding vacation of Director amounting to violation of Section 167 of the Companies Act, 2013 for which penalty under Section 172 of the Companies Act, 2013 was imposed.

FACTS

Milcent Appliances Private Limited (MAPL) had filed a compounding application in e-Form GNL-1 vide SRN H644673635 dated 13.06.2019 for default committed under Section 167 of the Companies Act, 2013. In its application, MAPL submitted that Mr. PJP had vacated the office of Director under Section 167(1)(b) of the Company Act,2013 as he remained absent from all (5) five Board Meetings held during the financial year 2015–16, specifically on respective Board Meeting dates 1.04.2015, 22.06.2015, 3.09.2015, 31.12.2015, and 31.03.2016, despite notices being served to him through hand delivery.

Hence, as per the provisions of Section 167, MAPL was required to file e-Form DIR-12 within 30 days from the date of the Board Resolution (20.04.2016) passed for vacation of office by Mr. PJP i.e., by 19.05.2016. However, MAPL filed the said form DIR-12 on 12.03.2019, as there was a delay of 1027 days in reporting vacation of office by Director.

Accordingly, the Registrar of Companies (ROC) had submitted a report to the Directorate General of Corporate Affairs (DGCoA) on 21.06.2024, forwarding the matter for consideration. The DGCoA scheduled personal hearings on 8.10.2024 and 8.11.2024 to allow the applicants to present their case. However, no representative appeared, nor was any adjournment sought in response to emails sent by the DGCoA on 1.10.2024 and 24.10.2024.

The DGCoA vide email dated 11.05.2022, and subsequent instructions from the Ministry of Corporate Affairs (MCA), had directed to ROC that all cases filed under the Companies Act, 1956 and Companies Act, 2013, which now stand decriminalized pursuant to the Companies Amendment Acts of 2019 and 2020, shall be considered under the “In-House Adjudication Mechanism” (IAM). These amendments, effective from 2.11.2018 and 28.09.2020, were aimed at promoting Ease of Doing Business and streamlining enforcement.

In line with these directions and in view of the default committed during the period 2016–17 to 2018–19, the matter falls within the purview of IAM. Accordingly, Adjudication proceedings were initiated under Section 454 of the Companies Act, 2013, against MAPL and the officers in default for violation of Section 167 of the Companies Act, 2013.

None of the representatives of MAPL / officers appeared during the adjudication proceedings.

PROVISIONS:

Section 167:  (1) The office of a director shall become vacant in case—

(b) he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board;

Penalty section for non-compliance / default if any

Section 172: “If a company is in default in complying with any of the provisions of this Chapter and for which no specific penalty or punishment is provided therein, the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees, and in case of continuing failure, with a further penalty of five hundred rupees for each day during which such failure continues, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an officer who is in default.”

ORDER:

The AO, after having considered the facts and circumstances of the case concluded that MAPL and its directors were liable for penalty as prescribed under section 172 of the Companies Act 2013. However, MAPL was categorised under the ambit of Small Company.

Therefore, total penalty imposed was ₹2, 00,000/- (Two Lakhs only) i.e. ₹1,50,000/- (One lakh fifty Thousand only) on MAPL and ₹50,000/- (Fifty Thousand only) on its Director Mrs. JRP.

Company Law

12. In the Matter of

STANLEY LIFESTYLES LIMITED

Before the Regional Director, South East Region

Appeal Order No. F. No:9/28/ADJ/SEC.118(10) of 2013/ROC(B)/RD(SER)/2025

Date of Order: 1st August 2025

Appeal under Section 454(5) of the Companies Act 2013 (CA 2013) against order passed for offences committed under Section 118(10) of CA 2013

FACTS

This is an appeal filed under section 454(5) of the Companies Act, 2013 by the above appellants against the adjudication order dated 25th March 2025 under section 454 read with section 118(10) of the Companies Act, 2013 passed by the Registrar of Companies, Bangalore for defaults in compliance with the requirements of Section 118(10) of CA 2013.

Registrar of Companies (ROC) in his order of adjudication had stated that the company and its directors are liable to penalty as prescribed u/s 118(11) of CA 2013 for violation of Section 118(10) of CA 2013. ROC had alleged that company had not disclosed the date of Board Meetings in the Directors’ Report relating to 2018-19, 2019-20 and 2020-21 as required under SS-1.

ROC, Bangalore had issued an e-adjudication notice and imposed a penalty vide his adjudication order dated 25th March 2025 levying a penalty of  ₹75,000 on the Company and ₹15.000 each on its defaulting 3 directors (total aggregating to ₹1,20,000).

EXTRACT FROM THE RELATED PROVISIONS OF THE ACT IN BRIEF:

Section 118:

(10) 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.

(11) 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.

FINDINGS AND ORDER:

The Authorised Representative of the appellant stated that in the year 2017 the Secretarial Standards were amended deleting the requirement of disclosing the number and dates of the meeting of the Board and committees held during financial year indicating the number of meetings attended by each director. The company followed the latest SS and accordingly did not disclose the date of the Board Meetings.

Since SS-1 had been amended and there was no requirement to disclose the dates of the meetings, there is no violation. Hence the order of the Adjudication Officer dated 25th March 2025 was set aside.

Note: We have been covering the orders of the Adjudicating Officers in the past. We thought it appropriate to cover the Appellate orders too. Sections 454(5) and 454(6) of CA 2013, provide that appeal against the order may be filed with Regional Director within a period of 60 days from the date of the receipt of the order setting forth the grounds of appeal and shall be accompanied by a certified copy of the order.

The purpose of such coverage is to have a 360-degree view of the approach of the MCA in handling defaults which are occasionally very trivial in nature too.

13. In the Matter of

BI MINING PRIVATE LIMITED

Registrar of Companies, Telangana Hyderabad.

Adjudication Order No – ROC HYD/BIMINING/ADJ/S134(3)(g)/2025/228 TO 233

Date of Order – 6th May, 2025

Adjudication order issued against the Company and its Director for contravention of provisions of Section 134(3)(g) of the Companies Act, 2013 with respect to not disclosing / mentioning particulars of loans guarantees or investments under Section 186 in the Board Report of the Financial Year 2016-17.

FACTS

An Inquiry into books and accounts of BMPL was issued by the Office of Registrar of Companies (ROC) authorised by the Central Government under Section 206(4) of the Companies Act, 2013.

Inquiry Officer (IO) observed from the Board Report of the Financial Year (FY) 2016-17 that under the head Particulars of Loans, Guarantees or Investments, BMPL had disclosed/mentioned that it had not granted any loans or given any guarantees or made any investments covered under the provisions of Section 186 of the Companies Act 2013. However, during the FY 2016-17, BMPL had made investments for purchase of equity shares of its Associate Company, BGRMIL.

The Inquiry Report (IR) found reasonable cause to believe that BMPL and its officers had violated the provisions of section 134(3)(g) of the Companies Act, 2013 and liable for penal action under section 134(8) of the Companies Act 2013.

Thereafter, Adjudication officer (AO) issued Show cause notice (SCN) to BMPL and its directors dated 18th September, 2023. BMPL filed an adjudication application dated 22nd May, 2024.
Therefore, BMPL made submission in its application that the disclosure was missed out inadvertently and that BMPL had no mala-fide or fraudulent intention in not disclosing the particulars of loans, guarantees or investments.

Thereafter, a hearing was fixed by AO, where Mr. KCH, Practising Company Secretary (PCS) being authorised representative appeared and pleaded before AO for imposition of lesser penalty on BMPL and its directors.

PROVISION

Section 134 (Financial Statement, Board’s Report, etc)

“(3) There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include –

(g) particulars of loans, guarantees or investments under Section 186;

(8) 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.”

ORDER

The Adjudicating Officer (AO) after considering the facts and circumstances of the case concluded that BMPL and its directors had failed to comply with the provisions of Section 134(3)(g) of the Companies Act, 2013 thereby attracting the penal provisions mentioned under Section 134(8) of the Companies Act, 2013.

AO therefore imposed the penalty of ₹3,00,000 on BMPL and₹50,000 on each of its officers in default.

Thus, a total penalty of ₹4,00,000 was imposed on BMPL and its Directors in default.

Company Law

10. In the Matter of

CHALASANI HOSPITALS PRIVATE LIMITED Before the Regional Director, South East Region Appeal Order No. F. No:9/03/ADJ/SEC.42(9) of 2013/ROC(AP)/RD(SER)/2025

Date of Order: 4th June, 2025

Appeal under Section 454(5) of the Companies Act 2013 (CA 2013) against order passed for offences committed under Section 42(9) of CA 2013

FACTS

This was an appeal filed under section 454(5) of the Companies Act, 2013 by the above appellants against the adjudication order dated 24.02.2025 under section 454 read with section 42(9) of the Companies Act, 2013 passed by the Registrar of Companies, Andhra Pradesh for default in compliance with the requirements of Section 42(9) of CA 2013.

Registrar of Companies in his order of adjudication has stated that there is a delay in filing the return of allotment within prescribed period from the date of allotment. Hence, the penalty is imposed as per Section 42(9) of the Companies Act, 2013.

ROC, Andhra Pradesh had issued an e-adjudication notice and imposed a penalty vide their adjudication order dated 24.02.2025 levying a penalty of ₹1,80,000/- on Company and ₹1,80,000/- each on its defaulting officers, namely 3 directors (total aggregating to ₹5,40,000).

EXTRACT FROM THE RELATED PROVISIONS OF THE ACT IN BRIEF:

Section 42:
(9) If a company defaults in filing the return of allotment within the period prescribed under sub-section (8), the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees.

FINDINGS AND ORDER

The Authorised Representative of the appellant stated that the company was required to file the form in January, 2023 but could file it only in July, 2023 due to issues in the portal. Appellant has provided copy of General Circular No.4/2023 dated 21.02.2023 issued by Ministry of Corporate of Affairs extending the time for filing PAS-03 e-form till 31.03.2023.

In view of the circular produced during the hearing, the delay caused in filing the forms during the period of January to March 2023, is not to be considered for the purpose of delay. The period of delay is thus to be counted from 1st April, 2023 to 4th July, 2023 i.e., 95 days. The order of the Adjudicating Officer was modified reducing the penalty in accordance of the period of delay at ₹1,000/- for each day of default.

The penalty was modified to an amount of ₹95,000/- for the company and ₹95,000/- for each director who were directors/promotors in default (total aggregating to ₹2,85,000/-, reduced from ₹5,40,000/-)

11. In the Matter of M/s TILAK PROFICIENT NIDHI LIMITED

Before the Registrar of Companies, Patna

Adjudication Order No. ROC/PAT/Sec. l58/140806/218 to 225

Date of Order: 30th May, 2025

Adjudication Order for violation with regards to non-mentioning of Director Identification Number (DIN) on the signed financial statements filed in e-form with ROC amounting to violation of provisions of the Section 158 of the Companies Act, 2013 and for which penalty under Section 172 of the Companies Act, 2013 was imposed.

FACTS

The Registrar of Companies (RoC), acting as the Adjudicating Officer (AO), observed that M/s TPNL filed e-forms containing financial statements for the fiscal years ending from 31st March 2015 to 31st March 2019 without including the Director Identification Numbers (DINs) under the respective signatures of the directors. This omission constitutes a violation of Section 158 of the Companies Act, 2013, which mandates the inclusion of DINs in all returns, information, or particulars related to directors.

Subsequently, the RoC / AO issued a Show Cause Notice (SCN) to M/s TPNL and its directors. One of the ex directors, Mr. C.K. submitted a reply and requested that the hearing be scheduled. Accordingly, a hearing was convened. On the date of the hearing, two directors of M/s TPNL, Mr. P.P. and Mr. S.B. appeared before the Adjudicating Officer. However, they made no submissions regarding the alleged non compliance with Section 158 of the Companies Act, 2013.

PROVISIONS

Section 158: “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.”

Penalty section for non-compliance / default if any

Section 172: “If a company is in default in complying with any of the provisions of this Chapter and for which no specific penalty or punishment is provided therein, the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees, and in case of continuing failure, with a further penalty of five hundred rupees for each day during which such failure continues, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an officer who is in default.”

ORDER

The AO, after having considered the facts and circumstances of the case concluded that the M/s TPNL and its directors were liable for penalty as prescribed under section 172 of the Companies Act 2013 for default made in complying with the requirements of Section 158 of the Companies Act, 2013. Hence, the AO imposed an aggregated penalty of ₹10,00,000/- (Rupees Ten Lakhs Only) the breakup of which was ₹2,50,000/- on M/s TPNL and total of ₹7,50,000/- on the respective 6 (Six) directors in default for the respective financial years in which they had signed the Financial Statements of M/s TPNL

Part A | Company Law

8. In the Matter of Vaishali Proficient Nidhi Limited

Registrar of Companies, Bihar

Adjudication Order: ROC/PAT/ Sec 158 / 013895/ 200 to 208

Date of Order: 30th May, 2025

Adjudication order for violation of section 158 of the Companies Act 2013 (CA 2013):

FACTS

  •  It was observed from the financial statements (filed for financial year ended 31st March, 2015 to 31st March, 2019) that they did not consist of Director’s Identification Number (DIN) in the annexure attached to the e- forms thereby leading to the violation of Section 158 of CA 2013.
  •  Notices were issued to the company seeking details as well explanation.
  •  In response, directors appeared in person but did not make any submissions.
  •  Hence, it was concluded that provisions of Section 158 of CA 2013 have been contravened by the company and its directors and therefore they are liable for penalty under section 172 of CA 2013.

THE PROVISIONS OF THE ACT IN BRIEF

Section 158: 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.

Section 172: If a company is in default in complying with any of the provisions of this Chapter and for which no specific penalty or punishment is provided therein, the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees, and in case of continuing failure, with a further penalty of five hundred rupees for each day during which such failure continues, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an officer who is in default.

FINDINGS AND ORDER

  •  The company being a Nidhi Company, does not fall in the definition of a small company u/s 2(85) of CA 2013 and as such the provisions of Section 446B of CA 2013 imposing lesser penalty shall not be applicable.
  •  After taking into account all the factors, and having considered all the facts and circumstances of the case, penalty was imposed on the company and directors as per details given below:
  •  On company for each of 5 years @ ₹50,000 per year = ₹2,50,000.
  •  On 6 directors who were directors at the time of respective defaults ranging from ₹50,000 to ₹2,00,000. Aggregate penalty on all the directors subject to Rs ₹50,000 per year = ₹7,50,000.

9 In the Matter of M/s ORIENTAL INDIA KISANSHAKTI NIDHI LIMITED

Registrar of Companies, Uttar Pradesh

Adjudication Order No – 07/23/ADJ/2024/ORIENTAL INDIA/1525

Date of Order – 04th September, 2024

Adjudication order issued against the Company and its Director for not regularising the Additional Director in the subsequent Annual General Meeting which was contravention of provisions of Section 161 of the Companies Act, 2013.

FACTS

During the inquiry, it was observed that Mr. KB was appointed as an additional director of the company w.e.f. 25th February, 2017. However, he was not regularised in the subsequent Annual General Meeting of the M/s OIKNL.

As per Section 161(1) of the Companies Act, 2013, an additional director shall hold office up to the next annual general meeting. Thus, accordingly, it was evident that the company and its Directors had failed to comply with the provisions of Section 161(1) of the Companies Act, 2013 and are liable for penal action under Section 172 of the Companies Act, 2013.

Thereafter, a Show Cause Notice (SCN) was issued to M/s OIKNL and its directors on 11th June, 2024 under section 161 of the Companies Act, 2013. M/s OIKNL and its directors had not furnished any reply to the said SCN, hence no hearing was fixed for this matter.

PROVISIONS

Section 161 (Appointment of Additional Director, Alternate Director and Nominee Director)

“(1) The articles of a company may confer on its Board of Directors the power to appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an Additional Director at any time who shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier.”

Section 172 (Penalty)

“If a company is in default in complying with any of the provisions of this Chapter and for which no specific penalty or punishment is provided therein, the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees, and in case of continuing failure, with a further penalty of five hundred rupees for each day during which such failure continues, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an officer who is in default.””

ORDER:

Adjudicating Officer (AO) after consideration of the facts and circumstances of the case concluded that M/s OIKNL and its directors have failed to comply with the provisions of section 161 of the Companies Act, 2013 thereby attracting the penal provisions mentioned under Section 172 of the Act.

AO, therefore imposed the total penalty of ₹6,00,000/- i.e. maximum ₹3,00,000/- on M/s OIKNL and maximum ₹1,00,000/- each on each of its directors.

Part A | Company Law

6. M/s Hankook Latex Private Limited

Registrar of Companies, Kerala & Lakshadweep

Adjudication Order: ROCK/Adj/S.90/Hankook Latex/ 752/2025

Date of Order: 21st April, 2025

Adjudication order for violation of section 90 of the Companies Act 2013 (CA 2013):

FACTS

  •  Notices were issued to the company seeking details of action taken by the company to identify significant beneficial owner in terms of Section 90 of CA 2013. The company in response, admitted to the default.
  •  Subsequently, company filed Form BEN 2 on 14th March, 2024 enclosing BEN 1 dated 8th March, 2024.
  •  It was observed that Mr. K and Mr. D were holding Significant Beneficial Ownership w.e.f. 10th June, 1997.
  •  Thus, ROC noticed delays in submission of BEN 1 as tabulated below:

Note: As per Rule 3 of the Companies (Significant Beneficial Owners) Rules, 2018, every individual who is a significant owner in a reporting company, was required to file a declaration within 90 days from the commencement of Companies (Significant Beneficial Owners) Amendment Rules, 2019. As the date of commencement of the said rules was 8th February, 2019, the declaration should have been filed on or before 8th May, 2019.

  •  An Adjudication Notice was issued to the company and in response company admitted the delay in filing BEN-1 by SBOs.
  •  Notice of hearing was issued and the adjudicating officer informed that the penalty will be imposed as per the relevant provisions of CA 2013.

FINDINGS AND ORDER:

  •  The company has not filed GNL-3 designating an officer for compliance of the provisions of CA 2013 and as such all the directors of the company during the period of default were considered as “officers in default”.
  •  Having considered the facts, the penalty was imposed as detailed below u/s 90(1) read with Section 90(10) of CA 2013:

7. M/s BE BOLD & CONFIDENT CAREERS PRIVATE LIMITED

Registrar of Companies, Punjab and Chandigarh

Adjudication Order No –ROC CHD/Adj/1019 to 1023 Date of Order – 13th January, 2025

Adjudication order issued against the Company and its Director for contravention of provisions of Section 134 of the Companies Act, 2013 with respect to not mentioning the correct number of Board Meetings of Board of Directors held in a Financial Year.

FACTS

An Inquiry order was issued by the Ministry of Corporate Affairs (MCA) vide letter no. CL-II-07/442/2021-O/o DGCoA-MCA dated 5th April, 2022 to conduct an inquiry under Section 206(4) of the Companies Act, 2013 based on complaint of Mr. AA. Mr. AA in his complaint dated 9th October, 2022 alleged that the company M/s BBCCPL and its directors indulged in financial malpractices.

As per the MGT-7A filed in MCA for FY 2021-22, there were six Board Meetings of the board of directors, however, in the board report only five Board Meetings were mentioned for the FY 2021-22. This is a violation of section 134 of The Companies Act, 2013 as wrong information was furnished in the Board Report.

MCA issued a Show Cause Notice (SCN) dated 30th October, 2024 to M/s BBCCPL and its officers in default for the violation of section 134 of The Companies Act, 2013. M/s BBCCPL replied on 5th December, 2024 that there was an unintentional oversight in filing the Board Report. MCA found this reply unsatisfactory as M/s BBCCPL had violated the provisions of Section 134 of the Companies Act, 2013 that cannot be disregarded and that the reply was not acceptable.

PROVISION: –

Section 134 (Financial Statement, Board’s Report, etc)

“(1) The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board by the chairperson of the company where he is authorised by the Board or by two Directors out of which one shall be managing director, if any, and the Chief Executive Officer, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of One Person Company, only by one director, for submission to the auditor for his report thereon.

(2) The auditors’ report shall be attached to every financial statement.

(3) There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include—

(a) the web address, if any, where annual return referred to in sub-section (3) of section 92 has been placed

(b) number of meetings of the Board;

(c) Directors’ Responsibility Statement;

(ca) details in respect of frauds reported by auditors under sub-section (12) of section 143 other than those which are reportable to the Central Government;

(d) a statement on declaration given by independent Directors under sub-section (6) of section 149;

(e) in case of a company covered under sub-section (1) of section 178, company’s policy on Directors’ appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a Director and other matters provided under sub-section (3) of section 178];

(f) explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made—

(i) by the auditor in his report; and

(ii) by the company secretary in practice in his secretarial audit report;

(g) particulars of loans, guarantees or investments under section 186;

(h) particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the prescribed form;

(i) the state of the company’s affairs;

(j) the amounts, if any, which it proposes to carry to any reserves;

(k) the amount, if any, which it recommends should be paid by way of dividend;

(l) material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the financial statements relate and the date of the report;

(m) the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed;

(n) a statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company;

(o) the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year;

(p) in case of a listed company and every other public company having such paid-up share capital as may be prescribed, a statement indicating the manner in which form 8 [annual evaluation of the performance of the Board, its Committees and of individual Directors has been made;

(q) such other matters as may be prescribed.

Provided that where disclosures referred to in this sub-section have been included in the financial statements, such disclosures shall be referred to instead of being repeated in the Board’s report.

Provided further that where the policy referred to in clause (e) or clause (o) is made available on company’s website, if any, it shall be sufficient compliance of the requirements under such clauses if the salient features of the policy and any change therein are specified in brief in the Board’s report and the web-address is indicated therein at which the complete policy is available]

(3A) The Central Government may prescribe an abridged Board’s report, for the purpose of compliance with this section by One Person Company or Small Company

(4) The report of the Board of Directors to be attached to the financial statement under this section shall, in case of a One Person Company, mean a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.

(5) The Directors’ Responsibility Statement referred to in clause (c) of sub-section (3) shall state that—
(a) in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;

(b) the Directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period;

(c) the Directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;

(d) the Directors had prepared the annual accounts on a going concern basis; and

(e) the Directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.

Explanation. —For the purposes of this clause, the term “internal financial controls” means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information;

(f) the Directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

(6) The Board’s report and any annexures thereto under sub-section (3) shall be signed by its chairperson of the company if he is authorised by the Board and where he is not so authorised, shall be signed by at least two Directors, one of whom shall be a managing director, or by the director where there is one director.

(7) A signed copy of every financial statement, including consolidated financial statement, if any, shall be issued, circulated or published along with a copy each of —

(a) any notes annexed to or forming part of such financial statement;

(b) the auditor’s report; and

(c) the Board’s report referred to in sub-section (3).

(8) 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.”

SECTION 446B.

“Notwithstanding anything contained in this Act, if penalty is payable for non-compliance of any of the provisions of this Act by a One Person Company, small company, start-up company or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person, as the case may be.
Explanation.—For the purposes of this section-

(a) “Producer Company” means a company as defined in clause (l) of section 378A;

(b) “start-up company” means a private company incorporated under this Act or under the Companies Act, 1956 and recognised as start-up in accordance with the notification issued by the Central Government in the Department for Promotion of Industry and Internal Trade.”

ORDER:

Adjudicating Officer (AO), after considering the facts and circumstances of the case, concluded that M/s BBCCPL and its directors had failed to comply with the provisions of Section 134 of the Companies Act, 2013, thereby attracting the penal provisions mentioned under Section 134(8) of the Act.

AO therefore imposed a penalty of ₹1,50,000/- on M/s BBCCPL and ₹25,000/- on each of its officers in default.

Thus, a total penalty of ₹2,25,000/- was imposed on M/s BBCCPL and its Directors in default

Part A | Company Law

4. Caparo India Limited

Registrar of Companies, NCT of Delhi & Haryana

Adjudication Order: ROC/D/Adj/2022/Section 149(1)/6647

Date of Order: 24th November, 2022

Adjudication order for violation of section 149 of the Companies Act 2013 (CA 2013): Failure to appoint woman director

FACTS

  •  As per the financial statements filed by the company for the financial year ended 31st March, 2021, the paid-up share capital of the company was R195.80 Crores.
  •  The company is clearly required to appoint a woman director based on Rule 3(ii) of Companies (Appointment and qualification of Directors) Rules, 2014 as the paid-up share capital of the company was more than R100 Crores.
  •  A Show Cause Notice was issued to the company and its officers in default on 27th July, 2022 in this regard. The company vide letter dated 9th August, 2022 submitted its reply and as per request of company an opportunity of personal hearing was also given. The authorised representative of the company appeared and made submissions on behalf of the company.
  •  It was submitted that there was a woman director who had resigned from the company w.e.f. 19R March, 2020 due to some reasons. The date of the Board Meeting held immediately subsequent to the resignation of the previous woman director was 23rd March, 2020. The company made its efforts to appoint an appropriate person, but those efforts were not fruitful. However, subsequent to the issue of show cause notice, a woman director was appointed. It was submitted that in any case non-executive directors should not be liable to any penalty on this account.

EXTRACT OF THE RELEVANT PROVISIONS OF THE ACT:

Section 454(6):

(1) …………………………

Second Proviso:

Provided further that such class or classes of companies as may be prescribed, shall have at least one woman director.

Rule 3 of the Companies (Appointment and qualification of Directors) Rules, 2014: The following class of companies shall appoint at least one-woman director-

(ii)Every other public company having- (a) Paid-up share capital of one hundred crore rupees or more; or (b) Turnover of three hundred crore rupees or more:
…………………………………..

Provided further that any intermittent vacancy of a women director shall be filled-up by the Board at the earliest but no later than immediate next Board meeting or three months from the date of such vacancy whichever is later.

Explanation- For the purposes of this rule, it is hereby clarified that the paid-up share capital or turnover, as the case may be, as on the last date of latest audited financial statements shall be taken into account.

Non compliance of section 149 r/w Rule 3 of Companies (Appointment and qualification of Directors) Rules, 2014 would give rise to liability under section 172 which read as under:

Section 172: If a company is in default in complying with any of the provisions of this Chapter and for which no specific penalty or punishment is provided therein, the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees , and in case of continuing failure, with a further penalty of five hundred rupees for each day during which such failure continues, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an officer who is in default.

FINDINGS AND ORDER

  •  As per second proviso to Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014, the company had a period of three months from the date of resignation to appoint a woman director, however, the company failed to do so.
  •  Further, as per explanation to Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014, the paid-up capital is being reckoned from the next date of latest audited financial statement i.e. one day after 26th November, 2021 (date of auditor report) and the period of default would continue till the issue of Show Cause Notice on 27th July, 2022 (this period is referred as default period).
  •  For the purpose of determination of penalty, the following data is to be considered :
  •  Duration of the default is from 27th November, 2021 to 27th July, 2022 i.e. period of 243 days
  •  Initial Penalty of ₹50,000 and ₹1,21,500 being Penalty for continuing default aggregating to ₹1,71,500 was levied.
  •  No penalty was levied for officers in default since the company had only non-executive directors.

5. M/s APTIA GROUP INDIA PRIVATE LIMITED

Registrar of Companies, NCT of Delhi & Haryana

Adjudication Order No – ROC/D/Adj/Order/Section 56(4)(a)/APTIA/4831-4833

Date of Order: 30th December, 2024

Adjudication order issued against the Company and its Director for contravention of provisions of Section 56 of the Companies Act, 2013 with respect to delay in issue of share certificate to shareholders post incorporation of the Company.

FACTS

M/s AGIPL suo-moto filed an application with regard to violation of provisions of the Section 56(4)(a) of the Companies Act, 2013 stating that the company was required to issue the share certificate to both the Subscribers of Memorandum within 2 months of its incorporation i.e. till 7th September, 2023 but failed to do so due to delay in receipt of the subscription money in company’s bank account. Hence, there was a delay in issuance of share certificate to subscribers of 105 days.

Thereafter, office of Registrar of Companies, NCT of Delhi & Haryana i.e. Adjudication Officer (AO) issued Show Cause Notice for the said default to M/s AGIPL and its officer. A response against the notice was received wherein M/s AGIPL re-iterated the facts and also submitted that the delay in issuance of share certificates was unintentional and due to external factors beyond its control and the company had also taken steps to rectify the error.

Further Ms. C J, Company Secretary being the authorized representative of M/s AGIPL appeared for oral submission in the matter and requested to take a lenient view while levying penalty on the company and its officers as the company is newly incorporated.

PROVISIONS

Section 56 – Transfer and Transmission of Securities

(4) Every company shall, unless prohibited by any provision of law or any order of Court, Tribunal or other authority, deliver the certificates of all securities allotted, transferred or transmitted
(a) within a period of two months from the date of incorporation, in the case of subscribers to the memorandum.
….
(6) Where any default is made in complying with the provisions of sub-sections (1) to (5), the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.

ORDER

AO after consideration of the reply submitted by M/s AGIPL concluded that M/s AGIPL had failed to issue the share certificate to both subscribers of memorandum within 2 months of its incorporation which was not in compliance with the provisions of Section 56(4)(a) of the Companies act 2013. Hence, penalty of ₹50,000/- was imposed on M/s AGIPL and penalty of ₹50,000/- was imposed on each of its officers in default.

Thus, a total penalty of ₹1,50,000/- was imposed on M/s AGIPL and its Directors.

Part A | Company Law

1. SMD STRATEGIC REAL ESTATE LIMITED & ORS.

Before the Regional Director, Western Region

Appeal Order No 454(5)/SMD Strategic/92/AB2222617/2024-25/962

Date of Order: 20th February, 2025

Appeal under Section 454(5) of the Companies Act 2013 (CA 2013) against order passed for offences committed under Section 92 of CA 2013

FACTS

The Registrar of Companies, Mumbai (ROC Mumbai) vide adjudication order dated 26th December, 2023 held the Company and its Officers / Directors, have defaulted and liable for penalty under Section 92(5) of the Act. The said default pertained to the period from 30th November, 2019 to 29th December, 2019 for not filing Annual Return for the Financial Year 2018-19 within sixty days from the date of Annual General Meeting. Adjudicating officer accordingly imposed a penalty of ₹53,000/- each on company and defaulting officer aggregating to ₹1,06,000/.

The Appellants filed appeal against the said order on 20th December, 2024. As per the provisions of Section 454(6) of CA 2013, every appeal u/s 454(5) is required to be filed within 60 days from the date of the receipt of the order. Thus, it was noticed that appeal was not filed within 60 days from the date of receipt of the order.

EXTRACT FROM THE RELATED PROVISIONS OF THE ACT IN BRIEF

Section 454(6):

Every appeal under sub section (5) shall be fled to within sixty days from the date on which the copy of the order made by the adjudicating officer is received by the aggrieved person and shall be in such form, manner and be accompanied by such fees as may be prescribed.

Rule 4(1) of the Companies (Adjudication of Penalties) Rules, 2014:

Every appeal against the order of the adjudicating officer shall be filed in writing with the Regional Director having jurisdiction in the matter within a period of sixty days from the date of receipt of the order of adjudicating officer by the aggrieved party, in Form ADJ setting forth the grounds of appeal and shall be accompanied by a certified copy of the order against which the appeal is sought:

FINDINGS AND ORDER

At the time of personal hearing, with regard to the delay in filing appeal, authorised representative stated that the said Adjudication Order was not received by the appellant.

Taking into consideration, submissions made by the Appellants in their application as well as oral submissions of authorized representative during the hearing, the Regional Director held as under;

“I am of the considered view that the appeal is barred by limitation and hence, is rejected without going in the merit of the matter as the appeal was filed beyond 60 days after the receipt of Adjudication Order dated 26th December, 2023. Accordingly, the Adjudication Order dated 26th December, 2023 passed by ROC, Mumbai is ‘CONFIRMED’ under Section 454(7) of the Act.

Note:We have been covering the orders of the Adjudicating Officers in the past. We thought it appropriate to cover the Appellate orders too. Sections 454(5) and 454(6) of CA 2013, provide that appeal against the order may be filed with Regional Director within a period of 60 days from the date of the receipt of the order setting forth the grounds of appeal and shall be accompanied by a certified copy of the order.

The purpose of such coverage is to have a 360-degree view of the approach of the MCA in handling defaults which are occasionally very trivial in nature too.

2. Tejas Cargo India Limited

Registrar of Companies, Delhi

Adjudication Order ID PO/ADJ/01-2025/DL/00052

Date of Order: 15th January, 2025

Adjudication order for violation of section 56(4) of the Companies Act 2013 (CA 2013): Failure to issue share certificates to subscribers to the memorandum within 2 months of incorporation

FACTS

  •  The company had submitted an application in Form GNL – 1 for adjudication of violation of the provisions of section 56(4)(a) of CA 2013.
  •  As per the said application, company was incorporated on 26th March, 2021 and as per the provisions of Section 56(4)(a) of CA 2013, the company was required to issue share certificates to the subscribers of memorandum within 2 months from the date of incorporation i.e. on or before 25th May, 2021.

The company in its application had further stated that the share certificates were issued on 7th August, 2021 and hence there was a delay of 74 days in issuance of share certificates to the subscribers of the memorandum of association (MoA). The company had further stated that delay occurred since there was a delay in receipt of share application money.

  •  A show cause was issued to the company and company in reply prayed adjudication of the matter on compassionate ground as the default occurred due to an oversight in procedural compliance.

EXTRACT OF THE RELATED PROVISIONS OF THE ACT IN BRIEF

(4) Every company shall, unless prohibited by any provision of law or any order of Court, Tribunal or other authority, deliver the certificates of all securities allotted, transferred or transmitted—
(a) within a period of two months from the date of incorporation, in the case of subscribers to the memorandum;
….
(6) Where any default is made in complying with the provisions of sub-sections (1) to (5), the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.

FINDINGS AND ORDER

Considering the default and further considering the fact that the company failed to issue share certificate/s to both the subscribers to the MoA within 2 months of incorporation which was not in compliance with the provisions of section 56(4)(a) of CA 2013. The submission of the company for remission in the penalty cannot be considered as the relevant provisions of the act provides for a fixed penalty. The subject company is not a small company as defined u/s 2(85) of CA 2013.

Hence, adjudication officer imposed a penalty of ₹50,000 each on the defaulting company and subscribers to the MoA.

3. In the Matter of ANHEUSER BUSCH INVBEV INDIA LIMITED

Registrar of Companies, Mumbai

Adjudication Order No: ROC (M)/Sec 118/Anneuser/ADJ-ORDER2023-24/2965 to 2974.

Date of Order: 24th December, 2024

Adjudication Order passed imposing penalty under Section 454(3) for not complying with all the provisions of “Secretarial Standards” specified by the Institute of Company Secretaries of India with respect to General and Board Meetings which amount to violation of provisions of Section 118(10) of the Companies Act, 2013

FACTS

M/s ABNIIL filed suo-moto application dated 24.08.2024 for adjudication of offence before the Office of Registrar of Companies, Mumbai i.e. Adjudication officer (AO) under section 454 of the Companies Act, 2013 towards violation of Section 118(10) of the Companies Act, 2013.

M/s ABNIIL in its application stated that the provision of Sec 118(10) of the Companies Act,2013 which states 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.”

However, M/s ABNIIL could not comply with all the provisions of Secretarial Standards with respect to General and Board Meetings specified by the Institute of Company Secretaries of India (ICSI) with respect to Board meetings for financial years 2020-21, 2021-22 and 2022-23.

Further, it was stated that non-compliance with respect to the Secretarial Standards mainly pertains to failure to furnish the following:-

i. Proof of sending of Notice and Agenda for the Board Meetings.

ii. Proof of sending of Draft Minutes and Copy of signed and certified minutes.

iii. Proof of circulation of some Board Resolutions passed by circulation along with their approval.

iv. Proof of sending Notice of General Meeting to the Directors and Auditors of the Company.

Thus, M/s ABNIIL had admitted that it was not in proper compliance with provisions of Section 118(10) of the Act and Secretarial Standards specified by (ICSI) and therefore, M/s ABNIIL and its officers in default are liable for penal action under Section 118 (11) of the Companies Act, 2013.

PROVISIONS

Section 118

Minutes of Proceedings of General Meeting, Meeting of Board of Directors and Other Meeting and Resolutions Passed by Postal Ballot

(1) 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.

…

(11) if any default is made in complying total 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.

ORDER

AO, after considering the facts and circumstances of the case and after taking into account the factors above, and submissions made by M/s ABNIIL in its application, imposed a penalty of ₹25,000/- (Rupees Twenty-Five Thousand only) on the Company for each financial year and a penalty of ₹5,000/- (Rupees Five Thousand only) each on officer in default for respective financial year for failure towards compliance with the provisions of Sec. 118(10) and Secretarial standards specified by the (ICSI) with respect to Board meetings for FY2020-21, 2021-22, 2022-23.

Thus, a total penalty of ₹1,50,000/- was imposed on M/s ABNIIL and its officers in default.

Part A | Company Law

18. Global One (India) Private Limited.

Registrar of Companies, NCT of New Delhi and Haryana

Adjudication Order No. ROC/D/Adj/Order/203/GLOBAL ONE/5224-5226

Date of Order: 31st January, 2025

Adjudication order for violation of section 203 of the Companies Act 2013(Act): Delay in appointing Whole Time Company Secretary.

FACTS

  •  The Company had earlier filed a compounding application before the Regional Director (NR) for the period starting from 1st November, 2013 to 1st May, 2023 for non-appointment of CS. During the hearing for compounding, it was indicated that for the period starting from 2nd November, 2018, the said default is under adjudication mechanism and accordingly, a separate application has to be filed before the ROC, NCT of Delhi & Haryana.
  •  In the adjudication application filed thereafter, it is stated that due to the financial constraints, the management was unable to find a suitable candidate for the purpose of appointment of Whole Time Company Secretary on Board.
  •  The CS could only be appointed on 1st May, 2023 and accordingly there has been a delay of 1642 days (i.e. from 2nd November, 2018 to 1st May, 2023) in the appointment.
  • Accordingly, a show cause notice for the default was issued to the company and its officer and a response was received to the notice. In its reply, the company put forth its business condition wherein it is submitted that the Company is part of the Orange Business Group i.e. multinational business group from France with Govt. of France. The Company had to carry certain business operations with Videsh Sanchar Nigam Limited (VSNL) but due to VSNL being wound up, this Company also did not pursue the business goals further. The company stated that it was neither carrying any business nor it had any revenue  from business operations so it could not appoint the CS to meet the requirement of the Companies Act. The company also requested for oral hearing in the matter.
  •  The authorised representative who appeared for oral submission in the matter requested to take a lenient view while levying penalty on the company and its officers as company is not making any revenue from its operations since many years.

EXTRACT FROM THE PROVISIONS OF THE ACT IN BRIEF:

Section 203 (Appointment of Key Managerial Personnel):

(1) Every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel,

(i) managing director, or Chief Executive Officer or manager and in their absence, a whole-time director;

(ii) company secretary; and (iii) Chief Financial Officer:

Provided that an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or
Chief Executive Officer of the company at the same time after the date of commencement of this Act unless,

(a) the articles of such a company provide otherwise; or

(b) the company does not carry multiple businesses

Provided further that nothing contained in the first proviso shall apply to such class of companies engaged in multiple businesses and which has appointed one or more Chief Executive Officers for each such business as may be notified by the Central Government. ………

(5) “If any company makes any default in complying with the provisions of this section, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees”

Rule 8A (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

Rule 8A. Every private company which has a paid-up share capital for ten crore rupees or more shall have a whole-time company secretary.

FINDINGS AND ORDER

The Company has failed to appoint to whole time company secretary for a significant period. There has been a delay of 1642 days (i.e. from 2nd November 2018 to 1st May, 2023) in appointment of CS. Further, the submission of the company to grant any remission in the penalty cannot be considered as the law provides for a fixed penalty. The subject company does not get covered under the purview of small company as defined u/s 2(85) of the Act. Hence, the benefit of section 446B would not be applicable on the company.

Thereafter in exercise of the powers conferred on the AO vide Notification dated 24th March, 2015 and having considered the reply submitted by the subject Company in response to the notice, the following penalty was imposed on the Company and its officers in default under Section 203 of the companies act 2013 for violation as follows:

  •  Penalty on Company of ₹5,00,000 being Maximum Penalty
  •  Penalty on each of the directors subject to Maximum of ₹5,00,000 per director

19. M/s HIND WOOLLEN AND HOSIERY MILLS PRIVATE LIMITED

Registrar of Companies, Chandigarh

Adjudication Order No. ROC CHD/ADJ/ 860 TO 865

Date of Order: 27th November, 2024.

Adjudication Order for Non-disclosure of interest or concern in other body corporate or entities by the Directors in Form MBP-1at the first Board Meeting of the Financial Year as required under the provisions of the Section 184 of the Companies Act 2013.

FACTS OF THE CASE

Registrar of Companies (ROC) or Adjudication Officer (AO) during its inquiry on M/s HWAHMPL under Section 206 of the Companies Act, 2013 found that the directors had failed to disclose their interest or concern in other companies or body corporate, including their shareholding, at the first board meetings for the financial years 2020-21 and 2021-22 and necessary Form MBP-1 was not submitted/filed by the directors to the M/s HWAHMPL.

Thereafter, ROC issued a show-cause notice (SCN)on November 7, 2024 to directors for violation of Section 184 (1) of the Companies Act 2013 read with Companies (Adjudication of Penalties) Rules, 2014. However, directors did not provide any response or communication to the said SCN.

PROVISIONS

Section 184(1): “Every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in such manner as may be prescribed.”

Section 184(4): “If a director of the company contravenes the provisions of sub-section (1) or sub-section (2), such director shall be liable to a penalty of one lakh rupees.”

Section 446B: “Notwithstanding anything contained in this Act, if penalty is payable for non­-compliance of any of the provisions of this Act by a One Person Company, small company, start-up company or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person, as the case may be.

Explanation. —For the pit/ poses of this section

(a) “Producer Company” means a company as defined in clause (1) of section 378A;

(b) “start-up company” means a private company incorporated under this Act or under the Companies Act, 1956 and recognised as start-up in accordance with the notification issued by the Central Government in the Department for Promotion of Industry and Internal Trade.”

Rule 3(12) of Companies (Adjudication of Penalties) Rules, 2014 “While adjudging quantum of penalty, the adjudicating officer shall have due regard to the following factors, namely.

a) size of the company

b) nature of business carried on by the company,

c) injury to public interest,

d) nature of the default,’

e) repetition of the default,’

f) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default: and

g) the amount of loss caused to an investor or group of investors or creditors as a result of the default.

Provided that, in no case, the penalty imposed shall be less than the minimum penalty prescribed, if any, under the relevant section of the Act.”

Rule 3(13) of Companies (Adjudication of Penalties) Rules, 2014 which read as under: “In case a fixed sum of penalty is provided for default of a provision, the adjudicating officer shall impose that fixed sum, in case of any default therein.”

ORDER

AO, after having considered the facts and circumstances of the case concluded that the directors of M/s HWAHMPL were liable for penalty as prescribed under section184(4)of the Companies Act 2013 for default made in complying with the requirements.

Hence, AO imposed an aggregate penalty of ₹5,00,000/- (Rupees Five Lakhs Only) i.e. ₹50,000/- (Rupees Fifty Thousand Only) on Each of the Director in default of M/s HWAHMPL for non-disclosure of interest or concern in other bodies corporate or entities at the first Board Meeting held for the Financial year 2020-21 and 2021-22 in form MBP-1 undersection 184 (4) of the Companies Act 2013 read with Section 446B of the Companies Act 2013.

Part A | Company Law

15. Mrs. Anubama

Registrar of Companies, Tamil Nadu, Chennai

Adjudication Order No. ROC/CHN/ANUBAMA/ADJ/S.155/2024

Date of Order: 3rd October, 2024

Adjudication order for violation of section 155 of the Companies Act 2013(CA 2013): Applying, Obtaining or possessing two DINs.

FACTS

Mrs. Anubama had submitted an Adjudication application in GNL-1dated 28th August, 2024 for violation of Section 155 of the companies Act, 2013 and also submitted a physical application. The applicant submitted that she has obtained her first DIN on 9th January, 2018. After that she was appointed as a director in multiple Companies using this first DIN but later resigned from all the companies as director, and hence she was not a director in any of the said companies thereafter. The applicant has further obtained inadvertently the second DIN on 23rd April, 2013. The applicant was also appointed as Director in some of the companies using this second DIN and later resigned from all such positions. Further, the applicant was appointed as designated partner in two LLPs and was continuing thereafter. The applicant had applied in form No DIR-5 to surrender the second DIN. However, the form was returned for resubmission with remarks stating that “the DIN holder has taken second DIN in violation of Section 155 of the CA 2013 and required to be adjudicated. The applicant further stated that Hence, submitted the adjudication application as the aforesaid contravention was not committed with any malafide intent and no prejudice is caused to any stake holders.

Based on the adjudication application, this Adjudicating Authority (AO) had issued Adjudication Hearing Notice to the Company and its officers in default. Pursuant to hearing notice issued an authorized representative of the applicant appeared before the Adjudicating Authority and made submissions that, ‘the said violation mav be adjudicated as per section 159 of the Companies Act, 2013’.

PROVISIONS OF THE ACT

Section 155: Allotment of Director identification Number. No individual, who has already been allotted a Director identification Number under section 154, shall apply for, obtain or possess another Director identification Number.

Section 159 – Penalty for Default of certain Provisions: 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 rupees for each day after the first during which such default continues.

FINDINGS AND ORDER

It is noticed that the applicant, Mrs. Anubama obtained her first DIN on 9th January, 2008 and she was appointed as a director in multiple companies using this first DIN. Further, on 23rd April, 2013, the applicant has further inadvertently obtained a second DIN. The applicant was also appointed as Director in some of the companies using this second DIN, although the applicant continues to serve as a designated partner in two LLPs.

The applicant was holding 2 DINs from 23rd April 2013. Further, Mrs. Anubama has filed e-form DIR-5 to surrender the DIN which was obtained on 23rd April 2013. The form was returned with remarks to adjudicate the violation. After that she filed the adjudication application in e-form GNL-1 on 28th August 2024. Hence, there was a violation of Section 155 of the CA 2013 till 27th August 2024. The applicant is liable for penalty under Section 159 of CA 2013.

After considering the facts, AO concluded that Mrs. Anubama has violated Section 155 of the CA 2013 and accordingly he imposed a Penalty u/s 159 of CA 2013 amounting to `19,51,000/-.

• Penalty from 1st April, 2014 to 27th August, 2024: 3802 days i.e. `50,000 + (`500*3802=19,01,000) = `19,51,000.

16. Panama Wind Energy Private Limited

Registrar of Companies, Maharashtra, Pune

Adjudication Order No. ROCP/ADJ/Sec. 203/STA(V)/23-24/ 2072 to 2075

Date of Order: 12th December, 2024

Adjudication order for violation of section 203 of the Companies Act 2013 (CA 2013): Violation arising out of non-filling of the vacancy of the whole time key managerial personnel within a period of 6 months.

FACTS

Company had submitted Form GNL-1 for filing an application before ROC, Pune under Section 454 of the Companies Act 2013 for adjudication of the offence committed under Section 203 read with rule 8 and 10 (Companies Appointment & Remuneration of Managerial Personnel Rules, 2014) of the Act.

It was stated in the application that Company Secretary was appointed by the Board of Directors in its Meeting held on 30th October 2019, with effect from 19th October, 2019. The said Company Secretary tendered her resignation from the post of Company Secretaryshipw.e.f. 23rd December, 2020, after serving the notice period of 30 days, and the same was approved by the board on 18th January, 2021. The Company was required to appoint a Company Secretary within 6 (Six) months from the date of such vacancy i.e. 22nd January, 2021 till 21st July, 2021. Further, the Company has appointed another incumbent as Company Secretary of the Company in the meeting of its Board of Directors with effect from 1st March, 2022, with the period of default from 21st July, 2021 to 28th February, 2022.

On receipt of the aforesaid application, a notice was sent to the company and Ex-Directors vide letter dated 06th August, 2024 to which the company replied vide its letter dated 20th August, 2024.

PROVISIONS OF THE ACT IN BRIEF

Section 203(4) of the Act provides that if the office of any whole-time key managerial personnel is vacated, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within a period of six months from the date of such vacancy.

Section 203(5) of the Act provides inter alia that if any company makes any default in complying with the provisions of section 203, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees.

FINDINGS AND ORDER

  •  The company, in its reply, accepted that the company is in violation of the provisions of the Act for non-appointment of the Company Secretary as required under the Act within a stipulated period of 6 (Six) months from the date of vacancy. The erstwhile Company Secretary had resigned w.e.f. 23rd December, 2020 and the same was approved by the board on 18th January, 2021. The company has filed the required form related to the resignation of the Company Secretary wherein the date of cessation is stated as 22nd January, 2021. Subsequently, the Company was required to appoint a Company Secretary within 6 (Six) months from the date of such vacancy i.e. 22nd January, 2021 till 21st July, 2021. However, the company appointed a Company Secretary with effect from 1st March, 2022, thereby defaulting for a period from 21st July, 2021 to 28th February, 2022 (223 days).
  •  On reading the provision of the Act, it is stated that the Act provides for a fixed penalty on the company and its officers in default for violating Section 203(4) of the Act.
  •  Section 203(4) clearly casts the obligation for appointment of a KMP in timely manner on the Board, making the entire Board of the company liable for the period in which the default occurred. Thus, it is required to identify the officers in default for the period of violation. On perusal of the records of the company, it is seen that the directors of the company for the relevant period of time are officers in default.
  •  Thus, in exercise of the powers conferred and having considered the facts and circumstances of the case besides submissions made by the Noticee(s) and after considering the factors mentioned herein above, AO imposed the penalty on the officers in default of an aggregate amount of `12,28,000/- as under:

* Ceased to be a director w.e.f. 30th November, 2021

17. In the Matter of M/s MACQUARIE GROUP MANAGEMENT (INDIA) PRIVATE LIMITED

Registrar of Companies, NCT of Delhi & Haryana

Adjudication Order No – ROC/D/Adj/Order/Section 62 (2)/MACQUARIE/4651-4654

Date of Order – 11th December, 2024

Adjudication order issued against the Company and its Director for contravention of provisions of Section 62(2) of the Companies Act, 2013 with respect to not following Statutory period i.e. dispatched notice of right issue to all existing shareholders at least three days before the opening of the issue.

FACTS

M/s MGMIPL suo-moto filed application for adjudication of offence before the office of Registrar of Companies, NCT of Delhi & Haryana i.e. Adjudication Officer (AO) with regards to violation of the provisions of the Section 62(2) of the Companies Act, 2013 stating that M/s MGMIPL had proposed the issues of shares pursuant to section 62 (1) of the Companies Act, 2013 which provides for further issue of share capital viz rights issue of 80,000,000 equity shares of ₹1/- each to its existing shareholders.

Further, it was stated that M/s MGMIPL relied on the exemption issued by Ministry of Corporate Affairs (MCA) to the Private Companies on 5th June 2015, and accordingly dispatched notice on email mentioned under sub-section (2) of section 62 of the Companies Act, 2013 on 30th June 2021, and offer was opened on 1st July, 2021. However, M/s MGMIPL was required to arrange consent from 90% of the shareholders in case where the issue was opened before three days and the fact was admitted by M/s MGMIPL that it erroneously missed to arrange for a written consent of shareholders for opening the issue ahead of the statutory period of 3 days.

Accordingly, a Show Cause Notice (SCN) was issued to M/s MGMIPL and its officers for the default under section 62(2) of the Companies Act, 2013. M/s MGMIPL in its reply, had reiterated the facts as stated in its application and informed that the default was unintentional and involuntary, occurred without mala fide intent. Further, no objections have been raised by the shareholders of the company regarding this matter throughout the Company’s proceedings.

PROVISIONS

Section 62 (Further issue of share capital)

(2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least three days before the opening of the issue.

Provided that notwithstanding anything contained in this sub-clause and sub-section (2) of this section, in case ninety percent, of the members of a private company have given their consent in writing or in electronic mode, the periods lesser than those specified in the said sub- clause or sub-section shall apply.

Section 450 (Punishment where no specific penalty or punishment is provided)

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 after the first during which the contravention continue, 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

ORDER

AO after consideration of the reply submitted by M/s MGMIPL, concluded that M/s MGMIPL had not adhered to the minimum time period of 3 days for opening of the offer [to be reckoned from the date of dispatch of the notice till the opening of the issue]. Further, by its own admission it did not take the benefit of obtaining a prior consent as per the proviso to the said sub-section so as to relax the minimum time specified therein. Hence, it had violated the provisions of Section 62(2) of the Company Act, 2013.

AO therefore imposed the penalty of ₹10,000/- on M/s MGMIPL and ₹10,000/- on each of its officers in default.

Thus, a total penalty of ₹40,000/- was imposed on M/s MGMIPL and its Directors.

Part A | Company Law

12 In the Matter of:

M/s. Venkatramana Food Specialities Limited

Registrar of Companies, Puducherry

Adjudication Order No. ROC/PDY/Adj / Sec.203 / 02550/ 2024

Date of Order: 9th October, 2024

Adjudication order for violation of section 203 of the Companies Act 2013 (CA 2013) by the Company: Failure to fill the vacancy arising from the resignation of the whole time Company Secretary within a period of 6 months.

FACTS

The company had appointed a Whole-time Company Secretary on 15th April 2019 as required under the provisions of Section 203(4) read with Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. Subsequently, the said Secretary resigned and moved out of the company from 26th December, 2019.

The company was required to appoint a whole-time company secretary on or before 20th June, 2020 i.e. within 6 months from the date of resignation (26th December, 2019). However, the company appointed a whole-time secretary who joined w.e.f. 9th December, 2023. Thus, there was a delay of 1442 days in the appointment of the Company
Secretary. (From 27th December, 2019 to 8th December, 2023).

The show-cause notice was issued and hearing was fixed. The authorised representative explained that due to Covid it was not possible to appoint any CS even after many advertisements and it was difficult to appoint a whole time Company Secretary. However, the default was accepted for the adjudication.

PROVISIONS OF THE ACT IN BRIEF:

Section 203(4) of CA 2013:

If the office of any whole-time key managerial personnel is vacated, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within a period of six months from the date of such vacancy.

Note: Section 203(1) requires certain classes of companies to have a whole-time key managerial personnel which includes a Company Secretary.

Section 203(5) of CA 2013:

If any company makes any default in complying with the provisions of this section, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees.

FINDINGS AND ORDER

Considering the default and acceptance of the same by the company, the Adjudication Officer, imposed a Penalty of ₹20 Lakhs as under:

Penalty imposed on  Calculation Amount ( R)
Company As per the provisions of Section 203(5) 5,00,000
Each of the 3 directors [50,000+(R1000 per day for 1442 days) Subject to Maximum of R5 Lakhs per Director] X 3 15,00,000
Total 20,00,000

13 In the Matter of M/s. Shunmugam Traders Private Limited

Registrar of Companies, Tamil Nadu, Chennai

Adjudication Order No. ROC/CHN/SHUNMUGAM/ADJ/S.137/2024

Date of Order: 16th September, 2024

Adjudication order for violation of section 137 of the Companies Act 2013(CA 2013) by the Company: Non-Filing of Financial Statements.

FACTS

It was observed from the MCA records that the company has filed its financial statements only up to the financial year 2014-2015. Since the company and its directors have not filed its financial statements up to date, Section 137 of the Companies Act, 2013 has been contravened and the defaulters are liable for action under section 137 (3) of the Companies Act, 2013. Accordingly, on submission of the inquiry report by the officer, Regional Director, Ministry of Corporate Affairs, Chennai had directed to take necessary action against the defaulters under the provisions of the Companies Act, 2013 for the financial year 2015-2016 to till date.

(i.e. FY 2022-23)

PROVISIONS OF THE ACT IN BRIEF:

Section 137 of the Companies Act, 2013-

Copy of financial statement to be filed with the Registrar:

(1) A copy of the financial statements, including consolidated financial statement, if any, along with all the documents which are required to be or attached to such financial statements under this Act, duly, adopted at the annual general meeting of the company, shall be filed with the Registrar within thirty days of the date of annual general meeting in such manner, with such fees or additional fees as may be prescribed.

(2) Where the annual general meeting of a company for any year has not been held, the financial statements along with the documents required to be attached under subsection(l), duly signed along with the statement of facts and reasons for not holding the annual general meeting shall be filed with the Registrar within thirty days of the last date before which the annual general meeting should have been held and in such manner, with such fees or additional fees as may be prescribed
(3) If a company fails to file the copy of the financial statements under sub-section (1) or sub-section (2), as the case may be, before the expiry of the periods specified therein, the company shall be liable to a penalty often thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day during which such failure continues, subject to a maximum of two lakh rupees, and the managing director and the Chief Financial Officer of the company, if any, and, in the absence of the managing director and the Chief Financial Officer, any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the Directors of the company, shall be liable to a penalty often thousand rupees and in case of continuing failure, with further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of fifty thousand rupees.

FINDINGS AND ORDER

Considering the default and further considering the fact that no response was received from the company, the Adjudication Officer concluded that the company and its directors have violated Section 137(3) of the companies Act, 2013. For the purposes of levy of penalty, date of AGM was considered as 30th September of the respective financial year.

Financial Year for which
Penalty was levied		 Final Penalty imposed on the Company and the Officers in default (Amount in R)
2015-16 4,50,000
2016-17 4,50,000
2017-18 4,50,000
2018-19 4,35,800
2019-20 3,99,200
2020-21 3,62,700
2021-22 3,26,200
2022-23 2,38,200
Total 33,12,100

Further, in exercise of Section 454 (3) (b) of the Companies Act,2013 the company was directed to rectify the default by filing Financial Statements for the remaining periods i.e. from 2015-16 onwards and intimate the details of filings along with SRNs within 30 days from the date of the order.

14 In the Matter of M/s. Subh Laabh Polymers Private Limited,

Registrar of Companies, Cum Official Liquidator, Chhattisgarh

Adjudication Order No/ Reference no. to Show Cause Notice:ROC-cum-OL-C.G./008625/ATR/Adj/140/1/2024/611

Date of Order: 13th September, 2024

Adjudication order issued against Statutory Auditor of the Company for delay in filing of Resignation Notice in the prescribed e-form ADT-3 under provisions of Section 140 (2) of the Companies Act 2013.

FACTS

An inquiry under Section 206(4) of the Companies Act,2013 was carried into the affairs of M/s SLPPL and it was observed that M/s SLPPL had appointed M/s R.K.S.A as the Statutory Auditor of M/s SLPPLunder Section 139(1) of the Companies Act, 2013 for the period starting from 1st April, 2016 to 31st March, 2021 and M/s SLPPL had informed the same to ROC by filing form ADT-1 on 21st October, 2016, after receiving the consent letter from the Auditor on 20th August, 2016 and in between this period, M/s SLPPL further had appointed M/s NC&A as the Statutory Auditor for the period of 1st April, 2017 to 31st March, 2022.

Therefore, in accordance with Section 140(2) of the Companies Act, 2013, the auditor who had resigned from the Company must within a period of thirty days file in e-form ADT-3 his / her resignation with Registrar of Companies (ROC).The same was not complied by M/s R.K.S.A.

Thereafter on the direction of the Regional Director (RD), a Show Cause Notice (SCN) was issued to M/s R.K.S.A on 14th August 2024 and M/s R.K.S.A replied to the SCN via letter dated 4th September, 2024 which stated that the auditing firm was going through a constitution change in the Institute of Chartered Accountants of India by way of conversion into a Limited Liability Partnership (LLP) and name change. Due to engagement on the above matter, the auditing firm missed out on the filing of a notice of resignation in form ADT-3 to the Registrar of Companies. The firm realised its default in the year 2023 and soon after, the firm filed the ADT-3 form along with the applicable fees in addition to the applicable late filing fees.

PROVISIONS

“As per Section 140(2) The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of companies referred to in sub-section (5) of section 139, the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation.

As per Section 140 (3); If the auditor does not comply with the provisions of sub- section (2), he or it shall be liable to a penalty of fifty thousand rupees or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees.”

ORDER

AO after consideration of facts and admission made by Auditor that the filing of ADT-3 form was delayed by period of 2077 days. Hence concluded that the auditor had violated the provisions of Section 140(2) read with Section 140(3) of the Companies Act, 2013 for which penalty of ₹2,00,000 (Rupees Two Lakhs only) was imposed.

Part A | Company Law

10 Case No 1/ December 24

In the Matter of

M/s. Holitech India Private Limited

Registrar of Companies, Kanpur Uttar Pradesh

Adjudication Order No. 07/01/Adj.134(3)(f) Holitech India Private Limited /5458

Date of Order: 13th November, 2023

Adjudication order for violation of section 134(3)(f) of the Companies Act 2013 by the Company and its Directors: Failure to provide explanations and comments in the Board Report on the qualification made by the Statutory Auditors in his Report.

FACTS

The Inquiry Officer (“IO”) during the course of his enquiry had observed from the Audit Report for the Financial Year ended as on 31st March, 2020, that the Statutory Auditor had given Qualified Report stating that the company did not have appropriate system regarding receipt and issue of inventories for production, overheads, trade payable which could potentially result in under statement and overstatement of financial of the company.

The Board Report for the said financial year did not include the comments or explanations by the Board on
Qualified Opinion made by the Statutory Auditor in his Audit Report.

Thereafter, Regional Director (“RD”) on basis of (IO) report, directed Adjudication Officer (“AO”) to take necessary action against M/s HIPL and its directors for non-compliance with provisions of Section 134(3)(f) of the Companies Act, 2013. Accordingly, the AO had issued

Show Cause Notice(SCN). However, the SCN was returned to the AO office as undelivered. Consequent to that, no hearing on this matter was fixed and neither any representative of M/s HIPL or its directors furnished their reply nor appeared before the AO.

Therefore, the AO decided to pass an order on this matter as per the provisions of the Companies Act, 2013.

PROVISIONS

Section 134(3)(f)

There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include, explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report; and by the company secretary in practice in his secretarial audit report

Penal section for non-compliance / default, if any

Section 134(8)

If a company is in default in complying the provisions of this section, the company shall be liable to a penalty of three lakh rupees and every officer who is in default shall be liable to a penalty of fifty thousand rupees.

ORDER

The AO, after having considered the facts and circumstances of the case and after taking into account the factors above, imposed ₹3,00,000 (Rupees Three Lakh only) on the company and ₹50,000/- (Rupees Fifty Thousand only) on each director of the company under section 134(8) of the Companies Act 2013 for failure to comply with section 134(3)(f) of the Companies Act, 2013, and for not providing explanations or comments on Board Report for qualification made by the Statutory Auditor in his Audit Report for the Financial year ended as on 31st March, 2020.

11 11 Case 2 / December 2024

In the Matter of

M/s Dalas Biotech Limited Company

Registrar of Companies, Jaipur

Adjudication Order No. ROCJP/SCN/149/2024-25/1367

Date of Order: 31st July, 2024.

Adjudication Order for violation with regards to Non-Appointment / Non-filling up Causal Vacancy of an Independent Director in the Board within the prescribed time limit and not having minimum Independent Directors on its Board as provided in Section 149(4) of the Companies Act 2013 read with Rule 4(1) of the Companies (Appointment of Directors) Rules, 2014.

FACTS

M/s DBL had two Independent Directors in its Board as on 28th March, 2015 and one of the Independent Directors Mr. BRS resigned from the Directorship from 23rd November, 2017, thereby creating a causal vacancy. The said vacancy of the Independent Director was required to be filled by the M/s DBL on or before 22nd February, 2018. However, M/s DBL filled the vacancy on 15th March, 2021.

Therefore, M/s DBL and its directors were in default since they had violated the provisions of Section 149(4) of the Companies Act, 2013 read with Rule 4(1) of the Companies (Appointment of Directors) Rules,2014 for the period from 23rd February, 2018 to 14th March, 2021 as the new director Mr. MK was appointed in M/s DBL with effect from 15th March, 2021.

Further, Mr. VK gave his resignation which was effective from 30th March, 2021 and that created a new vacancy for an Independent Director in the Board of Directors of the M/s DBL which was required to be filled up on or before 29th June, 2021. Thereafter, M/s DBL appointed another independent director Mr. SY on 06th January, 2023, thereby violating the provisions of Section 149(4) of the Companies Act, 2013 read with Rule 4(1) of the Companies (Appointment of Directors) Rule, 2014 for the period from 30th June, 2021 to 05th January, 2023.

In view of the above, the Registrar of Companies (ROC)/ Adjudicating Officer (AO) issued a Show Cause Notice (SCN) to M/s DBL for furnishing reply.

M/s DBL had made a submission/reply to AO stating that M/s DBL was in search of appropriate skill in the market but was not able to find appropriate person. Also, there was massive panic during COVID-19 pandemic and hence, there was delay in fulfilment of causal vacancy. However, the said submission was not considered as a satisfactory reply by AO. Therefore, the AO fixed a date for hearing of this matter. However, no representative of the M/s DBL appeared on the date.

PROVISIONS

149(4): “Every listed public company shall have at least one-third of the total number of Directors as independent Directors and the Central Government may prescribe the minimum number of independent Directors in case of any class or classes of public companies.”

Rule 4(1) of the Companies (Appointment of Directors) Rules2014:

“The following class or classes of companies shall have at least two directors as independent directors –

(i) the Public Companies having paid up share capital of ten crore rupees or more; or

(ii) the Public Companies having turnover of one hundred crore rupees or more; or

(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees:

Provided that in case a company covered under this rule is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it:

Provided further that any intermittent vacancy of an independent director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later.”

Penalty section for non-compliance / default, if any

172: “ If a company is in default in complying with any of the provisions of this Chapter and for which no specific penalty or punishment is provided therein, the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees, and in case of continuing failure, with a further penalty of five hundred rupees for each day during which such failure continues, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an officer who is in default.”

ORDER

AO, after having considered the facts and circumstances of the case and after considering the documents filed by the M/s DBL had concluded that the M/s DBL and its directors were liable for penalty as prescribed under section 172 of the Companies Act, 2013 for default made in complying with the requirements. Hence, AO imposed a penalty of ₹6,00,000 (Rupees Six Lakhs Only) on M/s DBL and ₹2,00,000 (Rupees Two Lakhs Only) on Mr.SR, Managing Director of M/s DBL under section 149(4) of the Companies Act, 2013 read with Rule 4(1) of the Companies (Appointment of Directors) Rules, 2014 in respect of non-appointment / non-filling up causal vacancy of Independent Directors in the Board within the prescribed time limit and not having minimum Independent Directors on its Board.

Part A | Company Law

9. M/s Martin Realty Private Limited

Registrar of Companies, Coimbatore

Adjudication Order No. ROC/CBE/A.O/ 179/13718/2024

Date of Order: 28th March 2024

Adjudication order for violation of Section 179 of the Companies Act 2013 read with Companies (Adjudication of Penalties) Rules 2014:

Company and its Directors fail to exercise power of the Board at the meeting of the Board by way of passing a resolution thereto for grant of loans or give guarantee or provide security in respect of loans.

FACTS

A transaction was done by M/s MRPL (Company) amounting to ₹1,30,15,000 with M/s ABT. However, the payment was wrongly done by the Company instead of transaction to be done by Mrs LR. The amount was repaid by Mrs LR on the same day to M/s MRPL when the error was observed. However, as per the provisions of section 179(3)(f) of the Companies Act 2013, M/s MRPL was required to obtain specific resolution of the Board before entering into such transaction at its Board Meeting. However, M/s MRPL had failed to obtain such specific approval. Upon realisation, M/s MRPL filed a suo-moto application for adjudication.

Thereafter, Adjudication Officer (AO) in exercise of the powers conferred upon him under sub-section (4) of section 454 of the Companies Act 2013 (with a view to give a reasonable opportunity of being heard before imposing the penalty) fixed a personal hearing on 20th March, 2024 for adjudicating the penalty for violation of the provisions of section 179(3)(f) of the Companies Act 2013.

Ms MJ, Chartered Accountant, authorised representative of the Company, appeared on behalf of M/s MRPL before the AO and admitted the fact that M/s MRPL did not obtain specific Resolution of the Board of Directors for the said loan transaction.

RELATED PROVISIONS OF THE COMPANIES ACT, 2013:

Section 179(3)-The Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely:

179 (3) (f) to grant loans or give guarantee or provide security in respect of loans.

Penal section for non-compliance / default if any

Section 450- Punishment where no specific penalty or punishment is provided.

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 punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

ORDER

The AO, after considering the circumstances of the case and the submissions made by the authorise drepresentative on behalf of the company and its directors, the company being a small company, imposed the penalty under the provisions of section 446B of the Companies Act 2013 on the company and its director of ₹1,75,000 for violation of section 179(3)(f) of the Companies Act 2013.

The AO directed that the penalty be paid by the company and its directors as per law and directed to submit the copies of challans once the payment was made. The order also instructed the company to file the form INC-28 with attachment of this order along with the copies of the challans.

Part A | Company Law

8 In the Matter of:

M/S Lions Co-Ordination of Committee of India Association

Registrar of Companies, Chennai

Adjudication Order No. ROC/CHN/ADJ/LIONS CO/S.134(3)(b)24

Date of Order: 25th June, 2024

Adjudication Order on Company and its Directors for Non-disclosure of details of the Number of Board Meetings conducted and the Dates of Board Meetings held during the financial years 2018–19 and 2019–20. This amounts to violation of the provisions of Section 134(3) (b) with Secretarial Standard-4 of the Companies Act, 2013, and hence, penalty was imposed under Section 134(8) of the Companies Act, 2013.

FACTS

An inquiry was conducted in the matter of M/s LCCIA by officer authorised by Central Government (CG), wherein it was observed that:

M/s LCCIA had not disclosed number of Board meetings conducted and dates of Board meetings in its Director’s Report for the Financial Year (FY) 2018–19.

Further, it was observed that in the Director’s Report for the FY 2019–20, the Company had disclosed that the maximum interval between any two meetings was well within the maximum period of 120 days. However, as per provisions of Section 134(3)(b) of the Companies Act, 2013 (CA 2013), “Number of Board Meetings conducted” should be disclosed and as per Secretarial Standard-4, the company should disclose “Dates of Board Meetings” conducted by the Company during the year.

Thereafter, the officer submitted his Inspection Report to the Regional Director (RD) of Chennai, and the office of RD had directed to initiate necessary action against the defaulters.

Thereafter, the Adjudicating Authority / Officer issued a Show Cause Notice (SCN) on 8th September, 2023 to M/s LCCIA and its directors. Mr Shri VPN was the only Director of M/s LCCIA who had filed a suo-moto Adjudication application in form GNL-1 dated 25th November, 2023. Therefore, on the basis of such application received from Mr Shri VPN, the AO imposed penalty on him for violation of Section 134(3)(b) of CA 2013.

Since no reply / information was received from M/s LCCIA and its other directors, the AO decided to fix a final hearing on 8th April, 2024 to complete the adjudication proceedings and issue notice to M/s LCCIA and all its Directors except Mr Shri VPN.

Pursuant to the notice, Mr PPK, Company Secretary appeared on behalf of the directors Mr VKL, Mr JPS, Mr NJKM and Mr RS before Adjudicating Authority and submitted that violation may be adjudicated.

RELEVANT PROVISIONS OF CA 2013:

134. Financial statement, Board’s Report, etc.

(3) There shall be attached to statement laid before a company in general meeting, a report by its Board of Directors, which shall include-

(a) the web address, if any, where annual return referred to in sub-section (3) Section 92 has been placed

(b) number of meetings of the Board;

(8) 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

Part I- SS-4: Secretarial Standard on the Report of Board of Directors: Board Meetings:

The number and dates of meetings of the Board held during the year shall be disclosed in the Report.

ORDER

After considering the facts and circumstances of the case, the AO concluded that M/s LCCIA and its directors had violated Section 134(3)(b) of CA 2013 and were liable for penalty as prescribed under Section 134(8) of CA 2013 for the FYs 2018–19 and 2019–20.

AO, accordingly, imposed penalty on the Company and its Officers in default aggregating to ₹ 24 lakhs. The said amount of penalty was to be paid through online mode by using the website www.mca.gov.in (Misc. head) within 90 days of receipt of this order, and intimate with proof of penalty paid.

Part A : Company Law

In the Matter of M/s Bluemax Capital Solution Private Limited

Registrar of Companies, Chennai

Adjudication Order— ROC/CHN/BLUEMAX/ ADJ/S.134/2024

Date of Order: 30th April, 2024

Adjudication Order on Company and its director for non-disclosure of related party transaction which amounts to violation of the provisions of Section 134(3) (i) of the Companies Act, 2013, and penalty was imposed as per Section 134(8) of the Companies Act, 2013.

FACTS

Based on the Inspection of books and accounts of M/s BCSPL carried out under Section 206(4) of the Companies Act, 2013 by Officer authorized by the Central Government it was observed that —
The particulars of contracts or arrangements with related parties referred to in Section 188(1) had to be mentioned in form AOC-2, but in the Directors Report for the Financial years ended 2015–16,2016–17,2017–18 it was mentioned that ‘The Company did not make any related party transaction during the financial year’. So Form AOC-2 was not applicable to the “Company” and consequently no particulars in Form AOC-2 were furnished.

However, in the Balance Sheet Note 4- “Other Long-Term Liabilities” for the Financial Year 2015–16, 2016–17, and 2017–18 ‘Dues to Directors and others amounting to ₹19,20,291, ₹32,23,697.46 and ₹32,63,015.30
respectively are mentioned, which showed that M/s BCSPL had transactions falling under section 188(1) of the Companies Act, 2013.

Thus, on the submission of the inspection report, the Regional Director (RD) of Chennai directed to office of the Registrar of Companies, Chennai (“ROC”) to initiate the necessary action against the defaulters. Thereafter a Show Cause Notice (SCN) was issued dated 13th June, 2023.

Shri. RA requested for some time through a reply dated 29th June, 2023, however after that no reply was received from M/s BCSPL and its directors and the adjudication hearing notice was fixed on 23rd January, 2024.

Pursuant to the notice Shri I.B.H, Company Secretary appeared on behalf of M/s BCSPL and its directors before the Adjudicating Officer (AO) and made a submission that violation may be adjudicated.

PROVISIONS

Section 134 of the Companies Act, 2013 — Financial statement, Board’s Report, etc.

(3) There shall be attached to statements laid before a company in general meeting, a Report by its Board of Directors, which shall include —

(h) particulars of contracts or arrangements with related parties referred to in sub-section

(1) of section 188 in the prescribed form;

Rule 8(2) of the Companies (Account) Rules 2014 provides:

(2) The Report of the Board shall contain the particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the Form AOC-2.

Section 188. Related party transactions:

(l) Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to —

(a) sale, purchase, or supply of any goods or materials;

(b) selling or otherwise disposing of or buying, property of any kind;

(c) leasing of property of any kind;

(d) availing or rendering of any services;

(e) appointment of any agent for purchase or sale of goods, materials, services or property;

(f) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and

(g) underwriting the subscription of any securities or derivatives thereof, of the company

Section 134 (8) provides —

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.

ORDER

After considering the facts and circumstances of the case the AO concluded that M/s BCSPL and its directors had violated Section 134(3)(h) of the Companies Act, 2013 and thereby were liable for penalty as prescribed under Section 134(8) of the Act for the FYs 2015–16, 2016–17 and 2017–18.

The details of the penalty imposed on the company and Officers in default are given in the table below:

Name of Company / person on whom penalty imposed The maximum limit for a penalty (₹) in each year Penalty

Imposed (₹)

 

FY 2015–16

 Penalty

Imposed (₹)

 

FY 2016–17

 Penalty

Imposed (₹)

 

FY 2017–18

 Total Penalty

Imposed (₹)
M/s BCSPL 3,00,000 3,00,000 3,00,000 3,00,000 9,00,000
Shri. RA 50,000 50,000 50,000 50,000 1,50,000
Shri. B 50,000 50,000 50,000 50,000 1,50,000
Shri. SG 50,000 50,000 50,000 50,000 1,50,000
TOTAL 4,50,000 4,50,000 4,50,000 13,50,000

Further, the said amount of penalty was to be paid within 90 days of receipt of the order, and compliance was required to be intimated to AO office with proof of penalty paid.

Part A | Company Law

6 In the Matter of M/s Nextgen Animation Media Limited

Registrar of Companies, Mumbai

Adjudication Order No. ROC(M)/NEXTGENMEDIALTD/ADJ-ORDER/92/101

Date of Order: 3rd June, 2024

Non-filing of Annual Return within a period of 60 days from the due date of Annual General Meeting amounts to violation of Section 92 of the Companies Act, 2013.

FACTS

The Registrar of Companies, Mumbai, Maharashtra (ROC) observed from MCA 21 database that NAML had defaulted in filing of Annual Return for the financial year ended on 31st March, 2019. Hence M/s NAML had not complied with the provisions of Section 92 of the Companies Act, 2013 by not filing Annual Return. A default period of 326 days was noticed.

Thereafter, a show-cause notice was issued to NAML and its officer in default on 21st October, 2020 under section 454 of the Companies Act, 2013, for adjudication of offence under Section 92(5) of the Companies Act, 2013.

However, no reply was received from NAML and its officers in default.

PROVISIONS

Section 92(4): Every company shall file with the Registrar a copy of the annual return, within sixty days from the date on which the annual general meeting is held or where no annual general meeting is held in any year within sixty days from the date on which the annual general meeting should have been held together with the statement specifying the reasons for not holding the annual general meeting, with such fees or additional fees as may be prescribed.

Section 92(5): If any company fails to file its annual return under sub-section (4), before the expiry of the period specified [therein], such company and its every officer who is in default shall be liable to a penalty of [ten thousand rupees] and in case of continuing failure, with further penalty of one hundred rupees for each day during which such failure 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].

HELD

Adjudication Officer (AO) has considered the facts and circumstances of the case that NAML and its officer in default had failed to reply or neglect or refuse to appear as required. Hence, AO imposed the penalty on NAML and its officer in default. AO imposed a penalty of ₹1,65,200 (one lakh, sixty-five thousand and two hundred only) on NAML and its officer in default (who is Mr. KKS being Managing Director of the NAML and considered as officer in default).

The AO further ordered to pay the penalty amount through MCA portal and proof of payment was asked to be produced for verification within 90 days of receipt of the order.

Part A | Company Law

5 In the Matter of M/s EIT Services India Private Limited

Registrar of Companies, Koramangala, Bengaluru

Adjudication Order No.ROC(B)/Adj.Order/454-118(1)/EITServices/Co.No.026968/2023

Date of Order: 05th January, 2024

Adjudication Order for not properly/consecutively numbering the pages of the minute book of the Board Minutes and a few pages of the book were left blank without crossing the same with initials of the Chairman, which amounts to a violation of section 118 (1) of the Companies Act, 2013 (CA 2013) read with the Secretarial Standard — I (SS-1) issued by the Institute of Company Secretaries of India

FACTS

It was observed during an inquiry conducted by the Inquiry Officer (“IO”) for violation of section 118(1) of CA 2013 that the Minute Book of the Board Minutes of M/s ESIPL dated 19th January, 2017, 23rd December, 2017 and 23rd March, 2018 did not contain proper pagination and few pages were left blank without crossing the same with the initials of the Chairman of the Board.

The Registrar of Companies, Koramangala, Bengaluru i.e., Adjudication Officer (“AO”) issued an adjudication notice dated 24th February, 2023 to M/s ESIPL and its directors. M/s ESIPL responded vide letter dated 12th March, 2023 accepting the default stating that due to management change and oversight, there was a non-compliance of section 118 of CA 2013 read with SS-I.

Relevant provisions of CA 2013:

Section 118(1) “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 the resolution by postal ballot in books kept for that purpose with their pages consecutively numbered.”

Section 118(10) “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.”

Section 118(11) “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.”

AO held a physical hearing which was attended by an Authorized Representative (AR) on behalf of M/s. ESIPL and its directors and made submissions. Further, AR submitted that M/s ESIPL has made good the offence and displayed the minutes book of the Board Meetings to the AO.

HELD

AO after considering the facts of the case and submissions made, for the non-compliance of the provisions of Section 118(1) read with SS-1, in the exercise of the powers vested under section 454(3) of CA 2013 imposed a penalty in the following manner on M/s ESIPL and its directors.

The amount of penalty was ordered to be paid through the MCA website, within 90 days of the receipt of the order and to be intimated by filing Form INC-28 attaching a copy of the order and payment challans. In case of directors, such penalty amount was ordered to be paid out of their own funds.

Part A | Company Law

4 In the Matter of M/s MITHLANCHAL PROFICIENT NIDHI LIMITED (MPLNL)

Registrar of Companies, Bihar

Adjudication Order No. ROC/PAT/Sec.143/19970/1918

Date of Order: 12th March, 2024

Adjudication Order against “Auditor” of the Company for failure to report violations / non-compliance made by the Company in its Audit Report under Section 143(3)(e) and Section 143(3)(j) of the Companies Act, 2013.

FACTS

Registrar of Companies, Bihar (“ROC”) observed non-compliance in the audited financial statements (based on the records on MCA Portal in the E-form AOC-4 filed by MPNL for the financial year ending on 31st March, 2017, 31st March, 2018 and 31st March, 2019). The Chartered Accountant Mr. VP was the auditor of MPNL during these financial years.

It was observed that MPNL while preparing the financial statements has contravened the provisions of Schedule III, Section 129 and Section 133 of the Companies Act, 2013 read with Accounting Standard-3. Further, Mr. VP the auditor of MPNL had not made any comments or not reported such non-compliance of MPNL in its Audit Report, leading to a violation of Section 143 of the Companies Act, 2013 by the auditor of the Company. Hence this was a failure on the part of Mr. VP the auditor of MPNL with respect to the non-reporting of violations/non-compliance in its Audit Reports.

The details of non-compliance while preparing the financial statements of MPNL and Non reporting of compliance by auditor Mr. VP in the Reports are as follows:

Sr. no.

Contravention of the provisions by MPNL

 Non-compliance by MPNL while preparing the financial statements

Violation of Section 143 of the Companies Act, 2013 by Not reporting or No comments offered on the Non-Compliance of MPNL by auditor Mr. VP in its Report
1.

Section 129, Section 133 and Section 2(40) of the Companies Act, 2013 read with Accounting  Standard- 3:

For the financial years ending as on 31st March, 2017, 31st March, 2018 and 31st March, 2019. The “Cash Flow Statement” was not attached along with the Financial Statements as required by the Companies Act, 2013.

Non-Compliance as mentioned alongside
2. Section 129, Section 133 of the Companies Act, 2013 read with AS-18

In the Financial Statements for the financial years ending as on 31st March, 2017, 31st March, 2018 and 31st March, 2019, MPNL had not disclosed the “Name of the related Party” and “Nature of the related party relationship where control exists irrespective of whether there have been transactions between the related parties”

Non-Compliance as mentioned alongside
3. Section 129 and Section 133 read with Schedule III of the Companies Act, 2013

i. In the Financial Statements for the financial years ending as on 31st March, 2017, 31st March, 2018 and 31st March, 2019 had shown “short term borrowings” amounting to  ₹2,36,15,116, ₹3,08,15,080 and ₹45,66,443 respectively, however, failed to “Sub-classify” such Short-term borrowings whether it was Secured / Unsecured as per Schedule III of the Companies Act, 2013.

Non-Compliance as mentioned alongside

ii. In the Financial Statements for the financial years ending of 31st March, 2018 and 31st March, 2019, had shown “Loan to Members” under the head of “Short Term Loans and Advances” amounting to ₹2,02,95,743 and ₹1,55,95,667. However, failed to “Sub-classify” such short-term loan advances whether it was Secured / Unsecured as per Schedule III of the Companies Act, 2013
4. Section 129, Section 133 read with Schedule III Item-6F(ii) of the Companies Act, 2013

i. In the Financial Statements for the financial years ending as of 31st March, 2019 the Schedules Forming Part of the said Balance Sheet shows “Deferred Tax Liability-Schedule-3″ whereas no effect of the said Deferred Tax Liability-Schedule-3 has been shown in the Balance Sheet,

ii. In the Financial Statements for the financial years ending as on 31st March, 2019 amount of ₹1,45,66,443 has been shown as “Short Term Borrowings”. However, failed to “Sub-classify” such Short-term borrowings whether it was Secured / Unsecured.

Non-Compliance as mentioned alongside

5.

Section 129, Section 133 read with Schedule III Item-6R(ii) of the Companies Act, 2013

In the Financial Statements for the financial year ending on 31st March, 2019 an amount of ₹1,56,14,109/- was shown as “Short Term Loans and Advances” in the Balance Sheet whereas the said amount was not sub-classified as (a) Secured, considered good; (b) Unsecured, considered good; (c) Doubtful.

 Non-Compliance as mentioned alongside

Accordingly, the auditor of MPNL, Mr. VP had violated the provisions of Section 143(3)(e) and Section 143(3)(j) of the Companies Act, 2013 and the office of Adjudication Officer (“AO”) had issued Show Cause Notice (“SCN”) for default under section 143 of the Companies Act, 2013. Thereafter, no reply or revert from Mr. VP, auditor of MPNL was received at the office of AO.

Section 450 of the Companies Act, 2013 stated that:

Punishment where no specific penalty or punishment is provided:

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.

ORDER / HELD

On non-receipt of any reply from Mr. VP, auditor of MPNL, the AO had concluded that the provisions of Section 143 of the Companies Act, 2013 have been contravened by him and hence he was liable for penalty under Section 450 of the Companies Act, 2013 for the financial years ending as on 31st March, 2017, 31st March, 2018 and 31st March, 2019.

The AO had imposed an amount of ₹10,000 as a penalty for each of the financial years 2016–17 to 2018–19. The AO, further ordered that the auditor of MPNL should pay the amount of penalty individually by way of e-payment within 90 (ninety) days of the order.

Part A : Company Law

3 In the Matter of M/s Octacle Integration Private Limited

Registrar of Companies, West Bengal

Adjudication Order No. ROC/ADJ/326/223465/2023/12320-12325

Date of Order: 22nd February, 2024

Individual appointed as a director on the Board of the Company without holding DIN at the time of his appointment- amounts to a violation of the provisions of Section 152(3) of the Companies Act, 2013

FACTS

On the basis of the inquiry carried out u/s 206(4) of the Companies Act, 2013, certain violations were pointed out in the inquiry report and it was observed that M/s OIPL had filed form DIR-12 for the appointment of a director Mr SK on 27th August, 2021. The said form was approved on 28th August, 2021. The DIN of the appointed director was 06762192

Further, on a careful examination of the DIN details of Mr SK available on the MCA portal and E-form DIR-12, it was observed that there were differences in the details/data with respect to address, PAN, email ID and Mobile no. of Mr SK and also DIN status was shown as de-activated due to non-filing of Form DIR-3 KYC.

Thereafter, the notice under section 206(1) of the Companies Act, 2013 was issued to M/s OIPL on 27th April 2023 and a reply was received on 12th May 2023. In the reply dated 12th May 2023, Mr SK, residing in the State of West Bengal had submitted the following facts by way of an Affidavit: –

a) At the time of appointment, he was not holding any DIN and inadvertently DIN 06762192 of Mr SK, IAS officer (New Delhi) was used by him for his appointment.

b) Mr SK had applied to obtain DIN in Form DIR-3 in his name and got the DIN 10159546 dated 11th May, 2023.

c) Accordingly, Adjudication Officer (“AO”) had issued Show Cause Notice (“SCN”) dated 12th December, 2023 to Mr SK for giving an opportunity to submit his reply with respect why the penalty under Section 159 of the Companies Act, 2013 should not be imposed for violation of the provisions of Section 152 of the Companies Act, 2013.

Thereafter, two times opportunity for appearing before the AO for a hearing was provided to Mr SK. However, Mr. SK remained absent himself or through his representative from hearing the matter.

CONTRAVENTION OF SECTION 152(3) OF THE COMPANIES ACT, 2013

Section 152(3) No person shall be appointed as a director of a company unless he has been allotted the Director Identification Number under section 154(7) (or any other number as may be prescribed under section 153).

Section 159 of the Companies Act, 2013 inter alia provides that “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 rupees for each day after the first during which such default continues.”

ORDER/HELD

The AO after taking into account the facts, passed an ex-parte order and imposed a penalty on Mr SK having (DIN 10159546) under Section 159 of the Companies Act, 2013 as per the table below for violation of section 152(3) of the Companies Act, 2013:

**The days of default are calculated from the date of appointment as the director i.e., 17th August 2021 till the date of allotment of new DIN i.e., 10th May, 2023.

Mr SK director of M/s OIPL had to pay the amount of penalty individually by way of e-payment within 90 (ninety) days from the date of the order.

Part A : Company Law

20 In the Matter of M/s Blue Sapphire Healthcares Private Limited

Registrar of Companies, NCT of Delhi & Haryana

Adjudication Order No. ROC/D/Adj/Section 118/Blue Sapphire/3143-3149

Date of Order: 9th August, 2023

Adjudication Order for delay in circulation of draft Board Minutes to Directors of the Company and delay in entry of minutes in Minutes’ Book which amounts to violation of provisions of Clause 7.4 and 7.5 of the Secretarial Standard — I (SS-1) issued by the Institute of Company Secretaries of India (ICSI) read with Section 118(10) of the Companies Act, 2013.

FACTS

M/s BSPL initially made a suo moto application before the office of the Registrar of Companies, NCT of Delhi & Haryana (“ROC”) for adjudication of non-compliance with regards to delay in circulation of 2 (two) draft Board meeting minutes to its directors, which amounts to violation of provisions of Clause 7.4 of the Secretarial Standard–I (SS-1) issued by Institute of Company Secretaries of India read with Section 118(10) of the Companies Act, 2013.

M/s BSPL had conducted its Board meetings on24th September, 2021 and 21st January, 2022. Thereafter as per Clause 7.4 of SS-1, the draft minutes were required to be circulated on or before 9th October, 2021 and 5th February, 2022 respectively. However, M/s BSPL circulated the draft minutes for the Board Meetings on 22nd October, 2021 and 2nd March, 2022, respectively i.e. beyond the 15 days timeline from the date of holding of the meeting.

The ROC on the basis of said application observed that M/s BSPL not only had committed delay in circulating the draft minutes, but also committed default of delay in entering the minutes in the Minute Book timely. The following table depicts the default:

Particulars of events 3rd Board Meeting of FY 2021-22 4th Board Meeting of FY 2021-22
Date of Board Meeting 24th September, 2021 21st January, 2022
Due date for circulation of Draft Minutes as per Para 7.4 of SS-1 9th October, 2021 5th February, 2022
Draft Minutes circulated on (Default for Suo-moto application filed by M/s BSPL) 22nd October, 2021 2nd March, 2022
Due date for entry of Minutes in the Minute Book as per Para 7.5 of SS-1 24th October, 2021 20th March, 2022
Minutes entered in Minute Book (Default observed by ROC on the basis of application received in the case) 29th October, 2021 9th March, 2022

 

Thereafter, the ROC issued show cause notice (“SCN”) to M/s BSPL and its officer for default with regard to non-compliance of provisions of Clause 7.5 of SS-1 for delay or late entry of minutes in the Minutes books. Subsequently, M/s BSPL in its reply to SCN admitted the violation of Clause 7.5 of SS-1.

Relevant Provisions of SS-1 and Companies Act, 2013:

SS-1 Clause 7.4. Finalisation of Minutes: –

“Within fifteen days from the date of the conclusion of the Meeting of the board or the Committee, the draft Minutes thereof shall be circulated by hand or by speed post or by registered post or by courier or by e-mail or by any other recognised electronic means to all the members of the Board or the Committee for their comments.”

SS-1 Clause 7.5 Entry in the Minutes Book: –

7.5.1 Minutes shall be entered in the Minutes Book within thirty days from the date of conclusion of the Meeting.

Section 118 of the Companies Act, 2013

Minutes of Proceedings of General Meeting, Meeting of Board of Directors and Other Meeting and Resolutions Passed by Postal Ballot: –

(1) 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.

(10) “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.”

(11) 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.

HELD

Adjudication Officer (“AO”) after considering the facts of the case and submissions made, noted that provisions of Section 118 read with clause 7.4 and clause 7.5 of SS-1 for the aforesaid 2 (two) Board meetings ofM/s BSPL had not been complied for which ROC imposed the penalty on M/s BSPL and its officer in default except one of the directors Mr. MKM who ceased to be director w.e.f. 21st January, 2022. Hence, he was not considered as officer in default for the violations pertaining to only the Board meeting held on 21st January, 2022.

 

Sr. No. Name of Person on which penalty imposed Violation provisions of Section 118 of the Act and Clause 7.4 of SS-1 for meetings held on 24th September, 2021 and 21st January, 2022. Violation provisions of Section 118 of the Act and Clause 7.5 of SS-1 for meetings held on 24th September, 2021 and 21st January, 2022. Penalty imposed under Section 118 of the Companies Act, 2013
1. M/s BSPL Yes Yes ₹1,00,000/- (₹25,000/- for
two defaults in each of the two Board meetings)
2. Mr. MKM (Wholetime Director) Yes, except meeting dated
21st January, 2022		 Yes, except meeting dated
21st January, 2022		 ₹10,000/- (₹5,000/- for each event of default on officer in default)
3. Mr. AP (Wholetime Director) Yes Yes ₹20,000/- (₹5,000/- for each event of default on officer in default)
4. Mr. PP (Wholetime Director) Yes Yes ₹20,000/- (₹5,000/- for each event of default on officer in default)
5. Mr. NKP (Managing Director) Yes Yes ₹20,000/- (₹5,000/- for each event of defaulton officer in default)
5. Mr. SM (Company Secretary) Yes Yes ₹20,000/- (₹5,000/- for each event of default on officer in default)

The amount of penalty was ordered to be paid through the MCA website, within 90 days of the receipt of the order and intimate by filing Form INC-28.

21 IN THE MATTER OF M/S CONTLO TECHNOLOGIES PRIVATE LIMITED

Registrar of Companies, Karnataka

Adjudication Order No. ROCB/ADJ.ORDER/SECTION 90(4)/CONTLO/Co. No.152010/2022

Date of Order: 9th November, 2022

Adjudication Order imposing penalty for delay in filing of Form BEN-2 with regards to declaration of Significant Beneficial Ownership (SBO) which amounts to violation of provisions of section 90 of the Companies Act, 2013.

FACTS

M/s CTPL suo-moto filed an adjudication application on 22nd August, 2022 for violation of sub-section (4) of section 90 of the Companies Act, 2013 before Registrar of Companies, Karnataka (“ROC”), for which hearing was held on 19th October, 2022.

It was noticed from the application that the share capital of M/s CTPL was held by 3 (three) shareholders, of which majority of the shares were held by a body corporate. Hence M/s CTPL identified that the provisions of Significant Beneficial Ownership (“SBO”) were applicable to M/s CTPL.

Thereafter, M/s CTPL had received a declaration in Form BEN-1 on 20th January 2022 which was required to be reported to the ROC in Form BEN-2 within 30 days of obtaining the declaration in Form BEN-1. However, M/s CTPL missed out the filing of Form BEN-2 within the required time period, i.e. on or before 19th February, 2022 but M/s. CTPL filed the Form BEN-2 with ROC on 2nd August, 2022 with a delay of 163 days.

Thus, M/s CTPL had failed to comply with the provisions of sub-section (4) of Section 90 of Companies Act, 2013 and Rule 4 of Companies (Significant Beneficial Owners) Rules, 2018.

During the hearing, the authorised representative of M/s. CTPL made written submissions, as directed by the ROC.

It was observed from the form BEN-2 that 99.98 per cent of M/s CTPL shares were held by M/s CI, USA. Hence M/s. CTPL was not a small company as defined under Section 2(85) of the Companies Act, 2013.

Provisions of section 90(4) of the Companies, 2013 require that every company shall file a return of Significant Beneficial Owners of the company and changes therein with the Registrar containing names, addresses and other details in Form No. BEN-2 within 30 days from the date of receipt of declaration from Significant Beneficial Owner, as prescribed in Rule 4 of Companies (Significant Beneficial Owners) Rules, 2018.

Sub-section(11) of Section 90 of the Companies Act, 2013, stipulates that a company, required to maintain register under sub-section (2) and file the information under sub-section (4) or required to take necessary steps under sub-section (4A), fails to do so or denies inspection as provided therein, the company shall be liable to a penalty of one lakh rupees and in case of continuing failure, with a further penalty of five hundred rupees for each day, after the first during which such failure continues, subject to maximum of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of twenty five thousand rupees and in case of continuing failure, with a further penalty of two hundred rupees for each day, after the first during which such failure continues, subject to a maximum of one lakh rupees.

HELD

Accordingly, an Adjudication officer (‘AO’) as per powers vested under Section 454(3) of the Companies Act, 2013, imposed a penalty on M/s CTPL and its directors under Section 90 (11) of the Companies Act, 2013 as per below table:

Sl. No. Particulars Period of Default
(19th February, 2022 to
1st August, 2022) 163 days		 Penalty Imposed (₹)
1. M/s CTPL R1,00,000 + (500*163 days) 1,81,500/-
2. Mr MNS, Director R25,000 + (200*163 days) 57,600/-
3. Mr IB, Director R25,000 + (200*163 days) 57,600/-
TOTAL 2,96,700/-

 

 

The penalty amount was to be remitted by M/s CTPL and its officers through the MCA portal within 60 days from the date of the order. M/s CTPL was required to file INC-28 as per the provisions of the Companies Act, 2013.

Part A : Company Law

19 In the matter of M/S. BESTOW FINISHING SCHOOL PRIVATE LIMITED

REGISTRAR OF COMPANIES, PUNJAB AND CHANDIGARH

Adjudication Order No. ROC CHD/ADJ/682

Date of Order: 14th December, 2023

Adjudication Order for not consecutively numbering the pages of the minute book of the Company: Violation of provisions of Section 118 (1) of the Companies Act, 2013 (CA 2013) read with Secretarial Standard-1 (SS-1) issued by Institute of Company Secretaries (ICSI) on “Meetings of Board of Directors”.

FACTS

Registrar of Companies, Punjab and Chandigarh (‘ROC’) had made an inquiry under Section 206(4) of CA 2013 against M/s. BFSPL. During inquiry proceedings, it was found that the pages of the minutes’ book of the company produced/maintained by the company were not consecutively numbered.

Thereafter, ROC had issued Show Cause Notice (‘SCN’) for violation of section 118(1) of (CA 2013) read with Companies (Adjudication of Penalties) Rules, 2014 to M/s. BFSPL and its directors. No reply or communication was received from M/s. BFSPL and its directors regarding making and maintaining minutes’ book without consecutive numbering of pages.

Further, on the request of M/s. BFSPL for making an oral submission before an Adjudication officer (‘AO’), Mr. SG, Director of M/s. BFSPL was given an opportunity to make an oral submission/representation either personally or through an authorized representative.

Mr. SG appeared and made the following oral submissions:-

i. that M/s. BFSPL is a non-working company and there is no instance of any type of sales/purchase or other activities in the company, there is no inventory or other business activities in the company and the directors have not performed any business since its incorporation,

ii. that they have not received the SCN as he was admitted to the hospital. So, during that time, the SCN might have reached his office,

iii. had agreed orally to pay the penalty if imposed.

Provisions of the Section 118(1) of the CA 2013 read as;

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.

Whereas Section 118(11) of CA 2013 reads as;

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.

HELD

AO after the examination and hearing, held that submission made by Mr. SG was not satisfactory as he has not furnished the proof of hospitalization. Therefore, it was concluded that M/s. BFSPL and its officers in default are liable for penalty as prescribed under Section 118(11) of the CA 2013 read with the Secretarial Standard-1 on meetings of Board of directors for not consecutively numbering the pages of the minutes’ book of M/s. BFSPL.

Accordingly, a penalty was imposed as prescribed under sub-section (11) of Section 118 of the CA 2013. The details of the penalty imposed on M/s BFSPL and officers in default is as under:

Nature of default Violation under CA 2013 Name of person on whom the penalty imposed Penalty imposed
(in ₹)		 Final Penalty imposed i.e. 50 per cent as per Section 446B of CA 2013 being Small Company (in ₹)
Not consecutively numbering the pages of the minutes’ book of Board Meeting Section 118 (1) On company 25,000 12,500
Mr. SG, Director 5,000 2,500
Mr. RA, Director 5,000 2,500

It was further directed that penalty imposed shall be paid through the Ministry of Corporate Affairs portal only.

Corporate Law Corner – Part A | Company Law

18 In the matter of Vridhi Finserve Home Finance Limited Registrar of Companies, Karnataka, Adjudication order

Date of order: 30th November, 2023

Order of Adjudication of Penalty for violation of provisions of the Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

FACTS

M/s VFHFL had filed a suo-moto application on 9th August, 2023 for adjudication before Registrar of Companies, Karnataka (‘ROC’) with regards to non-compliance of Rule 9A (1) (a) & 9A (3)(a) of the Companies (Prospectus and allotment of Securities) Rules, 2014, as M/s VFHFL had issued 10,000 equity shares in physical mode on 25th January, 2022 instead of dematerialised mode and the Board of M/s VFHFL had also approved the transfer of 4990 equity shares in physical mode on 20th June, 2022.

As per Rule 9A (1) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, every unlisted public company was at material time required to issue securities only in dematerialised form and further facilitate dematerialisation of all its existing securities.

Therefore, on the basis of the above suo-moto application, notice of hearing was sent and hearing was held before the office of ROC which was attended by Ms. K, Company Secretary and Mr SM, Director & CFO of M/s VFHFL who made their submissions.

ROC further asked for clarification on the matter. It was clarified that M/s VFHFL had made good the default by issuing the shares to initial subscribers and the transferees in dematerialised mode as per NSDL letters submitted to ROC with regards to activation of ISIN and for crediting equity shares in dematerialised accounts.

Provisions of the of 9A (1) (a) & (b) Companies (Prospectus and allotment of Securities) Rules, 2014 states that;

Issue of securities in dematerialised form by unlisted public companies. –

(1) Every unlisted public company shall –

(a) Issue the securities only in dematerialised form; and

(b) Facilitate dematerialisation of all its existing securities

in accordance with provisions of the Depositories Act, 1996 and regulations made there under.

Provisions of the of 9A (3) (a) & (b) Companies (Prospectus and allotment of Securities) Rules, 2014 states that;

Every holder of securities of an unlisted public company,

(a) who intends to transfer such securities on or after 2nd October, 2018, shall get such securities dematerialised before the transfer; or

(b) who subscribes to any securities of an unlisted public company (whether by way of private placement or bonus shares or rights offer) on or after 2nd October, 2018 shall ensure that all his existing securities are held in dematerialised form before such subscription.

Provisions of the section 450 of the Companies Act, 2013 states that;

Punishment Where No Specific Penalty or Punishment is Provided:

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

Adjudication Officer (AO), after considering the facts and circumstances of the case and submissions made by M/s VFHFL and its representatives, held that in view of violations of the provisions of Rule 9A(1)(a) & 9A(3)(a) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 penalty be imposed under Section 450 of the Companies Act, 2013 as mentioned in below table:

Sr. no. Penalty imposed on Penalty imposed for violation of Rule 9A(1)(a)
(R)		 Penalty imposed for violation of Rule 9A(3)(a)
(R)		 Total Penalty Imposed (R)
1. M/s VFHFL 10,000/- 10,000/- 20,000/-
2. Mr. SR, Director 10,000/- 10,000/- 20,000/-
3. Mr SS, Director 10,000/- 10,000/- 20,000/-
4. Mr DS, Director 10,000/- 10,000/- 20,000/-

M/s VFHFL and its directors were directed to pay the penalty amount as above within 90 days from the date of receipt of the Order and to file INC-28 attaching a copy of the order and payment challans. In the case of directors of M/s VFHFL, such a penalty amount was required to be paid out of their own funds.

Part A – Company Law

16 Case Law No. 01 /Jan 2024

In the matter of Shri Thiyagarajan Parthasarathy

Registrar of Companies, Tamil Nadu

F.NO.ROC/CHN/THIYAGARAJAN/ADJ ORDER/S.155/2023

Adjudication Order

Date of Order: 10th July, 2023

Adjudication Order for the violation of the provisions of Section 155 of the Companies Act, 2013 which do not permit holding more than one “Director Identification Number” (DIN).

FACTS

Shri Thyagrajan Parthsarathy made an application in DIR 5 before the office of the Regional Director (Northern Region) hereinafter RD for the surrender of his DIN.

RD further observed upon processing of application received in e-form DIR-5 with respect to the surrender of the second DIN that, the applicant earlier had applied for and obtained two DINs on the MCA portal, namely DIN: 03191514 dated 23rd August, 2010 (First DIN) and DIN: 09018479 dated 4th January, 2021 (Second DIN).

Thus, the applicant himself had admitted to holding two DINs and the same had been verified by the e-records of MCA. Further, it was observed that the DIN being surrendered was still associated with a company namely “M/s SPS HPL” and a new DIN was applied, while forming the new company i.e. “M/s SPS MPL”.

Thereafter, on request from the office of RD vide letter dated 5th September, 2022, the Adjudication Office (AO) i.e. Registrar of Companies, Tamil Nadu issued a Show Cause Notice to the director Shri. TP on 19th October, 2022 for violation of provisions of Section 155 of the Companies Act, 2013 for holding 2nd DIN. The AO issued an Adjudication hearing notice to the director Shri. TP vide letter dated 15th June, 2023.

Thereafter, Mr F, Practising Company Secretary representative of the Shri TP had appeared before the AO on 30th June, 2023 and admitted to the violation on behalf of Shri. TP.

Provisions of the Section 155 of the Companies Act, 2013 states that:

“No individual, who has already been allotted a Director Identification Number under Section 154, shall apply for, obtain or process another Director Identification Number.”

Whereas Section 159 of the Companies Act, 2013 reads as under:

“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 rupees for each days after the first during which such default continues.”

HELD

AO after examination and hearing, held that Shri. TP had violated the provisions of Section 155 of the Companies Act, 2013 for which a penalty was imposed as per Section 159 of the Companies Act, 20l3. Further, AO noted that the clarification provided with respect to duplication did not seem satisfactory and that the 2nd DIN was obtained in violation of Section 155 of the Companies Act, 2013.

Therefore, in the exercise of the powers vested with AO under Section 454 (l) & (3) of the Companies Act, 2013 penalty imposed was as follows:

Name of the Officer in default Amount of Penalty for 1st Default Additional Penalty for Continuing Offence Total amount of Penalty Imposed
Shri TP ₹50,000 ₹4,53,500
(500*907)
No. of days of default: 907 days		 ₹5,03,500

17 Case Law No. 02/Jan 2024

M/s Sarada Pleasure And Adventure Limited

No. ROC/PAT/Sec. 88/13364/691

Office of the Registrar of Companies, Bihar-Cum-Official Liquidator, High Court, Patna

Adjudication order

Date of Order: 27th July, 2023

Penalty order for non-maintenance of Statutory Registers under section 88 of the Companies Act, 2013.

FACTS

Registrar of Companies, Bihar (“RoC”) during the course of their inquiry, noticed that M/s SPAL had failed to maintain the statutory registers as required under sections 88 of the Companies Act, 2013. Thus, M/s SPAL and Mr RS, Mr SD and Mr SR, directors of M/s SPAL had violated the provisions of section 88(1) of the Companies Act, 2013 w.r.t. non-maintenance of the register of members, etc.

As per Section 88(1) of the Companies Act, 2013: Every company shall keep and maintain the following registers in such form and in such manner as may be prescribed, namely:

(a) register of members indicating separately for each class of equity and preference shares held by each member residing in or outside India;

(b) register of debenture-holders; and

(c) register of any other security holders.

Further, RoC had issued a show cause notice to M/s SPAL and Mr RS, Mr SD and Mr SR, directors of M/s SPAL for default under section 88(1) of the Companies Act, 2013 vide office letter dated 12th June, 2023 on which no reply was received.

Hence, RoC observed that the provisions of Section 88 (1) of the Companies Act, 2013 were contravened by M/s SPAL and therefore were liable for penalty under section 88 (5) of the Companies Act, 2013.

Section 88(5) of Companies Act, 2013 states that:

“If a company does not maintain a register of members or debenture-holders or other security holders or fails to maintain them in accordance with the provisions of sub-section (1) or sub-section (2), 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”.

It was further observed that, as per the MCA portal, the paid-up capital of M/s SPAL is ₹2,22,56,77,000. As regards to its turnover, M/s SPAL has not filed its balance sheet since the financial year 2014-2015, hence the turnover M/s SPAL could not be ascertained. Therefore, the benefits of a small company under Section 446B could not be extended to M/s SPAL while adjudicating penalty.

HELD

The Adjudicating Officer (“AO”) after considering the facts and circumstances of the case, imposed a penalty as stated below for violation of Section 88(1) of the Companies Act, 2013 and the matter was disposed of.

Penalty on M/s SPAL: ₹3,00,000

Penalty on officers in default:

Mr RS (Director of M/s SPAL): ₹50,000
Mr SD (Director of M/s SPAL): ₹50,000
Mr SR (Director of M/s SPAL): ₹50,000

Further, it was directed to pay the penalty within 90 days of the date of the order.

Corporate Law Corner : Part A | Company Law

15 Case Law No. 01/December/2023

M/s Antique Exim Private Limited

ROC-Guj/Adj. Order/Sec 138/ 2023/1676 to 80

Office of Registrar of Companies, GUJARAT DADRA & NAGAR HAVELI

Adjudication Order

Date of Order: 4th July, 2023

Adjudication order under section 454 read with Section 450 of the Companies Act, 2013 on the company and its directors for violation of provisions of section 138 read with Rule 13 of the Companies (Accounts) Rules, 2014 with respect to non-appointment of Internal Auditor in the Company.

FACTS

The Ministry of Corporate Affairs (‘MCA’) vide letter no. 3/82/2020/CL-II (DGA CoA), dated 17th March, 2020 had ordered an Inquiry of M/s. AEPL under section 206(4) of the Companies Act, 2013.

During the course of the inquiry and on examination of financial statements for the financial years 2018–19 and 2019–20 of M/s AEPL, the Registrar of Companies (‘RoC’) had found that the turnover of M/s AEPL being a Private Limited Company exceeded R200 Crores. Based on the same, it was required and mandatory for M/s. AEPL to appoint an Internal Auditor under provisions of Section 138 of the Companies Act, 2013. However, the company had failed to appoint an Internal Auditor since the financial years 2014-15. Therefore, M/s. AEPL and Mr. PKB, Mr. SP, its officers in default had violated the provisions of the Act.

The ROC had issued an adjudication notice to M/s. AEPL and Mr. PKB, Mr. SP, its officers in default on 6th December, 2022 under section 454 of the Companies Act, 2013 for violation of Section 138 with a request to remit the penalty as prescribedunder the provisions of the Companies Act, 2013. A hearing was fixed on 21st June, 2023 to give the appellants an opportunity of being heard.

Mr. BV, Practising Company Secretary (‘PCS’), Authorised Representative of M/s. AEPL and its directors, present in the hearing stated that M/s. AEPL had already submitted their reply on two occasions i.e., 7th March, 2022 and20th October, 2022, which were taken on record.

Mr. BV further stated that M/s. AEPL had already constituted an in-house Internal Audit Department commensurate with the size of the company and had not appointed any external professional as an internal auditor of M/s. AEPL. Further, the Director’s Reports of M/s. AEPL for the F.Ys. 2014–15, 2015–16, 2016–17, 2017–18, 2018–19 and 2019–20 had reported on the adequacy of the Internal control system with reference to its Financial Statement. Hence, there was no violation of Section 138 of the Companies Act, 2013 with respect to the appointment of the Internal Auditor by M/s. AEPL. In view of the above representation, M/s. AEPL and Mr. PKB, Mr. SP, and its directors had requested a lenient view on the matter.

HELD

The Adjudication Officer (‘AO’) submitted that the reply received from M/s. AEPL was unsatisfactory since M/s. AEPL was liable to appoint an Internal Auditor from the F.Y. 2014–15. Thereby, M/s. AEPL and its directors were in default and shall be liable for penalty as per the applicable provisions.

After considering the facts and circumstances of the case, the AO imposed a penalty under Section 450 of the Companies Act, 2013 as per the below-mentioned table:

Sr. No. Name of the Company /Director Maximum Penalty (₹) Penalty imposed (₹)
1. M/s. AEPL 2,00,000 2,00,000
2. Mr. PKB, Director of M/s. AEPL 50,000 50,000
Sr. No. Name of the Company /Director Maximum Penalty (₹) Penalty imposed (₹)
3. Mr. SP, Director of M/s. AEPL 50,000 50,000

M/s. AEPL, Mr. PKB and Mr. SP were directed to pay the penalty and comply with this Adjudication order individually within 90 days and failure to do so may result in penal action without further intimation.

Corporate Law Corner : Part A | Company Law

14 Case law 01/November 2023

M/s. DEXTER BIOCHEM PRIVATE LIMITED

No. ROC-GJ /ADJ. ORDER/ DEXTER BIOCHEM/ Sec.140/ 2023-24/2632/33

Office of the Registrar of Companies, Gujarat, Dadra & Nagar Haveli

Adjudication order

Date of Order: 15th September, 2023

Adjudication Order against the Auditor of the Company for violation of section 140(2) of the Companies Act, 2013, read with Rule 8 of the Companies (Audit and Auditors) Rules, 2014, for Non-filing of Form ADT-3 with respect to Resignation from the Company.

FACTS

On perusal of documents available on the MCA21 Portal, M/s DBPL (the Company) had appointed M/s. DKN&A as Statutory Auditors of the company for the period from 1st May, 2015 to 31st March, 2020. Further, it was noticed that the company had also appointed M/s. P.U.N & Co. Chartered Accountants as Statutory Auditors of the Company for the period from 1st April, 2017 to 31st March, 2022.

Based on this, the Registrar of Companies, Gujarat, Dadra & Nagar Haveli (“RoC”) had issued a show cause notice to M/s. DBPL and M/s. DKN&A, Chartered Accountant Firm for default under section 140(2) of the Companies Act, 2013 asking clarification whether the company had removed M/s. DKN&A under Section 140(1) of the Companies Act, 2013 or whether M/s. DKN&A had resigned pursuant to Section 140(2) of the Companies Act, 2013.

M/s DBPL, in their letter dated 24th May, 2023 had replied that “they have forwarded the above-referred notice to M/s DKN&A and have requested to file Form ADT-3 for their resignation at the earliest to make the default good”. It was revealed from the reply of M/s. DBPL that M/s. DKN&A, Statutory Auditors had violated the provisions Section 140(2) of the Companies Act, 2013 due to non-filing of the notice of resignation in the prescribed e-form ADT-3, and were thereby liable for penalty under Section 140(3) of Companies Act, 2013.

Adjudication Notice vide No. ROC-GJ/ADJ-Sec. 454 read with Sec.140/Dexter Biochem/2023-24/1447 dated 21st June, 2023 was issued to Mr. KAS, Partner of M/s. DKN&A, as per Section 454 of the Companies Act, 2013 read with Rule 3 for violation of Section 140(2) of the Companies Act, 2013 regarding non-filing of Form ADT-3 and no reply was received from M/s. DKN&A on such notice.

Thereafter, for providing an opportunity of being heard a “written notice” was issued to the mailing address of M/s DKN&A on 4th September, 2023 to hold a physical hearing and to give an opportunity to be heard.

In the hearing, Mr. MD, Practising Company Secretary (“PCS”) being the authorised representative of M/s. DKN&A submitted that due to ill-health conditions, the auditor was not able to file Form ADT-3 for his resignation in a time-bound manner as per the provisions of the Companies Act, 2013. However, the Auditors had filed ADT-3 on 8th June, 2023 under the MCA portal with an additional fee of ₹7,200 with a delay of 1711 days in the filing.

He also submitted that the Auditors were engaged in a small company and the provisions of Section 446B be considered at the time of levying penalties.

Thereafter, the Presenting 0fficer submitted that the additional fees paid for delayed filing as prescribed under the Companies (The Registered offices and Fees) Rules, 2014 is, only a fees paid for filing of form as the cost of facility of delayed filing and thereby can neither be considered as fine nor penalty specified under the Companies Act, 2013. Therefore, payment of additional fees by the auditor does not absolve the default committed and hence M/s. DKN&A is liable to pay a prescribed penalty under Section 140(3) of the Companies Act, 2013.

Relevant provisions of the Companies Act, 2013 as applicable, are as under:

“As per Section 140(2); The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of companies referred to in sub-section (5) of section 139, the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation.

As per Section 140 (3); If the auditor does not comply with the provisions of sub-section (2), he or it shall be liable to a penalty of fifty thousand rupees or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees.”

HELD

Accordingly, AO after considering the facts and circumstances of the case, imposed the following penalty on M/s. DKN&A:

Name of Auditor’s Firm Penalty as per Section 140(2) of the Companies Act, 2013 Penalty
for continuing default		 Final penalty imposed as per Section 140(2) of the Companies Act, 2013 read with Section 446B of the Companies Act, 2013 (R) #
M/s. DKN&A R50,000 or an amount equal to the Remuneration of Auditors, which is less.

 

As per the financial statement, no remuneration was given to the Auditor for F.Ys. 2016–17 and 2017–18.

 1711 days*250 = R4,27,750 ₹ 1,00,000

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 as M/s. DBPL satisfied the criteria of being a Small Company where M/s. DKN&A were Auditors.

Corporate Law Corner

1. Yenugu Krishna Murthy vs. UOI

W.P. Nos. 7819, 7820/2018 and 7821/2018 (GM-RES)

Date of Order: 26th February, 2018

 

Section 164(2) read with section 167 of the
Companies Act, 2013 – The said section is constitutionally valid – Validity of
provision of law cannot be questioned merely because it operates a little
harshly on the directors of defaulting company

 

FACTS

Y was a director under the
Companies Act, 2013. His DIN status appeared as “disqualified” on the website
of Ministry of Corporate Affairs. The reason for the same in brief was
“Violated Section 164(2)(a)”. Y admittedly, did not seek a copy of
the order from the Registrar Of Companies (“ROC”). Further neither had he approached
ROC nor was he served any show cause notice or adjudication order u/s. 164(2)
of Companies Act, 2013 (“the Act”). 

 

Before the High Court, it
was urged that directors were put in a very piquant and irreparable situation
and even if, disqualification on account of non-filing of financial statements
and Annual Returns in one company does take place for which they may not be
personally liable, they incur the ‘disqualification’ u/s. 164(2)(a) of the Act
and they are deemed to have vacated the office of the director in other such
companies also as per section 167 of the Act.

 

HELD

The High Court held that
the writ petitions in the instant case were premature as the directors did not
even try to approach the appropriate authority under the Act, namely, the ROC,
seeking even a copy of the order u/s.164(2)(a) of the Act, which might have
been passed by it. In absence of adequate facts the High Court could not
conclude whether Y was at fault or not; whether he had brought the relevant
facts to the notice of the ROC or not.

If Y had approached the ROC
with the relevant facts, it would be duty bound to pass a reasoned and speaking
order. ROC has the quasi-judicial powers and an obligation under the Act to
pass such appropriate orders in the matter.

 

As far as constitutional
validity of sections were concerned, the High Court observed that provisions
could not be held to be illegal, unconstitutional or ultra vires merely
because they may operate harshly against the Directors of the defaulting
company. It observed that the academic questions or the legislative wisdom is
not the subject matter to be decided by the Courts of law unless such questions
are raised in properly instituted cases, based on proper factual foundation of
the case.

 

Accordingly, the writ
petitions were dismissed by the Court.

 

2. Dr. Reddy’s Research Foundation vs. Ministry of Corporate
Affairs

[2018] 142 CLA 351 (AP HC)                                        

Date of Order: 6th October, 2017

 

Rule 14 of the Companies (Appointment and Qualification of
Directors) Rules, 2014 – There is a lacuna in the procedure that is required to
be followed by the Companies, which are defaulted in filing their annual
returns and the consequent disqualification of the Directors to rectify the
defect.

 

FACTS

D Co had failed to furnish
annual returns for the years 2011-12 to 2015-16 and financial statements for
the years 2012-13 to 2015-16. Consequently, the directors of the company were
disqualified to act as directors under the provisions of Companies Act, 2013.

Rule 14 of the Companies (Appointment
and Qualification of Directors) Rules, 2014, prima facie provides for
rectifying the defect by enabling the defaulting companies to file their
returns. The company will have to act through its Directors in order to do so.
However, as the directors are disqualified, they are not able to file these
returns because the e-platform through which this is required to be done cannot
be accessed owing to the disqualification.

D Co thus, approached the
High Court seeking remedy for the inherent inconsistency.

 

HELD

The High Court observed
that there is a lacuna in the procedure that is required to be followed by the
Companies, which are defaulted in filing their annual returns and the
consequent disqualification of the Directors to rectify the defect.

 

Taking a note of the
anomalous situation, the High Court directed that the DIN of the directors be
restored in respect of D Co so that they are able to submit the returns in
accordance with Rule 14.

 

3. Power Grid Corporation of India Ltd. vs. Jyoti Structures Ltd.

[2018] 142 CLA 285 (Del HC)                                        

Date of Order: 11th December, 2017

 

Section 14 of the Insolvency & Bankruptcy Code, 2016 read with
section 34 of Arbitration And Conciliation Act, 1996 – Proceedings u/s. 34 of
Arbitration Act which are in favour of corporate debtor would not be stayed
even though a moratorium has been granted to such corporate debtor.

 

FACTS

Arbitral tribunal had given
an award dated 20.05.2016 which was in the nature of pure money decree in
favour of J Co. Counter claim of P Co had been rejected by the Arbitrator and
claim of J Co was upheld. During the pendency of these proceedings u/s. 34 of
the Arbitration And Conciliation Act, 1996, (“Arbitration Act”) an application
u/s. 7 of the Insolvency and Bankruptcy Code, 2016 (“the Code”) was filed by a
financial creditor against J Co. Through an order dated 04.07.2017 the National
Company Law Tribunal (“NCLT”) admitted the application and declared a
moratorium in terms of section 14 of the Code.

 

P Co filed a petition u/s.
34 of the Arbitration Act claiming that proceedings under said section be kept
in abeyance in terms of embargo contained under section 14(1)(a) of the Code.

 

HELD

The High Court having read
the provisions of section 14(1) of the Code observed that the term ‘proceedings’
as is mentioned in section 14(1)(a) of the Code is not preceded by the word
‘all’ to indicate the moratorium provisions would apply to all the proceedings
against the corporate debtor. The High Court relied on the report of the
Bankruptcy Law Reforms Committee which demonstrated that moratorium is to apply
to recovery actions and filing of new claims against the corporate debtor and
the purpose behind moratorium is that there should be no additional stress on
the assets of the corporate debtor.

 

It was argued that once the
moratorium comes into effect, no proceedings against the corporate debtor may
continue. However, the High Court held that it was important to consider the
nature of these proceedings.  Stay of
proceedings against an award in favour of the corporate debtor would rather be
stalking the debtor’s effort to recover its money and hence would not fall in
the embargo of section 14(1)(a) of the Code.

 

It was held that
proceedings would not be hit by section 14 of the Code due to following
reasons:

 

(a)  “ ‘proceedings’ do not mean ‘all proceedings’;

 

(b)  moratorium under section 14(1)(a) of the Code
is intended to prohibit debt recovery actions against the assets of corporate
debtor;

 

(c)  continuation of proceedings under section 34
of the Arbitration Act which do not result in endangering, diminishing,
dissipating or adversely impacting the assets of corporate debtor are not
prohibited under section 14(1)(a) of the Code;

 

(d)  the term ‘including’ is clarificatory of the
scope and ambit of the term ‘proceedings’;

 

(e)  the term ‘proceeding’ would be restricted to
the nature of action that follows it i.e. debt recovery action against assets
of the corporate debtor;

 

(f)   the use of narrower term “against the
corporate debtor” in section 14(1)(a) as opposed to the wider phase
“by or against the corporate debtor” used in section 33(5) of the
Code further makes it evident that section 14(1)(a) is intended to have
restrictive meaning and applicability;

 

(g)  the Arbitration Act draws a distinction
between proceedings under section 34 (i.e. objections to the award) and under
section 36 (i.e. the enforceability and execution of the award). The
proceedings under section 34 are a step prior to the execution of an award.
Only after determination of objections under section 34, the party may move a
step forward to execute such award and in case the objections are settled
against the corporate debtor, its enforceability against the corporate debtor
then certainly shall be covered by moratorium of section 14(1)(a).”

 

Once the
moratorium is declared the decision to continue with the objections need to be
taken only by the Resolution Professional. The High Court observed that in the
peculiar circumstances of this case where a counter claims was preferred by the
objector, though rejected, it would be appropriate if the interim resolution
profession be made aware of the proceedings and he consents to its
continuation.  

 

Corporate Law Corner

 1.      
Deccan
Chronicle Holdings Ltd. (DCHL) vs. ROC [2017] 83 taxmann.com 315 (NCLT – Hyd.) Date of Order: 5th July, 2017

Section 297 read
with section 621A of Companies Act, 1956 – Money was advanced to a related
party without any interest without obtaining prior approval of concerned
authority – Even though the amount was returned by such a related party; the
same still violated section 297 – Offence could be compounded subject to
payment of hefty fees.

FACTS

“D Ltd.” a listed company, filed an
application for compounding an offence committed u/s. 297 of Companies Act,
1956 (“the Act”). Section 297 prohibited related party transaction except with
the consent of the Board of Directors and in case the company had a paid up
share capital of not less than Rs. 1 crore, prior approval of Central
Government was required. D Ltd. had transferred Rs. 99 crores to a company ‘F
Ltd.’ towards aircraft maintenance and other fund transfers. ROC issued a notice
demanding an explanation for violation of section 297. D Ltd. submitted that
the transactions with F Ltd. were out of purview of section 297 and also that
owing to some other reasons, F Ltd. was asked to repay all the sums transferred
to it and F Ltd. had duly complied with such request. In view of these facts,
proceedings, if any should be dropped. D Ltd filed an application with NCLT
which was dismissed by it. The Applicants therefore filed an appeal and
Appellate Tribunal directed the NCLT to examine the case in terms of section
621A of the Act which provides for compounding of offences.

Before the Tribunal, D Ltd. urged that the
transactions had been fairly concluded and all amounts remitted to F Ltd. had
been received back. As the offence did not continue, the same qualified for
compounding.  

HELD

The Tribunal observed that although the
amounts advanced to F Ltd. were recovered in full, there was no payment of any
interest by F Ltd. Such advancing of money without payment of interest caused
loss to the shareholders of D Ltd. The Tribunal observed that transparency in
operations is one of the key elements of listed company and appropriate
disclosures of related party transactions are very essential to various
stakeholders and as such, the same is the duty of the Company/Board of
Directors to give true and fair picture of the functioning of the Company to
its shareholders especially any decision having adverse financial impact on the
Company which in turn will have an impact on the shareholders whether directly
or indirectly.

The Tribunal held that D Ltd. was guilty of
violation of section 297 of the Act and directed that offence may be compounded
u/s. 621A upon payment of heavy charges in respect thereof.

2.             Chartered Accountants Act, 1949, In
re

[2017]
84 taxmann.com 175 (All)  Date of Order: 2nd
August, 2017

Sections 21 and
22 of Chartered Accountants Act, 1949 – Chartered Accountant had resigned from
Board of company prior to the opening of its public issue but signed the
prospectus for the same – The Chartered Accountant was held to be guilty of
other misconduct.

 FACTS

Mr. ‘S’ was a member of the Institute of
Chartered Accountants of India (ICAI) and a director of B Co. S had resigned
from the company before opening of its public issue, but his resignation was
accepted on 09.09.1997 which was after the close of issue. Public issue of BCo
opened on 25.07.1996 and closed on 05.08.1996. Mr. S signed the prospectus of
this public issue on 17.06.1996 which named him as a director of BCo. Mr. S did
not object to the inclusion of his name in the prospectus of BCo.

The disciplinary committee of the ICAI found
him guilty of “other misconduct”. The Council of ICAI considering the said
findings recommended the removal of his name as a member for a period of three
months to the High Court.

Mr. S argued that although he resigned prior
to opening of public issue, his resignation was accepted only on 09.09.1997. He
further submitted that since no public money was received by BCo; there was no
question of misleading investors and inducing them to subscribe to the shares
of the said company.

Counsel appearing for the ICAI urged that
under the Companies Act, 1956, resignation of a director comes into effect the
moment it is tendered. As Mr. S accepted that he in fact resigned from the
company before the opening of the public issue, his name should not have
appeared as a director in the prospectus.

HELD

The High Court observed that the Companies
Act, 1956 did not have any specific provision relating to resignation of
director from the company. Neither of the parties produced the Memorandum Of
Association and Articles Of Association of the company to show anything in this
regard. Accordingly, it was held that common law principle would apply in so
far as resignation of directors was concerned.

The Court having relied on various judgements,
came to a conclusion that resignation of a director of a company was a
unilateral act that came into effect as soon as the resignation was tendered by
the director of the company. The directors were merely agents of the company
and agents were competent to determine the agency at their own end.

As Mr. S had resigned before the opening of
the public issue, his name should not have appeared in the prospectus as a
director of the company which was in fact there. The Court held that such an
act amounted to lending of name to the prospectus and misleading the investors.
It was immaterial whether any investor was actually mislead. The act of
misconduct was nonetheless completed.

The High Court accordingly upheld the
finding of disciplinary committee that held Mr. S guilty of other misconduct
under sections 21 and 22 of the Chartered Accountants Act and accepted the
recommendation of Council on removal of name of Mr. S from the register of
members of Chartered Accountants for a period of three months. 

3.             APC Credit rating (P.) Ltd. vs. ROC

[2017]
84 taxmann.com 75 (NCLT – New Delhi)       Date
of  Order: 19th July, 2017

Section 420 of
Companies Act, 2013 – NCLT does not have an inherent power to review its own
decision – NCLT can only rectify its decision.

FACTS

ACo had violated various provisions of the
Companies Act, 1956 and filed applications with the Tribunal u/s. 441 of the
Companies Act, 2013 for compounding the same. The Tribunal dismissed the
applications vide order dated 26.09.2016 for reasons mentioned therein.
Subsequently, ACo preferred application under Rule 154 of National Company Law
Tribunal Rules, 2016 (“Rules”) for review of the orders in light of certain
decisions which were not considered by the Tribunal. The Tribunal, vide order
dated 28.04.2017, dismissed the applications by holding that review was
different from appeal and it was not possible to replace one order with
another. 

ACo challenged
this order before the Tribunal and also filed an application for condonation of
delay in filing the appeal.

HELD

The Tribunal examined the provisions of
section 420 of Companies Act, 2013 along with Rules 11 and 15. The Tribunal
observed that it has limited power to rectify any mistake apparent from the
record and to amend the order accordingly, but there is no inherent power to
review its own order.

It held that the present case did not fall
within the meaning of ‘mistake apparent on the face of the record’ of appellant
and therefore, there was no occasion for the Tribunal to exercise power
conferred by section 420 (2) of the Act. Further, non-reference to previously
rendered judgement did not constitute an “omission”.

 

As more than 9 months had elapsed from the order
dated 26.09.2016, the Tribunal held that it could not condone the delay in
filing appeal as law capped the power to condone the delay for a maximum of 90
days from the date of order.

Corporate Law Corner

4. 
(2018) 142 CLA 78 (NCLT – New Delhi)

Axis Bank Ltd. vs. Edu Smart Services Pvt.
Ltd.

Date of Order: 27th October, 2017

Regulations 12 and 13 of Insolvency and
Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons)
Regulations, 2016 – Corporate guarantee provided by Corporate debtor matured
after the commencement of insolvency resolution process – claim to accept the
invocation could not be accepted as the insolvency resolution process had
commenced prior to crystallization of liability


FACTS

E Ltd.   had  
provided   A Ltd.   a 
corporate  guarantee  of Rs. 396.76 crore in respect of loan
advanced by A Ltd. to group concern of E Ltd. A Ltd. filed a claim before the
Insolvency Resolution Professional (“IRP”) which was turned down by it. A Ltd.
filed an application before the National Company Law Tribunal (“NCLT” or the
“Tribunal”) in order to invoke a corporate guarantee after the date of
commencement of Corporate Insolvency Resolution Process (“CIRP”). The date of
commencement of the insolvency process was 27.06.2017 whereas the corporate
guarantee was invoked on 21.07.2017. E Ltd. sent a letter stating that
corporate guarantee could not be invoked as CIRP had been initiated and
moratorium was in force.

The loan agreement provides that in the
event of default by the Borrower the guarantor shall be liable to pay the
amounts payable by the Borrower. Accordingly, A Ltd. invoked the guarantee
which was not accepted by the IRP owing to the fact that date of invocation of
guarantee was much after the date of commencement of CIRP.

IRP argued that Regulations 12 and 13 of
Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for
Corporate Persons) Regulations, 2016 (“the Regulations”) which deal with
submission of proof of claims and verification of claims clearly postulate that
IRP is required to verify only those claims which are existing as on the
insolvency commencement date. Accordingly, any claims which have not matured as
on the date of commencement of CIRP cannot be accepted.

IRP further pointed out that A Ltd. had
separately filed for recovery against the Borrower in a separate insolvency
proceeding and which claim has been accepted in the application filed before
NCLT.

 

HELD

The limited issue before the Tribunal was
whether A Ltd. was entitled to make a claim against E Ltd. by invoking the
corporate guarantee after the date of commencement of the insolvency process.

The Tribunal perused the terms of the loan
documents, as well as Regulations 12 and 13. It held that in order to qualify
as a ‘debt’, the provisions of the corporate guarantee must be satisfied by
raising a demand which is expressed by invoking the corporate guarantee and the
date of its invocation has to precede the insolvency commencement date. In the
present case, although CIRP commenced on 27.06.2017, the corporate guarantee
was only invoked on 21.07.2017. IRP would not be in a position to verify the
claim as it will not be reflected in the books of accounts which are supposed
to be updated as on 27.06.2017. In the absence of any record to verify the
claim, it would be impossible for the IRP to accept any such claim which became
a debt after 27.06.2017.

The Tribunal further examined the provisions
of section 3(6), 3(8), 3(10), 3(11) and 3(12) of Insolvency and Bankruptcy
Code, 2016 which defined the terms claim, corporate debtor, creditor, debt and
default in order to conclude that a debt did not exist on the date insolvency
process commenced.

A Ltd. argued that liability of guarantor
under the Indian Contract Act, 1872 is joint and several and accordingly it had
a right to enforce the liability against E Ltd. However, Tribunal held that
liability only crystallised after the commencement of CIRP and the argument put
forth had no merit. A Ltd. further urged that there is no provision in the Code
declaring the insolvency commencement date as the date to determine the claims
of the parties. The Tribunal however observed that invocation of corporate
guarantee against E Ltd. would result in enforcing of security interest and it
would thus, be in violation of the moratorium provision of section 14(1)(c) of
the Code.

The Tribunal also observed that A Ltd. had
already filed separate proceedings against the borrower and its claim was
accepted in such separate proceedings.

The Tribunal therefore, dismissed the
application filed by A Ltd.

 

5. 
(2018) 1 CompLJ 36 (NCLAT – Kol)

Surojit Kumar vs. ROC

Date of Order: 08th March, 2017

Section 128(6) of Companies Act, 2013 – The
provision comes into effect from 01.04.2014 – Accordingly, penalty stipulated
therein cannot apply to offences committed up to 31.03.2014


FACTS

S and 2 other directors (for sake of brevity
referred to as S) filed an application u/s. 621A of the Companies Act, 1956
(“1956 Act”) for compounding offence for violating section 209 of the Companies
Act, 1956 during the year ending between 31.03.2011 to 31.03.2014 (“Petition
1”).

Another application was filed u/s. 621A of
1956 Act for compounding of offence for violation of section 217(2) of
Companies Act, 1956 during the year ending between 31.03.2011 to 31.03.2014
(“Petition 2”).

Petition 1 was admitted and NCLT compounded
the offence by levying a fee of Rs. 5,000 whereas Petition 2 was admitted by
NCLT and the compounding fees levied were Rs. 10,000.

S had no objections under both the petitions
in respect of financial years ending on 31.03.2011 to 31.03.2013. However, in
so far as financial year 31.03.2014 was concerned, NCLT levied the penalty
taking into consideration provisions of section 128(6) of the Companies Act,
2013. S thus, filed the present appeal to challenge the application of
Companies Act, 2013 in respect of financial year ended on 31.03.2014 by the
NCLT.

 

HELD

ROC before the Appellate Tribunal (NCLAT)
submitted that company regularised the mistake in the financial year ended
31.03.2015. However, NCLAT proceeded to hold that prospective regularisation
cannot be used as an excuse to apply the provisions of Companies Act, 2013
retrospectively in respect of offences which were committed prior to its coming
into force.

NCLAT held that 128(6) could not be applied
in respect of violation of section 209 committed during the financial year ended
31.03.2014. It thus set aside the order of NCLT to that extent and imposed a
fee similar to what had been laid down in respect of earlier years.

The appeal filed by S was thus accepted.

Order in matter of Insider Trading in the
Scrip Of Deep Industries Limited in respect of Rupeshbhai Kantilal Savla; Sujay
Ajitkumar Hamlai and V-Techweb India Private Limited

 

6. 
SEBI/WTM/MPB/IVD/ID–6/162/2018

Date of Order: 16th April, 2018

SEBI (Prohibition of Insider Trading)
Regulations, 2015 – Persons who are friends on Facebook can be regarded as
connected persons – Likes and other activity on the social media platform can
be looked into for the purpose of determining whether such persons are
“connected persons” or not


FACTS

D Ltd was engaged in the business of oil
exploration and allied activities and its shares were listed on National Stock
Exchange (NSE) as well as Bombay Stock Exchange (BSE). Between 17.07.2015 to
14.10.2015 (“Investigation period”) D Ltd. was awarded three contracts from
ONGC for hiring of mobile drilling rigs spanning across a period of several
months.

Some details in respect of these contracts
are as follows:

First contract: The bid for the same was
opened on 17.07.2015 and D Ltd. was declared as L1 bidder.

Second contract: The bid for the same was
opened on 01.07.2015. However, D Ltd. was not declared to be L1 bidder. ONGC
subsequently requested D Ltd. to match the evaluated day rate of L1 bidder on
17.08.2015. D ltd. submitted this bid on 18.08.2015.

Third contract: The bid for the same was
opened on 27.07.2015 and D Ltd. was declared as L1 bidder.

The stage at which the company was declared
as L1 bidder was the stage at which process of tendering got completed and what
remained pending was merely award of contract.

The receipt of these contracts was notified
to the stock exchanges after D Ltd. received the notification of award of
contract. The dates were 03.09.2015 for first and second contract and
14.10.2015 for third contract. Pursuant to these corporate announcements, there
was a rise in the price at which these scrips were being traded on the
exchanges.

 

HELD

Issues before SEBI and their disposal is as
follows:

SEBI observed that value of the two
contracts for which the announcement was made on 03.09.2015, constituted a substantial
52.47% of the annual turnover of the company for the FY 2015-16 and 87.65% of
the annual turnover for the FY 2014-15 i.e. immediately preceding financial
year. Similarly, the value of the single contract for which announcement was
made on 14.10.2015 constituted 53.40% of the annual turnover of the company for
the FY 2015-16 and 89.21% of the annual turnover for the FY 2014-15 i.e.
immediately preceding financial year. Considering the magnitude of the value of
the three contracts, the information relating to bagging of these orders by D
Ltd. constituted price sensitive information and the same was likely to
materially affect the share price of the company, once published.

UPSI periods were the periods where the
information was available with company regarding receipt of contracts and
ceased to exist on the day the same was notified to the exchanges.  Accordingly, period between 17.07.2015 and
14.10.2015 was determined as the UPSI period.

On the basis of the investigations conducted
by SEBI, R, V Ltd. and A were identified as insiders for the Investigation
period as per the Regulations.

R being the Managing director of D Ltd. was
held to be an insider as well as a connected person.

S and directors of V Ltd. were regarded as
connected persons on the basis of their being friends on social media platform
“Facebook” with R and his wife. Wife of S was also friends with wife of R. SEBI
also observed instances where they had “liked” each other’s pictures posted on
the platform. Thus, S and V Ltd. were held to be insiders and connected persons
owing to their social relationship.

SEBI observed that insiders had traded in or
brought shares of D Ltd. during the Investigation period and SEBI proceeded to
compute the gains and ordered that such gains be impounded from the insiders.

 


Corporate Law Corner

Editor’s note: For a long time, the flavour of company
law has been missing from the journal. From this issue, we recommence digesting
decisions on Company Law. We hope readers will find these useful.

1.  Esquire Electronics
vs. Netherlands India Communications Enterprises Limited

(2017) 1 CompLJ 131 (NCLT)  

Date of Order: 6th October, 2016

Sections 241 And 242 of Companies Act, 2013 – Order passed
by NCLT is a decree – Proceedings under sections 241 and 242 are in the nature
of the suit – Petition can be filed under sections 241 and 242 only if the same
is not barred by period of limitation as is prescribed under Limitation Act.

FACTS

Petitioners along with a company (SCo) and 2 other companies
entered into a Joint Venture Agreement dated 29.12.1995 wherein they decided to
establish a company in the name and style of NCo. Subsequently, all the parties
to the JV Agreement agreed to subscribe to the shares of SCo in the same
proportion as was agreed in the JV Agreement and the idea of formation of NCo
was supposedly dropped.

Petitioner alleged that NCo was secretly established in the
year 1996 with the same name as was agreed to in the JV Agreement. It was
further stated by the Petitioners that existence of this company was not
disclosed to them. Amongst other things, the Petitioners alleged various
irregularities on part of NCo such as non-conduct of Annual General Meeting
(AGM) from 2002 to 2010, non-existence of any office of NCo (violating
provisions of sections 17, 18 and 19 of Companies Act, 1956), illegal holding
of AGM in the year 2012, oppression and mismanagement by few directors of NCo,
amongst others.

Petitioners, filed a petition under sections 241 and 242 of
Companies Act, 2013 (the Act) with the National Company Law Tribunal (NCLT or
the Tribunal) against 5 respondents being NCo and its 4 directors on 25th July,
2016. The petition claims that the directors of NCo should be removed from the
company and its board be reconstituted excluding the aforesaid directors. They
have further prayed that all resolutions passed by NCo allotting shares to
various shareholders between 2000 and 2012 be declared as null and void. 

The Petitioners however, did not agitate any cause against
NCo prior to this petition.

HELD

The Tribunal observed that the last AGM of NCo was conducted
on 29.09.2012. Upon perusing the filings made to the Registrar of Companies,
the Tribunal noted that the Petitioners were neither shareholders nor directors
of NCo.  The Tribunal dismissed the
petition filed on two counts:

The Tribunal observed that section 433 of the Act makes it
patent that the Limitation Act would apply to the proceedings or appeals before
the Tribunal or the Appellate Tribunal. Referring to sections 424 and 425 of
the Act it held that it has powers vested in a Civil Court under the Code of
Civil Procedure while trying a suit in respect of specified matters and that
the orders passed by it are executable as a decree of Court. Once it is
established that the order passed by it is a decree then it follows that the
proceedings under sections 241 and 242 of the Act are necessarily proceedings
in a suit. It has all trappings of a suit. Therefore, the period of limitation
provided for suits would, ipso facto, be applicable as the Limitation
Act has been specifically made applicable by section 433 of the Act.

The Tribunal observed that since the last AGM of NCo was
conducted on 29.09.2012, in terms of Article 113 of Limitation Act, the period
of limitation would be three years from the date the right to sue accrues. The
cause of action, if any, arose to the Petitioners on 30.09.2012 and the instant
petition having been filed on 25.07.2016 was clearly beyond the period of three
years provided by Article 113 of the Limitation Act.

Further, since the Petitioners were neither directors nor
shareholders of NCo at any point of time, there was no locus standi available
for them to file the aforesaid petition.

The Tribunal, therefore, dismissed the petition with cost of
Rs. 25,000.

2.  West Hills Realty
Private Ltd. vs. Neelkamal Realtors Tower Pvt. Ltd.

[2017] 200 CompCas 179 (Bom)

Date of Order: 23rd December, 2016 

Section 433(e) of Companies Act, 1956 read with Rule 5 of
Companies (Transfer of Pending Proceedings) Rules, 2016 – Winding up petitions
which are pending before the High Court would not be transferred to NCLT if the
notice has already been served on the Respondent irrespective of whether they
have been admitted by the High Court or not

FACTS

Two company petitions were filed before the Hon’ble Bombay
High Court u/s. 433(e) r.w. section 434 of Companies Act, 1956 in April 2016
seeking winding up of respondent companies on account of inability to pay its
debts. In terms of notification dated 07.12.2016, issued by the Central
Government, all petitions relating to winding up u/s. 433(e) pending before
High Courts, and which have not been served on the Respondent as required by
Rule 26 of the Companies (Court) Rules, 1959, stand transferred to the
appropriate Bench of the National Company Law Tribunal (NCLT) exercising
territorial jurisdiction over the mater.

Respondent urged that the petitions were covered in the
mandate of the notification and stand transferred thereunder, whilst the
Petitioners submitted that the petitions having been served on the Respondent
as required by Rule 26, the transfer notification does not apply to them and
accordingly, the High Court retains its jurisdiction over them.

Since the issue would arise in several cases pending before
the Court, any interested party whose petition was pending before the Court
were allowed to appear and file submissions in this regard.

HELD

The crucial question before the Court was whether or not the
petition has been served on the Respondent “as required under Rule 26 of the Companies (Court) Rules, 1959”.

Counsel for the Respondents urged that service of petition
contemplated by Rule 26 was a post-admission service. It was submitted that the
service of a petition under Rule 26 contemplates a simultaneous service of the
notice of the petition, which, as Rule 27 provides, must be in Form No. 6 given
under the Rules. That form was to be served after the petition was admitted by
the court. It was further contended that there was no rule under the Companies
(Court) Rules, 1959, which required a pre-admission notice of the petition to
the Respondent.

Petitioner on the other hand urged that requirement under
Rule 26 was without any reference to the admission of the petition. It was
stated that service of the petition under Rule 26 and notice of the petition
under Rule 27 are two entirely different matters.

For ease of reference the said rules have been reproduced as
under:

“26. Service of petition – Every petition shall be
served on the respondent, if any, named in the petition and on such other
persons as the Act or these rules may require or as the Judge or the Registrar
may direct. Unless otherwise ordered, a copy of the petition shall be served
along with the notice of the petition.

27. Notice of petition and time of service – Notice of every
petition required to be served upon any person shall be in Form No. 6, and
shall, unless otherwise ordered by Court or provided by these Rules, be served
not less than 14 days before the date of hearing.”

The Court observed that

(i)  service of petition implied service on the
respondent or other person, as the case may be, of a copy of the petition,
whereas notice of the petition connoted notice of the hearing of the petition
before the court. Rule 26 provides for service of petition, whilst Rule 27
provides for notice of petition. 

(ii) if a respondent was named in the petition, the
requirement of service of the petition on such respondent is the requirement of
Rule 26 itself. One does not have to go to the other provisions of the Act or
the Rules or the orders of the Judge or the Registrar for such requirement.
Rule 26 has no reference to the order of admission of the petition.

Those petitions, which are pending admission and which have
been served on the respondent as required under Rule 26, shall continue to
remain in the High Court pending their admission, whilst the petitions pending
admission, which have not been served on the Respondent as required under Rule
26, shall be transferred to, and considered for admission by NCLT.

As the notice of the petitions had already been served upon
the Respondents, it held that the same were to be dealt with by the Court only.

3.  (2017) 77 taxmann.com
210 (NCLT – New Delhi)

JVA Trading (P.) Ltd., In re

Date of Order: 13th January, 2017

Sections 230, 231 and 232 of the
Companies Act, 2013 and Rules 3 and 5 of Companies (Compromise, Arrangement and
Amalgamation, Rules, 2016) – Compromise and arrangement – Tribunal does not
have the power to dispense the conduct of meeting of members / shareholders

FACTS

JCo (being a transferor) is engaged in business of trading in
electric and electronic goods whereas CS Co (being a transferee) is engaged in
the business of manufacturing the same. The Board of Directors of both the
companies had passed a resolution approving of the merger.

JCo  and CS Co  filed an application to the Tribunal under
sections 230 to 232 of the Act read with the Companies (Compromises,
Arrangements and Amalgamation) Rules, 2014 in relation to a scheme of
amalgamation proposed between JCo and CS Co 
requesting it to dispense the requirement to convene meeting of equity
shareholders of JCo and issue necessary orders / directions for conducting
meetings of creditors of JCO, equity shareholders and creditors of CS Co
amongst others. A scheme of Amalgamation was also filed with the Tribunal.

The companies also filed with the Tribunal their combined
capital structure; list of equity shareholders, secured and unsecured creditors
of both the companies; respective Memorandum and Articles of Association,
Certificate of Incorporation, provisional financial statements up to a cut off
date.  

HELD

The Tribunal upon perusing the necessary facts held that it
did not have the power to dispense with the requirement of convening the
meeting of shareholders / members under the provisions of the Companies Act,
2013.

It did proceed to give directions in respect of conduct of
meetings in respect of both the companies, appointment of Chairperson for the
aforesaid meetings, manner in which the notices would be sent, manner of
voting, amongst others.

4.  Sanjay Sadanand Varrier
vs. Power Horse India (P.) Limited [2017] 80 taxmann.com 47 (Bombay) Date of
Order: 22.03.2017

Section 433, read with sections
434 and 439 of the Companies Act, 1956 – An unpaid employee being a creditor of
the company can file a petition for winding up of the company – A winding-up
petition at instance of trade union for recovery of dues payable to its members
was maintainable

FACTS:

Petitioner (S), an employee of the Respondent Company (PCo)
was initially appointed as a Regional Sales Manager and thereafter as the
Manager, Key-Accounts and Trade Marketing. S alleged that since October 2009
till he resigned in March 2012, his entire salary was outstanding. S therefore
issued a statutory notice to PCo u/s. 434 of the Companies Act, 1956 for payment
of his dues, failing which he would initiate winding up proceedings. Since PCo
did not make the said payment, S filed a winding up petition before the High
Court. PCo relying on decision of Mumbai Labour Union vs. Indo French Time
Industries Ltd. [2002] 38 SCL 924 (Bom.) contended that S was not a
creditor of the company and therefore, petition u/s. 439 cannot be
maintained. 

The decision rendered in the case of Mumbai Labour Union was
overruled in the case of Khandelwal Tube Mill Kamgar Sangh vs. Government of
Maharashtra [2006] 1 CLR 51 wherein it was held that workman or an
individual employee, being a creditor within the meaning of the relevant
statutory provisions of the Companies Act, can institute or file a Petition for
winding up of a Company.

The only surviving issue before the Court was whether a Trade
Union could file a Petition so as to espouse the cause of workmen who are members of such a Trade Union.

HELD:

Court examined the provisions of the Companies Act, 1956 as
well as Trade Unions Act, 1926. It was noticed that Registered Trade Unions can
prosecute or defend any legal proceeding to which the Trade Union or member
thereof is a party. The Court held that a Trade Union, though having a
legitimate claim, cannot be shut out from approaching the appropriate forum for
winding up the Company on the ground that its members have not been paid their
wages and/or salaries.

It was therefore held that an employee can maintain a
petition for winding up of a company u/s. 439 r/w sections 433(e) and 434 of
the Companies Act, 1956 as a creditor based on the claim of the recovery of his
unpaid salary and wages. Further, a winding up petition at the instance of a
Trade Union and for the dues that are payable to its members is maintainable as
it clearly fell within section 439 of the Companies Act, 1956.

5.  Shabbir Ahmed vs.
Safedabad Cold Storage and Allied Industries (P.) Ltd.

[2017] 80 taxmann.com 46 (NCLT – Kolkata)            Date of Order: 1st March,
2017

Section 13, read with sections 12 and 241, of the Companies
Act, 2013 – company having its registered officer in West Bengal had shifted
its registered office from West Bengal to state of Uttar Pradesh without
issuing any notice to a shareholder – Company had acted in a manner prejudicial
to the interest of shareholders – The shifting of office was illegal – Prayer
to shift the petition to Uttar Pradesh was not allowed

FACTS:

Directors of Respondent Company (SCo) convened an Extra
ordinary general meeting (EOGM) for shifting its registered office from the
State of West Bengal to the State of Uttar Pradesh and in the said meeting, a
special resolution was passed by the members. Petitioner (S) holding 21.76%
shares in SCo alleged that due process was not followed in convening the
meeting and that they were not served any notice of the meeting.

SCo however did not produce any proof of service of notice
upon S. S accordingly pleaded that such resolution passed should be declared as
null and void and also filed Company Petition for mismanagement and oppression
challenging the shifting of registered office amongst other things.

HELD:

SCo failed to show or prove the service of notice upon the S
or upon any other members/shareholders as was required under Rule 30 of the
Companies (Incorporation) Rules, 2014. SCo relied only on the order of Regional
Director who allowed the application for change in its registered office from
state of West Bengal to state of Uttar Pradesh.

The Tribunal also observed that office of the company was
shifted locally within Kolkata and the same was reflected in the Master data
obtained from the MCA portal. However, SCo did not produce any document to show
that due procedures were complied, in regard to the shifting of the registered
office locally within the State.

The Tribunal found that the equity was in favour of S. It
held that the conduct of the SCo and its directors was prejudicial to the
interest of the S and it would be highly unjust to allow the prayers sought by
the director of company to transfer the Company Petition to Safedabad in Uttar
Pradesh.

The Tribunal, rejecting the grant of relief stated that
relief if allowed would be highly oppressive to S as SCo had acted in the
manner not only prejudicial to the interest of the S but also acted in
violation of the established principles/procedures of law while shifting the
registered office of the company.

Corporate Law Corner

10. Kediya Ceramics, In re

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


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

 

FACTS

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

 

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

 

The
Applicant put forth the following contentions before the Tribunal:

 

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

 

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

 

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

 

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

 

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

 

HELD

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

 

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

 

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

 

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

 

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

 

11. India Awake for Transparency vs. UOI

[2017] 88 taxmann.com 101 (Delhi)                             
Date of Order: 5th December, 2017

 

Section 124(6) – Section 124(6) does not contemplate a statutory
vesting of property in shares the dividends of which have not been claimed for
more than seven years – Such shares merely stand transmitted to the Investor
education and protection fund that continues to hold them as a custodian –
Companies are required to comply with requirement of giving 3 months’ notice to
the shareholders before giving effect to such transfer of shares.

 

FACTS

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

 

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

 

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

 

HELD

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

 

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

 

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

 

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

 

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

 

12. 
Mobilox Innovations Pvt. Ltd. vs. Kirusa Software Pvt. Ltd. CIVIL APPEAL
NO. 9405 OF 2017

 

Section 8 of the Insolvency and Bankruptcy Code, 2016 – Definition
of ‘dispute’ is an inclusive definition – Word ‘bonafide’ cannot be
imported before the word ‘dispute’ – Adjudicating Authority is only required to
ascertain if the dispute in fact exists and is not a patently feeble legal
argument or an assertion of fact unsupported by evidence – Meaning of ‘dispute’
and ‘existence’ decoded.

 

FACTS

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

 

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

 

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

 

HELD

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

 

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

 

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

 

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

 

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

 

The order
passed by NCLAT was thus set aside. _


Corporate Law Corner

7.  Navbharat Gasflame Pvt. Ltd. vs. ROC

[2017] 87 taxmann.com 160 (NCLT – New Delhi) Date of Order: 27th October,
2017

Section 560 of Companies Act, 1956 –
Company failed to file its annual return from 1998 to 2014 – There was no proof
of any activities carried out by the company in the said period – ROC’s action
in striking off the name was upheld by the Tribunal.

Section 3(3) of Companies Act, 1956 – No
effort was made by a private company to increase its paid up capital to minimum
amount of Rs. 1 lakh in the time stipulated by Companies (Amendment) Act, 2000
– Company was deemed to be a defunct company.

FACTS

NCo. was a private company incorporated on
24.11.1997 engaged in the business of trading of fabrics, textiles goods and
other related activities. The subscribed capital of NCo was Rs. 300/- divided
into 30 equity shares of Rs. 10/- each. NCo had failed to file its annual
return right from 1998 up to 2014 as per the reply filed by the Registrar of
Companies (ROC). Name of the company was struck off vide notification dated
23.06.2007 published in the official gazette. NCo filed an application for
restoration of its name u/s. 560 of Companies Act, 1956 (the Act). ROC
submitted that company had not filed any annual return or income-tax return
right since its incorporation till 2014.

NCo submitted that it had carried out its
operations and that it had filed its income-tax return for assessment year
2014-15. ROC submitted that there was no acknowledgement of any tax paid or
return filed by NCo. NCo had merely submitted its accounts which was not a
conclusive evidence of any operations being carried out by it.

HELD

The Tribunal examined the provisions of
section 560 of the Act which required that in order to pass the direction for
restoration of name with ROC, the Tribunal needs to be satisfied that the
company at the time of striking off had been carrying on business or in
operation or otherwise it is just that the company be restored to the register
of the Registrar of Companies.

The Tribunal observed that the company did
not give any proof of its operations in the year 2007 when its name was struck
off. Also, there was no explanation furnished as to why the company did not
respond from 2007 to 2014 and the nature of its business activity in the said
period.

Further, the Tribunal examined section
3(1)(iii) of the Act which defined a private company as a company which has a
minimum paid-up capital of one lakh rupees or such higher paid-up capital as
may be prescribed by its articles. The consequence of not enhancing the paid-up
capital was that such a company shall be deemed to be a ‘defunct company’
within the meaning of section 560 and the Registrar would be under a legal
obligation to strike off the name of such a company from its register.

The Tribunal observed that NCo had failed to
increase its paid up capital in the time stipulated under Companies (Amendment)
Act, 2000. Accordingly, it upheld the action of striking off of the name of
company by the ROC and dismissed the petition with a cost of Rs. 20,000.

8.  N.
C. Karany & Co. vs. New Timonhabi Tea Co. Pvt. Ltd.

C. P. No. 19/140(1)/140(4)/GB/ 2017                           

Date of Order: 22nd November, 2017

Sections 101, 139 and 140 of Companies Act,
2013 – Non-ratification of appointment of an auditor gives rise to a casual
vacancy envisaged u/s. 139 – Auditor should however, be given an opportunity of
being heard – Removal of auditor without applying this principle was held to be
bad in law.

 

FACTS

N Co was appointed as statutory auditor of
NT Pvt. Ltd. (Respondent) in the AGM held on 26.09.2014. The re-appointment was
confirmed for a block of four years in the AGM held on 26.09.2015. The notice
of said appointment was filed in form ADT-1 with the ROC in due course.
Respondent then proceeded to appoint A Co as the statutory auditor prior to the
term of N Co getting over without any prior intimation of such appointment. On
13.02.2017, NCo received a letter from one of the directors of the Respondent
company stating that A Co had been appointed as its auditor and requested it to
furnish its resignation at the earliest. N Co also received a letter from A Co
on 03.04.2017 seeking its NOC for appointment of A Co. Subsequently, on
08.05.2017, N Co received an email from one of directors of respondent that his
appointment was not ratified in the AGM and therefore, his appointment stands
vacated from the company.

Respondent submitted that appointment of A
Co was arising out of a casual vacancy in light of N Co’s non-reappointment at
the AGM of the company. Accordingly, the subsequent appointment of A Co was in
accordance with section 139(8) of the Companies Act, 2013 (the Act). Accordingly,
the Respondent was not required to follow the procedure laid down u/s. 140 of
the Act. N Co submitted that its removal and subsequent appointment of A Co was
illegal and in violation of provisions of section 101 and 140 of the Act.

HELD

The Tribunal examined the provisions of
sections 139(8), 140(1) and 140(4)(i) of the Act. Section 140(1) provides that
a statutory auditor appointed u/s. 139 can be removed from his office before
the expiry of the term provided a special resolution is passed at the general
meeting and prior approval of Central Government is obtained. Additionally, the
auditor concerned is given an opportunity of being heard.

However, section 139(8) provides that the
procedure laid down u/s. 140(1) need not be followed where a casual vacancy
arises in the office of an auditor.

Respondent submitted that non-ratification
of appointment of N Co gave rise to a casual vacancy; a claim which was
strenuously disputed by N Co; and therefore, the same was duly filled by the
Board of Directors in accordance with section 139(8) of the Act.

The Tribunal examined the meaning of the
term “casual vacancy” using various dictionaries which suggested that “Casual”
means something which occurs without being foreseen or expected. What required
attention of the Tribunal was whether non-ratification of appointment of the
auditor at the AGM constituted casual vacancy. The Tribunal held that
resignation of the auditor was tantamount to a casual vacany arising in the
office of the auditor as a company always expects the auditor to complete his
term of appointment. Non-ratification of appointment of auditor stood on a
similar footing as the company would expect the shareholders to ratify the
appointment already made. Such non-ratification therefore, did give rise to a
casual vacancy.

The Tribunal held it was sine-qua-non
for a company to give an opportunity of being heard to its Auditor who is
sought to be removed from his office prior to the expiry of his term. A
conjoint reading of sections 101 and 146 of the Act makes it imperative that an
auditor is required to be given an opportunity of being heard in case his
appointment is not being ratified by the shareholders in the AGM. A removal
without following the aforesaid procedure would make such an act unsustainable
in law.

In the facts of the present case, the
Respondent did not give a notice of the AGM to its statutory auditor N Co which
is the mandate of section 101 of the Act. The Tribunal observed that
Respondents stand that there was a casual vacancy in the office of auditor did
not hold good on several grounds. Firstly, respondents submitted that they sent
letter dated 13.02.2017 seeking resignation of N Co and notice dated 03.04.2017
seeking NOC of N Co.

This conduct, as per the Tribunal, was
against the stand that casual vacancy arose owing to non-ratification of
appointment of the auditor at the AGM. Secondly, the Act or the Rules do not
give any authority to the Board of directors to seek resignation of the auditor
before the expiry of its term unless procedure laid down u/s. 140 of the Act
has been duly complied with.

The Tribunal further held that N Co had
filed the petition in the time frame stipulated under the Limitation Act, 1963
which was applicable in respect of proceedings under the Act. Claim of the
respondents that conduct of N Co was barred by principle of delay and latches
was wholly without any substance.

Accordingly, the Tribunal held that removal
of N Co was illegal and consequent appointment of ACo as the auditor was
equally illegal and therefore unsustainable in law. The position – N Co was
reinstated as the auditor of the company till expiry of its term, unless it was
removed following due procedure of law.

9.  Ramesan Maithiyeri vs. UOI

[2017] 85
taxmann.com 19 (Kerala)                            
Date of Order: 19th July, 2017

Section 234 of
Companies Act, 1956 – No action can be taken against a person who was
wrongfully named as a director of the company in the annual returns filed by it
until scrutiny and enquiry by ROC is complete.

 FACTS

An individual R
was named as a director in the annual returns of company (B Ltd.) from 2005 to
2014 where in fact he was neither a shareholder nor a director. His name was suo
motu deleted as the director from the year 2015 onwards. R contended that
inclusion of his name as director was illegal and he apprehended that he will
be liable for any misdemeanour of the Board of the company for this period. He
therefore filed a writ petition praying that ROC be directed to initiate
proceedings u/s. 234 of the Companies Act, 1956 (the Act) for correction of the
books of the company.

Central
Government accepted that as per the inquiry and investigation conducted by
them, R had never been a director or a shareholder of B Ltd. R further informed
the court that he made investments in B1 Ltd. and purchased a flat in the
property being developed by B1 Ltd. B Ltd and B1 Ltd. had common directors. And
there were separate allegations of manipulation and misappropriation on part of
directors of B Ltd.

 HELD

The High Court
examined the provisions of section 234 of Companies Act, 1956 and held that ROC
had powers to cause a scrutiny into books and documents maintained by the
company. These provisions are intended and designed to vest with ROC, the power
of inspection, enquiry and investigation into the affairs of the Company and to
rectify mistakes or deliberate entries in the books and documents maintained by
it. Regulation No. 17 of the Companies Regulations, 1956 also empowers ROC to
examine the documents and to direct the company to rectify the defects and
additionally mandates that no document of the company can be taken on record
unless the defects are rectified.

In light of the
facts, the High Court directed the ROC to carry out scrutiny and investigation
into the books and documents maintained by the company and follow it up with
such action as is warranted and mandated by law.

 It was further
held that as name of R was wrongfully inserted as a director from 2005 to 2014,
no action shall be taken against him until the scrutiny by the ROC was
complete. _

Corporate Law Corner

1.  Jella Jagan Mohan
Reddy, In re

(2017) 82 taxmann.com 422 (NCLT – Hyd.)               

Date of Order: 5th June, 2017

Sections 211, 621A of Companies Act, 1956 read with Schedule
VI – Incorrect disclosure of Issued Capital in the Balance Sheet of the Company
was in violation of section 211 – The submission that there was no prejudice
caused to the members, creditors or public did not hold good – The application
for compounding was accordingly dismissed

FACTS

JCo was incorporated on 14.11.2006 as a private limited
company and was converted to a public company on 12.01.2009 under Companies
Act, 1956 (the Act). The Office of Regional Director carried out an inspection
of books of accounts of JCo for the years 2006-07 to 2012-13 and found that it
had violated provisions of section 211(1) read with Schedule VI of the Act. The
Balance Sheet of JCo as at 31.03.2009 disclosed the Issued Capital as Rs. 84.41
crore instead of Rs. 100 crore. The same allegedly resulted in a disclosure of
false particulars in the said Balance Sheet.  

JCo admitted to the default and submitted that the same was
not intentional and that it was of a nature that did not prejudice interest of
members, creditors or others dealing with the company. JCo further pleaded that
the default did not in any way affect the public interest. JCo therefore filed
an application u/s. 621A for compounding of offence.

ROC highlighted that JCo did not mention how the offence was
made good and therefore be put to strict proof of
the same.   

HELD

The Tribunal observed that it had the necessary power to
compound the offence as was established under Cambridge Technology Enterprises
Ltd., In re (2017) 77 taxmann.com 270 (NCLT – Hyd.). The Tribunal
observed that the Balance Sheet of JCo as at 31.03.2008 disclosed its Issued
capital as Rs. 106.41 crore whereas the same was reflected as Rs. 84.41 crore
in the Balance Sheet as at 31.03.2009. There was no mention of any reduction
being carried out in any of the Balance Sheets of JCo. Both the Balance Sheets
were signed by two whole-time directors of the Company, its Company Secretary
and reputed firm of Chartered Accountants.

The Tribunal further observed that the Balance Sheet was an
important financial statement used by the stakeholders for various purposes.
The factual error therein was not in accordance with section 211(1) of the Act
in as much as “True & Fair view” was not depicted in the Balance
Sheet, thereby resulting in disclosure of false particulars of Issued Capital.
In light of the aforesaid observations, it was held that the submission that
the error did not cause any prejudice to the creditors or members does not hold
good and the Tribunal proceeded to dismiss the application for compounding.

2. Hasmukh Bachubhai Baraiya
vs. Symphony Ltd.

(2017) 82 taxmann.com 420
(NCLT – Ahd.)                               

Date of Order: 26th April,
2017

Sections 56, 58 and 59 of Companies Act, 2013 – Tribunal
does not have power to issue directions for issue of duplicate share
certificate – The dispute as to title of shares has to be heard by a Civil
Court and the National Company Law Tribunal (NCLT) does not have the authority
to decide upon the same.

FACTS

H, a shareholder of SCo, a listed public company, alleged
that he misplaced the share certificates of the company. H made a request to
the share transfer agent of SCo for issue of duplicate share certificates
through a letter dated 11.09.2015. Subsequent letters were written to the Share
transfer agent on 07.10.2015 and 02.11.2015 for the same purpose. H visited the
office of Share transfer agent on 15.10.2015 and the office of SCo on
16.10.2015 and produced the relevant documents for verification in respect of
application for issue of duplicate share certificates. Upon failure of SCo and
Share transfer agent to issue the duplicate share certificate, H filed an
application before the NCLT under sections 56, 58 and 59 pleading it to issue
directions for issue of duplicate share certificate.

There was another Party who contested the ownership of the
shares in question stating that the same were acquired by him in the year 1997.
The said Party also sent the transfer deeds to the Share transfer agent but was
not issued the share certificates because there was a deficit in payment of
stamp duty. This claim of ownership by the Party has been disputed by H.

The Party had filed a civil suit to establish its case for
ownership and the said suit was pending in the Civil Court. SCo directed H and
Party to settle their dispute or produce an order from a Competent Court of
law.

HELD

Tribunal held that relief u/s. 58 was not available to H
since it was not his case that SCo refused to register his name in the register
of members.

Section 59 deals with rectification of Register of Members if
the name of any person is without sufficient cause entered into the Register of
members of a Company or without sufficient cause omitted the name of a Member
from the Register of Members or in case where a default was made or unnecessary
delay was made in making entry in the Register of Members. As the case of H did
not fall under any of the said categories, relief u/s. 59 was also held to be
not available to H.

Upon examining the provisions of section 56, the Tribunal
observed that where the instrument of transfer had been lost, the power to
issue duplicate shares was available with the Board of the Company. There was
nothing in section 56 which indicated that the Tribunal can give a direction to
the Company to issue duplicate shares.

The Tribunal proceeded to state that there was no specific
provision under the Companies Act, 2013 or rules framed thereunder which gave
it the authority to issue directions to a company for issue of duplicate
shares. When the Statute creates a right to obtain duplicate shares upon
satisfying the Board of a company about loss of shares and when the Board did
not exercise its discretion in the manner in which it is expected to exercise,
then the judicial authorities or quasi- judicial authorities are certainly
entitled to give appropriate directions.

It however observed that although H alleged that shares were
misplaced, he did not specify when they were misplaced. H did not inform the
Police about misplacement of shares either at the time when they were misplaced
nor when the Party contested his claim for ownership of the shares.

Also, in the aforesaid case, the challenge involved a dispute
as to title of the shares. The Tribunal dismissed the Petition by observing
that such title disputes could not be decided by it and only a Civil Court had
the jurisdiction to decide upon the same.

3.  Himalay Dassani vs.
Isolux Corsan India Engineering & Construction (P.) Ltd.

(2017) 82 taxmann.com 143 (NCLT-Chd.)

Date of Order: 8th May, 2017

Section 9 of Insolvency and Bankruptcy Code, 2016 – Where an
application was already filed u/s. 9 against the subsidiary of Corporate Debtor
for recovery of debt, parallel proceedings on the same cause of action could
not be initiated against the Corporate Debtor.

FACTS

ICo being the respondent was incorporated on 25.06.2008. ICo
availed consultancy service of H (being the operational creditor) in respect of
awarding of a project for developing and executing the transmission system at
Mainpuri and associated works on a build, own, operate and transfer (BOOT)
basis. ICo entered into a Service Agreement for the same with H on 08.07.2010
by virtue of which it agreed to pay a consultancy fee of Rs. 84 crore plus
applicable taxes in respect of the services to be rendered by H. The amount was
payable within 120 days of signing the agreement or upon financial closure of
project; whichever was later. H alleged that final financial closure of the
project took place on 1.5.2014.

On 15.03.2016, ICo entered into a Final Settlement and
Consultancy Agreement dated 15.03.2016 (Final Settlement Agreement) in order to
fully and finally settle its claims and dues with H. H alleged that the same
was done fraudulently and without an intention to honour the obligations. In
terms of Final Settlement Agreement, SCo, a subsidiary of ICo had undertaken to
pay H a sum of Rs. 38 crore along with applicable taxes in full and final
settlement of amount due by ICo. H filed a petition before Allahabad Bench of
NCLT in order to take recourse against SCo u/s. 9 of the Code for payment of
sum of Rs. 59.2 crore due in terms of Final Settlement Agreement. H
subsequently filed an application before this Tribunal u/s. 9 of the Code for
recovering an amount of Rs 96.6 crore.

HELD

The Tribunal observed that there were two different amounts
recorded as payable in respect of the same service rendered by H. The date of
default in the present application was stated to be 1.5.2014, whereas before
the Allahabad Bench, the date of default against SCo was 15.03.2016. Thus, the
Tribunal held that there was a dispute so far as the ICo is concerned, and
hence, the present petition u/s. 9 could not be admitted.

The Tribunal further held that as H had alleged fraud and
inducement on part of ICo and there was a counter defence to the same by ICo;
the existence of dispute could not be ruled out. Final Settlement Agreement did
not have a provision that if the payment was not honoured, H would be entitled
to fall back on the original agreement of the year 2010.

The said recourse was further denied as H had already
commenced the proceedings against SCo.

As the Final Settlement Agreement was already in
place with SCo and proceedings for default under the same were already
initiated, the application was dismissed by the Tribunal and a cost of Rs.
50,000 was imposed upon H.

Corporate Law Corner

13. 
Jotun India Private Limited vs. PSL Limited

Company Application N. 572 of 2017 [Bom HC]

Date of Order: 5th January, 2018

 

Insolvency and Bankruptcy Code, 2016 – NCLT
continues to retain its jurisdiction for petition filed by any creditor even
where the winding-up petition has already been admitted by the jurisdictional
High Court.

 

FACTS

On 10.03.2015, J Co supplied goods to P Co
worth Rs. 7.25 crores. Upon failure of P Co to pay the stipulated amount, it
filed a company petition under sections 433 and 435 of the Companies Act, 1956
seeking winding up of P Co.

 

On 19.06.2015, J Co filed a petition with
Board of Industrial and Financial Reconstruction (“BIFR”) under Sick Industrial
Companies (Special Provisions) Act, 1985 (“SICA”) which was admitted on
09.03.2017 although Official Liquidator was not appointed.

 

Insolvency and Bankruptcy Code, 2016 (“IBC”)
was enacted which resulted in repeal of SICA and all matters pending before
BIFR stood abated. However, companies were granted a window of 180 days to file
fresh applications before National Company Law Tribunal (“NCLT”) under the IBC
regime. Thus, on 29.05.2017, J Co filed an application before the NCLT within
the 180 day period granted under the IBC.

 

Subsequently, P Co filed an application
before the Hon’ble Bombay High Court for appointment of provisional liquidator.
An order was passed by the High Court on 19.07.2017, restraining the NCLT from
continuing with the application filed before it.  Present application was filed by J Co
requesting the High Court to recall the order dated 19.07.2017 which imposed a
stay on the IBC proceedings.

 

Parties and Intervenors made extensive
arguments before the High Court.

 

HELD

The matter which arose before the High Court
was whether it had the jurisdiction to grant a stay on the proceedings filed by
a Corporate Debtor before the NCLT, although a previously instituted
Company   Petition had been admitted, but
where a Provisional Liquidator had not been appointed.

 

The High Court observed that the most
fundamental distinction between the provisions of Companies Act and IBC is that
winding up of companies is for the Court to decide and under IBC there is a
paradigm shift in as much as it displaces the management and Insolvency
Resolution Professional is appointed and Creditors committee is left to decide
the fate of the company.

 

High Court placed reliance on the Supreme
Court in the case of Madura Coats Limited [2016] 7 SCC 603 where it was held
that even during the regime of SICA, SICA was to have primacy over the
provisions of Companies Act, 1956. It was held that since SICA is repealed and
replaced by IBC, the provisions of IBC should prevail over the provisions of
the Companies Act, 2013.

 

J Co had filed a reference which was pending
before the BIFR when SICA was not repealed. 
It had also made an application to NCLT within the stipulated period of
180 days. Further, placing reliance on Supreme Court’s decision in the case of
Bank of New York Mellon [2017] 5 SCC 1, it was held that in terms of section
252 of the IBC even in the case of a company where a winding up order has been
passed, it is open to such a company, whose reference was deemed to be pending
with BIFR, to seek remedies under IBC before NCLT. Also, there was no express
provision under Companies Act which stated that a post notice winding up
petition which is governed by the Companies Act, 1956 against the same company
(and which is retained by the Company Court), cannot be entertained by NCLT and
if entertained will be nullified.

 

It was held that admission of the winding up
petition by the jurisdictional High Court would not mean that NCLT either loses
jurisdiction or cannot exercise jurisdiction in case of a petition which is
filed by another creditor. It was observed that provisions of section 64(2) of
IBC indicated that the legislature did not intend that the Company Court would
have the power to injunct proceedings before NCLT. 

 

High Court held that a new petition filed
under the IBC could still apply to the post notice winding up cases that
continue to be governed by the Companies Act, 1956. The mere fact that post
notice winding up proceedings are to be “dealt with” in accordance with the
provisions of the Companies Act, 1956 does not bar the applicability of the
provisions of IBC in general to proceedings validly instituted under IBC, nor
does it mean that such proceeding can be suspended.

 

The High Court went on to state that NCLT is
not a court subordinate to the High Court and hence as prohibited by the
provisions of section 41 (b) of the Specific Relief Act, 1963 no injunction
could be granted by the High Court against a corporate debtor from institution
of proceedings in NCLT.

 

Reading section 141 of the Code of Civil
Procedure, 1908, along with Rule 9 of the Companies (Court) Rules, 1959 it was
held that High Court had sufficient power to recall any order previously passed
by it.

 

The order dated 19.07.2017 was thus recalled
by the High Court.

             

14. 
Ind-Swift Ltd., In re

[2018] 89 taxmann.com 149 (NCLT-Chd)

Date of Order: 8th December, 2017

 

Section 73 of Companies Act, 2013 – Company
facing liquidity problems approached NCLT for extension of time in repaying its
fixed deposits – Extension was denied in view of the fact that Company Law
Board had already granted a huge extension in 2013 – There was no reason to
grant any further extension.

 

FACTS

I Co was incorporated on 06.06.1986 and was
listed on the stock exchange. I Co had been accepting deposits from the public
since the year 2002 and regularly and punctually paid back the fixed deposits
up to 28.02.2013. In the financial year ending on 31.03.2013, it started facing
liquidity problems and incurred losses. It filed a petition before the Company
Law Board (“the Board”) pleading for extension of time in repayment of deposits
which was sanctioned by the Board on 30.09.2013 with certain directions. It was
also clarified that non-compliance with order of the Board would result in
penalty u/s. 58A (10) and section 274 (1) (g) of Companies Act, 1956 (“1956
Act”).

 

As a result of ongoing financial and
liquidity crunch, I Co filed a fresh application with the NCLT on 27.09.2016
seeking further extension of time for repayment of deposits u/s. 74 of the
Companies Act, 2013 (“2013 Act”) read with Rule 11, 15 and 73 of the National
Company Law Tribunal Rules, 2016 read with section 58AA of 1956 Act.

 

I Co was directed to publish notice of the
hearing by advertisement in two newspapers which was duly complied by it. I Co
pointed out that out of the total number of 5575 depositors, the company
received 45 objections seeking speedy payment of their deposits. Registrar Of
Companies (“ROC”) jointly with Regional Director filed a statement before the
NCLT that it regularly received complaints against the company for repayment of
fixed deposits, all of which were forwarded to the company for necessary
action.

 

HELD

I Co filed a fresh scheme of repayment
detailing the manner in which payments would be made to the deposit holders.
The Tribunal noted that I Co had not made any payment to the fixed deposit
holders since the institution of the application.

 

Tribunal held that once the company had
sought the sanction of the scheme from the Board by bringing its financial
position to its notice at the relevant time in the year 2013 and got the relief
of huge extension, there was no reason to accept the plea for further extension.
Tribunal noted that it in coming to a decision of whether or not to grant an
extension it would not only have to consider the financial position of the
company but also safeguard the interest of the fixed deposit holders. The
legislature had laid down severe punishment in case of failure by the company
to make the payments to the deposit holders within the extended time and this
provision will have to be implemented in letter and spirit.

 

In view of the extension already granted by
the Board and lack of sincere efforts on part of I Co to repay the deposits,
Tribunal rejected the application seeking further grant of extension in
repayment of fixed deposits. I Co was directed to abide by the terms of order
of the Board and any non-compliance would entail penalties as listed out in the
2013 Act.

 

15. 
Sree Gayathri Leisure India (P.) Ltd. vs. ROC

[2018] 89 taxmann.com 34 (NCLT – Hyd.)

Date of Order: 29th December, 2017

 

Section 252 of Companies Act, 2013 –
Company was carrying out regular business and there was a delay in filing
statutory returns – Name of company which was struck-off for the non-filing was
ordered to be restored upon payment of additional fees.

 

FACTS

S Co was a private company incorporated on
29.04.2013 in the state of Andhra Pradesh. The main objects of the Company were
to act as commission agent for referring and enrolling members into any
resorts, clubs, hotels, family parks and other related activities etc. S
Co did not file annual accounts and annual returns for the Financial Years 2013-2014
to 2015-2016. It was the claim of S Co that it had been carrying out normal
business activities in the said period and the non-filing was wholly
inadvertent. ROC vide notice dated 21.07.2017 read with grounds mentioned in
public notice dated 05.05.2017 struck off the name of S Co.

 

S Co contended that company had been
regularly carrying out its business and was under the impression that all the
returns are being regularly filed. While filing of pending return on MCA portal
for pending period did the company realise that its name has been struck off.
It was pleaded that action of striking off of the Company would adversely
affect not only the company but its customers and various stake holders etc
alike. S Co submitted that it was ready to comply by filing annual returns in
question within the stipulated time as granted by the Tribunal, along with
required fees.

 

HELD

Tribunal examined the provisions of section
248 to 252 of the Companies Act, 2013 which deal with striking off the name of
the company. It was observed that before taking final action to strike off a
company u/s. 248(5), the ROC, is under duty to follow section 248, which
mandates the ROC to satisfy itself that sufficient provisions have been made
for realization of all amounts due to the company and for payment or discharge
of its liabilities and obligations etc. In the case of S Co, company had
ongoing business and there were people who depended on the company.

 

Considering the interest of company, its
employees and public employment, the Tribunal allowed the application of S Co
and directed the Registrar to restore its name in the Register of Companies
subject to filing of all the pending returns and payment of prescribed
additional fees. The Tribunal also imposed a cost of Rs. 30,000.  _

Corporate Law Corner

4.  M.D.
Frozen Foods Exports (P.) Ltd. vs. Hero Fincorp Ltd.

[2017] 86 taxmann.com 92 (SC)  Date of Order: 21st
September, 2017

Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) –
Proceedings under SARFAESI and Arbitration Act can be conducted simultaneously
– Provisions of SARFAESI Act would become applicable in respect of all debts owing
and live when the Act became applicable to NBFC.


FACTS

MCo borrowed
money for its business from lenders against security of immovable properties by
the creation of an equitable mortgage by deposit of title documents (seven such
properties) on 30.09.2015 and 21.10.2015. Due to financial indiscipline, the
account of MCo soon turned into a ‘Non-Performing Asset’ (‘NPA’) within the
meaning of section 2(1)(o) of the SARFAESI Act on 06.07.2016 itself. Lender
invoked the arbitration clause on 16.11.2016. Pursuant to notification dated
05.08.2016, the lender NBFC was covered in the ambit of SARFAESI as well. NBFC
issued a notice u/s. 13(2) of the SARFAESI Act on 24.11.2016 for one of the
seven properties. The statement of claim was filed by the respondent before the
Arbitrator on 14.12.2016 and interim orders were granted by the Arbitrator on
05.01.2017, restraining MCo from creating any third party interest over the
properties. On 16.02.2017, the lender issued another notice u/s. 13(2) of the
SARFAESI Act for two more of the seven properties. MCo filed an appeal against
the final arbitration order which was dismissed by the High Court on
13.07.2017.

The following
issues came up for determination before the Supreme Court in light of these
facts –

 (i)  Whether
the arbitration proceedings initiated by the lender can be carried on along
with the SARFAESI proceedings simultaneously?

(ii) Whether
resort can be had to section 13 of the SARFAESI Act in respect of debts, which
have arisen out of a loan agreement/mortgage created prior to the application
of the SARFAESI Act to the NBFC?

 (iii) A
linked question to question (ii), whether the lender can invoke the SARFAESI
Act provision where its notification as financial institution u/s. 2(1)(m) has
been issued after the account became an NPA u/s. 2(1)(o) of the said Act?

 

HELD

The Supreme
Court heard the extensive arguments and examined the divergent decisions laid
down by various High Courts. The Court observed that arbitration is an
alternative to the civil proceedings. The provisions of the SARFAESI Act are a
remedy in addition to the provisions of the Arbitration Act. Liquidation of
secured interest through a more expeditious procedure, is what has been
envisaged under the SARFAESI Act and the two Acts are cumulative remedies to
the secured creditors. SARFAESI proceedings are in the nature of enforcement
proceedings, while arbitration is an adjudicatory process. In the event that
the secured assets are insufficient to satisfy the debts, the secured creditor
can proceed against other assets in execution against the debtor, after
determination of the pending outstanding amount by a competent forum. The Court
upheld the judgements in case of Orissa High Court in Sarthak Builders Pvt.
Ltd. vs. Orissa Rural Development Corporation Limited 2014 SCC OnLine Ori 75,
the Full Bench of the Delhi High Court in HDFC Bank Limited vs. Satpal Singh
Bakshi (supra) and the Division Bench of the Allahabad High Court in Pradeep
Kumar Gupta vs. State of U.P AIR 2010 All 3.

In respect of the
second issue, the Supreme Court proceeded to hold that SARFAESI Act applies to
all the claims which would be alive at the time when it was brought into force.
Thus, in respect of the lender or the other NBFCs, it would be applicable
similarly from the date when it was so made applicable to them. The scheme of
the SARFAESI Act was to provide a procedural remedy against security interest
already created. Therefore, an existing borrower, who had been granted
financial assistance was covered u/s. 2(f) of the said Act as a ‘borrower’. The
right to proceed under SARFAESI Act accrued once the Notification was issued.

The scheme of
the SARFAESI Act sets out an expeditious, procedural methodology, enabling the
bank to take possession of the property for non-payment of dues, without
intervention of the court. The mere fact that a more expeditious remedy is
provided under the SARFAESI Act did not mean that it was substantive in
character or created an altogether new right. The Court held that argument of
MCo that substantive law cannot be made retrospective was bad in law and could
not be upheld for reasons specified above. The provisions of the SARFAESI Act
would become applicable qua all debts owing and live when the Act became
applicable to the NBFC.

The Supreme
Court observed that since the appeal was devoid of merit and an endeavour to
prolong the date of judgment, it dismissed the appeal and imposed cost of Rs.
20,000 on MCo.

5. 
Arvind Aggarwal vs. Trinetra Cements Ltd.

[2017] 86 taxmann.com 53 (NCLAT – New Delhi)     Date of Order: 12th September,
2017

Section 232 read with section 230 of
Companies Act, 2013 – Minority shareholder failed to show any irregularity in
the valuation report made by the valuer in a scheme of amalgamation – Plea for
modification of scheme was therefore rejected.

FACTS

Scheme of
Amalgamation of TCo1 and TCo2 with ICo was filed before the Madras High Court.
After the first motion, this scheme was transferred to the Tribunal at the
stage of second motion. Shareholders holding 2.37% stake in TCo1 (the
Appellants) sought modification of the Scheme of amalgamation and the same was
rejected by NCLT vide order dated 13.04.2017. Aggrieved, the Appellants have
preferred an appeal to the Appellate Tribunal.

The Appellants
filed objections under Rule 34 of the Companies (Court) Rules, 1959 challenging
the valuation arrived at by the Valuer on the ground that it was unfair and
non-transparent.

The Appellants
urged that the Tribunal had disregarded the fact that Valuation report and
Fairness opinion issued by the Valuer and Merchant Banker respectively carried
the same date, being 26.02.2014, which implied that they were working in tandem
and not independently as required under the law. It was further urged that the
Scheme could not be approved as the unaudited balance sheet for the nine months
as on 31.12.2013 relied on and referred to by TCo1, was not on record. It was
submitted that the Tribunal also failed to consider the surplus land available
with TCo1 and the ‘market deal of barring private equity’.

TCo1 and TCo3
argued that the objectors were not present, either in person or by proxy,
during the shareholders’ meeting held on 25.03.2015, when no objection to the
Scheme was raised by the shareholders and the resolutions were passed
unanimously. It was further submitted that no objections were raised by the
shareholders of TCo1 and that belated objections of the Appellants could not
have been taken into consideration after more than two years, as the decision
was taken on 25.03.2015 (inadvertently stated as 25.03.2013 in the order) and
as the scheme became effective on 28.04.2017.

HELD

The Appellate Tribunal
observed that the multiple steps for the ‘Scheme’ taken on a single day
(26.02.2014 herein) would not render the reports invalid. Validity of one or
other report can be looked into if specific illegality is brought to the notice
of the Hon’ble High Court/Tribunal. The external institutions engaged for
providing the valuation and fairness opinions were all professionals and
reputed institutions. It is usual practice by companies across India that the
reports are provided to the Board for approval on the same day.

It was held
that mere allegation made by the ‘minority shareholders’ (Appellants) that the
valuation was not properly made will not hold good, till certain illegalities
in the matter of valuation are highlighted. As the Appellants failed to show
any such illegality in the valuation made by the Valuer, the said reports could
not be interfered with.

With respect to
the surplus assets, it was held that the same were not valued separately
because the Company had to be treated as ‘going concern’. It was on this
premise, that valuation of both TCo1 and ICo, the ‘Net Asset Value’ method was
not used. TCo1 and ICo, both had power plants, mining leases etc., which
were their business assets. Adding the market value of business assets to the
enterprise value would be grossly erroneous, as the very cash flows were
generated using those business assets.

The Tribunal
thus dismissed the petition filed by the Appellant.

 6. 
Reebok India Co., In re

[2017] 79 taxmann.com 35 (NCLT – New Delhi)        Date of Order: 6th February,
2017

Section 621A read with sections 193, 211,
217, 255, 256, 295 and 297 of the Companies Act, 1956 – Compounding of offences
– The Tribunal cannot compound the offences where defaults committed by the
Managing Director (MD) were not due to any bonafide omission.

 

FACTS

R Ltd. was a
company incorporated in India, the holding company of which was a foreign
company. The main objects of the company were to design, style, manufacture,
produce, merchandise, buy, sell, export and import all types of footwear, parts
and components thereof, and accessories thereto. ‘S’ was appointed as Managing
Director of the company on 01.10.2003 and resigned from the company on
28.03.2012. In August 2009, R Ltd. received notices from ROC for violating provisions
of sections 295, 297, 255 & 256, 193(2), 217(4) & 211(1) of Companies
Act, 1956 (the Act).

Office of ROC
initiated prosecution and certain offences were referred to SFIO which in turn
launched criminal prosecution for serious offences under sections 477A, 464,
471, 405 r/w 406, 418, 107, 409, 120A r/w 120B of the Indian Penal Code. The
investigation carried out by the office of SFIO established that the sale of
products of R Ltd. were grossly inflated by S in connivance with other
executives by raising fictitious invoices and manipulating other documents.
These activities were carried out with criminal intention and in conspiracy
with selected vendors and channel partners of R Ltd. Bills were discounted on
fictitious basis. Further, in violation of the provisions of section 58A of the
Companies Act, 1956, deposits were also accepted under the guise of a franchise
referral programme.

R Ltd. filed an
application seeking compounding of various offences under Companies Act, 1956.

 

HELD

The Tribunal
observed that discretion to compound an offence under the Act was with the
Tribunal and should primarily be exercised in cases of inadvertent technical
aberrations. The technicalities under the Act are vast, complicated, time bound
and tend to often escape the notice of even professionals. The provisions for
compounding primarily exist to impose fines for such inadvertent defaults with
a gateway to escape the trauma of a protracted trial for a bonafide mistake.
The discretion to compound the offence has therefore to be considered on the
merits of each case, whether such a mistake was inadvertent and bonafide or
deliberate.

The Tribunal
held that non-adherence to statutory compliances was both deliberate and
malafide. Defaults in this case were incurable and could not have been
rectified. Compounding of these offences would demolish and prejudice the
prosecution under the penal provisions as well.

The Tribunal
further held that the prayer to compound could not be granted since the
offences were not due to any bonafide omission or a delayed rectification of a
statutory requirement. Compounding of the offences under the Act would hamper
the criminal prosecutions. The Tribunal was of the view that no accused should
be allowed to get away with deliberate large-scale bungling and fabrication of
documents carried out with criminal intention and accordingly dismissed the
application for compounding filed by R Ltd.

Corporate Law Corner

16.
Vivek Vijay Gupta vs. Steel Konnect (India) (P.) Ltd.

[2018] 90 taxmann.com 78 (NCLT – Ahd.)

Date of Order: 15th January, 2018

 

Section 31 read with section 30 and 25 of
the Insolvency and Bankruptcy Code, 2016 – NCLT does not have any power or
authority to interfere with the decision of committee of creditors in rejecting
a resolution plan submitted for its consideration. 

 

FACTS

Financial Creditor instituted Insolvency
proceedings against S Co u/s. 7 of the Insolvency and Bankruptcy Code, 2016
(“the Code”). The appeals filed by SCo were dismissed by the National Company
Law Tribunal (“NCLT”) and subsequently by the Supreme Court. Resolution
Professional (“IRP”) was appointed and a valuation report was finalised by him
on 10.11.2017 which pegged the value of S Co at Rs. 39 crore. Promoters of S Co
submitted a resolution plan for Rs. 85 crore on 25.11.2017. In view of the
Ordinance passed by the Central Government amending section 29 of the Code, the
resolution plan submitted by the Promoters was rejected as they were not
eligible to submit a resolution plan and the Committee of Creditors (“COC”) did
not accept the same. Pursuant to an advertisement filed by the IRP an Asset
Reconstruction Company (“ARC”) filed a resolution plan for Rs. 93.42 crore
which was also rejected by the IRP. ARC filed a modified plan which was placed
before the COC and the same was also rejected by the COC.

 

Present application was filed by the
Promoter / Director of S Co alleging that the plan submitted by the ARC was in
compliance with the provisions of the Code and that COC had simply rejected the
plan with a remark that the same was not in compliance with the Code without
assigning any reasons even though the plan was in the interest of S Co and its
stakeholders. It was prayed that NCLT should intervene and overturn the
decision of COC which rejected the resolution plan.   

 

HELD

NCLT observed that it has two fold powers
granted to it u/s. 31 of the Code, namely:

 

(i)  accept the plan which is
approved by the COC; or

(ii) reject the plan which
though approved by the COC does not meet the requirements of the Code.

 

In case if no resolution plan is placed before
NCLT before the expiry of the Insolvency Resolution Process period or the
extended period, then NCLT is bound to pass an order for liquidation. Section
33(1)(b) of the Code gives authority to the NCLT to order liquidation in case
it rejects the resolution plan u/s. 31(2) for non-compliance of the
requirements specified therein. Therefore, even at the stage of ordering
liquidation, NCLT has no authority to consider a resolution plan that was
rejected by the COC.

 

It was observed that NCLT does not have any
power to sit over the judgment on resolution of COC in the rejecting the
resolution plan. The Tribunal held that it had no power to or authority to
interfere with the decision of the COC in rejecting the resolution plan.

 

When the information is there before the COC
regarding the non-compliance of the requirements of the Code and Regulations,
COC is perfectly justified in rejecting the resolution plan. It was held that
there were no facts and circumstances that warrant interference by NCLT in the
rejection of the resolution plan.

 

The IRP, in carrying out its duties,
submitted the plan which it received from the ARC before the COC. It also
brought out the fact that the same was not in accordance with the provisions
contained in the Code. The NCLT further observed that in light of the fact
pattern of this case, there was no lapse on part of the IRP in carrying out its
duties enumerated under the Code.

 

There was a contention raised that the
Promoters and directors of S Co (who filed the application) are persons
aggrieved or not. Since the resolution plan was in the interest of S Co and its
stakeholders, it could be said that its promoters and directors were also
aggrieved persons. However, NCLT observed that although promoters and directors
were invited to be a part of the meeting of COC they did not choose to attend
the same. Without demonstrating how the plan was beneficial to S Co and its
stakeholders it could not be held that the Promoters / directors were aggrieved
persons.

 

The NCLT, thus rejected the application
filed before it. 

 

17. Bengal Chemists and Druggists Association
vs. Kalyan Chowdhury

[2018] 90 taxmann.com 112 (SC)  

Date of Order: 02nd  February, 2018

 

Section 421 read with section 433 of the
Companies Act, 2013 – Proviso to section 421(3) is peremptory in nature – Any
appeal filed after the period specified therein becomes time barred – Delay
cannot then be condoned by resorting to the provisions of Limitation Act, 1963.

 

FACTS

B Co being aggrieved by an order passed by
National Company Law Tribunal filed an appeal before the National Company Law
Appellate Tribunal (“NCLAT”). NCLAT dismissed the appeal on the grounds that
the same was filed 9 days after the expiry of period of limitation of 45 days
as well as further period of another 45 days. NCLAT held that the appeals were
not maintainable in lines with section 421(3) of the Companies Act, 2013 (“the
Act”).

 

B Co filed an application before the Supreme
Court against the order of NCLAT dismissing the appeal.  

 

It was argued before the Supreme Court that
section 421(3) of the Act does not contain the language of section 34(3)
proviso of the Arbitration Act, 1996 which contains the words “but not
thereafter”. It was further argued that in terms of section 433 of the Act,
provisions of the Limitation Act, 1963 shall, as far as may be, apply to
Appeals before the Appellate Tribunal. Section 5 would therefore be applicable
to condone the delay beyond the period of 90 days.

 

HELD

The Supreme Court considered the provisions
of sections 421 and 433 of the Act. It observed that a cursory reading of
section 421(3) made it clear that the proviso provides a period of limitation
different from that provided in the Limitation Act, and also provides a further
period not exceeding 45 days only if it is satisfied that the appellant was
prevented by sufficient cause from filing the appeal within that period. 

 

It was observed that section 433 cannot
apply because the provisions of the Limitation Act only apply “as far as may
be”. There is a special provision contained in proviso to section 421(3) and as
a corollary, section 5 of the Limitation Act cannot apply.

 

The Supreme
Court held that 45 days is the period of limitation, and a further period not
exceeding 45 days is provided only if sufficient cause is made out for filing
the appeal within the extended period. If the Court was to accept the argument
put forth by the Applicant, it would mean that notwithstanding that the further
period of 45 days had elapsed, the NCLAT may, if the facts so warrant, condone
the delay. This would be to render otiose the second time limit of 45 days,
which is peremptory in nature.

 

In coming to this conclusion, the Supreme
Court relied on its own decision in the case of Chhattisgarh SEB vs. Central
Electricity Regulatory Commission, 2010 (5) SCC 23. The Supreme Court also
distinguished the decisions which were relied upon by the counsel for B Co.

 

The appeal filed by B Co was thus dismissed
by the Supreme Court.

 

18. Prem Prakash Sethi vs. Union of India

[2018] 89 taxmann.com 234 (Delhi)             

Date of Order: 10th January, 2018

 

Section 252 of Companies Act, 2013 read
with Condonation of Delays Scheme, 2018 – Name of company was struck-off from
the Register of Companies owing to non-compliances – Petition filed u/s. 252 was still pending before the NCLT – Directors of the
company could avail the benefit of Condonation of Delays Scheme, 2018

 

FACTS

S Co was in an active business and it
defaulted in making certain statutory compliances under Companies Act, 2013
(“the Act”) and requisite returns were not filed by them. Registrar of
Companies (“ROC”) believed that directors of S Co were disqualified u/s.
164(2)(a) of the Act and that S Co was disqualified u/s. 248(1) of the Act.

 

ROC
therefore, issued a show cause notice in March 2017 requiring S Co to show
cause as to why it was not liable to be removed from the Register of Companies.
S Co failed to respond to this notice, resulting in passing of an order of
removal of the company from the Register of Companies. S Co then invoked remedy
available u/s. 252(3) of the Act by filing a petition with the National Company
Law Tribunal (“NCLT”) praying for revival of 
the company.

 

Director of S Co filed the present writ
petition before the High Court expressing that it was desirous of availing the
Condonation of Delays Scheme, 2018 (“CODS-2018”) but was unable to do so
because name of S Co had been struck off from the Register of Companies. It was
prayed before the High Court that they be permitted to avail the benefit of
CODS-2018, subject to the outcome of the proceedings initiated u/s. 252 of the
Act. 

 

S Co also conceded that non-filing of
returns was a bonafide mistake on part of the company and it was stated that it
was ready to submit all the relevant documents which were required by the ROC.

 

HELD

The High
Court observed that S Co deserves to be fairly given an opportunity to avail
the benefit of CODS-2018 given that order striking off its name from the
Register of Companies was itself pending consideration before  the NCLT.

 

The High Court therefore, directed S Co to
file all the requisite returns in relation to the company and submit necessary
application along with requisite charges to the ROC in order to enable it to
avail the benefits provided under the CODS-2018.

 

The High Court also directed NCLT to dispose
the application expeditiously given that benefit under CODS-2018 is available
only up to 31.03.2018. In the event the NCLT is unable to dispose of the appeal
within the time as requested for the reasons that are not attributable to S Co,
it was directed that the ROC shall ensure that the Scheme under CODS-2018 is
extended in respect of the directors of S Co.

 

The High Court held that directors of S Co
would not be deprived of the opportunity to avail the CODS-2018 only on account
of pendency of the petition before NCLT. 

 

It was also clarified that if directors of S
Co did not avail of the CODS-2018 or file necessary documents then, in addition
to other consequences, they would also be liable for prosecution for Contempt
of Court.

 

Petition filed by S Co was thus allowed.

 

19.
Real time Interactive Media Pvt. Ltd. vs. Metro Mumbai Infradeveloper Pvt. Ltd.

[2018] 90 taxmann.com 89 (Bombay)

Date of Order: 12th January, 2018

 

Section 271 read with section 248 of
Companies Act, 2013 – High Court has the power to order winding up of company
although its name has been struck off from the Register of Companies.

 

FACTS

R Co was engaged in the business of
publishing and managing advertisements on BEST TV LED screens in the BEST buses
(BEST TV) running in Mumbai. R Co was the sole agent of BEST in respect of
airing such advertisements on BEST TV. M Co engaged R Co for displaying
advertisements on BEST TV in 1300 Non AC buses and 250 AC buses for a period of
3 months from 07.10.2011 till 07.01.2012 for a consideration of Rs. 15 lakhs
plus taxes. In terms of the agreement, R Co aired those advertisements and
raised invoices of Rs. 5,16,665 in respect of each of the months for which the
service was provided. Invoices raised also mentioned that interest would be
charged if the same were not paid on or before the due date.

 

M Co paid in installments a total amount of
Rs. 5 lakhs and as on 16th April, 2012 after adjusting this Rs. 5
lakhs from the total invoice of Rs. 15,49,995 there was a balance outstanding
of Rs. 10,49,995. As no payments came forth, R Co issued a statutory notice
dated 27.05.2014 to M Co. M Co did not file any reply to the statutory notice
issued to it.

 

R Co urged before the Court that the
registered address shown in the Company Master Data is the same address to
which notice under Rule 28 of the Companies Court (Rules), 1959 (“the Rules”)
has been sent and that is the same address which reflected even in the cause
title to which statutory notice was also sent. As on date, recent MCA website
extract indicates the status of M Co as “Strike Off”.

 

The Court was approached to decide whether
winding up proceedings can be initiated against a company which has been struck
off the Register of Companies.

 

HELD

The High Court observed that in light of the
facts it was possible to hold that the statutory notice was duly served as
required under Rule 28 of the Rules.

 

The High Court after examining the
provisions of section 248 of Companies Act, 2013 (“the Act”) observed that
there was nothing in section 248 which 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 of company notified as dissolved was that the company
shall on and from the date mentioned in the notice u/s. 248(5) of the Act 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 amount due to the company and for the payment or discharge of the
liabilities or obligations of the company.

 

The High Court held that just because the
name of the company was struck off the register u/s. 248 of the Act, the same
will not come in the way of the Court to pass an order of winding up of
company.

 

It was further observed that M Co neither
filed any affidavit opposing the petition nor did it reply to the statutory notice
that was duly served. The High Court had the power to order winding up on the
presumption of inability to pay the amounts claimed and not denied. The High
Court held that where no response has been made to the statutory notice, the
company runs a risk of winding up petition being allowed. By virtue of section
434 of the Companies Act, 1956 a presumption of the indebtedness could be
legitimately drawn by the court where no reply to the statutory notice was
forthcoming.

 

The High Court thus, ordered winding up of
M Co and proceeded to appoint Official Liquidator who would take charge of the
winding up proceedings to be carried out against M Co. _

Corporate Law Corner

6.   Vaibhav Goyal Ltd., In
re

(2016) 76 taxmann.com 249 (Rajasthan)                    Dated:
18.11.2016

Section 100 of the Companies Act, 1956 read with section 52
of the Companies Act, 2013 – Whether a company could utilise the balance held
in Securities Premium Account to adjust the accumulated losses – Held yes,
provided the same was permitted under its Articles and adjustment was approved
by requisite majority of equity shareholders

FACTS

Petitioner company (VCo) was engaged in the business of
dealing in gems and jewellery. The Incidental or ancillary objects clause of
the Memorandum of Association (MOA) of the company provided for activity of
investment. As per the Balance sheet as at 31.03.2015, VCo had a balance of Rs.
589.72 crore in its securities premium account and accumulated losses of Rs.
264.27 crore in its reserves and surplus. The accumulated losses were on
account on diminution in the value of investments made in the subsidiary
companies. The shareholders of VCo in a meeting held on 16.01.2016 passed a
special resolution approving the adjustment of such accumulated losses against
balance held in securities premium account. Articles of Association (Articles)
of VCo permitted reduction of share capital of the company.

The Registrar of Companies (ROC) challenged the reduction on
the grounds that company did not comply with provisions of section 149(2A) and
372A of the Companies Act, 1956 (1956 Act). ROC further argued that diminution
in the value of investments was not a permitted purpose for use of securities
premium in terms of section 52 of the Companies Act, 2013 and accordingly, the
special resolution passed was ultra vires. It also raised objections on
non-registration of VCo under RBI Act, 1934 in the context of investments made
in its subsidiaries. 

HELD

The High Court examined the provisions contained in section
52 of the Companies Act, 2013 as well as section 100 of the 1956 Act (which
were applicable for reduction of share capital). It was held section 52 equates
the securities premium account of a company to its paid up share capital.
Balance in share premium account could be used for purposes specified therein
without any approval of Court. For other purposes, the provisions of sections
100-104 of the 1956 Act applied and approval of the court was to be sought for
the reduction of paid up share capital of the company. 

It was observed that if the reduction of share capital of a
company u/s. 100(1) of the 1956 Act was authorised by its Articles of
Association and supported by a special resolution of equity shareholders, the
court of which approval is sought should merely evaluate whether it is
reasonable, just and fair and not prejudicial to the interest of the
shareholders, creditors or any other stakeholders of the company.

In the facts of the present case, Court observed that
contemplated adjustment would not entail any outflow of funds or assets and the
same was a commercial decision taken by the company with approval of
shareholders. Also, the said adjustment would not prejudice any creditor of VCo
or entail a reduction in the value of its shares. Court thus, upheld the
validity of resolution which permitted the utilisation of balance held in
securities premium account for adjustment of accumulated losses. It relied on
judgements rendered by various other High Courts in respect of utilisation of
securities premium account beyond the purposes specified u/s. 78 of the 1956
Act as long as the same was permitted by the Articles of the Company and
approved by requisite majority of equity shareholders.

Argument of ROC that VCo was not permitted to make
investments was not maintainable owing to the fact that the Incidental and
ancillary objects of VCo permitted the activity of making investments. Section
17 read with section 149(2) of the 1956 Act were also held to be inapplicable
for the same reason. Further, the Court observed that ROC did not have anything
on record to show that the investments in question beginning 2004-2005 were at
any point of time objected to by any statutory authority.

The Court also dispensed the procedure required u/s. 101(2)
of the 1956 Act as well as the formality of using the words “And reduced” while
describing its capital structure.

7.  SPC & Associates, Chartered Accountants
vs. DVAK & Co.

[2017] 80 taxmann.com 48
(NCLT – Hyd.)                  Dated:
17.03.2017

Sections 139 and 140 of the Companies Act, 2013 –CA firm was
appointed as auditor for 5 years – The appointment was not ratified at the
succeeding AGM – The only reason for the same was a nominal hike in audit fees
– CA firm was not given any opportunity before the decision of non-ratification
was taken – Whether such an act was bad in law – Held yes 

FACTS

Respondent company (NCo) appointed the Petitioner (SCo) as
its statutory auditor for a block of 5 years in its 17th Annual
General Meeting (AGM) held on 28.08.2015 till the conclusion of AGM in the year
2020. However, NCo proceeded to appoint Respondent No. 2 (DCo) as its statutory
auditor for a period of five years from the 18th AGM till the
conclusion of AGM in the year 2021. Two partners working in SCo had resigned
and established a new firm in the name and style of DCo. 

NCo alleged that it had an understanding with SCo that audit
fees would remain fixed for the tenure of 5 years. NCo admitted that the
ratification for appointment of SCo was not carried out because of a 10%
increase in the audit fees charged by SCo. NCo urged that SCo was not removed,
only its appointment was not ratified by the members of the company.

SCo thus approached the Tribunal with the prayer that removal
of SCo and appointment of DCo be declared as illegal and that Tribunal direct
NCo to appoint SCo as its auditor.

HELD

Although an auditor is appointed for a block of 5 years in
terms of section 139(1) of the Act, its appointment is required to be ratified
by the members in every AGM.  Section
140(5)(1) requires a company to pass a special resolution and obtain the
approval of Central Government before it removes the existing auditor. The
Tribunal observed that said approval was not obtained by NCo. The only ground
for non-ratification of appointment of SCo was the proposed fee hike. The
Tribunal noted that there was no documentary evidence furnished by NCo to
establish the alleged understanding that audit fees would remain fixed for 5
years. It was of the view that 10% rise in fees was reasonable.

The Tribunal noted that SCo should have been provided with a
sufficient opportunity before its non-ratification. It was directed that DCo
would be removed as auditor of NCo and that its appointment was improper. The
Tribunal also held that SCo would continue to be the auditor till the next AGM
and that NCo may take necessary course of action in accordance with law.

8.  Bimla Kothari vs.
Unitech Ltd.

(2016) 75 taxmann.com 151 (NCLT – New Delhi)      Dated: 06.10.2016

Section 73 of the Companies Act, 2013 – Law does not
distinguish between deposits accepted prior to commencement of 2013 Act and
ones accepted after it – Remedy to approach NCLT upon failure of company to
repay them was available to both the set of depositors. 

FACTS

A company (UCo) accepted deposits from public prior to
01.04.2014. It was not able to repay the same upon their maturity. UCo filed an
application with the erstwhile Company Law Board seeking an extension of time
to repay the deposits which was rejected. Various investors approached NCLT
u/s. 73(4) of the Companies Act, 2013 for redressal of their grievances. It was
also alleged that UCo had siphoned off the money raised from public deposits.

UCo urged that since the deposits in question were accepted
under Companies Act, 1956 it would not be covered by the term “deposits” as
referred u/s. 73 of the Companies Act, 2013. UCo argued that investors could
not approach NCLT as they were not “depositors” within the meaning of the
Companies Act, 2013 and that the only available recourse to them was filing a
suit with the Civil Courts.

HELD

The Tribunal observed that it had trappings of a Court with
adjudicatory rights for exercising all equitable jurisdiction. It was further
held that Legislature did not intend to differentiate between depositors prior
to 01.04.2014 or thereafter. The remedies available cannot be any different.
Rule 19 of the Companies (Acceptance of Deposits) Rules, 2014 clarifies the
applicability of sections 73 and 74 of Companies Act, 2013 to deposits accepted
from public by eligible companies, prior to or after coming into force of the
2013 Act.

It was held that the term every deposit would mean and
include all previous deposits accepted by a company. Petition u/s. 73(4) was
accepted by the Tribunal for recovery of the deposits. UCo assured the Tribunal
to sell six parcels of land owned by it and use the proceeds for repayment of
deposits. Separately, ROC had started proceedings for prosecution and was
directed by the Tribunal to investigate into the allegations of siphoning off
of funds.

9.  Rupak Gupta vs. U.P.
Hotels Ltd., In re

(2016) 71 taxmann.com 158 (NCLT – New Delhi)      Dated:
22.06.2016

Section 173 of the Companies Act, 2013 read with Rule 3 of
Companies (Meetings of Board and its Powers) Rules, 2014 – Directors are
entitled to use video conference facility to participate in Board Meetings even
if the intimation for such use has not been furnished at the beginning of the
calendar year.

FACTS

Applicant and his mother (A) were directors on the Board of a
company (UCo) along with R2 and one other independent director (G). R2 and A
were joint Managing Directors. A received a notice on 28.05.2016 for attending
a board meeting scheduled to be held on 04.06.2016. Since A and his mother were
travelling overseas on that date, it was agreed to re-schedule the same on
01.06.2016. A received another notice on 30.05.2016 which further re-scheduled
the meeting to its original date being 04.06.2016. R2 assured that A and his
mother could participate in the Board Meeting through a video conference. On
03.06.2016, A and his mother were denied the permission to attend the meeting
through the video conference and meeting was conducted as per the schedule
without A and his mother being present there.

R2 submitted to the Tribunal that the video conferencing
facility was denied with a view to comply with provisions of Rule 3(3e) of
Companies (Meeting of Board and its Powers) Rules, 2014 (Rule) which requires a
director to intimate his intention of participating in a Board meeting through
video conference facility at the beginning of the calendar year.

In addition to the items specified in the agenda, R2 proposed
to appoint B as an additional director of UCo. G had objected the denial of
video conference to A and his mother as well as appointment of B. Another Board
meeting was scheduled on 22.06.2016 to confirm the minutes of meeting held
previously, as well as to appoint B as a non-executive independent Chairman of
UCo.

A approached the Tribunal to order a stay on the meeting to
be held as well as on operation of resolution passed in the meeting of
04.06.2016.

HELD

The Tribunal noted that R2 had assured to provide the video
conference facility to A and his mother on 30.05.2016 and on the basis of this
assurance, they left for overseas. The said Rule which was cited as a reason
for denial was also in force on the date of providing the assurance. The
Tribunal held that if at all any person backed out from the assurance given,
and if the assured proceeded on that assurance, then such statement was hit by
doctrine of estoppel.

The Tribunal further held that Rule 3 was meant for providing
video conferencing. It was the obligation of the directors convening the
meeting to provide every facility to the directors asking video conference and
enable them to participate in the Board meeting. Sub-rule 3(e) merely provided
that intimations given at the beginning of the calendar year would continue to
remain valid for the entire calendar year. It did not in any way intend that in
absence of such intimation at beginning of the calendar year, directors would
not be entitled to use video conference facility during the year. Owing to the
unfairness in the manner of holding the Board meeting on 04.06.2016, the
Tribunal stayed the operation of resolutions passed therein. 

The Tribunal noted that there was a separate
petition challenging the appointment of B and therefore did not direct anything
in that regard.

Corporate Law Corner

7.  [2018] 143 CLA 421 (SC)
Mackintosh Burn Limited vs. Sarkar and
Chowdhury Enterprises Private Limited

Date of Order: 27th March,
2018

 

Sections 58(2) and 58(4)
of Companies Act, 2013 – Refusal to record registration of shares is a mixed
question of law and facts – “Sufficient cause” as appearing in section 58(4) is
not restrictive to mean that only illegal or impermissible transfers can be
refused – A refusal to transfer shares for conflict of interest in a given
situation can also be a cause – Each case will have to be examined for facts to
determine what constitutes “sufficient cause”

 

FACTS

M Co is a public company
with majority of shares held by the Government of West Bengal. S Co held 28.54%
of the shares of M Co and further acquired 100 shares, which together would
make its holding 39.77%. M Co refused to register the transfer of shares on the
contention that S Co was controlled by a competitor in business, and hence, it
would not be in the interest of a Government Company to permit such transfer.
Company Law Board (“CLB”), vide order dated 16.09.2015 rejected the contentions
and directed registration of shares in favour of S Co.

 

The order of CLB was
challenged before the High Court of Calcutta u/s. 10F of the Companies Act,
1956. The appeal was dismissed by the High Court. After several rounds of
litigation, review petition was filed before the High Court, which was also
dismissed by the High Court. High Court, in the order dated 15.09.2017 held
that there was no mistake capable of correction and that correction could be
done only by a superior forum.

 

Present application was
filed before the Supreme Court challenging the orders.

 

HELD

Refusal of registration of
the transfer of shares and the appellate remedy are provided u/s. 58 of the
Companies Act, 2013. This provision had come into force at the relevant time.
Supreme Court went through provisions of section 58(2) and 58(4) of the
Companies Act, 2013. It observed that the securities or interest of any member
in a public company are freely transferable. However, u/s. 58(4), it is open to
the public company to refuse registration of the transfer of the securities for
a sufficient cause. To that extent, section 58(4) has to be read as a limited
restriction on the free transfer permitted u/s. 58(2).

 

Supreme Court held that
section 10F of the Companies Act, 1956, provides that an appeal against an
order passed by the Company Law Board can be filed before the High Court on
questions of law. Right to refuse registration of transfer on sufficient cause
is a question of law and whether the cause shown for refusal is sufficient or
not in a given case, can be a mixed question of law and fact.

 

The Supreme Court held
that High Court should have considered various aspects arising through the
order of CLB and not restricted itself in adjudicating on the grounds of
limitation only.

 

The Supreme Court observed
that meaning of the words “without sufficient cause” as used in section 58(4)
cannot be interpreted to mean that transfer of shares can be permitted only if
the transfer is otherwise illegal or impermissible under any law. Refusal can
be on the ground of violation of law or any other sufficient cause. Conflict of
interest in a given situation can also be a cause. It observed that whether the
reason for refusal of registration is sufficient in the facts and circumstances
of a given case is for the Company Law Board to decide.

 

Without going into any
further merits of the case, Supreme Court set – aside the orders of CLB and
High Court and remitted the matter back to NCLT for afresh consideration
without being influenced by any findings recorded in the orders of CLB, High
Court or the Supreme Court.

 

 

 

8.  (2018) 91 taxmann.com 123 (NCLAT)

Achintya Kumar Barua vs.
Ranjit Barthkur

Date of Order: 08th
February, 2018

 

Section 173(2) of
Companies Act, 2013 – A company is bound to provide video-conferencing or
participation through other audio visual means to a director who intends to
avail the same for attending the meetings of Board of Directors – Secretarial
Standards which make provision of this facility optional for the company would
not override the law contained in Act and Rules

 

FACTS

‘R’ had filed an
application in order to enforce its right to participate in the Board meetings
of the company through video conferencing. 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 Hon’ble High Court
found that the appeal did not raise any question of law and sent back the
matter. The same came up before the National Company Law Tribunal (“NCLT”) and
hearing both sides, the NCLT allowed the application directing that the
facility u/s. 173(2) of the Companies Act, 2013 should be made available. It
further observed that company had necessary infrastructure to provide such a
facility. ‘A’ and other directors filed an appeal before National Company Law
Appellate Tribunal (“NCLAT”) against the order of the NCLT.

 

‘A’ put forth two
contentions before the NCLAT. Firstly, it was urged that provisions of section
173(2) are not mandatory and that it is not compulsory for the company to
provide facility for video-conferencing. Secondly, Rule 3(2)(e) of the
Companies (Meetings of Board and its Powers) Rules, 2014 (“Rules”) casts
responsibility on the Chairperson to ensure that no person other than the
concerned Director is attending or having access to the proceedings of the
meeting through video-conferencing mode or other audio-visual means. It was
submitted that Chairman may not be able to ensure the same as he would have no
means to know as to who else is sitting in the room or place concerned.

 

HELD

NCLAT perused the
provisions of section 173(2) as well as Rule 3. It held that use of the word
“may” in the section only gave an option to the Director to choose whether he
would be participating in person or through video-conferencing or other
audio-visual means. The word “may” did 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 so desire.

 

NCLAT held that Rules,
read as a whole, were a complete scheme. While Rule 3(2)(e) casts a
responsibility on the Chairman, Rule 3(4) casts a responsibility on the
participating director as well. The Chairperson will ensure compliance of Rule
3(2)(e) and the director will need to satisfy the Chairperson that Rule 3(4)(d)
is being complied. 

 

‘A’ further submitted that
Secretarial Standard on Meetings of the Board of Directors provide that
participation through video conferencing or other audio-visual means can be
done only “if the Company provides such facility”. NCLAT however held that the
said guidelines would not override the provisions contained under the Act and
Rules.

 

NCLAT thus held that
provisions of section 173(2) were mandatory and the companies cannot be
permitted to make any deviations therefrom and dismissed the appeal filed
before it by ‘A’.

 

[Author’s note: An analysis
of this judgement has been carried in May 2018 issue of the Journal on page 93]

 

9.  I.A. No. 594 of 2018 in Company Appeal (AT)
(Insolvency) No. 188 of 2018 – NCLAT (New Del) Rajputana Properties Pvt. Ltd.
vs. Ultra Tech Cement Ltd.

Date of Order: 15th
May, 2018

 

Sections 24, 29 and 30 of
Insolvency and Bankruptcy Code, 2016 – Resolution professional does not have
power to take comments on the resolution plan submitted by any of the
Resolution Applicant(s) – Procedure to be followed by the IRP and CoC explained
in light of provisions of law

 

FACTS

National Company Law
Appellate Tribunal (“NCLAT”) had vide an interim order dated 04.05.2018 ordered
that Committee of Creditors (“CoC”) and Adjudicating Authority would approve
one or the other resolution plans which would be subject to the decision of the
appeal.

 

Insolvency resolution professional
(“IRP”) gave a notice to all the parties concerned that he would decide about
the eligibility of one or more resolution applicant (“RA”).

 

CoC argued that it is
required to consider all the resolution plans and all the aspects of every plan
in order to approve one of the plans.

 

It was submitted that IRP
is required to decide whether resolution plan(s) are in accordance with
existing provisions of law and fulfil other conditions as prescribed u/s. 30(2)
of the Insolvency and Bankruptcy Code, 2016 (“the Code”) and therefore, it was
within the domain of the IRP to decide such issue.

 

IRP submitted that he did
not intimate RAs that he will decide eligibility of one or other RA and that he
merely called for comments of all the RAs.

 

HELD

The NCLAT examined the
provisions of sections 29 and 30 in order to determine the duties of the IRP.
It observed
the following:

 

(a) IRP is required to prepare an ‘Information
Memorandum’ for formulating a resolution plan. The IRP is required to provide
RA all the relevant information in physical and electronic form.

 

(b) IRP is required to examine each resolution plan
received by him to confirm that the resolution plan provides for payment of
Insolvency Resolution Process costs, payment of debts of Operational Creditor(s),
management of the affairs of the corporate debtor, implementation and
supervision of the resolution plan, other requirements as may be specified by
the Board and does not contravene any of the provisions of law for the time
being in force.

 

(c) In absence of any information through any
source while scrutinising the resolution plan u/s. 30(2) of the Code, IRP
cannot decide upon eligibility of the RA u/s. 29A.

 

(d) There is no provision in the Code conferring
power upon the IRP to decide upon the eligibility or otherwise of the RA.

 

(e) IRP is only required to examine whether the
plan conforms to provisions of section 30(2). He cannot disclose it to any
other person including the RA(s) who has submitted the plan.

(f) The resolution plan
submitted by a RA being confidential cannot be disclosed to any competitor RA
nor any opinion can be taken or objection can be called for from other RAs with
regard to one or other resolution plan.

 

(g) Joint reading of
sections 24 and 30 suggests that following persons are to take part in the
meeting of CoC at the time of approval of one or other resolution plan:

 

?   Members of CoC

?   Members of the (suspended) Board of Directors
or the partners of the corporate persons;

?   Operational Creditors or their
representatives if the amount of their aggregate dues is not less than ten per
cent of the debt

?   RAs

 

(h) CoC while approving or
rejecting one or other resolution plan should follow such procedure which is
transparent. Persons who do not have a right to vote can certainly express
their views to the CoC.

 

(i) CoC should record
reasons (in short) while approving or rejecting one or the other resolution
plan.

 

(j) Views expressed by
persons not entitled to vote have to be taken in to consideration by the CoC
before approving or rejecting a resolution plan.

 

(k) RAs may, in the
meeting before CoC, point out whether one or the other person (Resolution
Applicant) is ineligible in terms of section 29A or not.

 

(l) IRP is required to
communicate the final decision of the CoC to the Adjudicating Authority.

 

(m) The Adjudicating
Authority who is required to take decision as per section 31 of the Code, can
go through the reasoning to accept or reject one or other objection or
suggestion and may express its own opinion/decision.

 

NCLAT thus, laid down the
procedures to be followed by the IRP and the manner in which meetings of the
CoC would
be conducted.

 

IRP was directed to not
take any comments from any of the RA(s).

CORPORATE LAW CORNER

4. B.
K. Educational Services (P). Ltd. vs. Parag Gupta & Associates [2018] 98
taxmann.com
213 (SC)

Date
of Order: 11th October, 2018

 

Section 238A of the Insolvency and Bankruptcy Code, 2016 –
Provisions of Limitation Act, 1963 are applicable to applications filed under
Insolvency and Bankruptcy Code – Applications under the Code cannot be filed
where the default has occurred more than three years prior to the date of
filing of application, except in cases where delay is condoned in terms of
section 5 of the Limitation Act

 

FACTS

National Company Law Appellate
Tribunal (“NCLAT”) in a batch of appeals held that Limitation Act, 1963 did not
apply to applications made u/s. 7 and 9 of Insolvency and Bankruptcy Code, 2016
(“Code”) from the date of its commencement of which was 01.12.2016 till the
date on which the Code was amended to incorporate section 238A which was
06.06.2018. The matter was taken up before the Supreme Court to determine
whether section 238A of the Code applied retrospectively or was prospective in
nature. Section 238A was inserted on 06.06.2018 and reads as follows:

 

The provisions of the Limitation
Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or
appeals before the Adjudicating Authority, the National Company Law Appellate
Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal,
as the case may be.

 

Section 238 A has the same language
as section 433 of the Companies Act, 2013.

 

HELD

The Supreme Court referred to the
Report of the Insolvency Law Committee of March, 2018 and perused the
provisions of Companies Act as well as the Code and observed that the Code
cannot be used as a tool to revive debt which is no longer due as the same was
time barred. It was held that amendment of section 238A would not serve its
object unless it is construed as being retrospective, as otherwise,
applications seeking to resurrect time-barred claims would have to be allowed,
not being governed by the law of limitation.

 

Supreme Court further referred to
its decision in Innoventive Industries Ltd. vs. ICICI Bank & Anr.,
(2018) 1 SCC 407 in order to conclude that expression “debt due” in the
definition sections of the Code would only refer to debts that are “due and
payable” in law, i.e., the debts that are not time-barred.

 

It was observed that the Insolvency
Law Committee Report of March, 2018 made it very clear that the object of the
Code from the very beginning was not to allow dead or stale claims to be resuscitated.
The intention of the Legislature from the very beginning was to apply the
Limitation Act to the NCLT and the NCLAT while deciding applications filed u/s.
7 and 9 of the Code and appeals therefrom. Section 433 of the Companies Act,
2013 which applies to the NCLT and the NCLAT, expressly applies the Limitation
Act to the NCLAT, as well. Both, section 433 of the Companies Act as well as
section 238A of the Code, applied the provisions of the Limitation Act “as far
as may be”. Where periods of limitation were laid down in the Code, these
periods would apply notwithstanding anything to the contrary contained in the
Limitation Act.

 

It was held that since the
Limitation Act is applicable to applications filed u/s. 7 and 9 of the Code
from the inception of the Code, Article 137 of the Limitation Act would get
attracted. Article 137 of the Limitation Act provides the period of limitation
in case of “any other application for which no period of limitation is
provided elsewhere” to be three years from the time when the right to
apply accrues. “The right to sue”, therefore, accrues when a default occurs. If
the default had occurred over three years prior to the date of filing of the
application, the application would be barred under Article 137 of the Limitation
Act, save and except in those cases where, in the facts of the case, section 5
of the Limitation Act may be applied to condone the delay in filing such
application.

 

5.  Nikhil Mehta & Sons (HUF) vs. AMR
Infrastructure Ltd. [2018] 98 taxmann.com 8 (NCLT – New Delhi)

Date
of Order: 29th September, 2018

 

Section 22(2) of the Insolvency and Bankruptcy Code, 2016 –
Threshold voting share for decision of the Committee of Creditor (“CoC”) by 66%
would be directory and not mandatory in the cases of class of creditors where
the prospective buyers of Real Estate (Commercial & Residential) alone
constitute the CoC.

 

FACTS

CP No. (IB)-02(PB)/2017 (Nikhil
Mehta& sons (HUF) &Ors. vs. M/s. AMR Infrastructure Ltd.) was
admitted for initiating Corporate Insolvency Resolution Process (“CIRP”) on
10.05.2018 by the National Company Law Tribunal (“NCLT”). Mr. Vikram Bajaj was
appointed as Interim Resolution Professional (“IRP”). IRP took various steps in
discharge of his duties as required under law.

 

A new class of financial creditors
was introduced in the Insolvency and Bankruptcy Code, 2016 (“Code”) by
Amendment Act of 2018 with effect from 06.06.2018 being Real Estate
(Commercial) and Real Estate (Residential). Two representatives were appointed
to represent the aforesaid new classes through order dated 14.08.2018. The
representatives were given a list of 906 financial creditors, full details of
meeting, the electronic Id of the creditors for electronic communication etc.
The electronic window was kept opened for 48 hours for easy facilitation of
voting and understanding the agenda with clarifications.

 

236 financial creditors in the Real
Estate (Residential) forming 16.36% of voting share and 227 financial creditors
of Real Estate (Commercial) constituting 36.4% voted in the meeting of
Committee of Creditors (“CoC”). Overall, 463 financial creditors consisting of
52.78% voted up to 10.00 AM on 25.08.2018. Majority of the financial creditors
gave voting instructions to their authorised representative in favour of the
resolution proposed by the IRP. None of the resolutions proposed could meet the
voting threshold of 66% prescribed under the Code and none of the resolution
has been approved as per the existing provisions.

 

IRP therefore approached NCLT to
resolve the deadlock created by the low percentage of votes cast by a new
category of financial creditor. The NCLT was to decide if the threshold of
voting shares’ in respect of the class of financial creditors Real Estate
(Commercial) and Real Estate (Residential) as provided in various provisions of
the Code (e.g. section 22(2) provides threshold of 66%) was mandatory or not.

 

HELD

The Tribunal observed that
different thresholds have been provided for various provisions under the Code.
Having read section 22(2), it was observed that the expression ‘may’ in section
22(2) was associated with the phrase ‘either resolve to appoint the interim
resolution professional as a resolution profession or to replace the interim
resolution professional by another resolution professional’ and would not have
any bearing on the expression ‘by a majority vote of not less than sixty six
percent of the voting shares of the financial creditors’.

 

The threshold for the purposes of
seeking extension of a period of CIRP, appointing IRP as RP etc. is 66% for all
the financial creditors irrespective of class to which they belong.

 

NCLT relied on Supreme Court ruling
in case of Delhi Transport Corporation vs. D.T.C Mazdoor Congress and Ors.
(1991) Supp (1)SCC 600 and Tinsukhia Electrical Supply Co. Limited vs.
State of Assam [1989] 3 SCC 709 to apply the principle that interpretation
which need to be adopted has to be such that sustains the constitutional
validity of a statute rather than leaning in favour of interpretation which
results in its declaration as ultra vires.

 

Applying the purposive
interpretation above, it was held that threshold voting share for decision of
the committee of creditor by sixty six percent would not be mandatory in the
cases of class of creditors where the prospective buyers of Real Estate
(Commercial & Residential) alone constitute the CoC. In case of deadlock
the preference can be given to the decisions taken by the highest percentage in
the CoC and section 22(2) must be regarded as directory in nature in case CoC
is comprised 100% of class of creditors Real Estate (Commercial &
Residential).

 

The resolutions polled for in the
said case were held to be passed.

 

6.  Loyz Oil PTE Ltd. vs. Interlink Petroleum
Ltd.

[2018]
97 taxmann.com 627 (NCLT – New Delhi)

Date
of Order: 7th September, 2018

 

Ss. 5(2), 5(8) and 7, of the Insolvency and Bankruptcy Code, 2016
–Mere waiver of interest by the Financial creditor on the request of corporate
debtor would not alter the commercial nature of loan advanced – Contention that
amounts would be paid in future would not be sufficient and the financial
creditor continued to hold the right to proceed and seek remedy provided for in
the Code

 

FACTS

I Co obtained loan from L Co as
External Commercial Borrowing (“ECB”) after obtaining due permission from
Reserve Bank of India (“RBI”) in this regard. I Co entered in to two loan
agreements with L Co on 26.12.2012 and 23.05.2014 respectively for USD
12,50,000 and USD 90,00,000. On 30.06.2016 I Co requested L Co to waive of the
interest from the loan amount. L Co agreed to claim only the principal amount
and reversed the interest charged.

 

On 18.04.2018, L Co vide an e-mail
demanded the repayment of ECB of USD 1,02,50,000. I Co was unable to clear the
requested amounts. I Co in its reply dated 10.08.2018 acknowledged that it was
in receipt of the aforesaid e-mail. It stated that it made huge investment in
exploration activity but due to failure in commercial discovery and adverse
business conditions for the past few years the company was facing financial
difficulties. I Co proceeded to state that amounts due would be repaid once
steps taken for discovery of oil became fruitful.

 

All loans given by L Co are duly
reflected in the audited financial statements of I Co for the financial year
2016-17.

L Co filed for Corporate Insolvency
Resolution Process (“CIRP”) against I Co by filing an application u/s. 7 of the
Code and proposed the appointment of Shri Atul Mittal as Interim Resolution
Professional (“IRP”).


HELD

National Company Law Tribunal
(“NCLT”) examined the provisions of sections 5(7) and 5(8) of the Code which
define the terms “financial creditor” and “financial debt”.

 

In the facts of the present case, L
Co had indeed disbursed the loan to I Co which was recoverable with interest
pursuant to validly executed loan agreements. Merely because there was a
subsequent waiver of interest pursuant to the request made by I Co, would not
alter the commercial nature of the transaction. It was held that the claim
would continue to qualify as a “financial debt” and L Co would be regarded as a
“financial creditor” eligible to file the application u/s. 7 of the Code.

 

It was observed that financial
creditor could file a claim as long as the following conditions were satisfied:

 

(a)    Default
has occurred.

(b)    Application
is complete, and

(c)    No
disciplinary proceeding against the proposed IRP is pending

 

In the facts of the present case,
application u/s. 7 was maintainable as the records showed the advancement of
loan, occurrence of existence of default and the amount of default in excess of
Rs. 1 lakh. Merely because I Co contended that it would repay the debt in
future would not alter the fact there was a default on its part.

 

Thus
petition was admitted and appointment of IRP was confirmed by the NCLT as well
as necessary directions for further steps were given by the NCLT.

Corporate Law Corner

1. 
Bhagavan Das Dhananjaya Das vs. Union of India [2018] 96 taxmann.com 189
(Madras)

W.P. NOS. 25455 OF 2017 AND 25456, 25729,
26654, 16903, 16970, 16995, 16999, 17151, 17161 of 2018 & Oths.

Date of Order: 3rd August, 2018

 

Section 164(2) of the Companies Act, 2013 –
Disqualification of directors – The provision which came into effect on
01.04.2014 cannot be given a retrospective effect especially when the
disqualification clause did not trigger in the previous regime

 

FACTS

B was a
director of B Co a private limited company incorporated under the Companies
Act, 1956 (“1956 Act”). He was also a director in other company S Co which was
also a private limited company incorporated under the 1956 Act. B Co had no
operations and was lying dormant till the year 2012.

 

In the year
2012, the directors planned to revive the company and there was infusion of
additional share capital as well as introduction of three new members to the
Board of B Co (one of them being Mr. B). The revival plan did not fructify and
B Co continued to remain a dormant company. B Co did not file its annual
returns from financial year 2012-13. The last annual return filed was in
respect of financial year 2011-12.

 

Registrar Of Companies (“ROC”) on 18.03.2017
issued a show cause notice for striking off the name of B Co. There being no
plans to revive the company, B Co issued a no objection letter to the ROC for
striking off. On 08.09.2017 ROC issued a list of directors disqualified u/s.
164(2)(a) of Companies Act, 2013 (“2013 Act”) which included name of B as well.
Accordingly, B would be prohibited from acting as a director in any other
company for a period of 5 years.

 

Aggrieved, B filed a writ petition before
the Hon’ble Madras High Court. B contended that provisions of section 164(2)(a)
came into effect from 01.04.2014. Applicability of the section would commence
in respect of financial years commencing from 01.04.2014 and should not apply
in respect of offences committed prior to that date.

 

HELD

The High Court examined the provisions of
section 274(1)(g) of 1956 Act and section 164 (2)(a) of the 2013 Act. The
former section only disqualified a director from being appointed as a director
in any “public” company for a period of 5 years which was broadened under the
2013 Act to any company. The High Court observed that section 164(2)(a) was
made effective from 1.4.2014, as per section 2(41) of the 2013 Act, the first
financial year for the purpose of section 164 of the 2013 Act would be
31.3.2015 i.e., from 1.4.2014 to 31.3.2015. ROC thus wrongly applied section
164(2)(a) from financial year 01.04.2013.

 

The High Court further held that the
disqualification of directors of a private company could get triggered only on
or after 30.10.2017, hence, the list of disqualified directors published on the
website of the first respondent in September, 2017 had no legal legs to stand
up to the scrutiny of the Court under Article 226 of the Constitution of India.

 

It was observed that General Circular
No.08/14 dated 4.4.2014 also has made it clear that in respect of the financial
year commencing on or after 01.04.2014, the provisions of the new Act shall
apply, the first financial year for the purpose of section 164(2)(a) shall be
1.4.2014 to 31.3.2015 and the second and third financial years would be from
1.4.2015 to 31.3.2016 and from 1.4.2016 to 31.3.2017 respectively.

 

The High Court observed that by virtue of
the first proviso to section 96(1) of the 2013 Act, Annual General Meeting for the
year ending on 31.3.2017 can be held within six months from the closing of
financial year i.e., 30.9.2017, additionally in the light of section 164(2)(a)
referring to “annual return” and “financial statement”, the
time limit to file annual return u/s. 92(4) of 2013 Act is sixty days from
Annual General Meeting or the last date on which Annual General Meeting ought
to have been held, hence, the time limit to file balance sheet u/s. 137(1) of
the 2013 Act is again thirty days from Annual General Meeting. The
disqualification could get triggered off only on or after 30.10.2017 only, if
any company fails to file annual forms for three financial years. Even beyond
that time limit, additional time limit of 270 days was available by virtue of
the then first proviso to Section 403.

 

The High Court observed that ROC although
sent a show cause notice to B Co before striking off its name, it did not give
any such notice to B before disqualifying him as a director.

 

A company can be struck off if that company
has not been carrying on any business for a period of two financial years and
if their directors had not filed the financial statements or annual returns for
any continuous period of three financial years, they shall be, no doubt,
disqualified to be reappointed as a director of that company for a period of
five years from the date on which the said company fails to do so, whereas for
disqualification of the directors u/s. 164(2)(a), there must be a default for
not filing the financial statement or annual return for a continuous period of
three financial years.

 

The ROC should have sent a notice to B
before taking any action, as it affects its right to continue as directors in
other companies which are complying with the provisions of law.

 

The High Court however clarified that the
mischief of removal of the names of the companies by the Registrar of Companies
and the disqualification of the directors in the defaulting company will go
together, as it is inseparable, and the ROC need not give fresh notice to the directors
for their disqualification from the dormant company, if there is a failure to
file the financial statement or annual return for any continuous period of
three financial years as per section 164(2)(a).

 

The High Court thus set aside the order and
allowed the writ petitions filed before it.

 

2. 
Dinesh Kumar Bhasin vs. Batliboi Impex Ltd.[2018] 96 taxmann.com 94
(NCL-AT)

COMPANY APPEAL (AT) (INSOLVENCY) NO. 318 of
2018

Date of Order: 29th June, 2018

 

Section 9 of Insolvency and Bankruptcy
Code, 2016 – NCLT admitted the petition against the corporate debtor which was
filed by the operational creditor for default in payment of certain sum – A
shareholder of the corporate debtor challenged the admission on the ground that
the same was passed without hearing the corporate debtor – The order of the
NCLT was set aside – The dispute was already settled and hence, the same was
not remanded back to NCLT

 

FACTS

B Co filed an application u/s. 9 of the
Insolvency and Bankruptcy Code, 2016 (“the Code”) for initiating corporate
insolvency resolution process against T Co (“Corporate debtor”). National
Company Law Tribunal (“NCLT”) admitted the application, passed order of
‘Moratorium’ and pursuant to proceeding, an ‘Interim Resolution Professional’
was appointed.

 

Mr. D, a shareholder of T Co, objected to
the order of the NCLT on the grounds that an opportunity of being heard was not
afforded to B Co. Had B Co been heard, it could have pointed out the grounds
for rejection and in case of non-acceptance, it could have settled the dispute.

 

It was submitted to the NCLAT that T Co and
B Co had arrived at a settlement.

 

HELD

NCLAT held that the order of the NCLT was
passed without giving the corporate debtor an opportunity of being heard.
Accordingly, the same was liable to be set aside.

 

However, as the parties had already come to
a settlement, the same could not be remanded back to NCLT.

 

B Co was further ordered to bear the cost of
resolution professional appointed through the order of NCLT.

 

3. 
[2018] 96 taxmann.com 271 (SC)
State Bank of India vs. V. Ramakrishnan

CIVIL APPEAL NOS. 3595 & 4553 of 2018

Date of Order: 14th August, 2018

 

Section 14 of the Insolvency and Bankruptcy
Code, 2016 – Moratorium for limited period mentioned in the Code would not
apply to personal guarantor of a corporate debtor – Amendment to section 14(3)
was clarificatory in nature and accordingly would have a retrospective
application

 

FACTS

V was the Managing Director of corporate
debtor and also its personal guarantor in respect of credit facilities availed
from State Bank of India (“SBI”). The guarantee agreement is dated 22.02.2014.
Owing to non-payment of debt, account of the corporate debtor was classified as
a non-performing asset on 26.07.2015 and proceedings under SARFAESI Act were
initiated.

 

On 20.05.2017 corporate debtor filed a
petition to initiate corporate insolvency resolution process against itself
which was admitted on 19.06.2017 and moratorium was statutorily imposed in
terms of section 14 of the Insolvency and Bankruptcy Code, 2016 (“the Code”).

 

V took up a plea that moratorium would apply
to the personal guarantor as well and as a consequence the proceedings against
personal guarantor ought to be stayed. National Company Law Tribunal (“NCLT”)
admitted the plea and restrained SBI from moving against V.

 

An appeal filed by SBI against the order of
NCLT before the NCLAT was also dismissed. The reasoning was that since the
personal guarantor can also be proceeded against, and forms part of a
Resolution Plan which is binding on him, he is very much part of the insolvency
process against the corporate debtor, and that, therefore, the moratorium
imposed u/s. 14 should apply to the personal guarantor as well.

 

HELD

Supreme Court examined various provisions of
the Code.


Section 2(e) as substituted by the Amendment Act, 2018 which came into effect
from 23.11.2017 specifically provides that provisions of the Code shall apply
to personal guarantors to corporate debtors. It was observed that Part III of
the Code titled “Insolvency Resolution and Bankruptcy for Individuals and
Partnership Firms” was not yet been brought into force. The repealing
provision, namely section 243, which repeals the Presidency Towns Insolvency
Act, 1909 and the Provincial Insolvency Act, 1920, was also not been brought
into force. Section 249, which amends the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993, so that the Debt Recovery Tribunals under
that Act can exercise the jurisdiction of the Adjudicating Authority conferred
by the Code, was also not been brought into force.

 

Supreme Court observed that on a plain
reading, moratorium referred to in section 14 can have no manner of application
to personal guarantors of a corporate debtor. It was observed that so far as
personal guarantors were concerned, Part III has not been brought into force,
and neither has section 243, which repeals the Presidency-Towns Insolvency Act,
1909 and the Provincial Insolvency Act, 1920. The net result of this was that
so far as individual personal guarantors were concerned, they will continue to
be proceeded against under the aforesaid two Insolvency Acts and not under the
Code. It was further observed that use of the word “bankruptcy” in section
60(2) of the Code would not include SARFAESI proceedings but only to the two
Insolvency Acts referred to above.

 

It was observed that the scheme of section
60(2) and (3) was thus clear – the moment there was a proceeding against the
corporate debtor pending under the Code, any bankruptcy proceeding against the
individual personal guarantor would, if already initiated before the proceeding
against the corporate debtor, be transferred to the NCLT or, if initiated after
such proceedings had been commenced against the corporate debtor, be filed only
in the NCLT. However, NCLT would decide such proceedings only in accordance
with the Presidency-Towns Insolvency Act, 1909 or the Provincial Insolvency
Act, 1920, as the case may be.

 

Section 31 which was relied upon by V, only
stated that once a Resolution Plan, as approved by the Committee of Creditors,
takes effect, it shall be binding on the corporate debtor as well as the
guarantor. Supreme Court observed that this was for the reason that otherwise,
u/s. 133 of the Indian Contract Act, 1872, any change made to the debt owed by
the corporate debtor, without the surety’s consent, would relieve the guarantor
from payment. Section 31(1), in fact, makes it clear that the guarantor cannot
escape payment as the Resolution Plan, which has been approved, may well
include provisions as to payments to be made by such guarantor.

 

It was further observed that sections 96 and
101, when contrasted with section 14, would show that section 14 cannot
possibly apply to a personal guarantor. It was open for the Supreme Court to
mark the difference in language between sections 14 and 96 and 101, even though
sections 96 and 101 were not yet been brought into force. This was for the
reason that a law ‘made’ by the Legislature is a law on the statute book even
though it may not have been brought into force.

 

Upon examining the history of the Code and
previous enactments, the Court observed that Parliament, specifically did not
provide for any moratorium along the lines of section 22 of the Sick Industrial
Companies (Special Provisions) Act, 1985 in section 14 of the Code.

 

It was observed that Amendment of 2018,
which makes it clear that section 14(3), is now substituted to read that the
provisions of section 14(1) shall not apply to a surety in a contract of
guarantee for corporate debtor. It was held that object of the Amendment was to
clarify an overbroad interpretation of section 14 and such the same was a
clarificatory amendment which would be retrospective in nature.

 

The order of the NCLT was thus set aside.  

 

CORPORATE LAW CORNER

1 Commissioner of Income Tax vs. Gopal Shri
Scrips Pvt. Ltd. [2019] LSI-87-SC-2019(NDEL) (SC) Civil Appeal No. 2922 of 2019 Date of Order: 12th March, 2019

 

Section 560(5)
of the Companies Act, 1956 – In the event name of a company has been struck off
the Register of companies, liability, if any, of every director, manager or
other officer who was exercising any power or management, and of every member
of the company, would continue and could be enforced as if the Company had not
been dissolved.

 

FACTS

Commissioner of  Income-tax (“CIT”) Jaipur (IT department) had
filed an appeal u/s. 260A of the Income Tax Act, 1961 in the High Court of
Rajasthan (Jaipur Bench) against the order of Income Tax Appellate Tribunal
(“ITAT”). During the course of the hearing of the said appeal, status of G Pvt
Ltd was sought. ROC had issued communication to the court that name of G Pvt
Ltd been struck off from the register and said company was dissolved. The High Court
of Rajasthan held that the appeal filed has become infructuous and accordingly
dismissed the appeal u/s. 260A of IT Act, 1961. An SLP was filed in Supreme
Court challenging the order of High Court of Rajasthan, dismissing the appeal
of IT department.

 

HELD

The Supreme Court (SC) examined the
provisions of section 560(5) of the Companies Act, 1956 and held that the High
Court failed to notice section 560 (5) proviso (a) of the Companies Act and
further failed to notice Chapter XV of the Income Tax Act which deals with
“liability in special cases” and its clause (L) which deals with
“discontinuance of business or dissolution”.

 

The SC further observed that the
aforementioned two provisions, namely, one under the Companies Act and the
other under the Income Tax Act specifically deal with the cases of the
Companies, whose name has been struck off u/s. 560 (5) of the Companies Act.

 

The SC further concluded that these
provisions provide as to how and in what manner the liability against such
Company arising under the Companies Act and under the Income Tax Act is
required to be dealt with.

 

Since the High
Court of Rajasthan did not decide the appeal keeping in view the aforementioned
two relevant provisions the order of the High Court is not legally sustainable
and hence was set aside. The case was accordingly remanded to the High Court
for deciding the appeal afresh on merits in accordance with law keeping in view
of the relevant provisions of Companies Act and the Income tax Act.

 

(Note: This judgment was delivered in the
context of section 560(5) (a) of the 1956 Act, dealing with the striking of the
name of the Company. 2013 Act covers identical provisions u/s. 248 and hence
this case is relevant in the current context).

 

CORPORATE LAW CORNER

9. Neena Somani vs. Jaiprakash Associates Ltd.[2019] 111 taxmann.com 293 (NCLT, All.) Date of order: 13th September, 2019

 

Petition filed by depositors u/s 73 of the
Companies Act 2013 (CA 2013) for recovery of interest due is maintainable in
case of deposits accepted by company even prior to 1st April, 2014,
i.e., date on which section 73 of CA 2013 is notified – Depositors entitled to
interest payment from the date of maturity till actual payment is made

 

FACTS

‘N’ had invested her money in the company J
in different fixed deposit receipts (FDRs). However, company J had not repaid
the FDRs on the date of maturity and also not paid the interest for additional
time period for which the money of the investors was kept with it.

 

‘N’ had sent some claim letters to
company J about non-payment of due interest after maturity period of FDRs and
approached company J several times, but had not received any satisfactory
response.

 

‘N’ filed petition u/s 73(4) of CA 2013
seeking direction to company J to make repayment of the interest due from the
date of maturity till the date actual payment was released.

 

Company J contended that the deposits in
respect of which the present petition had been filed were accepted by the
company before the commencement of the Companies Act, 2013, i.e., prior to 1st
April, 2014. It was also submitted that the repayment of these deposits,
after the enforcement of CA 2013, was now governed by section 74 of CA 2013 and
not by section 73 of CA 2013 under which the present petition had been filed.

 

HELD

It was observed that NCLT has held in the
past that it is not the intention of the legislature to differentiate between
depositors prior to or after 1st April, 2014. The remedies cannot be
any different nor can they be categorised into two separate groups. Rule 19 of
the Companies (Acceptance of Deposits) Rules, 2014 clarifies the applicability
of the provisions of sections 73 and 74 of CA 2013 to deposits accepted from
the public by eligible companies, prior to or after the coming into force of
the 2013 Act. The term deposit would mean and include all previous deposits
accepted by the company.      

 

In Jaiprakash Associates vs. Jainendra
Sahai Sinha (in the matter of another depositor of company J) the
Supreme Court had held company J liable to pay interest at the rate of 12/12.5%
per annum from the date of maturity till the actual payment.           

 

As per section 74(2) of CA 2013, the
Tribunal may, on an application made by the company, after considering the
financial condition of the company, the amount of deposit or part thereof and
the interest payable thereon and such other matters, allow further time as
considered reasonable to the company to repay the deposit.          

 

A mere plain reading of the provision shows
that by exercising the power, the Tribunal allows time as it may consider
reasonable to the company to repay the deposit, and since the Tribunal simply
regularised the belated payment which was made by company J to the depositors
by extending the time to make the payment u/s 74(2) of CA 2013, the order of
the Tribunal will not debar ‘N’ from getting the interest after the maturity
till the date the actual payment is made.        

 

Therefore, the Tribunal held that in view of
the order passed by the Supreme Court in another case, the petitioners were
entitled to get the interest at the rate of 12/12.5% p.a. from the date of
maturity till the date the actual payment is released to the depositors. Hence,
‘N’ and other depositors are entitled to get the interest at the rate of
12/12.5% p.a. from the date of maturity till the date payment is released to
‘N’ and other depositors.      

 

Thus, company J was directed to make the
payment to ‘N’ at the rate of 12/12.5% p.a. from the date of maturity till the date the actual payment is released to ‘N’ and other depositors.  

 

Corporate Law Corner

10.  JAK
Builders (P.) Ltd., In re

[2018] 93 taxmann.com 467 (NCLAT)                        

Date of Order: 24th April, 2018

 

Section 419 read with 232 of Companies Act,
2013 – Transferor and Transferee companies effecting an amalgamation belonged
to two separate territorial jurisdictions of two NCLTs– Application under
sections 230-232 were filed before both the benches of NCLT – President of NCLT
has the power to transfer the case from either one of the jurisdictions to the
other where the matter was pending

 

FACTS

JBPL and JIPL (together referred to as
“transferors”) intended to amalgamate with JGPL (“transferee”). The transferors
had their registered office at Gurgaon, Haryana and transferee had its
registered office at Nehru Place, New Delhi. As they intended to get their
scheme approved for merger, they filed two separate applications both under
sections 230-232 of the Companies Act, 2013, one before the National Company
Law Tribunal, New Delhi Bench (‘NCLT, New Delhi’) and another before the
National Company Law Tribunal, Chandigarh Bench, Chandigarh (‘NCLT,
Chandigarh’).

 

The NCLT, New Delhi Bench by order dated 17th
November, 2017 dismissed the application as not maintainable in view of
the lack of territorial jurisdiction. Other matter was pending before the NCLT,
Chandigarh.

 

The question before NCLAT was where an
application under sections 230 to 232 could be filed if the registered office
of two companies are situated within the territorial jurisdiction of two
different NCLT Benches.

 

HELD

NCLAT considered the facts of the case and
examined the provisions of Rule 16 of National Company Law Tribunal Rules, 2016
(“the Rules”) which lays down the powers and functions of the President of
Tribunal.

 

It was observed that President of the NCLT
had power to transfer any case from one Bench to other Bench when the
circumstances are so warranted. In view of such provision, and considering the
facts of the case, it was held that circumstances warranted that the President
exercises his power under Rule 16(d) to transfer one of the case from one Bench
to other Bench where other matter is pending including the cases where
transferor and transferee companies are at different places of the country.

 

Order passed by NCLT Delhi was set aside and
NCLAT held that parties had liberty to file application before the Hon’ble
President of the NCLT to transfer one of the case either to Chandigarh Bench or
the Bench at New Delhi for hearing of both the cases by one of the Benches.

 

11. Quantum Limited vs. Indus Finance
Corporation Limited

[2018] 144 CLA 157 (NCLAT)                                      

Date of Order: 20th February, 2018

 

Section 12(2) of the Insolvency and
Bankruptcy Code, 2016 – Application for extension of Corporate Insolvency
Resolution Process can be filed even after the period of 180 days is over as
long as the resolution permitting the extension has been duly approved by the
Committee of Creditors within the time frame of 180 days (including the last
day)

 

FACTS

Time to complete the Corporate Insolvency
Resolution Process (“CIRP”) of 180 days on Q Limited was over on 25.11.2017. On
24.11.2017, Committee of Creditors (“COC”) passed a resolution seeking
extension of time. The Resolution Professional filed the application under
section 12(2) of the Insolvency and Bankruptcy Code, 2016 (“Code”) before the
National Company Law Tribunal (“NCLT”) on 30.11.2017.

 

NCLT dismissed the said petition on the
grounds that there was no provision to file such application after expiry of
180 days of CIRP.  

 

Aggrieved by the order of NCLT, Corporate
debtor preferred an appeal to the NCLAT.

 

HELD

NCLAT examined the provisions of section
12(2) of the Code. It was observed that as per provision of section 12(2),
resolution professional can file an application for extension of the period of
the CIRP, only if instructed to do so by a resolution passed at a meeting of
the COC by a vote of 75% of the voting shares. The provision does not stipulate
that such application is to be filed before the Adjudicating Authority within
180 days.

 

It was further held that If within 180 days
including the last day i.e. 180th day, a resolution is passed by the
COC by a majority vote of 75% of the voting shares, instructing the resolution
professional to file an application for extension of period in such case, in
the interest of justice and to ensure that the resolution process is completed
following all the procedures time should be allowed by the Adjudicating
Authority who is empowered to extend such period up to 90 days beyond 180th
day.

 

The NCLAT accordingly, set aside the order
of NCLT and ordered for extension of the period by 90 days from the date of
passing of the order. It was further held that period from 181st day to the
date of passing this order would not be counted for any purpose.

 

12. 
Three Star Properties Private Limited vs. ROC

[2018] 144 CLA 80 (NCLT – New Del)                         

Date of Order: 25th April, 2018

 

Section 252 of the Companies Act, 2013 –
Name of the company was struck off the register of companies due to non-filing
of returns – NCLT may restore the name of company which has been struck-off
from the register of companies for a “just” cause – Non-filing of returns owing
to existence of ongoing litigation in respect of immovable property proposed to
be acquired  by the company constituted a
“just” cause

 

FACTS

TCo was a private company incorporated on
08.10.2010 with the objective of acquiring and dealing with immovable
properties. In pursuance of the said object, it commenced acquisition of a
valuable property at New Okhla Industrial Development Authority (‘NOIDA’). In
order to facilitate the purchase, TCo entered into an agreement to sell with
the owners of the said property on 15.11.2010 and even paid a part of the sale
consideration towards purchase of the property. Subsequently, TCO learned that
the said property is subject matter of dispute before Civil Judge, Gautam Buddh
Nagar, Uttar Pradesh.

 

In the intervening period, due to the
pendency of litigation in respect of the property being acquired, operations of
TCo came to a standstill. It however, regularly held the AGM, finalized its
accounts and filed its income-tax returns even though there were no business
operations.

 

Name of TCo was however, struck off from the
register of companies by the ROC due to alleged non-filing of financial
statements or annual returns for a continuous period of three financial years.
TCo filed an appeal with NCLT for the restoration of the name consequent to the
directions by the Hon’ble High Court of Delhi issued in Writ Petition(C) No.
9933 of 2017 titled “Kanwar Pal Singh v. Union of India and Others“.

 

TCo submitted
that it has been regular in filing returns with income-tax authorities,
regularly held the AGM since its inception. It was further submitted that TCo
continued to be in operation of business and the agreement dated 15.11.2010 was
still in force, although the same was subject matter of dispute, the outcome of
which was pending.

 

ROC contended that TCo should be declared a
dormant company owing to inactivity in the operations. Income-tax department
confirmed that there were no pending proceedings against TCo and it had no
objections if the name of the company was to be restored.

 

HELD

NCLT observed that section 252(3) of the
Companies Act, 2013 (“the Act”) empowered it to restore the name of the company
which had no business operations if the circumstances justify the existence of
“just” cause.

 

The Tribunal relying on decision of Delhi
High Court in CP No. 174/2013 [M.A. Panjwani ] observed that use of the word
“just” in section 252(3) of the Act has to be understood in the background of
the specific language of the sub-section and not on the basis of the principle
of ejusdem generis. Further, it was observed that where litigations were
pending and where immovable property rights were involved [as held in CP No.
406 of 2009 by the Hon’ble Delhi High Court] it was only proper that the name
of the company be restored to the register.

 

In the facts of the present case, land
proposed to be acquired by TCo was subject matter of civil dispute.

NCLT, in light of the ratio of the decisions
and facts of the present case, thus held that there existed a ‘just’ ground for
the restoration of the name of the TCo in the register of RoC. It order for
restoration of the name to the register of ROC but, however, the restoration
would be subject to certain terms and conditions with respect to payment of
fees, costs, non-disposal of valuable assets, restoration of names of
disqualified directors to be in accordance with law and power to ROC being
available for conduct of proceedings for late-filing, etc.  

 

CORPORATE LAW CORNER

6

Ramco Systems Ltd. vs. SpiceJet Ltd.

[2019] 105 taxmann.com 175 (NCLAT)

Company Appeal (AT) (Insolvency) No.
31
of 2018
Date of order: 8th May, 2019

Section 9 of the Insolvency and Bankruptcy Code, 2016 – When
Operational creditor could not establish that invoices in respect of debt due
and payable were actually forwarded to the corporate debtor and received by it,
claim u/s. 9 could not be maintained for want of consistency and clear
documentation of debt due

 

FACTS

R Co entered into “Aviation Software Solutions Agreements”
dated 13.05.2013 consisting of four agreements, all of even date, with S Co.
There were certain amendments made on 01.07.2014 which reduced the number of
authorised licences, amongst others.

 

By an email sent on 19.01.2016, R Co submitted that an amount
of Rs. 62.89 lakhs was payable and an invoice of the same was intimated to S Co
by email on that day. The invoices relate to documents dated 30.05.2013 and
23.07.2014. S Co, on the other hand, submitted that all the claims depended on
invoices raised in the year 2013-14 and were barred by limitation.

 

Next, R Co issued a demand notice u/s. 8(1) on 24.04.2017
without attaching the invoices relating to the debt which was payable. S Co, on
the other hand, claimed that it never received the invoices in question.

 

R Co filed an application with the NCLT u/s. 9 of the Code.
NCLT dismissed the said petition on the grounds of inconsistency in the overall
payments and the non-compliance with the provisions of section 9(3)(c) by the
“Operational Creditor”. NCLT further observed that S Co had made certain
payments to R Co. R Co then filed an appeal before the NCLAT.

 

HELD

The Appellate Tribunal held that there was no record to show
that invoices dated 23.07.2014 were received or forwarded to S Co. Therefore,
the demand notice issued on 24.04.2017 as related to invoice dated 23.07.2014,
though it cannot be held to be barred by limitation, but in absence of specific
evidence relating to invoices actually forwarded by R CO and there being a
doubt, it was held that the NCLT had rightly refused to entertain the
application u/s. 9 which required strict proof of debt and default.

 

It was further held that this order would not come in the way
of R Co to move before a court of competent jurisdiction for appropriate
relief.

 

7

JK Jute Mill Mazdoor Morcha vs.
Juggilal Kamlapat Jute Mills Company Ltd.

[2019] 105 taxmann.com 1 (SC)

Civil Appeal No. 20978 of 2017

Date of order: 30th
April, 2019

Section 5(20) of the Insolvency and Bankruptcy Code, 2016
– Registered trade unions qualify as “person” within the meaning of section
3(23) – The statement that there were no services rendered by them to the
corporate debtor was of no significance – Registered trade unions represent
their members who are workers, to whom dues may be owed by the employer –
Registered trade unions can thus qualify as operational creditors that are
capable of filing and maintaining a petition on behalf of their members

 

 

FACTS

J Co was a jute mill that was closed and reopened several
times until, finally, it was closed for good on 07.03.2014. Proceedings were
pending under the Sick Industrial Companies (Special Provisions) Act, 1985. On
14.03.2017, JM being the trade union of J Co, issued a demand notice on behalf
of roughly 3,000 workers u/s. 8 of the Insolvency and Bankruptcy Code, 2016
(“the Code”) for outstanding dues of workers. J Co replied to the same on
31.03.2017. The National Company Law Tribunal (“NCLT”) dismissed the petition
filed by JM on the grounds that a trade union was not an operational creditor.
On 12.09.2017, the National Company Law Appellate Tribunal (“NCLAT”) followed
suit and dismissed the appeal filed by JM.

 

Aggrieved, JM filed an
appeal before the Supreme Court. It was their contention that a trade union
being a person would qualify as an operational creditor within the meaning of
the Code. If a purposive interpretation is given to the provisions of the Code,
the same would result in maintenance of the application. J Co argued that there
were no services rendered by the registered trade union to it to claim any dues
which could be termed as debt, and as such the trade unions would not come
within the definition of operational creditors. That apart, each claim of each
workman was a separate cause of action in law and, therefore, there are
separate dates of default of each debt. That being so, a collective application
under the rubric of a registered trade union would not be maintainable.

 

HELD

The Supreme Court examined
the provisions of sections 5(20), 5(21), 3(23) of the Code; Rule 6 of the
Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016
(“the Rules”); as well as the provisions of the Trade Unions Act.

 

The Court observed that a
trade union was an entity established under a statute – namely, the Trade
Unions Act, and would therefore fall within the definition of
“person” u/s. 3(23) of the Code. Thus, a claim in respect of
employment could certainly be made by a person duly authorised to make such
claim on behalf of a workman. Rule 6 of the Rules also recognises the fact that
claims may be made not only in an individual capacity but also conjointly.

 

It was further held that a
trade union, like a company, trust, partnership, or limited liability
partnership, when registered under the Trade Union Act, would be
“established” under that Act in the sense of being governed by that
Act.



Also, it was observed that
instead of one consolidated petition by a trade union representing a number of
workmen, filing individual petitions would be burdensome as each workman would
thereafter have to pay insolvency resolution process costs, costs of the
interim resolution professional, costs of appointing valuers, etc., under the
provisions of the Code read with Regulations 31 and 33 of the Insolvency and
Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons)
Regulations, 2016.

A registered trade union which is formed for the purpose of
regulating the relations between workmen and their employer can maintain a
petition as an operational creditor on behalf of its members. The Supreme Court
further observed that procedure was a handmaid of justice, and is meant to
serve the justice.

 

The Court held that NCLAT was incorrect in not going into
whether a trade union was a person or not as well as holding that a trade union
would not be an operational creditor as no services are rendered by the trade
union to J Co. It was also observed that if one were to state that for each
workman there would be a separate cause of action, a separate claim and a
separate date of default, this would ignore the fact that a joint petition
could be filed under Rule 6 read with Form 5 of the Rules.

 

The judgement of NCLAT was set aside and the appeal was
allowed with a direction to NCLAT to decide the appeal on merits expeditiously.

 

8

Serious Fraud
Investigation Office vs. Rahul Modi

[2019] 103 taxmann.com 408
(SC)

Criminal Appeal Nos. 538,
539 of 2019

Date of order: 27th
March, 2019

 

CL: Prescription of period within which a report has to be
submitted to Central Government under sub-section (3) of section 212 is purely
directory – Even after expiry of such stipulated period, mandate in favour of
Serious Fraud Investigation Officer (SFIO) and the assignment of investigation
under s/s. (1) would not come to an end – The only logical end as contemplated
is after completion of investigation when a final report or “investigation
report” is submitted in terms of sub-section (12) of section 212

 

FACTS

The investigation was assigned to SFIO vide order dated
20.06.2018. The order stipulated that the inspectors should complete their
investigation and submit their report to the Central Government within three
months. The period of three months expired on 19.09.2018. The proposal to
arrest three accused persons was placed before the Director, SFIO and approval
was granted by him on 10.12.2018. After they were arrested, the accused were
produced before the Judicial Magistrate, who by his order dated 11.12.2018
remanded them to custody till 14.12.2018, to be produced before the Special
Court on that day. On 13.12.2018 extension of time for completing investigation
of the case was preferred by the SFIO which was accepted on 14.12.2018,
granting an extension up to 30.06.2019.

 

On 14.12.2018 the Special
Court, Gurugram, remanded the accused to custody till 18.12. 2018. On
17.12.2018, the accused (respondents herein) preferred Writ Petitions which
came up for hearing for the first time before the High Court of Delhi on
18.12.2018. On that day itself, the accused were further remanded to police
custody till 21.12.2018. On 20.12.2018 the Writ Petitions were entertained and
the order which is under appeal was passed. Pursuant to the said order, the
original writ petitioners (the respondents herein) were released on bail.

 

The principal issues which arise in the matter are whether
the High Court was right and justified in entertaining the petition and in
passing the order of release under appeal?

 

HELD

The Supreme Court (SC) examined the provisions related to
SFIO in detail as under:

 1. Section 212 empowers the Central Government to assign the
investigation into the affairs of a company to SFIO. Upon such assignment the
Director, SFIO may designate such number of inspectors under sub-section (1)
and shall cause the affairs of the company to be investigated by an
Investigating Officer under s/s.(4).

2. The expression used in s/s. (1) is “assign the
investigation”. S/s. (2) incorporates an important principle that upon such
assignment by the Central Government to SFIO, no other investigating agency of
the Central Government or any State Government can proceed with investigation
in respect of any offence punishable under the 2013 Act and is bound to
transfer the documents and records in respect of such offence under the 2013
Act to the SFIO.

3. Under s/s. (3) where the investigation is so assigned by
the Central Government to the SFIO, the investigation must be conducted and a
report has to be submitted to the Central Government within such period as may
be specified.

4. The subsequent provisions then contemplate various stages
of investigation including arrest under s/s. (8) and that SFIO is to submit an
interim report to the Central Government, if it is so directed under s/s.
(11). Further, according to sub-section (12), on completion of the
investigation, SFIO is to submit the “investigation report” to the
Central Government. Under s/s. (14) on receipt of said “investigation report”
the Central Government may direct SFIO to initiate prosecution against
the company.

5. The “investigation report” under s/s. (12) is to be
submitted on completion of the investigation, whereas report under s/s. (11) is
in the nature of an interim report and is to be submitted if the Central Government
so directs.

6. In the backdrop of these provisions the Supreme Court had
to consider whether the period within which a report is contemplated to be
submitted to the Central Government under s/s. (3) is mandatory.

 

The Supreme Court, on the basis of an analysis of the above
provisions, concluded as under:

 

  • Section 212(3) of the 2013 Act
    by itself does not lay down any fixed period within which the report has to be
    submitted. Even under s/s. (12) which is regarding “investigation report”,
    again, there is no stipulation of any period. In fact, such a report under s/s.
    (12) is to be submitted “on completion of the investigation”. There is no
    stipulation of any fixed period for completion of investigation which is
    consistent with normal principles under the general law.
  • Again, sub-section (2) of
    section 212 of the 2013 Act does not speak of any re-transfer of the relevant
    documents and records from SFIO back to the said investigating agencies after
    any period or occurrence of an event. For example, u/s. 6 of the National
    Investigation Agency Act, 2008 (“NIA Act” for short) the Agency (NIA) can be
    directed by the Central Government to investigate the scheduled offence under
    the NIA Act and where such direction is given, the State Government is not to proceed
    with any pending investigation and must forthwith transmit the relevant
    documents and records to the Agency (NIA). But u/s. 7 of the NIA Act, the
    Agency may, with previous approval, transfer the case to the State Government
    for investigation and trial of the offence.
  • The very expression “assign” in
    section 212(3) of the 2013 Act contemplates transfer of investigation for all
    purposes where after the original Investigating Agencies of the Central
    Government or any State Government are completely divested of any power to
    conduct and complete the investigation in respect of the offences contemplated
    therein. The transfer under sub-section (2) of section 212 would not stand
    revoked or recalled in any contingency. If a time limit is construed and
    contemplated within which the investigation must be completed then logically,
    the provisions would have dealt with as to what must happen if the time limit
    is not adhered to.
  • The statute must also have
    contemplated a situation that a valid investigation undertaken by any
    investigating agency of the Central Government or State Government which was
    transferred to SFIO must then be re-transferred to the said investigating
    agencies. But the statute does not contemplate that. The transfer is
    irrevocable and cannot be recalled in any manner. Once assigned, SFIO continues
    to have the power to conduct and complete investigation. The statute has not
    prescribed any period for completion of investigation. The prescription in the
    instant case came in the order of 20.06.2018. Whether such prescription in the
    order could be taken as curtailing the powers of the SFIO is the issue.
  • It is well settled that while
    laying down a particular procedure if no negative or adverse consequences
    are contemplated for non-adherence to such procedure, the relevant provision is
    normally not taken to be mandatory and is considered to be purely directory.
    Furthermore, the provision has to be seen in the context in which it occurs in
    the statute. There are three basic features which are present in this matter:

 

1. Absolute transfer of investigation in terms of section
212(2) of the 2013 Act in favour of SFIO and upon such transfer all documents
and records are required to be transferred to SFIO by every other investigating
agency.

2. For completion of investigation, sub-section (12) of
section 212 does not contemplate any period.

3. Under sub-section (11) of section 212 there could be
interim reports as and when directed.

 

  • In the face of these three
    salient features, the Supreme Court held that the prescription of period within
    which a report is to be submitted by SFIO under sub-section (3) of section 212
    is for completion of period of investigation and on the expiry of that period
    the mandate in favour of SFIO must come to an end. If it was to come to an
    end, the legislation would have contemplated certain results including
    re-transfer of investigation back to the original investigating agencies which
    were directed to transfer the entire record under sub-section (2) of section
    212.
  • In the absence of any clear
    stipulation, the Supreme Court further held that an interpretation that with
    the expiry of the period, the mandate in favour of SFIO must come to an end
    will cause great violence to the scheme of legislation. If such interpretation
    is accepted, with the transfer of investigation in terms of sub-section (2) of
    section 212 the original investigating agencies would be divested of power to
    investigate and with the expiry of mandate, SFIO would also be powerless which
    would lead to an incongruous situation that serious frauds would remain beyond
    investigation.
  • The only construction which is,
    possible therefore, is that the prescription of period within which a report
    has to be submitted to the Central Government under sub-section (3) of section
    212 is purely directory. Even after the expiry of such stipulated
    period, the mandate in favour of the SFIO and the assignment of investigation
    under s/s. (1) would not come to an end. The only logical end as contemplated is
    after completion of investigation when a final report or “investigation report”
    is submitted in terms of sub-section (12) of section 212.
  • It cannot, therefore, be said
    that in the case discussed above the mandate came to an end on 19.09.2018 and
    the arrest effected on 10.12.2018 under the orders passed by Director, SFIO was
    in any way illegal or unauthorised by law. In any case, extension was granted
    in the present case by the Central Government on 14.12.2018. But that is
    completely besides the point since the original arrest itself was not in any
    way illegal.

 

The Supreme Court accordingly concluded that the High Court
had completely erred in proceeding on that premise and in passing the order of
release of the respondents herein.

CORPORATE LAW CORNER

Corporate Law Corner started in May,
1988 with Swati Mayekar as the contributor. Anil J Sathe continued with to man
it for 12 years along with Sunil Kothare (7 years), R K Tanna (3 years) and
Jayant Thakur (3 years). Pooja J Punjabi has been carrying the feature since
May, 2017.

The aim of the feature is to digest
decisions given under the Companies Act that are relevant and useful and those
that lay down principals. Since the advent of Insolvency and Bankruptcy Code,
decisions given thereunder are also being covered.

 

12. Gaurang Balvantlal Shah vs. Union of India [2019] 101 taxmann.com 261 (Gujarat) R/Special Civil Application Nos. 22435 of 2017 And Others Dated: 18th December, 2018

 

Section 164 of Companies Act, 2013 – Section 164 is
prospective in application and would cover defaults committed from financial
year 2014-15 and onwards – The section does not apply to filings required to be
made in respect of financial year 2013-14 

 

Section 154 of Companies Act, 2013 – DIN of a director
cannot be deactivated or cancelled merely because one of the companies in which
he is a director was struck off from the register of companies maintained by
ROC – DIN can be cancelled or deactivated only in circumstances specified in
Rule 11 of Companies (Appointment of Directors) Rules, 2014

 

FACTS


G was a director of K Co, a
private company along with various other companies. After due notice from
Registrar of Companies (“ROC”), name of K Co was struck off from the register
of companies and it was dissolved on 21.06.2017. Ministry of Corporate Affairs
(“MCA”) on 12.09.2017 published a list of directors associated with struck off
companies u/s. 248 of the Companies Act, 2013 (“the Act”) on its
website which inter alia included the name of G as a “disqualified”
director. As a consequence of publication of the above mentioned list,
Directors Identification Number (“DIN”) of G was deactivated. G accordingly
filed a petition before the High Court as a result of inability to file
documents for other non-defaulting companies.  

MCA challenged the petition
by submitting that G was disqualified by operation of law and upon fulfilment
of the criteria contained in section 164(2)(a) read with section 167(1)(a) of
the Act.

 

G on the other hand
submitted that the list published on the website was in violation of principles
of natural justice. Further, section 164 which came into effect on 01.04.2014
could only apply prospectively. Thus, the three financial years beginning from
1.4.2014 would be financial year 2014-15 to 2016-17 and the date for filing
financial statements for the third financial year (1.4.2016 to 31.3.2017) was
30.10.2017 (with regular fees) and 27.07.2018 (with additional fees u/s. 403
which provides for additional period of 270 days). Hence, no default attracting
disqualification u/s. 164(2) could be said to have taken place before the said
dates. Further, disqualification if any, would not affect the right to continue
as directors in other non-defaulting companies.

 

MCA on the other hand
argued that section 164(2)(a) would cover in its ambit filing of financial
statements and annual returns falling due after 01.04.2014, which would include
annual returns for the year 2013-14 as well. Further, disqualification happens
pursuant to the operation of law and the section only enumerates the
disqualification as a consequence statutorily provided for non-compliance with
section 164. Thus, the vacation of office is by operation of law where no
hearing is contemplated.

 

HELD


The High Court analysed the
provisions contained in section 164, 167, 92, 96, 137 and 403 of the Act along
with Companies (Appointment of Directors) Rules, 2014 (“the Rules”). It was
observed that section 164(2) speaks about the ineligibility of the director,
who is already working as a director or has worked as a director in the past,
in the company which has committed defaults as mentioned therein, to be
reappointed as a director of that company or appointed in other company. As
such, there was no procedure required to be followed by the respondent
authorities for declaring any person or Director ineligible or disqualified
under the said provision. The ineligibility was incurred by the person/director
by operation of law and not by any order passed by the MCA / ROC and therefore,
adherence of principles of natural justice by MCA / ROC was not warranted.

 

Further,
High Court held that section 164(2)(a) being prospective in application and
effective with effect from 01.04.2014, the three financial years contemplated
in the said provision would be 2014-15, 2015-16, and 2016-17 only. Application
of the section to financial year 2013-14 would tantamount to giving effect to
the section retrospectively.

 

In the facts of the present
case, AGM for financial year 2016-17 could be held up to 30.09.2017, and the
annual returns could be filed within 60 days and financial statements within 30
days of holding of such AGM i.e. up to 30th of November and 30th
of October 2017 respectively. Under the circumstances, the Director would incur
disqualification or would become ineligible to be reappointed as a Director of
a company or appointed in other company for a period of five years, for the
defaults u/s. 164(2)(a), only after 30th of October or 30th
of November, as the case may be, of the year 2017. Hence, the impugned list
dated 12.9.2017 showing G as disqualified for a period of five years from
1.11.2016 to 31.10.2021, was held to be not only premature, but untenable in
law.

 

With respect to deactivation
of DIN of G by MCA, it was observed that Central Government or Regional
Director or any authorised officer of Regional Director may, on being satisfied
on verification of particulars of documentary proof attached with an
application from any person, cancel or deactivate the DIN on any of the grounds
mentioned in Rule 11. The said Rule 11 did not contemplate any suo motu powers
either with the Central Government or with the authorised officer or Regional
Director to cancel or deactivate the DIN allotted to the Director, nor any of
the clauses mentioned in the said Rule contemplates cancellation or
deactivation of DIN of the director of the “struck off company” or of
the Director having become ineligible u/s. 164 of the Act.

MCA was directed to restore
the DIN of G.

 

The High Court also
observed that if the company is struck off and stands dissolved u/s. 248 of the
Act, it could still realise the amount due to the company, as also it is
obliged to discharge the liabilities or obligations of the company.

 

13. Vijay Kumar Jain vs. Standard Chartered Bank [2019] 102 taxmann.com 14 (SC) Civil Appeal No. 8430 of 2018 Writ Petition (Civil) No. 1266 of
2018 Dated : 31st January, 2019

 

Section
25 and 31 of the Insolvency and Bankruptcy Code, 2016 read with Regulations 24
and 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution
Process for Corporate Person) Regulations, 2016 – Members of the suspended
board of directors have a right to attend the meeting of Committee of Creditors
and have access to documents used for deliberations therein including the
resolution plan

 

FACTS


R Co, the corporate debtor
was incorporated in the year 1986 and was a profitable company engaged in the
business of processing of oil-seeds and refining crude oil for edible use.
Standard Chartered Bank and DBS Bank Ltd. being the financial creditors of R Co
filed company petitions in December 2017 which were admitted by National
Company Law Tribunal (“NCLT”) and Interim Resolution Professional (“IRP”) was
appointed. V was a member of the suspended Board of directors and in his
capacity as such was permitted to attend the first meeting of Committee of
Creditors (“CoC”) held on 12.01.2018.

 

V was allegedly denied
participation in subsequent meetings and to challenge the same filed an
application before the NCLT in June 2018. By an order dated 01.08.2018, the
NCLT dismissed the application with liberty to the appellant to attend CoC
meetings but not to insist upon being provided information considered
confidential either by the resolution professional or the CoC. Against this
order, V filed an appeal before the Appellate Tribunal which recognised V’s
right to attend and participate in CoC meetings, but denied V’s prayer to
access certain documents, most particularly, the resolution plans. Thereafter,
an application for modification/clarification of the Appellate Tribunal’s order
was also dismissed.


V even executed a
non-disclosure undertaking whereby he agreed to indemnify the resolution
professional and keep information that is received as to the resolution plan
strictly confidential. However, in order to challenge the order of Appellate
Tribunal, present application was filed before the Supreme Court.

 

V submitted that they are
“participants” in the meetings of the CoC, albeit without voting
rights, yet, they are persons who, in order to participate effectively, must be
given the necessary documents so that their views can also be considered by the
CoC. On behalf of the resolution professional, it was argued that the terms
“committee” and “participant” are differently defined under
the Regulations and that participants are expressly excluded by Regulation 39
of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for
Corporate Persons) Regulations, 2016 (“Regulations”).

 

HELD


Supreme
Court analysed and explained the entire statutory scheme laid down by the Code.
It was observed that though the erstwhile Board of Directors are not members of
the CoC, yet, they have a right to participate in each and every meeting held
by the CoC, and also have a right to discuss along with members of the CoC all
resolution plans that are presented at such meetings u/s. 25(2)(i) of the Code.

Supreme Court relying on Regulations
observed that every participant is entitled to a notice of every meeting of the
CoC. Such notice of meeting must contain an agenda of the meeting, together
with the copies of all documents relevant for matters to be discussed and the
issues to be voted upon at the meeting vide Regulation 21(3)(iii). Obviously,
resolution plans are “matters to be discussed” at such meetings, and
the erstwhile Board of Directors are “participants” who will discuss
these issues. The expression “documents” is a wide expression which
would certainly include resolution plans. Supreme Court upon a combined reading
of the Code as well as the Regulations held that members of the erstwhile Board
of Directors, being vitally interested in resolution plans that may be discussed
at meetings of the CoC, must be given a copy of such plans as part of
“documents” that have to be furnished along with the notice of such
meetings. So far as confidential information was concerned, the resolution
professional can take an undertaking from members of the erstwhile Board of
Directors, as has been taken in the facts of the present case, to maintain
confidentiality.

 

Resolution Professional was
thus directed to hand over a copy of the resolution plan to the members of the
erstwhile Board and convene a meeting of the CoC within two weeks thereafter,
which will include V and others as participants. The ruling of NCLAT was thus
set aside.

 

CORPORATE LAW CORNER

1.  Shweta
Vishwanath Shirke vs. Committee of Creditors [2019] 109 taxmann.com 30 (NCLAT) Company Appeal (AT) (Insolvency) Nos. 601,
612, 527 of 2019 Date of order: 28th August, 2019

 

Sections 12A and 29A of Insolvency and
Bankruptcy Code, 2016 – The directors / promoters reached a settlement with the
CoC – More than 90% of voting shares of the CoC approved the withdrawal of
corporate insolvency resolution process – NCLT should have accepted the
application of withdrawal especially when the settlement was being made by
promoters in their individual capacity and not by using the proceeds of crime –
Section 29A would not apply when examining an application u/s 12A

 

FACTS

About 90% of the Committee of Creditors
(CoC) approved the withdrawal of S Co from the Insolvency Resolution Process
and filed an application u/s 12A of the Code. National Company Law Tribunal
(NCLT) rejected the application on the ground that since the promoter was not
eligible to file a resolution plan u/s 29A it could not have filed an
application for withdrawal u/s 12A of the Code.

 

Andhra Bank, which was on the CoC, also
challenged the order of NCLT on the ground that section 29A would not apply to
an application filed u/s 12A which has been approved by more than 90% of the
CoC.

 

The Enforcement Directorate, SEBI and CBI
were also investigating the matter against S Co. The ED submitted that the
assets of S Co were based on the proceeds of crime and, accordingly, they could
not be given to anyone.

 

The matter for examination before the NCLAT
was whether section 29A of the Code would apply to the applicant, if he intends
to withdraw the petition u/s 7 or 9, if the CoC approves a proposal with 90%
voting share in terms of section 12A.

 

HELD

NCLAT examined the provisions of section 29A
of the Code which provides for persons not eligible to be resolution
applicants. It was observed that if any person including the ‘Promoter’ /
‘Director’ was ineligible in terms of any one or more clauses of section 29A,
he / she was not entitled to file any ‘resolution plan’ individually or jointly
or in concert with another. Section 12A, on the other hand, dealt with
withdrawal of the application filed by an ‘applicant’ u/s 7 or section 9 of the
Code, if the CoC with more than 90% voting share approved the proposal.

 

The NCLAT, relying on the observations of
the Supreme Court in the decision of Swiss Ribbons Pvt. Ltd. vs. Union of
India (2019 SCC Online SC 73) held that promoters / shareholders are
entitled to settle the matter in terms of section 12A and in such case, it was
always open to an applicant to withdraw the application under section 9 of the
Code on the basis of which the Corporate Insolvency Resolution Process was initiated.
Thus, section 29A would not apply for entertaining / considering an application
u/s 12A as the applicants are not entitled to file an application u/s 29A as
‘resolution applicant’.

 

NCLAT held that since the application u/s 7
was filed by Andhra Bank and the application for withdrawal was approved by
more than 90% of voting shares in CoC, it was not in the purview of NCLT to
reject the application for withdrawal. The order of liquidation passed by the
NCLT was, accordingly, set aside.

 

It was further held that if the ED concludes
that the assets of S Co are based on the proceeds of crime, it could exercise
its powers under the Prevention of Money Laundering Act, 2002 (PMLA) and seize
those assets.

 

As the
settlement with creditors was to be paid by the directors / shareholders in
their individual capacity, from the funds held in their accounts and not from
proceeds of crime, the application for withdrawal was approved by NCLAT. It was
further held that the order would not amount to interference with any order
passed by the ED with regard to the assets of S Co. Proceedings under PMLA will
continue against S Co in accordance with the law.

 

It was further directed that the fees of the
liquidator and the resolution professional would be determined and paid by
Andhra Bank on behalf of the CoC and it may adjust the same with the members.

 

2.  State
Bank of India vs. Moser Baer Karamchari Union [2019] 108 taxmann.com 251 (NCLAT New Delhi) Company Appeal (AT) (Insolvency) No. 396 of
2019 Date of order: 19th August, 2019

 

Section 36 of
Insolvency and Bankruptcy Code, 2016 – All sums due to an employee or a workman
from the provident fund, pension fund and gratuity fund do not fall in the
ambit of the liquidation assets and accordingly cannot be a part of waterfall /
distribution mechanism laid down u/s 53 of the Code

 

FACTS

Corporate Insolvency Resolution Process was
initiated against M Co and an order for liquidation was passed on 20th
September, 2018. Pursuant to the judgement by the National Company Law Tribunal
(NCLT) the workmen stood discharged u/s 33(7) of the Code.

 

The liquidator, vide email dated 5th
December, 2018, denied the payment of the gratuity fund, the provident fund and
the pension fund preferentially and included the same for payments under the
waterfall mechanism provided in section 53 of the Code.

 

In January, 2019 the Moser Baer Karamchari
Union (MBKU) filed a prayer for exclusion of provident fund, pension fund and
gratuity fund from the waterfall mechanism and payment of their dues as they
did not form a part of liquidation estate. NCLT upheld the prayer. SBI, the
secured creditor, filed an appeal to the National Company Law Appellate
Tribunal (NCLAT) against the order passed by the NCLT.

 

SBI submitted that waterfall mechanism
provided under the Code included the contribution to provident fund. Reliance
was also placed on Explanation below section 53 of the Code which suggested
that the ‘workmen’s dues’ shall have the same meaning as assigned to it in
section 326 of the Companies Act, 2013. MBKU highlighted the provision of
section 36 of the Code which defines liquidation assets. It was submitted that
in terms of section 36(4)(a)(iii), liquidation assets specifically excluded all
sums due to any workman or employee from the provident fund, pension fund and
gratuity fund.

 

HELD

NCLAT heard counsel for both sides. The
matter for consideration before NCLAT was whether provident fund, pension fund
and gratuity fund come within the meaning of assets of M Co for distribution
u/s 53 of the Code.

 

NCLAT examined the provisions of sections 36
and 53 of the Code as well as sections 326 and 327 of the Companies Act, 2013.
It was observed that all sums due to any workman or employee from the provident
fund, the pension fund and the gratuity fund shall not be included in the
liquidation estate assets and cannot be used for recovery in the liquidation as
per section 36 of the Code. Further, as the sums mentioned were not a part of
the liquidation estate / liquidation assets, the question of their distribution
in order of priority u/s 53 did not arise at all.

 

Further, while applying section 53 of the
Code, section 326 of the Companies Act, 2013 is relevant for the limited
purpose of understanding ‘workmen’s dues’ which can be more than provident
fund, pension fund and the gratuity fund kept aside and protected u/s
36(4)(iii).

 

It was thus held that the provident fund,
gratuity fund and pension fund do not come within the meaning of ‘liquidation estate’ for the purpose of distribution of assets u/s 53.

 

The NCLAT upheld the order passed by NCLT
and dismissed the appeal.

 

3.  Pioneer
Urban Land & Infrastructure Ltd. vs. Union of India [2019] 108 taxmann.com 147 (SC) Writ Petition (Civil) Nos. 43, 99, 124, 121,
129 of 2019 & Ors. Date of order: 9th August, 2019

 

Sections 21(6A)(b), 25A and Explanation to
section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016 – Amendments made
to the Code which deem the allottees of real estate projects to be ‘financial
creditors’ such that it gives them the right to enforce the Code u/s 7 are
constitutionally valid


FACTS

Amendments were carried out to the
Insolvency and Bankruptcy Code, 2016 (the Code) pursuant to a report prepared
by the Insolvency Law Committee dated 26th March, 2018 (Insolvency
Committee Report). The amendments so made deemed allottees of real estate
projects to be ‘financial creditors’ so that they may trigger the Code, u/s 7
thereof, against the real estate developer. In addition, being financial
creditors, they were entitled to be represented in the Committee of Creditors
by authorised representatives.

 

The Supreme Court in the case of Chitra
Sharma vs. Union of India (Writ Petition [Civil] No. 744 of 2017)
appointed a representative to protect the interest of home buyers on the
Committee of Creditors. The Insolvency Committee Report suggested that
amendments be made in the Code seeking to clarify, as a matter of law, that
allottees of real estate projects are financial creditors. On 17th
August, 2018, Parliament passed the Insolvency and Bankruptcy Code (Second
Amendment) Act, 2018 (Amendment Act) incorporating the aforesaid amendments as
were provided for by the Amendment Ordinance.

 

The real estate developers filed a petition
challenging the provisions saying it violates two facets of Article 14. One,
that the amendment is discriminatory inasmuch as it treats unequals equally,
and equals unequally, having no intelligible differentia; and two, that there
is no nexus with the objects sought to be achieved by the Code. The amendments
were alleged to be arbitrary, irrational and without determining principle and
in violation of public interest under Article 19(6). Further, there was a
specific legislation on the subject of real estate, namely, Real Estate
(Regulation and Development) Act, 2016 (RERA) which provides for adjudication
of disputes between allottees and the developer, together with a large number
of safeguards in favour of the allottee.

 

Reliance was placed on the decision of Swiss
Ribbons vs. Union of India (2019) 4 SCC 17 to drive home the point that
not a single one of several characteristics of financial creditors stated in
that judgement would apply to allottees / home buyers.

 

HELD

The Supreme Court heard the parties and
observed that the Legislature must be given free play in the joints when it
comes to economic legislation. Apart from the presumption of constitutionality
which arises in such cases, the legislative judgement in economic choices must
be given a certain degree of deference by the courts.

 

Further, the Supreme Court observed that
from the introduction of the explanation to section 5(8)(f) of the Code, it was
clear that Parliament was aware of RERA and applied some of its definition
provisions so that they could apply when the Code was to be interpreted. The
fact that RERA is in addition to and not in derogation of the provisions of any
other law for the time being in force, also made it clear that the remedies
under RERA to allottees were intended to be additional and not exclusive
remedies. Further, the Code as amended, is later in point of time than RERA and
must be given precedence over RERA in view of section 88 of RERA. Given the
different spheres within which these two enactments operate, different parallel
remedies are given to allottees – under RERA to see that their flat / apartment
is constructed and delivered to them in time, barring which compensation for
the same and / or refund of amounts paid together with interest at the very
least comes their way. If, however, the allottee wants that the corporate
debtor’s management itself be removed and replaced, so that the corporate
debtor can be rehabilitated, he may prefer a section 7 application under the
Code.

 

As regards unequal treatment afforded, the
Supreme Court observed that home buyers / allottees can be assimilated with
other individual financial creditors like debenture holders and fixed deposit
holders who have advanced certain amounts to the corporate debtor. The Court
gave the example that fixed deposit holders, though financial creditors, would
be like real estate allottees in that they are unsecured creditors. Financial
contracts in the case of these individuals need not involve large sums of money.
Debenture holders and fixed deposit holders, unlike real estate holders, are
involved in seeing that they recover the amounts that are lent and are thus not
directly involved or interested in assessing the viability of the corporate
debtors. Though not having the expertise or information to be in a position to
evaluate the feasibility and viability of resolution plans, such individuals,
by virtue of being financial creditors, have a right to be on the Committee of
Creditors to safeguard their interest. The allottees, being individual
financial creditors like debenture holders and fixed deposit holders and
classified as such, show that they were within the larger class of financial
creditors and there was infraction of Article 14.

 

It was held that home buyers / allottees
give advances to the real estate developer and thereby finance the real estate
project at hand (and) qualified as financial creditors.

 

The Code was observed to be a beneficial
legislation which can be triggered to put the corporate debtor back on its feet
in the interest of unsecured creditors like allottees, who are vitally
interested in the financial health of the corporate debtor, so that a replaced
management may then carry out the real estate project as originally envisaged
and deliver the flat / apartment as soon as possible and / or pay compensation
in the event of late delivery, or non-delivery, or refund amounts advanced
together with interest. It could not be said that amendment to section
5(8) was therefore manifestly arbitrary, i.e., excessive, disproportionate or
without adequate determining principle.

 

The Supreme Court also turned down the
argument of the petitioners that allottees be treated as operational creditors.
It was further held that all persons who have advanced monies to the corporate
debtor, like other financial creditors, be they banks and financial
institutions, or other individuals, should have the right to be on the
Committee of Creditors. Even though allottees were unsecured creditors, but
they did have a vital interest in amounts that were advanced for completion of
the project, maybe to the extent of 100% of the project being funded by them
alone.

 

The Court held that section 5(8) would
subsume within it amounts raised under transactions which are not necessarily
loan transactions, so long as they have the commercial effect of a borrowing.
Amounts raised from allottees under real estate projects would, thus, be
subsumed within section 5(8)(f) of the Code.

 

The Supreme Court thus held that:

(i) The Amendment Act to the Code does
not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the
Constitution of India.

(ii) The RERA is to be read harmoniously
with the Code, as amended by the Amendment Act. It is only in the event of
conflict that the Code will prevail over the RERA. Remedies that are given to
allottees of flats / apartments are therefore concurrent remedies, such
allottees of flats / apartments being in a position to avail of remedies under
the Consumer Protection Act, 1986, RERA as well as the triggering of the Code.

(iii) Section 5(8)(f) as it originally
appeared in the Code being a residuary provision, always subsumed within it
allottees of flats / apartments. The explanation together with the deeming
fiction added by the Amendment Act is only clarificatory of this position in
law.  

 

CORPORATE LAW CORNER

 7. 
Transmission Corporation of Andhra Pradesh Ltd. vs. Equipment Conductors
& Cables Ltd.[2018] 98 taxmann.com 375 (SC) Date of Order: 23rd October, 2018


Section 9 of Insolvency and Bankruptcy
Code, 2016 – Existence of an undisputed debt is essential to initiate the
Corporate Insolvency Resolution Process – IBC is not intended to substitute
recovery forum – IBC proceedings cannot be initiated if there exists a dispute
with respect to the claim


FACTS


A Co is in the activities relating to
transmission of electricity. It had awarded certain contracts to E Co for
supply of goods and services. Some disputes arose and E Co initiated
arbitration proceedings. 82 claims were filed by E Co and Arbitral Council held
that 57 of those claims were barred by law of limitation and the rest were
awarded in favour of E Co.


E Co challenged
the said part of the award of the Arbitral Council, but was not successful. On
the basis of certain observations made by the High Court of Punjab and Haryana
in its appeal decision dated 29th January, 2016, E Co further
attempted to recover the amount by filing execution petition before the Civil
Court, Hyderabad. However, that attempt of E Co was also unsuccessful inasmuch
as the High Court of Judicature at Hyderabad categorically held that since that
particular amount was not payable under the award, execution was not
maintainable.


After failing
to recover the amount in the aforesaid manner, E Co issued notice to A Co u/s.
8 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) treating itself as the
operational creditor and A Co as the corporate debtor. Although A Co refuted
this claim, E Co proceeded to file an application u/s. 9 of the IBC which was
dismissed by the NCLT. An appeal was filed before the NCLAT and it passed an
interim order directing the parties to settle the “claim”. A Co filed an appeal
before the Supreme Court against the said order of NCLAT.


HELD


The Supreme Court examined the facts in case
and observed that the NCLAT perceived that A Co owes money to E Co and for this
reason a chance was given to A Co to settle the claim of E Co, failing which
order would be passed for initiation of Corporate Insolvency Resolution Process
(“CIRP”).


Supreme Court reading the provisions of
section 9 of the IBC observed that existence of an undisputed debt is sine qua
non of initiating CIRP. It also follows that the adjudicating authority shall
satisfy itself that there is a debt payable and there is operational debt and
the corporate debtor has not repaid the same.


The Court relying on its own judgment in the
case of Mobilox Innovations Private Limited vs. Kirusa Software Private
Limited [2018] 1 SCC 353 observed that IBC was not intended to be
substitute to a recovery forum. Whenever there was existence of real dispute,
the IBC provisions could not be invoked.   


The Appeal was allowed by the Supreme Court
and the order of NCLAT was set aside. After examination of facts, Supreme Court
held that order of NCLT was justified and that no purpose would be served by
remanding the matter back to NCLAT. It accordingly quashed appeal filed by E Co
as also the miscellaneous applications filed by it before the NCLAT.


8.  Radius Infratel Pvt. Ltd. vs. Union Bank of
India Company Appeal
(AT) (Insolvency) No. 535 of 2018 Date of Order: 13th
November, 2018


Section 7 of the insolvency and
bankruptcy code, 2016 – appeal filed by corporate debtor is not maintainable
after order of moratorium is passed and interim resolution professional has
been appointed facts


UBI filed an application for initiating corporate
insolvency resolution process (“CIRP”) u/s. 7 of the Insolvency and Bankruptcy
Code, 2016 (“IBC”) against R Co with National Company Law Tribunal (“NCLT”).
NCLT admitted the said petition; ordered moratorium and appointed the Interim
Resolution Professional.


R Co preferred an appeal against the order
of NCLT. 


HELD


NCLAT relied on the decision of Supreme
Court in the case of Innoventive Industries Ltd. vs. ICICI Bank and Ors
(2018)1 SCC 407 and passed an order on 14.09.2018 to hold that an appeal at
the instance of corporate debtor was not maintainable in law. R Co prayed that
one of the shareholders of R Co be made the applicant and transpose R Co
through ‘Resolution Professional’ as the second respondent. NCLAT further
directed that R Co may file an affidavit to show that there was no ‘debt due’
or there was no ‘default’ as on the date of filing of the petition u/s. 7 of
the IBC.


As no affidavit was filed and neither was a
substitution application made, NCLAT on 09.10.2018 passed an order allowing for
extension of time which was prayed by R Co. However, as no one appeared from R
Co on the said date, the appeal filed was dismissed by NCLAT.


It was held that shareholder / director of R
Co could move an appeal in accordance with the law if the same was not barred
by limitation.  

 

CORPORATE LAW CORNER

4.  Vashdeo R. Bhojwani vs. Abhyudaya
Co-operative Bank Ltd. [2019] 109
taxmann.com 198 (SC) Civil Appeal No.
11020 of 2018 Date of order: 2nd
September, 2019

 

Section 7 of Insolvency and Bankruptcy Code, 2016 read with article 137
and section 23 of the Limitation Act – Application u/s 7 or 9 cannot be moved
if more than three years have lapsed since the default giving rise to the
application – Default does not constitute a continuing wrong – The loss is a
continuing damage arising as a result of the wrong

 

FACTS

V made a default of
Rs. 6.7 crores and was declared as a non-performing asset (NPA) by A Bank on 23rd
December, 1999. A recovery certificate dated 24th December, 2001 was
issued for this amount. A Bank filed a petition against V on 21st
July, 2017 before the National Company Law Tribunal (NCLT) claiming that this
amount together with interest which kept ticking from 1998, was payable to it.
The loan initially granted to Respondent No. 2 had originally been assigned and
after a merger with a co-operative bank in 2006, A Bank became a financial
creditor to whom these moneys were owed. NCLT admitted the petition stating
that no period of limitation would attach since the default continued.

 

The appeal filed
before National Company Law Appellate Tribunal was dismissed on the ground that
since the cause of action continued, no limitation period would attach.

 

Aggrieved by the
order, an appeal was filed before the Supreme Court.

 

HELD

After hearing both
sides, the Supreme Court referred to its own judgement in B.K.
Educational Services Private Limited vs. Parag Gupta and Associates, 2018 (14)
Scale 482. It was held that the Limitation Act applied to the petitions
filed u/s 7 and 9 of the Insolvency and Bankruptcy Code, 2016. The judgement
stated that the application would be barred under Article 137 of the Limitation
Act if the default occurred more than three years prior to the date of filing
the application.

 

It was urged before
the Supreme Court that in order to save the case, provisions of section 23 of
the Limitation Act would apply. The Court, relying on Balkrishna Savalram
Pujari and others vs. Shree Dnyaneshwar Maharaj Sansthan and others [1959],
Supp. (2) S.C.R. 476, held that section 23 of the Limitation Act refers
not to a continuing right but to a continuing wrong. If the wrongful act causes
an injury which is complete, there is no continuing wrong even though the
damage resulting from the act may continue. If, however, a wrongful act is of
such a character that the injury caused by it itself continues, then the act
constitutes a continuing wrong. A distinction between the injury caused by the
wrongful act and what may be described as the effect of the said injury was
important.

 

The Supreme Court,
setting aside the orders of the NCLT and the NCLAT, held that when the Recovery
Certificate dated 24th December, 2001 was issued, the Certificate
injured effectively and completely the appellant’s rights as a result of which
limitation would have begun ticking. The suit was held to be time-barred but
there was no order as to costs.

 

5.  Duncans Industries Ltd. vs. A.J. Agrochem [2019] 110
taxmann.com 131 (SC) Civil Appeal No. 5120
of 2019 Date of order: 4th
October, 2019

 

Insolvency and
Bankruptcy Code, 2016 – Consent of Central Government was not required to be
obtained for initiating proceedings under the Code where notification to take
over the management of tea units of a company by the authorised personnel of
Central Government was already issued – Provisions of the Code would have an
overriding effect over the provisions of Tea Act, 1953

 

FACTS

D Co is a company
that owns and manages 14 tea gardens. A Co supplied pesticides, insecticides,
herbicides, etc., to D Co and accordingly was its operational creditor. A sum
of Rs. 41,55,500 was payable by D Co to A Co and, therefore, proceedings u/s 9
of the Insolvency and Bankruptcy Code, 2016 (the Code) were initiated. The
Central Government, vide notification dated 28th January, 2016, in
exercise of its power u/s 16E of the Tea Act, 1953 had taken over the control
of seven of the tea gardens of D Co. The notification of the Central Government
was challenged before the Calcutta High Court and it had, by an interim order,
restored the management of the tea gardens to D Co.

 

Section 16G of the
Tea Act provided that prior consent of the Central Government was required to
initiate the winding up, or appointment of receiver of the company, once the
management of its tea unit was taken over by the Central Government. D Co
submitted that since this consent was not in place, application u/s 9 of the
Code could not be admitted. The NCLT upheld this contention and dismissed the
application filed.

 

Aggrieved, A Co
filed an appeal with the NCLAT which, after hearing both the sides, reversed
the order passed by the NCLT and held that a petition u/s 9 would be
maintainable even though the consent of the Central Government had not been
obtained.

 

Aggrieved by the
order of the NCLAT, D Co filed an appeal before the Supreme Court and raised
the following arguments:

(i)    Section 16G of the Tea Act specifically
governed the situation of D Co. Further, ‘winding up’ process under the
Companies Act, 1956 includes the insolvency proceedings under the Code;

(ii)   The order of the Calcutta High Court did not
stay the notification issued by the Central Government but only provided
interim relief;

(iii)  Section 238 of the Code which provides it an
overriding effect comes into play only when there is an inconsistency in the
provisions of two statutes. It would not apply when there is no conflict. As
such, there is no conflict between the Tea Act and the Code. Section 16G only
requires obtaining consent before initiation of proceedings of winding up.

 

A Co made the
following arguments:

(a)   The Code is an entire code in itself. A
prerequisite of obtaining consent cannot be imported and / or read into the
Code when the self-contained Code itself does not provide for it;

(b)  Importing the requirement of obtaining consent
of the Central Government would be contrary to legislative intent sought to be
achieved and to the overriding nature of the Code. Further, as both the Tea Act
and the Code have the objective of restarting or revival of the company, provisions
of the Code would prevail in terms of section 238 of the Code;

(c)   It was submitted that section 16G(1) of the
Tea Act does not automatically get triggered with the issuance of a
notification u/s 16E(1) of the Tea Act, but becomes applicable once the
management of a tea undertaking or tea unit owned by a company has been taken
over by the Tea Board. Pursuant to the interim order of the High Court, D Co
continues to be in control and management of the tea units / gardens;

(d)  Further, section 16G(1)(c) of the Tea Act is
applicable to a proceeding for ‘winding up’ and not to proceeding for
initiation of ‘corporate insolvency resolution process’, as the two are not one
and the same proceedings.

 

HELD

The Supreme Court
examined the provisions of section 16G of the Tea Act and also heard both the
parties at length. It was observed that pursuant to the interim order of the
High Court, D Co continued to be in management and control of the tea estates,
despite the notification u/s 16E dated 28th January, 2016. In the
facts of the case, provisions of section 16G would not be applicable at all.
The Court held that section 16G of the Tea Act shall be applicable only in a
case where the actual management of a tea undertaking or tea unit owned by a
company has been taken over by any person or body of persons authorised by the
Central Government under the Tea Act. Therefore, taking over the actual
management and control by the Central Government or by any person or body of
persons authorised by the Central Government is sine qua non before
section 16G of the Tea Act is made applicable. Accordingly, in the
circumstances of the case, the provisions of section 16G of the Tea Act would
not apply.

 

The Court observed
that the Insolvency and Bankruptcy Code, 2016 was a complete code in itself. It
took note of its own verdict in the case of Innoventive Industries Ltd.
vs. ICICI Bank, (2018) 1 SCC 407: (2018) 1 SCC (Civ) 356 and proceeded
to hold that the entire ‘corporate insolvency resolution process’ as such could
not be equated with ‘winding-up proceedings’. The proceedings u/s 9 of the Code
were not limited and / or restricted to winding up and / or appointment of
receiver only. The winding up / liquidation of the company would be the last
resort and only in the eventuality that the corporate insolvency resolution
process fails. The focus of the legislation was to ensure revival of business
and by protecting the corporate debtor from its own management and from a
corporate debt by liquidation. The procedure was required to be completed in a
time-bound manner.

 

It was held that
the Code having been passed subsequent to the Tea Act would have an overriding
effect. Further, prior consent of the Central Government before initiation of
the proceedings u/s 7 or 9 of the IBC would not be required; and even without
such consent of the Central Government the insolvency proceedings u/s 7 or 9 of
the Code shall be maintainable.

 

The order passed by
NCLAT was upheld and the appeal was dismissed without any costs.

 

6. 
Yashodhara Shroff vs. Union of India [2019] 106 taxmann.com 297 (Kar.) Date of order: 12th June, 2019

 

Companies Act – Section 164(2)(a)
disqualifying directors of companies from office for a period of 5 years on
failure to submit annual returns and statements for 3 consecutive years is not ultra
vires Constitution – the period prior to 1st April, 2014 cannot
be reckoned for the purpose of applying the disqualification under the said
provision along with the period subsequent thereto

 

FACTS

The petitioner Y
challenged the list published by the Ministry of Corporate Affairs (MCA) in
September, 2017 whereby nearly 3,00,000 directors were disqualified u/s
164(2)(a) and section 167(1)(a) of the Companies Act, 2013 for failing to file
annual returns and statements for a period of three consecutive years.

 

Further, the
petitioners also contended that there had been an arbitrary exercise of power
by the MCA in disqualifying the petitioners as directors of the respective
companies by giving retrospective operation to the aforesaid provisions of the
Act.

 

HELD

The High Court
observed as under:

 

The object of
disqualifying a person as a Director of a company on account of circumstances
mentioned in section 164 and the provisions of section 167 is to bring in a
higher degree of transparency and accountability in corporate governance, which
is necessary to protect the interest of investors and ensure compliance in
filing the annual accounts and annual returns which are a means of disclosure
to all stakeholders.

 

Further, section
164(2) applies to both private as well as public companies, as against section
274(1)(g) of the Companies Act, 1956.

 

The High Court,
after deliberations, held as under:

(i)    Where the disqualification of the
petitioners is based on taking into consideration any financial year ‘prior to
1st April, 2014 as well as subsequent thereto’ while
reckoning continuous period of three financial years u/s 164(2)(a) of the Act, such
a disqualification is bad in law;

(ii)   If the disqualification of the directors is
based on taking into consideration any financial year prior to 1st
April, 2014 only, i.e., the disqualification has occurred under the
provisions of the 1956 Act, such disqualification is not bad in law;

(iii)  If the disqualification of the directors is
based on taking into consideration three continuous financial years
subsequent to 1st April, 2014, such disqualification is not
bad in law.

 

With regard to the
constitutional validity of the proviso of section 167(1)(a) of the Companies
Act, 2013, the Court ruled that the said provision does not violate Articles 14
and 19(1)(g) of the Constitution as it is made in the interest of the general public.
 

 



CORPORATE LAW CORNER

7. Religare Finvest Ltd. vs. Bharat Road Network Ltd. CP(IB) No. 540/KB/2018 & CP(IB) No.
1060/KB/2018 Date of order: 28th August, 2019

 

Section 7(1),
read with sections 14 and 33 of the Insolvency and Bankruptcy Code, 2016 – An
admission of debt and default was sufficient to initiate the corporate
insolvency resolution process – Any document bypassing such admission was not
to be looked into – Provisions of Indian Stamp Act, 1899 to ascertain the
validity of these documents would not be considered to the extent they are
inconsistent with the Code – A person would be considered as a financial
service provider only when there is license / registration with a regulator to
that effect

 

FACTS

R Co, a non-banking financial institution
(NBFC), advanced a sum of Rs. 50 crores to B Co as a short-term loan for one
year and executed a memorandum of understanding (MOU) for the same on 14th
December, 2016. The same was payable with interest on 14th December,
2017. Stamp duty on the MOU was paid by B Co. A loan recovery notice dated 28th
February, 2018 was issued to B Co.

 

R Co contended that the genuineness of the
MOU was not in dispute. Further, B Co had in its balance sheet dated 31st
March, 2019 disclosed the loan payable to R Co and the fact that insolvency
proceedings u/s 7 of the Insolvency and Bankruptcy Code, 2016 (the Code) were
commenced against it.

 

B Co raised three objections against the
initiation of corporate insolvency resolution proceedings (CIRP). Firstly, the
MOU was a bond within the meaning of the Stamp Act, 1899. Irrespective of the
nomenclature, if the relevant provisions of the Stamp Act applied, it was to be
construed as a bond. Further, if the same was inadequately stamped then the
document would not be enforceable in law and such a document could not be
considered as evidence. Reliance was placed on various decisions to advance
this contention.

 

The second argument was that B Co was a core
investment company and an NBFC as on 31st December, 2018, and most
certainly it was one on 31st March, 2019. It was urged that B Co was
a financial service provider within the meaning of the Code. Although
registration as an NBFC from the Reserve Bank of India (RBI) was yet to be
received, the eligibility for authorisation was to be considered as a
requirement to qualify as a financial service provider under the Code.

 

Thirdly, the person initiating the
proceedings did not have adequate authority to do so.

 

HELD

The National Company Law Tribunal (NCLT)
heard both the parties at length.

 

It was taken on record that R Co was a
registered NBFC and in the course of its business granted the short-term loan
to B Co as per the terms and conditions agreed through the MOU. The amount of
loan, the rate of interest and the fact of failure to repay are not in dispute.
Hence, R Co has filed an application for insolvency.

 

As regards the first contention of B Co,
NCLT examined the meaning of the terms ‘claim’, ‘default’, ‘debt’ and the judicial
precedents on these subjects. It was observed that B Co had obtained a loan,
enjoyed it subject to the MOU and the same constituted a legal and equitable
obligation of B Co. Admitted facts need not be proved and, consequently, there
was no need to examine the legal validity of a document bypassing the admission
of facts made by B Co. Since the facts have been admitted by B Co in its annual
audited statements, there was no need to examine the nature of the MOU or its
enforcement for insufficiency of stamp duty. Further, applicability of the
Stamp Act, 1899 was not to be considered to the extent that its provisions were
inconsistent with the Code.

 

The NCLT also held that in terms of section
3(17), a financial creditor was a person to whom the authorisation was issued
or registration granted by the regulator. In the facts of the present case, B
Co had merely applied for a license / registration with the RBI. There was no
license or registration either on the date of taking the loan, or on the date
of filing the petition u/s 7, or even on the date of the order by NCLT. Thus,
the contention that B Co was a financial services provider was rejected by
NCLT.

 

The contention
as to authorisation was discarded by NCLT on the ground that the person filing
the petition had authority vide a board resolution to file a petition before
the adjudication authority. The adjudication authority being NCLT, the petition
was held to be in order.

 

The contentions raised by B Co were all
discarded and NCLT passed an order admitting the application made by R Co and
initiated the CIRP. A moratorium was declared and an order to make necessary
public announcements was passed by the NCLT.

 

8. Alliance Commodities (P) Ltd. vs. Office of 
Registrar of Companies [2019] 110 taxmann.com 219 (NCLAT, Delhi) Date of order: 9th July, 2019

 

ROC was justified in striking off name of
‘A’ company where company had failed to file financial statements and annual
returns for various financial years – At the time of striking off ‘A’ company
was not carrying on business or operations

 

FACTS

‘A’ company was
incorporated on 1st February, 2008 with the object of doing business
of trading in all types of commodities. It had been complying with the
statutory requirements of filing returns and financial statements till 2013,
but thereafter failed to abide by the statutory compliances. This resulted in
its name being struck off by the Registrar of Companies.

 

In its appeal
before the Tribunal, ‘A’ company contended that it was unaware of the notice
issued by the ROC and thus the default committed by it was unintentional. It
sought restoration of its name on the aforesaid ground.

 

The Registrar
of Companies contested the appeal on the ground that ‘A’ company failed to file
its annual returns and financial statements for more than two consecutive years
and it did not pray for obtaining the status of a ‘Dormant Company’. The ‘A’
company was accordingly struck off after complying with the mandate of section
248 as there were reasonable grounds to believe that the appellant company was
not carrying on any business, or was not in operation for a period of two
immediately preceding financial years.

HELD

It was observed
by the Appellate Tribunal that the notice contemplated u/s 248(1) of the
Companies Act, 2013 read with Rule 3 of the Companies (Removal of names of
companies from the Register of Companies) Rules, 2016 was issued by speed post
to ‘A’ company and its directors. A copy of the notice was published in the
official website calling for objections to the proposed removal / striking off
of the name of the company within 30 days from the publication of the same . A
copy of the notice was published in the official gazette. A public notice was
published in the Times of India and in a regional newspaper. The notice
published in the official website notified that the ‘company stands struck off
from the Register of Companies’. Thus, no legal infirmity or flaw was pointed
out in adherence to the provisions relevant to the process of striking off of
‘A’ company. It was done after following due procedure laid down in the Act.

 

On the crucial issue of ‘A’ company being in
operation and doing business in consonance with its objects, it was noticed
that the financial statements covering the fiscal period beginning 2013 through
2017 demonstrated that ‘A’ company was not in operation and did not conduct any
business of the nature bearing nexus with its intended object/s. The Tribunal
had tabulated the factual position arising from such financial statements
reflecting the assets, liabilities and turnover of the company as NIL. It was
further observed that indulging in business activity not falling within the
ambit of the objects of the company, or not being incidental or ancillary
thereto, cannot be termed as a legitimate business for demonstrating that the
company was in operation.

 

‘A’ company has
failed to make out a just ground warranting interference with the order passed
by the Tribunal which is neither shown to be legally infirm, nor the findings
recorded therein shown to be erroneous, much less perverse.

 

In view of the
above facts and being devoid of merit, the appeal against the order passed by
the ROC was dismissed.  

 

CORPORATE LAW CORNER

11.  Housing Development Finance Corporation Ltd.
vs. RHC Holding (P) Ltd. [2019] 107
taxmann.com 200 (NCLAT – New Delhi) Date of order: 10th
July, 2019

 

Sections 3(8), 3(16) and 3(17) read with
section 7 of the Insolvency and Bankruptcy Code, 2016 – A company which is
registered as a non-deposit-taking NBFC with the Reserve Bank of India would
qualify as a financial service provider – Accordingly, it would be outside the
purview of the definition of corporate debtor and hence the provisions of the
Code would not apply to it in such capacity

 

FACTS

H Co initiated insolvency proceedings
against R Co by filing an application u/s 7 of the Insolvency and Bankruptcy
Code, 2016 (the Code) which was rejected by the National Company Law Tribunal
(NCLT) on the grounds that R Co being a non-banking financial institution was
rendering ‘financial services’ and was, therefore, out of the purview of the
Code. Aggrieved by the order, H Co filed the present petition before the
National Company Law Appellate Tribunal (NCLAT).

 

H Co argued that R Co was a holding company
that invested in the shares, bonds, debentures, debts or loans of group
companies and gave guarantees on behalf of group companies. None of these
activities qualified as rendering of financial services. H Co even elaborated
how the activities carried out by R Co did not fall in any of the limbs of
section 3(16) of the Code which defines financial services.

 

R Co, on the
other hand, argued that it was a financial institution within the meaning of
the Reserve Bank of India Act, 1934 and therefore a financial service provider.
Accordingly, it would not qualify as a corporate person and provisions of the
Code could not be enforced against it.

 

HELD

The Tribunal examined the provisions of the
Code and the Reserve Bank of India Act, 1934. It was observed that the
definition of financial services u/s 3(16) of the Code was an inclusive
definition. This would imply that there were other services which would come in
the definition of financial services. The argument of H Co would not hold good
on that count.

 

It was also observed that R Co being a
non-banking financial institution was carrying on the business of financial
institution and thus, it being a financial service provider, would not come
within the definition of Corporate Debtor. Accordingly, the provisions of the
Code could not be applied to R Co in its capacity as a Corporate Debtor.

 

The order passed by the NCLT was upheld by
the NCLAT and the appeal was dismissed.

 

12.  Janak Goyal vs. Satyendra Jain [2019] 107
taxmann.com 68 (NCLAT) Company appeal
(AT) (Insolvency) No. 202 of 2019 Date of order: 10th
June, 2019

 

Section 7 read with section 12A of the
Insolvency and Bankruptcy Code, 2016 – Once the parties had settled the matter
inter se between them, the application u/s 7 was treated as withdrawn and
therefore dismissed

 

FACTS

Mr. S filed an
application u/s 7 of the Code against O Co which was admitted by the National
Company Law Tribunal (NCLT). It was argued before the NCLT that the loan given
by O Co is time-barred. However, it was observed that there was a suit filed
against O Co which was decided against it. O Co thereafter moved the Supreme
Court and that appeal was dismissed by the Supreme Court as well. Mr. S also
filed an execution case for the same.

 

The Committee of Creditors had been formed
and two meetings of the same held. The Resolution Professional was appointed in
one of those meetings. O Co sought time to settle the matter and in the third
meeting of the Committee of Creditors the Resolution Professional was informed
that O CO had settled the matter and Form FA was duly submitted.

 

It was unanimously agreed in the meeting
that the corporate insolvency resolution process would be withdrawn against O
Co and an application to that effect should be made before the authority.

 

HELD

The NCLAT observed that the consent of all
the financial creditors to withdraw the application had been obtained by O Co.
Further, the dues of the Resolution Professional were also paid to him.

In view of the
above, NCLAT permitted the withdrawal of the application filed before it u/s 7
of the Code. The order passed by NCLT was set aside and disposed of as
withdrawn. All other orders of moratorium, appointment of Resolution
Professional and advertisements given in the newspapers were also set aside.
NCLT was directed to close the proceedings and O Co was permitted to function
independently through its Board of Directors with immediate effect. The appeal
was thus allowed.

 

 

Corporate Law Corner

13.  Scheme
of amalgamation between Real Image LLP with Qube Cinema Technologies Pvt. Ltd.

TCA/157/CAA/2018

CP/123/CAA/2018

Date of Order: 11th June, 2018

 

Section 232 of Companies Act, 2013 –
Amalgamation of Indian LLP with Indian company – Permissible as long as the
scheme was reasonable and not contrary to public policy

 

FACTS

R LLP proposed to amalgamate with Q Co as a
going concern. R LLP is incorporated under the provisions of Limited Liability
Partnership Act, 2008 (“LLP Act”) whereas Q Co is incorporated under the
provisions of Companies Act, 2013 (“Companies Act”). The intention behind the
proposed amalgamation was to consolidate the business operations and provide
efficient management control and system.

 

The proposed scheme provided for:

 

(a) transfer of entire business of the Limited
Liability Partnership (“LLP”) to the company;

(b) protection of interest of employees of LLP; and

(c) accounting treatment in conformity with
accounting standards

 

The parties to the amalgamation were regular
in filing their returns with statutory authorities and maintained their books
in accordance with provisions of law.

 

HELD

The issue before the Tribunal was whether an
LLP could be allowed to amalgamate with a private company under a scheme of
amalgamation filed before it. It was pointed out to the Tribunal that both the
LLP Act and Companies Act provide for similar language with respect to
provisions dealing with amalgamation and both the Acts empower the Tribunal to
sanction a scheme of amalgamation.

 

It was further submitted that u/s. 394(4)(b)
of Companies Act, 1956 there was no bar for a transferor to be a body corporate
which included an LLP. However, there is no such provision u/s. 232 of
Companies Act, 2013. It was further highlighted that section 234 of Companies
Act did provide for amalgamation of foreign LLP with Indian company. Thus,
while foreign LLP could merge with an Indian company, similar benefit has not
been extended to an Indian LLP.

 

The Tribunal observed that intent of both
the Acts was to facilitate ease of doing business. However, absence of specific
provision under Companies Act resulted in a case of “casus omissus”. It
was observed that if the intention of the Parliament was to merge foreign LLP
with an Indian company, then it was incorrect to presume that the Act prohibits
a merger of Indian LLP with Indian company.

 

As the scheme was fair and not contrary to
public policy, the Tribunal allowed the Indian LLP to merge with the Indian
company subject to obtaining other necessary approvals and due compliance of
law.

 

14.  Sushant
Aneja vs. J. D. Aneja Edibles (P.) Ltd.

[2018] 94 taxmann.com 443 (NCLT – New Delhi)

Date of Order: 4th June, 2018

 

Section 5(8) read with sections 3(12) and 7
of the Insolvency and Bankruptcy Code, 2016 – Corporate debtor claimed that
amounts disclosed in the balance sheet as “unsecured loans” were in fact
“capital contributions” – There being no reason for such a categorisation, the
same was treated as “financial debt”; non-repayment of which led to initiation
of insolvency proceedings

 

 

FACTS

SA and NA (HUF) (“Applicants”) advanced
loans to J Co during Financial Years 2004-05 to 2012-13. During the F.Ys.
2013-14 to 2016-17, J Co neither paid the interest nor deposited the TDS,
however, the original loan amounts were reflected in the balance sheet of J Co.
Applicants wrote demand letters dated 16.11.2016 demanding outstanding loans.
They also sent legal notices for remittance of outstanding amounts. This was
followed by two separate notices sent on 15.09.2017, acceptance of which was
denied by J Co. In November 2017, applicants filed the application before
National Company Law Tribunal (“NCLT”).

 

J Co submitted that the amount in question
was not a “financial debt”. It was further submitted that since the amount was
given as quasi-capital there were no terms and conditions for repayment, and no
date was specified as to when the amount would become due and payable and thus,
there is no default in repayment of the said amount. Applicants contended that
absence of a written agreement prior to extension of credit did not entitle the
J Co to escape liability.

 

HELD

NCLT observed that advancement of the amount
from the Applicants to J Co is not in dispute. However, the nature of the money
advanced is disputed. The Tribunal further observed that the reflection of the
amounts in the balance sheets under the head of ‘Unsecured Loan’, the payment
of TDS on interest by the J Co on behalf of the Applicants and the fact that
interest was to be paid by J Co to the Applicants point towards the fact that
the money was taken by J Co from the Applicants against the consideration for
the time value of money. J Co failed to explain why the amount claimed to have
been taken as quasi capital contribution was treated as unsecured loan in its
balance sheet.

 

The Tribunal thus held that there was a
financial debt which was owed by J Co to the Applicants.

 

In connection with the fact whether there
was a default or not, the Tribunal observed that while Applicants sent legal
notices to J Co; J Co did not reply to the same nor did it produce any proof of
payment before the Tribunal.

 

The Tribunal considering the facts of the
case held that a default had been committed in terms of section 3(12) of the
Code of financial debt as defined u/s. 5(8) of the Code and that the Applicants
had rightly invoked the provisions of the Code.

Tribunal accordingly proceeded to appoint an
Insolvency Resolution Professional and initiated the corporate insolvency
resolution process laid down u/s. 7 of the Code.

 

15.  Principal
Director General of Income Tax vs. Spartek Ceramics India Ltd.

[2018] 94 taxmann.com 1 (NCLAT)

Date of Order: 28th May, 2018

 

Section 61 read with section 242 of the
Insolvency and bankruptcy Code, 2016 – Notification S.O.1683(E), dated
24.05.2017 is inconsistent with maximum period of limitation granted u/s. 61(2)
of the Code – NCLAT has no jurisdiction to entertain an appeal beyond 45 days.

 

FACTS

S Co had a scheme of demerger sanctioned by
Board for Industrial and Financial Reconstruction (“Board”) u/s. 18 of the Sick Industrial Companies (Special Provisions) Act, 1985
(“SICA Act, 1985”). Income-tax department preferred an appeal against
the said scheme stating that the same was in violation of the principle of
natural justice and provisions of ‘SICA Act, 1985’ which is prejudicial to the
interest of revenue involving huge loss of income tax. The appeal was preferred
for removal of the grievances.

 

The other Appeal was preferred by the ‘G Co’
u/s. 32 of the I&B Code read with 3rd proviso to section 4(b) of
the ‘Sick Industrial Companies (Special Provisions) Repeal Act, 2003’
(“SICA Repeal Act, 2003”) as amended by the Eighth Schedule to the
I&B Code and by the Insolvency and Bankruptcy Code (Removal of
Difficulties) Order, 2017. G Co in the appeal, challenged the same very scheme
of demerger sanctioned by Board, for restructuring S Co. An appeal was also
preferred by G Co before the Appellate Authority for Industrial and Financial
Reconstruction (“AAIFR”), which stood abated in view of the SICA
Repeal Act, 2003. The main challenge has been made on the ground that the Board
has not discussed the objections raised by G Co nor has taken into consideration
that G Co is the Creditor of S Co, which was required to take the
responsibility and other liabilities which were not recorded in the books of
Neycer.

 

The appeals have been filed under the Eighth
Schedule of the I&B Code.

 

 

HELD

The issues before NCLAT was whether the
Central Government u/s. 242 of the I&B Code can empower the NCLAT to hear
an appeal against an order passed by the Board; the Eighth Schedule of the
I&B Code, having not been amended by a legislative Act, but by an executive
order? In this connection, it was observed that Notification S.O. 1683(E) dated
24th May, 2017, was issued in view of difficulties arisen to give
effect to review or monitoring of the schemes sanctioned u/s. 18 of the SICA
Act, 1985, in view of SICA Repeal Act, 2003 and omission of sections 253 to 269
of the Companies Act, 2013. It did not relate to removal of any difficulty
arising in giving effect to the provisions of the I&B Code, which is the
only ground for which Central Government can exercise power conferred u/s. 242.

 

In absence of any ground shown for removing
any difficulty in giving effect to the provisions of the I&B Code and as
the Central Government cannot exercise powers conferred under section 242 of
the I&B Code for removing the difficulties arisen due to ‘SICA Repeal Act,
2003’ or omission of provisions of the ‘Companies Act, 2013’, NCLAT could not
act pursuant to Notification S.O. 1683(E) dated 24th May, 2017 to entertain the
appeal.

 

It was
further held that executive instruction issued by the Central Government u/s.
242 was contrary to the provisions of section 4 of the ‘SICA Repeal Act, 2003’.
 

The second issue before the NCLAT was
whether the provision to prefer the appeal within 90 days before the NCLAT, as
made by the Central Government Notification dated 25th May, 2017 is
in conflict with section 61(2) of the I&B Code, which provides 30 days
period to prefer an appeal before the NCLAT? It was observed that grounds to
prefer appeal u/s. 61 of the I&B Code against an order of approval of plan
passed by the Adjudicating Authority u/s. 31, should be such as mentioned in
section 61(3). As per section 61(2), the appeal is required to be filed within
30 days before the NCLAT. NCLAT is empowered to condone the delay of another 15
days after the expiry of the period of 30 days in preferring the appeal; that
too for a sufficient cause.

 

The NCLAT observed that the Central
Government u/s. 242, is competent to make provision to remove the difficulty in
giving effect to the provisions of the I&B Code, but it cannot be in
conflict with nor can change the substantive provisions of the I&B Code.
The period of limitation as prescribed by Notification S.O. 1683(E) dated 24th
May, 2017 was in conflict with the maximum period of limitation granted u/s.
61(2) of the I&B Code and beyond forty-five days. NCLAT was thus, not
empowered to entertain the appeal.

 

It was held that appeals filed by both G Co
and Income-tax department were barred by limitation and were otherwise not
maintainable u/s. 61 of the I&B Code. To maintain the judicial decorum,
though NCLAT noticed the conflict in the order passed by the Hon’ble High Court
of Delhi and the Notification S.O. 1683(E) dated 24th May, 2017, it
refrained from giving any specific declaration about the same.

 

Further, in view of the facts of the Scheme,
NCLAT held that the same was illegal. However, in in absence of its
jurisdiction to exercise of powers u/s. 61 of the I&B Code, being barred by
limitation, it would not be desirable to set aside the impugned illegal Scheme. 


CORPORATE LAW CORNER

2. 
Principal Director-General of Income-tax vs. Synergies Dooray Automotive
Ltd. [2019] 103 taxmann.com 361 (NCLAT)  Company Appeal (AT) (Insolvency) No. 205
of 2017 and 309, 559, 671 & 759 of 2018 Date of Order: 20th March,
2019

 

Section
5(20) of the Insolvency and Bankruptcy Code, 2016 – Income-tax Department,
Sales tax department and other statutory bodies fall within the ambit of
“operational creditors” and the monies owed to them on account of these
statutory dues is an “operational debt”

 

FACTS


Various regulatory
authorities preferred appeals against resolution plans approved by the National
Company Law Tribunal (“NCLT”) where the demands owed by the corporate debtors
to them were classified as operational debt and their names were included as
operational creditors of such companies. Accordingly, the demands owed were
substantially reduced under the resolution plans and they were not given an
opportunity to attend the meetings of the committee of creditors (“COC”). As
the legal issue arising in the appeals was the same, all of them were combined
and heard together.

 

HELD


There were arguments from
both sides on interpretation of the term ‘operational debt’ as defined u/s.
5(21) of the Code. The National Company Law Appellate Tribunal (“NCLAT”)
examined the definition and observed that there was no ambiguity in it. NCLAT
further observed that ‘Operational Debt’ in normal course meant a debt arising
during the operation of the company (‘Corporate Debtor’). The ‘goods’ and
‘services’, including employment, were required to keep the company (‘Corporate
Debtor’) operational as a going concern. If the company (‘Corporate Debtor’) is
operational and remains a going concern, only in such case will the statutory
liability, such as payment of Income-tax, Value Added Tax, etc., arise. As the
‘Income Tax’, ‘Value Added Tax’ and other statutory dues arising out of the
existing law arises when the Company is operational, it was held that such
statutory dues had a direct nexus with operation of the company. It was further
held that all statutory dues including ‘Income Tax’, ‘Value Added Tax’, etc.,
came within the meaning of ‘Operational Debt’.

 

As the statutory
authorities were treated at par with similarly situated ‘operational
creditors’, there was no reason to interfere in the orders passed by the NCLT.

 

NCLAT dismissed the appeals
so filed.

 

3.  Forech India Limited vs. Edelweiss Assets
Reconstruction Co. Ltd. [2019]
101 taxmann.com 451 (SC) Civil
appeal No. 818 of 2018 Date
of Order: 22nd January, 2019

 

Section
255 of the Insolvency and Bankruptcy Code, 2016 read with Rule 5 of the
Companies (Transfer of Pending Proceedings) Rules, 2016 as well as Rules 26 and
27 of the Companies (Court) Rules, 1959 – In a winding-up petition filed before
the High Court where a notice has been served and which is pending in the High
Court, application to transfer the same to NCLT under the Code can be made –
High Court would transfer such a proceeding and it would be treated as an
insolvency petition under the Code

 

Sections
11 and 10 of the Insolvency and Bankruptcy Code, 2016 – Application of section
11 is limited in nature – It merely bars a corporate debtor from initiating a
petition u/s. 10 of the Code in respect of whom a liquidation order has been
made – It does not follow that until a liquidation order has been made against
the corporate debtor, an Insolvency Petition may be filed u/s. 7 or u/s. 9 as
the case may be

 

FACTS


F Co filed a winding-up
petition against the corporate debtor in the year 2014 for inability to pay its
dues. Notice in this petition had been served, the existence of debt or
liability has been admitted. Meanwhile, E Co being the financial creditor moved
to the National Company Law Tribunal (“NCLT”) and filed an insolvency petition
u/s. 7 of the Insolvency and Bankruptcy Code, 2016 (“the Code”) in May/June,
2017. This petition was admitted on 07.08.2017. F Co filed an appeal against
the order of admission before the NCLAT and the same was dismissed on the
ground that since the winding-up order had not been passed by the High Court,
insolvency petition was maintainable in the eyes of law.

 

F Co argued that in light
of the provisions of the law, it should be the winding-up petitions filed before
the High Court that should be allowed to continue and not the insolvency
petitions filed by the creditors before the NCLT. E Co, on the other hand,
contended that the whole object of the Code would be frustrated if petitions
for winding up in the High Court were to continue in the face of the insolvency
petitions that have been filed under the Code.

 

HELD


The Supreme Court examined
various arguments and referred to section 255 of the Code along with various
amendments brought out by the Eleventh Schedule to the Code, section 434 of the
Companies Act, 2013 (which relates to transfer of certain pending proceedings),
Rule 5 of the Companies (Transfer of Pending Proceedings) Rules, 2016, as well
as Rules 26 and 27 of the Companies (Court) Rules, 1959.

 

It was pointed out that
there were divergent views on the interpretation of the aforesaid rules. The
Bombay High Court in Ashok Commercial Enterprises vs. Parekh Aluminex Ltd.
[2017] 80 taxmann.com 359/141 SCL 363, had stated that the notice referred
to in Rule 26 was a pre-admission notice and hence, held that all winding-up
petitions where pre-admission notices were issued and served on the respondent
will be retained in the High Court. On the other hand, the Madras High Court in
M.K. & Sons Engg. vs. Eason Reyrolle Ltd. in CP/364/2016 held that
the notice under Rule 26 is referable to a post-admission position of the
winding-up petition and accordingly held that only those petitions where a
winding-up order is already made can be retained in the High Court. For this
purpose, the Madras High Court strongly relied upon Form No. 6 appended to Rule
27 and the expression “was admitted” occurring in the Notice of
Petition contained in the said Form.

 

The Supreme Court held that
the view taken by the Bombay High Court was correct in law and the reasoning
laid down by the NCLAT in its order was incorrect.

Further, in the context of
section 11 of the Code it was observed that the same was of limited application
and only barred a corporate debtor from initiating a petition under section 10
of the Code in respect of whom a liquidation order has been made. From a
reading of this section, it does not follow that until a liquidation order has
been made against the corporate debtor, an Insolvency Petition may be filed
u/s. 7 or section 9 as the case may be.

 

The financial creditor’s
application which was admitted by the Tribunal was held to be an independent
proceeding which would be decided in accordance with the provisions of the
Code. The order of the NCLAT dismissing appeal was upheld by the Supreme Court
and F Co was granted an opportunity to apply before the Supreme Court under the
proviso to section 434 of the Companies Act (added in 2018), to transfer the
winding-up proceeding pending before the High Court of Delhi to the NCLT, which
can then be treated as a proceeding u/s. 9 of the Code.

 

4.  SGM Webtech (P.) Ltd. vs. Boulevard Projects
(P.) Ltd. [2019]
103 taxmann.com 176 (NCLT –  New Delhi) Company
petition (IB) No. 967(PB) of 2018 Date
of Order: 8th February, 2019

 

Sections
5(7) and 5(8) of the Insolvency and Bankruptcy Code, 2016 – Commercial Unit
allotted in a real estate development project was not completed in time –
Amounts advanced had to be refunded to the allottee and default in doing so
constituted a default in repayment of financial debt as contemplated under the
Code – Proceedings under the Code could be initiated for the default

 

FACTS


S Co, a private company,
agreed to purchase a commercial unit in a project being developed by B Co. Over
a period of time, B Co raised various demands on S Co which were duly met by
it. An “Office/Unit Buyer Agreement” dated 08.01.2013 was entered into between
the parties. The agreement fructified the terms between the parties qua
the rights of S Co in the commercial unit and the project, B Co’s obligations
of delivery of completed commercial unit as per specifications within 36 months
and consequences of delay thereof including penalty for the period of delay, S
Co’s right to terminate the agreement and also to seek refund with interest.

 

B Co, despite repeated
assurances, failed to complete the construction in the stipulated time. Various
letters were issued by S Co demanding the refund of its money along with
interest for which no reply was furnished by B Co. S Co further stated that a
failure on part of B Co would necessitate further action under Real Estate
(Regulation and Development) Act, 2016. The said action was initiated and the
U.P. Real Estate Regulatory Authority (“UPRERA”) and the authority levied
penalty on B Co.

 

B Co owed money to S Co
which had fallen due on various dates on account of its default in completion
of the allotted unit within time and the default in re-payment (despite
demands) of amount paid by S Co along with compound interest @ 18% per annum
from the actual dates of receipt of payment by B Co till date of repayment
to/realisation of the entire amount to S Co, and penalty thereon as ordered by
UPRERA.

 

S Co thus filed a petition
initiating Corporate Insolvency Resolution Process (“CIRP”) under the
Insolvency and Bankruptcy Code, 2016 (“the Code”) and proposed the name of Amit
Agarwal for appointment as Interim Resolution Professional. B Co, on the other
hand, had filed a further petition with UPRERA and it was contended that since
the proceedings there were pending, the proposed application may not be
proceeded with. It was further contended by B Co that delay arose due to
demonetisation and the order passed by the NGT in respect of the Okhla Bird
Sanctuary; and that in view of force majeure, the claim of S Co was
premature.

 

HELD


The National Company Law
Tribunal (“NCLT”) examined the provisions of section 5(7), 5(8), 7(1) read with
the Insolvency and Bankruptcy (amendment) Ordinance, 2018. The Ordinance 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 a borrowing and thus
will come within the definition of ‘Financial Debt’ under the Code. The
definition of ‘Financial Debt’ has been amended to specifically include dues of
home buyers and the home buyers are recognised as “Financial
Creditor” under the Amendment Act.

 

The Tribunal observed that
S Co had advanced a sum of Rs. 4,10,68,472 to B Co and a Builder-Buyer Agreement
had also been executed between the parties. It was observed that the present
application was filed by S Co u/s. 7 and all the relevant files and documents
as required for the same along with Form I had been duly filled.

 

The only point of
contention that remained was whether a default in payment of financial debt was
committed by B Co. In that connection, NCLT observed that B Co had failed to
show how the demand made by S Co was premature. The fact that the claim of S Co
had been admitted by UPRERA established that the said claim was in fact a
financial debt as defined under the Code and that there was default on the part
of B Co in repayment of financial debt.

 

NCLT thus admitted the
petition to initiate the CIRP against B Co and declared moratorium in terms of
section 14 of the Code with a direction to the IRP to take further steps as
prescribed under the Code.

 

5.  Satyendra Jain vs. OmwayBuilestate (P.) Ltd. [2019]
103 taxmann.com 111 (NCLT – New Delhi) Company
petition (IB) No. 1013 (PB) of 2018 Date
of Order: 12th February, 2019

 

Section
238A read with section 7 of the Insolvency and Bankruptcy Code, 2016 –
Insolvency Resolution Process can be initiated against the corporate debtor
even though recovery suit has already been filed and decree has been passed
more than 5 years ago – The applicable period of limitation being 12 years,
application under the Code was maintainable

 

FACTS

O Co took a loan of Rs.
4.35 crore from Mr. S in the year 2010 which it failed to repay as per the
agreed terms and conditions. Mr. S filed a recovery suit before the Delhi High
Court which passed a decree on 19.03.2013 for Rs. 5.75 crore along with pendente lite and future interest. O Co did
not pay its dues even 5 years after the passing of the decree. Mr. S has claimed
that as on 20.07.2018, the total outstanding amount including interest due was
Rs. 10.14 crore.

 

O Co has objected to the
application primarily on the ground that the claim of Mr. S was barred by
limitation. It was further submitted that the Delhi High Court had passed a status
quo on the assets of O Co which was still in operation and hence no action
could be taken against it.

 

Mr. S brought to the notice
of the National Company Law Tribunal (“NCLT”) that the decree dated 19.03.2013
was modified by the High Court on 04.02.2016 and the said decree had still not
been satisfied by O Co.

 

 

HELD


The
primary objection to the admission of the application was that the claim was
barred by limitation. NCLT examined section 238A of the Insolvency and
Bankruptcy Code, 2016 (“the Code”) which makes the provisions of the Limitation
Act, 1963 applicable to proceedings or appeals applicable to the Code. However,
NCLT observed that Article 136 of the Limitation Act, 1963 provides for a
period of 12 years with respect to execution of order or decree of a Civil
Court. In light of this, the argument of application being barred by limitation
did not hold good and NCLT rejected the same.

 

The fact of existence of
the loan which is recoverable with applicable interest has not been disputed by
either parties. Either parties also do not dispute the default of O Co in
repayment of loan in accordance with agreed terms. Mr. S had filled out a duly
complete form along with necessary documents to initiate the proceedings u/s. 7
of the Code.

 

Thus, the application of
Mr. S was accepted by the NCLT and Mr. Lekhraj Bajaj was appointed as the
Interim Resolution Professional (“IRP”). NCLT further declared moratorium in
terms of section 14 of the Code with a direction to the IRP to take further
steps as prescribed under the Code.

 

 

CORPORATE LAW CORNER

9 Amira Pure Foods Pvt. Ltd. vs. Canara Bank
Ltd.

[2019] 105 taxmann.com 326
(Delhi)

W.P. (C) No. 5467/2019

Date of order: 20th
May, 2019

 

Section 18 of the
Insolvency and Bankruptcy Code, 2016 – Debt Recovery Appellate Tribunal should
have recalled its order of taking control and possession of assets of corporate
debtor and handing over the same to the Insolvency Resolution Professional in
exercise of its mandate u/s. 18 of the Code – DRAT should have modified its
order as it has adequate powers to do the same

 

FACTS

CB (“Financial Creditor”)
had approached the Debt Recovery Tribunal (“DRT”) for recovering its dues from
A Co under the Recovery of Debts Due to Banks & Financial Institutions Act,
1993; arising from these proceedings, the matter reached the Debt Recovery
Appellate Tribunal (“DRAT”). DRAT, vide its order dated 15th
November, 2018 appointed Joint Court Commissioners to take over the assets of A
Co including its perishable assets. Soon thereafter, CB also initiated
proceedings against A Co under the Insolvency and Bankruptcy Code, 2016 (“the
Code”) and pursuant to the same, an Interim Resolution Professional (“IRP /
RP”) was appointed on 11th December, 2018.

 

Upon appointment, the IRP
approached DRAT for taking over the properties and assets of A Co and prayed
for an early hearing. CB also accorded its consent to the said application
being allowed. But DRAT did not consider the application for early hearing and
the matter was adjourned. IRP then filed a writ petition with the High Court
where an order was passed instructing DRAT to hear and dispose of the matter
within a week. Consequently, DRAT passed an order on 22nd April,
2019 dismissing the petition filed by IRP on the grounds that as a moratorium
u/s. 14 of the Code was operational, all proceedings against A Co were to be
stalled. The IRP challenged this order of DRAT before the High Court.

HELD

It was submitted by A Co /
IRP that section 14 of the Code imposes a restriction of proceedings which are
against the corporate debtor. It does not bar undertaking of proceedings which
are not considered as being “against the corporate debtor”. Further, since IRP
is required to act in a time-bound and efficient manner, appointment and continuation
of Court Commissioners with vesting of assets was detrimental to the interest
of IRP. Since CB did not object to continuation of proceedings under IBC, the
order of DRAT was bad in law.

 

The High Court heard the parties and held that DRAT was not powerless
to modify its own order whereby the two Court Commissioners had been appointed
to take over control of the assets of A Co. DRAT should have recalled its order
so that the IRP / RP could take over the assets of A Co in the exercise of its
mandate under the Code. The order of DRAT was accordingly set aside and IRP was
permitted to exercise its powers in terms of the Code. The costs of
Commissioner were to be paid by the IRP.

 

10 Pranatpal Tradelink (P.) Ltd., In re

[2019] 105 taxmann.com 308
(NCLT – Ahd)

C.P. No.
32/441/NCLT/AHM/2018

Date of order: 28th
March, 2019

 

CL: Where a company
contravened provisions of section 217 by not attaching board report with its
balance sheet while filing e-form 23AC with MCA portal, in view of fact that
alleged offence was made compoundable and could be compounded because it was
punishable with imprisonment up to six months or with fine alone or both,
application for compounding of said offence was to be allowed

 

FACTS

In the instant case, during
the course of technical scrutiny of the balance sheet of P-Company Pvt. Ltd.
(the applicant), the Registrar of Companies observed that the applicant
company’s Board report was not attached with the balance sheet in e-form 23AC
filed with the MCA portal for the financial year 2010-11; thus, P-Company Pvt.
Ltd. had violated provisions of section 217(1) of the Companies Act, 1956
[Section 134 of The Companies Act, 2013].

 

The directors of P-Company
Pvt. Ltd. admitted that such violation was unintentional and with no mala fide
intention. However, they had later on attached the Board report along with
their compounding application and, thus, they had made good the alleged lapses.

 

HELD

The NCLT observed as
under:

  •  P-Company Pvt. Ltd. (applicant) in the compounding
    application submitted that the violation of not attaching the Board report
    along with the balance sheet for the financial year 2010-11 was totally
    erroneous and there was no wrongful intention on the part of the directors;
  • P-Company Pvt. Ltd. admitted the default and filed
    a compounding application for compounding of the offence committed u/s. 217(1)
    of the Companies Act, 1956;
  • The provisions of section 217(5) of the Companies
    Act, 1956 read as under:

 

If any person, being a
director of a company, fails to take all reasonable steps to comply with the
provisions of sub-sections (1) to (3), or being the chairman, signs the Board’s
report otherwise than in conformity with the provisions of sub-section (4), he
shall, in respect of each offence, be punishable with imprisonment for a
term which may extend to six months, or with fine which may extend to twenty
thousand rupees, or with both.

 

  • The Central Government has declared that matters
    transferred from the Company Law Board to the National Company Law Tribunal
    shall be disposed of by NCLT in accordance with the provisions of the Companies
    Act, 2013 or the Companies Act, 1956;
  • The provisions of Section 441 of the Companies
    Act, 2013 also confer necessary power to NCLT for compounding of certain
    offences. Such violations / offences are made punishable u/s. 217(5) of the
    Companies Act, 1956 but are also made compoundable u/s. 621A of the same
    Companies Act, 1956;
  • On perusal of the material available on record,
    the NCLT observed that the alleged contravention seems to be technical in
    nature and due to some procedural lapses on the part of its directors of not
    enclosing the Board’s report along with the company’s balance sheet as on 31st
    March, 2011. However, P-Company Pvt. Ltd. has attached the Board’s report for
    the financial year 2010-2011 along with a compounding application. Thus, they
    have made good the alleged lapses. P-Company Pvt. Ltd. has further explained
    that non-attaching of the Board’s report with the balance sheet was erroneous,
    and without any wrongful intention on the part of its Directors. Thus, it was
    observed that P-Company Pvt. Ltd. has admitted the default, but has sought
    compounding of offence;
  • The NCLT held that the compounding application for
    the offence was to be allowed as the alleged offence could be compounded
    because it was punishable    with imprisonment up to six months or with fine alone or both.

CORPORATE LAW CORNER

9.  Lalit Mishra vs. Sharon Bio Medicine Limited
Company Appeal (AT) (Insolvency) No. 164 of 2018  Date of Order: 19th
December, 2018

 

Insolvency and Bankruptcy Code, 2016 –
Shareholders and promoters are not creditors – Right available to surety (who are
also the promoters and shareholders) under contract law will not be applicable
in case of an approved resolution plan

 

FACTS

 

National Company Law Tribunal (“NCLT”) passed an order whereby a
resolution plan was approved in respect of S Co. L was a promoter of S Co.
Predominantly, the grounds of appeal are that L and others although are
promoters and shareholders, no amount has been provided for them; and some of
the promoters being personal guarantors are discriminated against.

 

L has also submitted that the security interest which include the
personal guarantees of L have been reduced to ‘nil’ and thereby the ‘Resolution
Plan’ have been submitted against the provisions of sections 133 and 140 of the
‘Indian Contract Act’. 

 

HELD

 

NCLAT examined the various clauses of the resolution plan approved by
the NCLT. It was observed that restructuring of the financial debt as part of
the ‘Resolution Plan’ approved by the NCLT under the Code did not envisage
complete discharge of the liability of personal guarantors of the S Co. The
plan mentioned that all securities/ collaterals/ margin money/ fixed deposit
with lien provided by S Co shall be deemed to be released immediately on
Effective Date. It is subsequently mentioned that the personal guarantee provided
by the existing promoters of S Co shall not result in any liability towards S
Co or the ‘Resolution Applicants’.

 

This ‘treatment of security’ and with regard to personal guarantee
provided by the existing promoters of S Co is alleged to be in violation of
section 140 and section 133 of the ‘Indian Contract Act’.

 

However, it was held that intention of the law was maximisation of the
value of the assets of the ‘Corporate Debtor’, then to balance all the
creditors and make availability of credit and for promotion of entrepreneurship
of the ‘Corporate Debtor’. The Code prohibits the promoters from gaining,
directly or indirectly, control of the ‘Corporate Debtor’, or benefiting from
the ‘Corporate Insolvency Resolution Process’ or its outcome. The Code seeks to
protect creditors of the ‘Corporate Debtor’ by preventing promoters from
rewarding themselves at the expense of creditors and undermining the insolvency
processes.

 

The NCLAT held that the shareholders and promoters are not creditors and
thereby the ‘Resolution Plan’ cannot balance the maximisation of the value of
the assets of the ‘Corporate Debtor’ at par with the creditors. They were also
ineligible to submit the ‘Resolution Plan’ to again control or takeover the
management of the ‘Corporate Debtor’. Further it was held that there was no
discrimination if no amount is given to the promoters/shareholders and the
other equity shareholders who are not the promoters have been separately
treated by providing certain amount in their favour. The appeal was accordingly
dismissed.

 

10. 
KKR Jupiter Investors (P.) Ltd. vs. JBF  Petrochemicals Ltd. [2018]
100 taxmann.com 341 (NCLT-Ahd.) Date of Order: 19th November, 2018

 

Section 60(5)(c) r.w.s 7 of Insolvency and
Bankruptcy Code, 2016 -_ Proceedings u/s. 7 can only be initiated by or against
the corporate debtor – No other person (including a financial investor,
promoter or shareholder) can intervene in the proceedings so initiated

 

FACTS

 

K Co, is a financial investor of J Co. In April 2018 K Co came to know
that corporate insolvency resolution process u/s. 7 of the Insolvency
Bankruptcy Code, 2016 has been initiated against J Co by one of its financial
creditors. K Co as a financial investor submitted that it proposed to implement
a comprehensive solution to the problems faced by all the stakeholders of J Co
within a reasonable time period and sought the co-operation of the financial
creditor. This was mainly based on the contention that corporate insolvency
resolution process would not serve any beneficial purpose to the stakeholders
including financial creditor and the proposed financing would resolve the
issues whereby the lender would receive payment of outstanding principal amount
under the facility arrangement and K Co’s interest would also be preserved. The
applicant thus filed intervention application for affording an opportunity to
it to raise all the issues for the effective adjudication in the matter.

 

HELD

 

National Company Law Tribunal (“NCLT”) examined the provisions of
section 60(5) of the IBC which deal with adjudicating authority for corporate
persons. It observed that an application/proceeding u/s. 60(5) of the IBC could
be filed by or against the corporate debtor. This was unlike the K Co’s case,
where, the intervention application was filed against the financial creditor.

 

NCLT further observed that section 60(5)(c) had no applicability at the
stage of adjudication on admissibility of application filed u/s. 7 of IBC. This
was because section 60(5)(c) dealt with questions of priorities or any question
of law or facts “arising out of or in relation to the insolvency resolution or
liquidation proceedings of the corporate debtor” or corporate person. NCLT,
thus, concluded that the intervener cannot resort to section 60(5)(c) to invoke
jurisdiction of the Tribunal to entertain the intervention application in a
case where the proceedings are initiated by the financial creditor u/s. 7 of
the IBC which is under way and the insolvency resolution process against the
corporate debtor has not been initiated.

 

NCLT relied on the decision of the NCLAT in Axis Bank vs. Lotus Three
[2018] 97 taxmann.com 96 wherein it was held that, third party i.e. an
entity other than the financial creditor/corporate debtor is not offered the
right to be heard and/or to intervene in a proceeding initiated u/s. 7. NCLT
thus held that adjudicating authority was only required to satisfy that the
default had occurred and the corporate debtor was entitled to point out that
the default had not occurred, i.e. the debt was not due. No other person had
the right to be heard at the stage of admission of application u/s. 7 and 9
including the shareholder or the personal guarantor. The Tribunal also relied
on the decision of the Supreme Court in the case of Innoventive Industries
Ltd. vs. ICICI Bank Ltd. [2017] 84 taxmann.com 320 (SC) to draw support for
this position held by the Tribunal. NCLT, thus, rejected the application filed
by K Co.

 

11. Vestal Educational
Services (P.) Ltd. v. Lanka Venkata Naga Muralidhar [2018] 100 taxmann.com 286
(NCL-AT) Date of Order: 16th November, 2018

 

Section 62 of Companies Act, 2013 – Money was
given by ex-director to Company for re-payment of loans taken by the company –
Company alleged that amount was advanced against equity shares and not loan as
was claimed by the ex-director – Company was required to establish that a valid
offer of shares was made to and accepted by the ex-director and that procedure
laid down u/s. 62 was complied with – Inability to prove the same rendered the
allotment null and void.

 

FACTS

 

L is a shareholder of V Co and acted as a director of the same from
December 2006 to October 2011. V Co had borrowed loan from SBI in 2009 against
which properties of V Co were mortgaged and L also gave a personal guarantee.

 

The term loan became NPA in 2013 (i.e. after L ceased to be a director
in October 2011). There was a one-time settlement agreed by V Co. Since the
company could not meet its liability as per the one-time settlement scheme
entered into with the Bank, it approached L to lend Rs. 1.54 crore. L deposited
the said sum in the account of V Co.

 

L claimed that he sent reminders to the company for repayment of the
amount and also sent legal notices asking for payment of amounts advanced by
him to the company. Meanwhile, V Co sent a courier to the original petitioner
showing the latest shareholding and on verification, the original petitioner
found that amount lent by him had been converted into equity without his
knowledge, intimation or authorisation and that the action  on the part of company to convert the amount
into equity was to avoid the payment of money to him and clearly an
afterthought.

 

The NCLT observed that there was no evidence as regards issue of notice
offering shares and ultimately set aside the allotment made by the company and
directed that the amount be paid to L.

 

V Co filed the present appeal pleading that amounts were advanced by L
as a consideration for issue of shares and not as a loan as was held by NCLT.

 

HELD

 

NCLAT observed that having regard to the opposing nature of claims,
burden was on V Co to show that when the payments were made by L, he had agreed
that against the said amount, shares be issued to him. V Co was also required
to establish that procedures laid down u/s. 62 of Companies Act, 2013 were
complied with.

 

The NCLAT observed that there was no match between the amounts advanced
by L and shares alleged to be allotted by V Co in light of ledger maintained by
V Co.

 

NCLAT held that V Co was unable to establish at any point of time that L
had in fact consented to the issue of equity shares against money advanced by
him. Further, additional documents that V Co tried to submit in order to
further its claim were never filed before NCLT and there was a concern on the
genuineness of the documents so tendered for filing. NCLAT further held that
had the documents been considered, the conclusion would still be the same as
NCLT. V Co was unable to prove that shares were offered to L or that L had in
fact accepted the offer alleged to have been made.

 

The appeal filed by V Co was accordingly aside and a cost of Rs.
1,50,000 was imposed upon V Co.

 

 

CORPORATE LAW CORNER

6. Mahesh Sureka vs. Marathe Hospitality [2020] 116 taxmann.com 552 (NCLT-Mum.) C.P.(IB) No. 3603/(MB)/2018 Date of order: 20th March, 2020

 

Section 238 of the Insolvency and
Bankruptcy Code, 2016 – Assets attached by EOW were to be released in favour of
RP as non-obstante clause appearing in the later legislation would
precede the former – Transfer of assets to a partnership firm (where one of the
partners was a tax adviser of the corporate debtor) for an inadequate
consideration without prior consent of the mortgagee was a fraudulent
transaction and was set aside

 

FACTS

Insolvency
proceedings were admitted against the corporate debtor P Co on 14th
March, 2018 on an application filed by U Bank (the ‘Financial Creditor’). One
of the properties of the corporate debtor was financed by way of mortgage by U
Bank. The corporate debtor had leased the said property to MH (a partnership
firm) on a long-term basis for a sum of Rs. 25,000 per month vide lease
deed dated 18th May, 2016. Mr. AN, who was a partner in MH, was also
a tax adviser to the corporate debtor. Further, the said property was leased to
MH without obtaining the prior approval of U Bank.

 

The Resolution Professional (RP) learned
that one of the directors of the corporate debtor was in jail (in judicial
custody) and that the Economic Offences Wing (EOW) had attached several of the
properties of the corporate debtor which included its registered office. The RP
mentioned that due to the attachment of the registered office of the corporate
debtor and unavailability of the Directors and other staff members, it was
impossible to prepare essential details of the assets and liabilities of the
corporate debtor. The property mentioned above was also attached by the EOW.

 

Mr. AN contended that although it was the
duty of the corporate debtor before giving the said property on lease to seek
prior permission of U Bank, MH could not be prejudiced for the wrong-doings of
the corporate debtor. Further, as per section 46 of the Insolvency and
Bankruptcy Code, 2016 (the Code) the relevant time for avoidance of undervalued
transaction was one year prior to commencement of the Corporate Insolvency
Resolution Process (CIRP) of the corporate debtor. It was pleaded that since
the said lease agreement was entered into on 18th May, 2016, and
hence was beyond the one-year period from the CIRP commencement date, it could
not be covered u/s 46 of the Code.

 

HELD

The Tribunal heard both the parties at
length. It observed that the lease rental for a period of ten years was a
paltry sum of Rs. 25,000 per month payable by the 10th of the subsequent month
and that the lease could be renewed for a further period by the lessee as per
the said agreement. The fact that Mr. AN was a partner in MH and a tax adviser
to the corporate debtor indicated that it was a case of preferred transaction.
The fact that there was no provision for an annual increment and the extension
was only at the prerogative of the lessee, leads to the conclusion that the
transaction was a fraudulent one.

 

The Tribunal
relied on the provisions of section 65A(2)(c) of the Transfer of Property Act,
1882 which provided that no lease shall contain a covenant for ‘renewal’. It
was observed that the lease agreement of the corporate debtor with a related
party MH provided for a total rent of a sum of Rs. 25,000 per month in respect
of huge commercial property measuring about 2,310 sq. metres along with a
two-storey building structure with no increase in rental for a period of ten
years. In addition, as per the lease agreement, there was a provision for
further extension at the will of the lessee. In view of this, the lease
agreement entered into between the corporate debtor and MH was held to be
illegal as per the relevant provisions of the Transfer of Property Act, 1882.

 

Besides, the mortgage deed signed by the
corporate debtor with U Bank provided that the corporate debtor could not let
or license its interest in the said property, or part with its possession,
unless it obtained the written consent of U Bank. Since the said consent was
not obtained, the Tribunal held that the transaction of lease was invalid and mala
fide.

The NCLT observed that the attachment of the
assets of the corporate debtor by the EOW would hamper the claim of the
creditors of the corporate debtor. Thus, to protect the interest of the bank
and the present creditors, NCLT directed the EOW and other Government
Departments to release the property and assets of the corporate debtor
currently attached with them so that the CIRP of the corporate debtor could be
conducted in the substantial public interest.

 

In the context of section 238 of the Code
which has a non-obstante clause, the Tribunal relied on the decision of
the Supreme Court in the case of Solidaire India Ltd. vs. Fairgrowth
Financial Services Pvt. Ltd., wherein it was held that where two statutes
contain the non-obstante clause, the latest statute would prevail.

 

Thus, the lease agreement was held as null
and void and the attachment of assets by the EOW was directed to be released in
favour of the RP for carrying out the CIRP in the best interest of the
creditors of the corporate debtor.

 

7. American Road Technology & Solutions
(P) Ltd. vs. Central Government, Hyderabad [2020] 115 taxmann.com 16 (NCL-Beng.) Date of order: 31st December,
2019

 

Where company filed application for
revision of financial statements in F.Y. 2017-18, three preceding years for
purpose of revision of financial statements would be 2016-17, 2015-16 and
2014-15 (which was one of the years in which incorrect financial reporting had
been detected and in respect of which approval for revision had been sought),
since a true and fair picture of company’s finances would not emerge for F.Y.
2014-15 unless financial statements for 2012-13 and 2013-14 were also revised –
Application for revision of financial statements for years 2012 to 2015 was to
be allowed

 

FACTS

Company A Pvt. Ltd., the applicant, was
incorporated in the year 2012 under the Companies Act, 1956 with the Registrar
of Companies, Karnataka at Bangalore. Its business was mainly carried out in
Bangalore.

 

During the year 2014-15, the majority
shareholder was informed by one of the ex-senior employees that the affairs of
A Pvt. Ltd. are not run as per the provisions of the Companies Act and the
applicable rules and regulations, and further that there were several financial
irregularities and even falsification of accounts has taken place.

 

The majority shareholder and A Pvt. Ltd.
decided to appoint an independent auditor to conduct a forensic audit of the
company. The independent auditor submitted his investigation report. This
report was examined internally and expert views were also taken in consultation
with the independent auditor and the statutory auditor.

 

The statutory auditors had opined that A
Pvt. Ltd.’s records need improvement to ensure controls which are not
commensurate with the size of the company and the nature of its business, with
regard to execution of contracts and raising invoices.

 

The findings of
the statutory auditor were incorporated in the annual returns filed for the
financial year 2014-15 and it was noted that suspicious transactions have taken
place and falsification of accounts has been done. It was noted that the annual
returns and balance sheets for the years 2012-13, 2013-14 and 2014-15 were
filed without even reconciling the bank statements with the actual activities
of the company that have taken place during the relevant period.

 

After consideration of the independent
auditor’s report, the management had lodged various criminal proceedings. The
statutory auditor has advised A Pvt. Ltd. to move u/s 131 of the Companies Act,
2013 for the accounts to be redrafted for the period and recasting of the books
for the periods 2015-16 and 2016-17 to incorporate the changes in the opening
balances, subject to ratification by members in a general meeting. Accordingly,
the present petition was filed before the Tribunal.

 

Based on above factual matrix, the Tribunal
ordered notices to be issued to the respondents, namely, the Registrar of
Companies, the Regional Director, the Income Tax Officer concerned and the
auditor of the company.

 

The regional director (RD) submitted that
the company has filed the application u/s 131 of the Companies Act, 2013 for
revision of financial statement and board reports for the Financial Years
2012-13, 2013-14 and 2014-15. The RD raised an interesting issue that the application is not made for revision of any of
the three immediately preceding financial years but for all the earlier
years. Hence the same does not fall under the provisions of section 131
of the Act and that, too, for revision of financial statements to reflect
suspicious transactions and falsification of accounts that had taken place in
the company.

As per the Regional Director, u/s 131(2) of
Companies Act, 2013 the revisions must be confined to – (a) The correction in
respect of which the previous financial statement or report do not comply with
the provisions of section 129 or section 134; and (b) The making of any necessary
consequential alteration. He further stated that the petitioner company has
sought blanket revision of financial statements for the years 2012-13, 2013-14
and 2014-15 without actually specifying or limiting itself to any particular
entry or disclosure. Hence the petition is not maintainable. Further, the RD
reiterated that it appears that the revision of financial statements based on
alleged fraud will not fall within the ambit of section 134 of the Companies
Act, 2013.

 

HELD

The Tribunal, after considering the
objections raised by the RD, observed as under:

(i) The petition seeks approval for
voluntary revision of financial statements and board reports for the financial
years 2012-13, 2013-14 and 2014-15.

(ii) It is the contention of A Pvt. Ltd. that
this provision permits it to voluntarily revise its accounts for any three
preceding financial years, whereas the other respondents in these proceedings
have opposed this view and stated that the same is permitted only for any of
the three immediately preceding financial years and not beyond.

 

Section 131 of the Act reads as under:

Voluntary Revision of Financial
Statements or Board’s Report:

(1) If it appears to the directors of a
company that –

(a) the financial statement of the
company; or

(b) the report of the Board

do not comply with the provisions of
section 129 or section 134 they may prepare revised financial statement or a
revised report in respect of any of the
three preceding financial years after obtaining approval of the
Tribunal on an application made by the company in such form and manner as may
be prescribed and a copy of the order passed by the Tribunal shall be filed
with the Registrar…:’ (emphasis added).

 

The Tribunal observed that the petition is
filed on 22nd January, 2018 and falls within the F.Y. 2017-18.
Section 131, even going by the contention of the respondent that the words ‘in
respect of any of the three preceding financial years’ should mean
‘immediately’ preceding three financial years, then such preceding three
financial years would be 2016-17, 2015-16 and 2014-15. Thus, F.Y. 2014-15,
which is one of the years in which the incorrect financial reporting has been
detected and in respect of which approval for revision has been sought, is
squarely covered by section 131.

 

The Tribunal
further observed that when a balance sheet is drawn for a particular year, it
brings forward balances of the preceding year/s, and as such will necessarily
impact the balance sheet for the Y.E. 31st March, 2015, i.e., for
F.Y. 2014-15, and for this reason the years 2012-13 and 2013-14 will
necessarily have to be considered for revision of the accounts that are not
giving a true and fair picture of the accounts for these years, for the reasons
mentioned herein above. This accounting compulsion cannot be ignored.
Once this is made clear, the issue whether the accounts of the three F.Y.s
referred to in the petition could be revised or not in view of an
interpretation of section 131, becomes redundant and of mere academic interest.

 

In section 131
the term ‘immediately preceding’ is not used. Instead, the section speaks of ‘any
of the three preceding financial years‘.

 

In order to
determine the intent of the Legislature, it is necessary to look into the 57th
Report of the Standing Committee on Finance on the Companies Bill, 2011. The
relevant portion of the said Report of the Standing Committee is extracted
below:

 

‘The change
proposes to provide procedural requirement in respect of revision in
accounts in certain cases. The present law is silent in respect of re-opening
or re-casting of accounts. In certain cases, particularly in cases relating
to fraud, there may be need to re-open / re-cast accounts to reflect true and
fair accounts. In case of Satyam, such re-casting was ordered
by the Court. The provisions in the Bill mandate such re-opening on the order
of the Court or Tribunal. In other cases the re-opening is being permitted,
through order of Tribunal, with adequate safeguards.’ (Emphasis supplied.)

 

The Tribunal
further observed that considering that the thrust of several provisions of the
Act is either to prevent financial misdemeanour or oppression and
mismanagement, all such provisions need to be understood and interpreted in
this light.

 

Since the
instant case is prima facie that of mismanagement, misreporting and
alleged fraud, the Tribunal observed that the section has to be interpreted in
the spirit of the Act and the exercise of correcting the same cannot become a
victim of interpretation of allowable time. Such time limits can at best be considered
to be advisory and not mandatory, since the same is only a procedural
requirement, as mentioned in the Standing Committee Report.

 

Thus, the
Tribunal observed that the words ‘in respect of any of the three preceding
financial years’ have to be read as any three previous years. It
further elaborated that even otherwise, the Tribunal is competent to initiate
reopening / revision of accounts u/s 130 in cases of the kind in hand, for
which no time limit is prescribed. It cannot be the case that if an application
is made u/s 131 where the grounds are similar to section 130, the accounts
prepared incorrectly, or when the affairs are
mismanaged, the revision of accounts would be prevented by any one view on time
limitation. Hence, in view of the totality of facts and circumstances, all
three years, i.e. F.Y.s 2012-13, 2013-14 and 2014-15, would be covered for
revision, not only because of the accounting compulsion, since F.Y. 2014-15 is
in any case covered, and the earlier years’ accounts have a bearing on the
same, but also as per the provision contained in section 131 of the Act.

 

The Tribunal
accordingly held that in the facts and circumstances of the case, this is a fit
case for granting approval u/s 131 to prepare revised financial statements and
/ or revised reports in respect of the F.Y.s 2012-13, 2013-14 and 2014-15 in
the case of A Pvt. Ltd. and the same was accordingly granted.  

 

CORPORATE LAW CORNER

1.       Flat
Buyers’ Association Winter Hills-77 vs. Umang Realtech Pvt. Ltd.

Company Appeal (AT)(Ins.) No. 926 of 2019

Date of order: 4th February, 2020

 

Insolvency and Bankruptcy Code, 2016 – Reverse Corporate
Insolvency Resolution Process is to be followed in the case of real estate
companies – The CIRP initiated for one project of a real estate company is
restricted to that project alone – It does not extend to the other assets or
projects of the said company

 

FACTS

R and A were allottees in the real
estate project of U Co. They moved an application u/s 7 of the Insolvency and
Bankruptcy Code, 2016 (Code) for initiating Corporate Insolvency Resolution
Process (CIRP) against U Co. NCLT passed an order admitting the application and
directed that R and A deposit a sum of Rs. 2 lakhs with the Interim Resolution
Professional (IRP). Under the Code, it is the duty of the IRP to keep the
company a going concern which would be very difficult in the facts of the
present case where Rs. 2 lakhs would be insufficient for the said purpose.

 

The typical issue for real estate
companies stems from the fact that while homebuyers / allottees are financial
creditors, the homes / projects are often assets of the corporate debtor that
are offered as security against loans taken from banks or Non-Banking Financial
Companies (NBFCs). The assets of the corporate debtor as per the Code cannot be
distributed, they are secured for secured creditors. On the contrary, the
assets of the corporate debtor are to be transferred in favour of the allottees
/ homebuyers and not to the secured creditors such as financial institutions /
banks / NBFCs.

 

Normally, the banks / financial
institutions / NBFCs also would not like to take the flats / apartments in
lieu of the money disbursed by them. On the other hand, the
‘unsecured creditors’ have a right over the assets of the corporate debtor,
i.e., the flats / apartments which constitute the assets of the company.

The NCLAT was to examine whether
during the CIRP a resolution could be reached without approval of the
third-party resolution plan.

 

One of the promoters, UH Co, agreed
to remain outside the CIRP but intended to play the role of a lender (financial
creditor) to ensure that the CIRP reaches success and the allottees take
possession of their flats / apartments during the CIRP without any third-party
intervention. The Flat Buyers’ Association of Winter Hills-77, Gurgaon also
accepted the aforesaid proposal. ‘JM Financial Credit Solutions Ltd.’, one of
the financial institutions, has also agreed to co-operate in terms of the
agreement on the condition that they will get 30% of the amount paid by the
allottees at the time of the registration of the flats / apartments.

 

The CIRP progressed and a number of
allottees took the possession of their flats and had the sale deeds registered
in their favour. UH Co invested a certain amount as an outside financial
creditor and as promoter co-operating with the IRP. The specific details of the
project were laid out before the NCLAT and which were also endorsed by the IRP.
The claim of JM Financials was also satisfied at the time of registration of
flats.

 

HELD

NCLAT
observed that there were some aspects which were typical to real estate
companies. The decisions of the Supreme Court in the cases of Committee
of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta as
well as Pioneer Urban Land and Infrastructure Limited & Anr. vs.
Union of India were referred to. It was observed that ‘allottees’
(homebuyers) come within the meaning of ‘financial creditors’. They do not have
any expertise to assess the viability or feasibility of a corporate debtor.
They don’t have commercial wisdom like financial institutions / banks / NBFCs.
However, these allottees have been provided with voting rights for approval of
the plan. NCLAT observed that many such cases came to its notice where the
allottees were the sole financial creditors. However, it was not made clear as
to how they can assess the viability and feasibility of the ‘Resolution Plan’
or commercial aspect / functioning of the corporate debtor.

 

Further, it was observed that in a
CIRP against a real estate company if allottees (financial creditors), or
financial institutions / banks (other financial creditors), or operational
creditors of one project initiated a CIRP against the corporate debtor (the
real estate company), it is confined to the particular project. It cannot
affect any other project(s) of the same real estate company (corporate debtor)
in other places where separate plan(s) are approved by different authorities;
land and its owner(s) may be different and mainly the allottees (financial
creditors), financial institutions (financial creditors), operational creditors
are different for such separate projects. Accordingly, all the assets of the
corporate debtor are not to be maximised. CIRP should be on a project basis as
per plans approved by the Competent Authority. Any other allottees (financial
creditors), or financial institutions / banks (other financial creditors), or
operational creditors of other projects cannot file a claim before the IRP of
the other project of the corporate debtor and such claim cannot be entertained.

 

It was thus held that CIRP against a
real estate company (corporate debtor) is limited to a project as per the plan
approved by the Competent Authority and does not extend to other projects which
are separate and for which separate plans are approved.

 

Further,
a secured creditor such as a bank or financial institution, cannot be provided
with the asset (flat / apartment) in preference over the allottees (unsecured
financial creditors) for whom the project has been approved. Their claims are
to be satisfied by providing the flat / apartment. While satisfying the
allottees, one or other allottee may agree to opt for another flat / apartment
or one tower or another tower if not allotted otherwise. In such a case, their
agreements can be modified to that effect.

 

The prayer of any allottee asking
for a refund cannot be entertained in view of the decision of the Supreme Court
in the case of Pioneer Urban Land and Infrastructure Limited & Anr.
vs. Union of India & Ors. [(2019) SCC OnLine SC 1005]. However,
after offering allotment it is open to an allottee to request the IRP /
promoter, whoever is in charge, to find out a third party to purchase the said
flat / apartment and get the money back. After completion of the flats /
project or during the completion of the project, it is also open to an allottee
to reach an agreement with the promoter (not corporate debtor) for a refund of
the amount.

 

In a CIRP, NCLAT was of the view
that a ‘Reverse Corporate Insolvency Resolution Process’ could be followed in
cases of real estate infrastructure companies in the interest of the allottees
and survival of the real estate companies, and to ensure completion of projects
which provides employment to large numbers of unorganised workmen.

 

UH Co, in the facts of the present
case, was directed to co-operate with the IRP and disburse amounts (apart from
the amount already disbursed) from outside as lender (financial creditor) and
not as promoter, to ensure that the project is completed within the time frame
given by it. The flats / apartments should be completed in all aspects by 30th
June, 2020. All internal fitouts for electricity, water connection should be
completed by 30th July, 2020. The financial institutions / banks
should be paid simultaneously. Common areas such as swimming pool, clubhouse,
etc. as per the agreement be also completed by 30th August, 2020.
The allottees are allowed to form a ‘Residents’ Welfare Association’ and get it
registered to empower them to claim the common areas. Only after getting the
certificate of completion from the Interim Resolution Professional / Resolution
Professional and approval of the Adjudicating Authority (National Company Law
Tribunal), unsold flats / apartments, etc. be handed over to the promoter / UH
Co.

 

If the ‘promoter’ fails to comply with the
undertaking and fails to invest as financial creditor, or does not co-operate
with the Interim Resolution Professional / Resolution Professional, the
Adjudicating Authority (National Company Law Tribunal) will complete the
Insolvency Resolution Process.

CORPORATE LAW CORNER

10. Anand Rao Korada (Resolution
Professional) vs. Varsha Fabrics (P) Ltd. [2019] 111 taxmann.com 474 (SC) Civil Appeal Nos. 8800-8801 of 2019 Date of order: 18th November,
2019

 

Sections 14, 231 and 238 of Insolvency and
Bankruptcy Code, 2016 – High Court cannot continue with auction proceedings to
sell the assets of corporate debtor if the proceedings under the Code have been
initiated and order declaring the moratorium has been passed by the NCLT

 

FACTS

I Co held shares in H Co. Pursuant to a
share purchase agreement (SPA) dated 10th July, 2006 it sold its
entire shareholding in H Co to V Co, IF Co and M Co. H Co shut down its factory
on 8th May, 2007. Subsequently, their stake in H Co was sold to IW
Co.

 

The workers of
H Co through their union (hereinafter referred to as the Union) filed writ
petitions before the Odisha High Court for cancellation of the SPA dated 10th
July, 2006 and payment of the arrears and current salaries of the
workmen. The High Court vide order dated 14th March, 2012 directed
the Deputy Labour Commissioner to recover the workmen’s dues by sale of the
assets of H Co through a public auction. The Supreme Court in the said matter
passed an order dated 3rd August, 2015 wherein it was directed that
the issue of quantifying the compensation payable to the workmen should be
determined by the Labour Court. In the event V Co, IF Co and M Co failed to pay
the compensation so determined, the assets of H Co would be sold in a public
auction and the proceeds would be used to disburse the arrears of workmen.

 

Pursuant to an order of the High Court dated
12th January, 2017, the sale of a parcel of land of H CO was
completed and the amounts recovered compensated a portion of the total dues of
the workmen.

 

During the pendency of proceedings with the
High Court, N Co, a financial creditor of H Co, initiated corporate insolvency
resolution proceedings (CIRP) against H Co for default in payment of financial
debt. The National Company Law Tribunal (NCLT) admitted the petition and
declared a moratorium in accordance with the provisions of sections 13 and 15
of the Insolvency and Bankruptcy Code, 2016 (the Code) vide order dated 4th
June, 2019.

 

The writ petitions came up for further
hearing and orders were passed by the High Court on 14th August,
2019 and 5th September, 2019. The Resolution Professional filed a
civil appeal to challenge the interim orders of the High Court on the ground
that since CIRP were already underway, the proceedings before the High Court
ought to be stayed.

 

HELD

The Supreme Court heard the parties at
length. It examined the provisions of sections 13, 14, 231 and 238 of the Code
and observed that section 238 gave an overriding effect to the Code over all
other laws. The provisions of the Code vested exclusive jurisdiction on the
NCLT and the NCLAT to deal with all issues pertaining to the insolvency process
of a corporate debtor and the mode and manner of disposal of its assets.
Further, section 231 of the Code bars the jurisdiction of civil courts in
respect of any matter in which the adjudicating authority, i.e. the NCLT or the
NCLAT, is empowered by the Code to pass any order.

 

In view of the said provisions, it was held
that the High Court ought not to have proceeded with the auction of the
property of H Co once the proceedings under the Code had commenced and an order
declaring moratorium was passed by the NCLT. It was observed that if the assets
of H Co were alienated during the pendency of the proceedings under the Code,
it would seriously jeopardise the interest of all the stakeholders.

 

The interim orders of the High Court were
set aside by the Supreme Court and it was held that the sale or liquidation of
assets of H Co would now be governed by the Code. Further, the union was
directed to file its claim under Regulation 9 of the Insolvency and Bankruptcy
Board of India (Insolvency Resolution Process for Corporate Persons)
Regulations, 2016 for payment of arrears, salaries and other dues before the
competent authority. All the parties were granted liberty to pursue the
available remedies in accordance with law.

 

11. Omega Finvest LLP vs. Direct News (P)
Ltd. [2019] 112 taxmann.com 297 (NCLT, N.Del.) C.P. (IB) No. 1478 (PB) of 2019 Date of order: 30th September,
2019

 

Section 5 of Insolvency and Bankruptcy
Code, 2016 – Providing a place on lease for the purpose of carrying on
day-to-day activities was a supply of services – Lessor was an operational
creditor who was entitled to commence resolution proceedings when there was a
default in payment of rent

 

FACTS

D Co, a private
limited company, had entered into a lease agreement with S Co on 28th
August, 2008. S Co was demerged into O Co and O Co was converted into an LLP in
the year 2012. In order to continue the lease of the premises, the parties had
entered into a lease deed dated 13th July, 2016 for a period of
three years from 1st July, 2016 to 30th June, 2019. D Co
paid a sum of Rs. 1.25 crores to O Co pursuant to the lease deed. O Co submitted
that upon execution of the modification deed dated 14th June, 2018,
D Co issued 13 post-dated cheques for payment of rent for each month from 1st
June, 2018 to 30th June, 2019 for a sum of Rs. 21,60,000,
inclusive of the base rent of Rs. 20,00,000 along with Goods and Services Tax @
18% amounting to Rs. 3,60,000. It is claimed by O Co that cheques issued
towards payment of rent for the months of April, 2019 and May, 2019 got
dishonoured.

 

O Co furnished a demand notice dated 28th
May, 2019 to D Co u/s 8 of the Insolvency and Bankruptcy Code, 2016 (the Code).
O Co alleged that there was no reply to the notice so served.

 

D Co opposed the petition on the ground that
the debt claimed does not fall in the ambit of the definition of ‘operational
debt’ and therefore O Co was not an ‘operational creditor’. D Co further
submitted that a reply to the demand notice was communicated in due time. There
was prior communication to adjust the rent against the security deposit and
accordingly, it was alleged that there was a pre-existing dispute even before
notice u/s 8 was served.

 

HELD

The National Company Law Tribunal (NCLT)
heard both the sides at length. It examined the provisions of sections 5(20)
and 5(21) of the Code which define operational creditor and operational debt.
It was observed that in the facts of the present case, lease of premises was
for functioning of day-to-day operations and it was directly related to the
input and output of the supply of services by D Co. O Co had provided
infrastructure services to D Co for its functioning. Thus, leasing of premises
was held to be supply of services. Reliance was also placed on the report of
the Bankruptcy Law Reforms Committee dated 4th November, 2015 which
also mentions that… ‘the lessor. that an entity rents out space from is an
operational creditor to whom the entity owes monthly rent’. It was held
that O Co was an ‘operational creditor’ within the meaning of section 5(20) of
the Code.

 

NCLT perused the communication between D Co
and O Co regarding adjustment of security deposit towards rent. The request for
adjustment was not met with by O Co and it proceeded to deposit the cheques
issued and the same were returned for want of sufficient funds.

 

NCLT also examined the provisions of the
rent agreement and observed that the security deposit had an entirely different
purpose. O Co had never agreed to adjust the rent from the security deposit.
The assumption of D Co that the agreement would extend to August, 2019 was
unfounded and the submission that there was a pre-existing dispute could not be
accepted.

 

As the default
stood established, NCLT proceeded to admit the petition
for initiating corporate insolvency resolution
process against D Co and declared a moratorium over its assets. An
interim resolution professional was also appointed.

 

12. Anil Syal
vs. Sanjeev Kapoor [2020] 113
taxmann.com 52 (NCLAT) Company Appeal
(AT)(Insolvency) No. 961 of 2019 Date of order:
8th November, 2019

 

Sections 8 and 9 of the Insolvency and
Bankruptcy Code, 2016 – Dues claimed in the demand notice related to sister
concern of the corporate debtor and not the corporate debtor itself – Service
of such a notice was not valid – Application for initiating corporate
insolvency resolution proceedings was not maintainable for want of appropriate
notice

 

FACTS

A service
contract was entered into and executed between Sanjeev Kapoor, proprietor of
Kapoor Logistics (operational creditor) and Flywheel Logistics Solutions
Private Limited (corporate debtor) for running route vehicles in freight-line
haul operations between Pantnagar and Pune. Anil Syal is ex-director and
shareholder of the company Flywheel Logistics Solutions Pvt. Ltd. (corporate
debtor).

 

The operational creditor submitted that
Logistics Services were provided to the corporate debtor and pursuant to that
invoices were raised for the amount totalling Rs. 66,00,860 for the period
January, 2017 to August, 2017. Part payment of Rs. 35,68,484 was received from
the corporate debtor against the pending bills. Anil Syal stated that the balance
confirmation of Rs. 30 lakhs was admitted by the corporate debtor vide e-mail
dated 27th July, 2018. But despite repeated e-mails and reminders,
the outstanding dues were not paid by the corporate debtor. The operational
creditor claimed that a demand notice was furnished calling upon the corporate
debtor to pay the total outstanding amount of Rs. 33,69,997.

 

The corporate debtor challenged the
submission stating that the demand notice and invoices were never received and
therefore the application was not maintainable for want of a valid demand
notice. Further, it was alleged that the demand notice was furnished to a
sister concern which was a separate legal entity by the name of Flywheel
Logistics Pvt. Ltd. having a different CIN and registered address, separate and
distinct from the corporate debtor. It was also submitted that the National
Company Law Tribunal (NCLT) which passed an order for initiation of the
corporate insolvency resolution process (CIRP) against the corporate debtor did
not take into account the evidence establishing a pre-existing dispute.

 

HELD

The National Company Law Appellate Tribunal
(NCLAT) observed that invoices were issued against M/s Flywheel Logistics Pvt.
Ltd. but the demand notice was issued to Flywheel Logistics Solutions Pvt. Ltd.
being the corporate debtor. The two are different corporate entities having
different CIN numbers and registered addresses.

 

NCLAT held that the operational creditor had
no right to claim dues relating to the invoices issued against ‘M/s Flywheel
Logistics Pvt. Ltd.’ from the corporate debtor, ‘M/s Flywheel Logistics
Solutions Pvt. Ltd.’ which is a separate corporate entity, having a different
CIN number.

 

It was observed that the mandatory primary
requirement for filing a petition u/s 9 of the Code was the service of the
demand notice u/s 8 of the Code. Since the demand notices related to the dues
of another corporate entity, it could not be treated as a valid and proper
service. The order passed by NCLT was thus set aside by NCLAT. It was further
held that this order would not prejudice the right of the operational creditor
to proceed against Flywheel Logistics Pvt. Ltd.

 

13. Indiavidual Learning (P) Ltd. vs.
Registrar of Companies [2019] 112 taxmann.com 101 (NCLT-Beng.) Date of order: 10th October, 2019

 

In the Board
Report of the company filed with the ROC, certain matters were unintentionally
omitted to be reported – It could be permitted to revise the said Board Report
if the same would not prejudice the interests of the company, its shareholders
or stakeholders, or violate any provisions

 

FACTS

The Audited Financial Statements of I Pvt.
Ltd. (company), which included the Board’s Report for the financial year
2015-16, were approved by the Board of Directors. The Auditor’s Report attached
to the Financial Statements was sent to the shareholders of the company. The
same were laid before and adopted at the Annual General Meeting. The Audited
Financial Statements, together with the Board’s Report, was filed with the ROC
in due course.

 

It was brought
to the notice of the Bench that in the aforesaid Board’s
Report for the financial year 2015-16, certain matters to be covered in terms
of the provisions of section 134 of the Companies Act, 2013 were
unintentionally omitted to be reported. Those inadequacies were noticed by
the company later on, when it was reviewing the documents filed with the NCLT
in connection with a proposed reduction of share capital. It was further stated
in the petition that the inadequacies and omissions arising from non-compliance
of various applicable provisions happened purely due to inadvertence and no
part of it was prejudicial to the interests of any of the stakeholders.

 

A decision was taken at the meeting of the
Board of Directors of the company to revise the Board’s Report for the
financial year 2015-16, subject to approval of the Tribunal, and accordingly
the petition filed sought permission to revise the Board’s Report.

 

The notice of the petition was served on the
ROC concerned. Even though notice was served on the ROC and sufficient time
granted, ROC had not filed any response.

 

HELD

The proviso to section 131(1) of the
Companies Act, 2013 mandates that the Tribunal shall give notice to the
statutory authorities and it shall take into consideration the representations,
if any made by such authorities, before passing any order under this section.
Since ROC had not filed any representation on the petition, it appeared to the
Bench that it had no representation against the petition. Therefore, on the
principle of ease of doing business, it was held that orders are to be passed as
per merits of the case.

 

The inadequacies noticed in the Board’s
Report were as under:

(i)    The financial highlights of the performance
of the company in terms of Rule 5(i) of the Companies (Accounts) Rules, 2014;

(ii)   Details of subsidiaries, joint ventures or
associate companies in terms of Rule 5(iv) of the said Rules;

(iii)  Details relating to deposits in terms of Rule
5(v) of the said Rules;

(iv)  Details in respect of frauds reported by
auditors in terms of section 134(3)(ca) of the Companies Act, 2013;

(v)   Disclosures on details of the Employee Stock
Option Scheme in terms of the Companies (Share Capital and Debentures) Rules,
2014;

(vi)  The statutory auditor had made a qualification
stating that ‘no employee compensation expenses is accounted as required by
ICAI guidelines in absence of the fair value option, the impact on loss for the
year is not ascertained’. As per provisions of section 134(2)(f) of the
Companies Act, 2013, the Board was required to include in the Board’s Report
explanations or comments of the Board on every qualification, reservation or
adverse remark or disclaimer made by the Auditor in his report, if any.
However, there was an omission in this respect also since in the Board’s Report
dated 6th September, 2016 no explanation was provided for the
adverse remarks / comments of the statutory auditors in their Report;

(vii) In terms of the provisions under the Sexual
Harassment of Women at Workplace (Prevention and Prohibition and Redressal)
Act, 2013 the company had to make certain disclosures on the complaints
received, if any, under the said Act. While the company had during the F.Y.
2015-16 complied with the requirements under the said Act, a statement to that
effect was omitted in the Board’s Report; and

(viii)      In respect of the paragraph under
Directors’ Responsibility Statement in terms of section 134(3)(c) read with
section 134(5) of the Companies Act, 2013, the wording in the said paragraph
was not on the lines prescribed under the Act and, therefore, warranted a
correction.

 

On perusal of
the inadequacies of the Board’s Report as noticed and pointed out, it was
observed that they were not serious in nature and happened due to inadvertence
and if permitted to be revised as sought for, would not prejudice the interests
of the company, its shareholders, or stakeholders, or violate any provisions of
the Act. They have also declared that the company has been prompt in all annual
filings with the ROC in the past and all statutory registers and records were
maintained in accordance with the provisions of the Act. Therefore, considering
the fact that the instant petition is filed duly following the provisions of
the Act and the rules made thereunder and thus, by following the principle of
ease of doing business, the company petition is to be disposed of subject to
compliance of provisions of the applicable NCLT rules.

 

In the result, the company was permitted to
revise its Board’s Report for the financial year 2015-16 in terms of section
131(1) of the Companies Act, 2013.

 

However, it was made clear to the company
that the order would not absolve the company of any other violation(s)
committed by it and the statutory authorities were entitled to take appropriate
action in accordance with law.  

 

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: 22nd
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 21st 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 21st
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: 11th
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 27th 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 31st
March, 2015 to 31st March, 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
31st March, 2015 to 31st March, 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 31st
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.  

 

 

 

CORPORATE LAW CORNER

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

Section 9 read with Notification dated 24th
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 3rd December, 2018 to 11th 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 1st
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 (17th
January, 2020 and 3rd February, 2020), the corporate debtor chose
not to file a reply without assigning any valid reason. The matter was then
posted for hearing on 13th 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 24th March, 2020 which introduced the proviso
to section 4 of the Insolvency and Bankruptcy Code, 2016, filed a submission
before the NCLT on 13th 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: 13th 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 27th
August, 1987.

 

On 29th December, 2005, D Ltd
came out with a Rights issue which remained open till 18th January,
2006. The offer was available to all the existing shareholders as on 18th
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
25th May, 2007, for the first time the legal heirs informed that DNK
had expired on 27th August, 1987. Thereafter, by their letter dated
1st 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 26th September, 2007 in
order to be eligible for allotment of shares on Rights basis.

 

The legal heirs after the cut-off date (26th
September, 2007) for the first time vide their letter dated 16th
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 1st
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.

 


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: 19th 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 10th  April, 2008.
G Co entered into a loan agreement with Union Bank of India on 25th
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
15th May, 2017 which was admitted on 24th July, 2017. A
moratorium in terms of section 14 was also declared by this order.

 

On 12th 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 19th January,
2018. The NCLT, by its order dated 24th January, 2018, extended the
CIRP period by 90 days as permissible under the Code. On 1st
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 2nd 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 9th May, 2018 issued
by the NCLAT, the entire 55 days taken before the NCLT were excluded.

 

On 3rd 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 14th
December, 2018 (after omitting to refer to the order dated 9th 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: 13th 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 4th
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 4th 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 31st 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 31st March, 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 31st
March, 2013, 31st March, 2014 and 31st 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.

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: 11th 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 20th
August, 2007 and 20 debentures of Rs. 25 lakhs each totalling Rs. 5 crores on
20th 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 21st
May, 2007 and a Master Facility Agreement also dated 21st 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 30th 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 20th 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 18th 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 14th 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: 6th 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 11th March, 2017. In its reply dated
29th March, 2017, the company intimated the ROC that inadvertently
regulatory filings for the years ending 31st 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 7th April, 27th
April and 11th 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 31st March, 2014 and till 31st
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 11th November, 2017; the same
was further extended up to 10th 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 11th 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 31st March, 2014 and till 31st 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 31st
March, 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 29th 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 7th
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
    31st 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

 

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

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: 17th 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 9th September, 2020, directed
implementation of the approved Resolution Plan on or before the extended due
date, 30th 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 4th
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 5th 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 30th
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: 18th 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 28th
September, 2019 and the second on 4th 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 18th
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 31st December,
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: 4th 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 21st
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 24th September, 2019 and EOGM dated 4th
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 24th September, 2019 and notice of
EOGM dated 4th 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 24th September, 2019 and ousted J from
directorship in the EOGM on 4th 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 24th
September, 2019 and subsequent to this alleged AGM, an EOGM was held on 4th
January, 2020 wherein J was removed. It was pointed out that there was no
resolution nor any minutes of the alleged Board Meeting dated 22nd June,
2019 to show that the two directors of the company had decided to hold the AGM
on 24th 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 6th 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 24th
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 24th September, 2019 is non est and the
resolutions passed on that date deserved to be stayed. Further, the purported
resolution of 4th 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 26th November, 2019
was served on J. The genuineness of the alleged notice for the EOGM of 12th
December, 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 22nd 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 24th 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 5th
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 24th 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: 29th 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 31st March, 2014 to
31st 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 31st March,
2014 to 31st March, 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 31st
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.

 

 

 

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1 hour of investing / trading research

1 hour of fun

1 hour of research

1 hour maximum television

1 hour personal social media max

8 hours to make a living

8 hours of sleep

 

— Steve Burns

 

CORPORATE LAW CORNER

4. Economy Hotels India Services (P) Ltd. vs. Registrar of Companies
[2020] 119 taxmann.com 271 (NCLAT) Date of order: 24th 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 19th 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 19th
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 27th May, 2020 had observed as under:

 

‘We have perused the minutes of the Annual General Meeting of the
company held on 19th 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 19th 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 19th
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.  

CORPORATE LAW CORNER

2. R. Ajayender vs. Karvy Computershare (P)
Ltd. [2020] 119 taxmann.com 412 (NCLT – Hyd.) Date of order: 21st
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: 16th 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 22nd June 1989 over a parcel of land,
followed by two other supplementary MOU’s dated 20th November, 1989
and 22nd 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 28th February, 1990.

 

As the MOU dated 22nd 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 10th 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 10th 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 28th 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 6th 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 28th
February, 1990 till its refund in 1995. Further, default occurred on 9th
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 28th 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., 28th 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

CORPORATE LAW CORNER

1. P. Parameswaram vs. Union of India  [2020] 118 taxmann.com 113 (Delhi) Date of order: 23rd 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 22nd 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 26th
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 4th
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.

CORPORATE LAW CORNER

10. P. Suresh vs. Super Foodis Pvt. Ltd. IBA/541/2019 – NCLT Chennai Date of order: 20th 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 12th August, 2016 to 11th
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 1st March, 2019. It was submitted that
there was a loan liability of Rs. 29,95,461 due to the corporate debtor on 31st
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 19th December, 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 18th 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: 10th 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.

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 7th
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 7th 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 7th May,
2018 qua other ‘active’
companies

As held in Mukut Pathak, in all cases where the
directors have been disqualified on or after 7th 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 7th 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

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.

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.

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.

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.’

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.  

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.

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.

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.

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).

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.

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.

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.

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.

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).

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.

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)

31st
March, 2019

7th
November, 2019

18th
November, 2019

30th
September, 2019

48

31st
March, 2020

28th
May, 2021

29th
May, 2021

31st
December, 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.)

On Company
(M/s KCL)

On Managing Director

31st March, 2019

Rs.
3,00,000

Rs.
50,000

Rs.
3,50,000

31st 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.

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.

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.

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.

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

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.  

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.

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

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

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.

(c) The repetitive nature of 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

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.

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.

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

1

9985

Support services

2

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.  

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
14th November, 2016 150,000 1000 x 150
15th November, 2016 50,000 1000 x 50
24th November, 2016 200,000 1000 x 200
02nd 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 NA 10,000 10,000 5,000

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.