Corporate Law Corner Archives

Corporate Law Corner : Part A | Company Law

7 M/s Assam Company India Ltd & Ors
vs. Union of India & Ors
The Gauhati High Court
High Court of Assam, Nagaland, Mizoram and Arunachal Pradesh
Case No. : WP(C) 2572/2018
Date of Order: 07th March, 2019The expression “Shell Company” had not been defined under any law in India. Therefore, before declaring any Company as a Shell Company, a notice or an opportunity of being heard shall be given having regard to its negative implications and serious consequences. FACTS

M/s ACIL was incorporated on 15th March, 1977 having its Registered Office at Assam, involved in the business of cultivation and manufacture of tea having several tea estates in the State of Assam.

M/s ACIL learned that respondent No.2, i.e., Securities and Exchange Board of India (‘SEBI’) had initiated proceedings against M/s ACIL by instructing the Bombay Stock Exchange, National Stock Exchange and Metropolitan Stock Exchange (collectively referred to as ‘Stock Exchanges’) to restrict and/or to suspend trading of shares of M/s ACIL. Further learned that, SEBI had initiated such proceedings on the basis of a letter dated 09th June, 2017 received from Government of India by the Ministry of Corporate Affairs (‘MCA’) forwarding the database of 331 listed shell companies for initiating necessary action. In the said list of 331 shell companies, M/s ACIL was listed at Serial No.2 with the source indicated as Income Tax Department.

M/s ACIL represented before SEBI on 07th August, 2017 contending that it was an on-going company and could not be included in the list of shell companies. It was pointed out that M/s. ACIL produces 11 million KGS of tea and employs about 20 thousand workers across the Tea Estates.

According to M/s ACIL, no steps were taken by SEBI on the representation by M/s ACIL. Therefore, an appeal was filed before the Securities Appellate Tribunal (‘SAT’), Mumbai which was registered as Appeal No.196/2017. The appeal was disposed of vide order dated 21st August, 2017 by directing the stock exchanges to reverse their decision expeditiously, while granting liberty to M/s ACIL to make a representation to SEBI, which was directed to be disposed of by SEBI in accordance with the law. It was further observed that the aforesaid order of appeal would not come in the way of SEBI as well as the stock exchanges from investigating the case of M/s ACIL and to initiate proceedings if deemed fit.

In compliance with the order of the SAT, M/s ACIL submitted several representations before SEBI and also sought for copies of documents on the basis of which M/s ACIL was declared as a shell company, which were handed over by SEBI on 25th January, 2018.

According to M/s. ACIL, based on the documents handed over, it was found that the aforesaid letter dated 09th June, 2017 was received from the Serious Fraud Investigation Office of Government of India, Ministry of Corporate Affairs (SFIO). The same included the database of 124 listed companies along with a Compact Disc received from the Income Tax Department, having been identified during various search/seizures.

From the database (Compact Disc) of the letter, it appeared that M/s ACIL was shown as a company controlled by Mr VKG against whom several Income Tax Proceedings were pending. A nexus was drawn between Mr VKG and M/s ACIL through Mr SK who was one of the Independent Directors of M/s ACIL and also a Director in one of such companies controlled by Mr VKG.

M/s. ACIL contended that the mere presence of Mr. SK as an Independent Director of M/s ACIL, who was also a Director in the companies controlled by Mr VKG, cannot be construed as there being any relationship between M/s ACIL and Mr VKG. Furthermore, Mr VKG had filed an affidavit before SEBI stating that he had no association with M/s ACIL in any manner.

In the meanwhile, SEBI passed an interim order dated 08th December, 2017. By the said order trading in securities of M/s ACIL was reverted to the status as it stood prior to issuance of the letter dated 07th August, 2017. It was ordered that Stock Exchanges would appoint Independent Auditors to verify misrepresentation of finance and business of M/s ACIL as well as misuse of funds/books of accounts. Also, the Promoters and Directors of M/s ACIL were permitted only to buy securities of M/s ACIL, prohibiting them from transferring the shares held by them.

Aggrieved by the order, present writ petition was been filed by M/s ACIL seeking the relief that passing of such order by SEBI was not justified and stated that M/s ACIL cannot be treated as a Shell Company.

The expression “Shell Company” had not been defined under any law in India. Therefore, there was no statutory definition of a Shell Company, be it in fiscal statutes or in penal statues. In addition, neither the Companies Act, 1956 nor the Companies Act, 2013 defines the expression shell company. In the interim order passed on 12th July, 2018, the Court observed that in the Concise Oxford English Dictionary, 11th Revised Edition, a Shell Company had been defined as a non-trading company used as a vehicle for various financial manoeuvres.

In popular parlance, a Shell Company was understood as having only a nominal existence; it exists only on paper without having any office and employee. It may be used as a deliberate financial arrangement providing service as a tool or vehicle of others without itself having any significant assets or operations i.e., acting as a front. Popularly Shell Companies are identified as companies that are used for tax evasion or money laundering, i.e., channelising crime tainted money or proceeds of crime into the formal economy.

The Organisation for Economic Cooperation and Development (OECD) has prepared a glossary of foreign direct investment terms and definitions. In the said glossary, a Shell Company has been defined as a company which is formally registered, incorporated or otherwise legally organised in an economy, but which does not conduct any operations in that economy other than in a pass-through capacity. Shell companies tend to be conduits or holding companies and are generally included in the description of special purpose entities.

Mr AB, Assistant Professor in Law, Nirma University, Ahmedabad had carried out a study and published an article on the subject ‘Tackling the Menace of Shell Companies in India’. He had stated that there had been a spurt in economic crimes, such as, money laundering, benami transactions, tax evasion, generation of black money, round tripping of black money, etc. which not only causes revenue and foreign exchange loss to the Government, but also creates economic inequality in the society. It may compromise economic sovereignty of the State. According to him, such illegal activities are committed through the incorporation of companies which have neither any asset nor liability nor any operational businesses. These companies exist only on paper to facilitate illegal financial transactions, such as, money laundering and tax evasion. According to him, these kinds of companies are called shell companies.

However, it is no offence to be a shell company per se. A corporate entity may be set up in such a fashion with the objective of carrying out corporate activities in future. That would not make it an illegal entity. The Registrar of Companies can strike off the name of such a company from the register of companies. But, if such Shell Company is/was involved in money laundering or tax evasion or for other illegal purposes, then relevant provisions of laws under the Prevention of Money Laundering Act, 2002, Prohibition of Benami Transactions Act, 2016, Income-tax Act, 1961 and the Companies Act, 2013 would be attracted.

As per the study, SEBI had proposed to the Government of India that there should be a legal definition of Shell Company as there was no law in India which defines a Shell Company. Such definition besides giving legal clarity, would also enable the investigative agencies to carry out investigation more swiftly and in a structured manner. The Committee was of the view that all Shell Companies may not have fraudulent intention. Therefore, the expression shell company needs to be defined as having fraudulent intent as one of the characteristic features of such a company.

HELD

The Honourable Judge based on the above, deduced that though Shell Company was defined in other jurisdictions, in India there was no statutory definition of the term. However, the general perception was that with presence of shell companies there can be a potential use for such Companies for illegal activities that threatens the very economic foundation of the country and severely compromises its economic foundation and ultimately sovereignty.Thus, there was a prima facie view that since declaration of M/s ACIL as a Shell Company by itself would entail adverse consequences, M/s. ACIL should have been at least served a notice before being branded as a Shell Company. It was recorded that M/s ACIL was an old and reputed company owning 14 tea estates in the State of Assam producing 11 million KGS of tea every year and having a labour force of 20 thousand of its own. Therefore, branding such a company as a Shell Company was not justified.

Principles of natural justice would require that before such branding, M/s ACIL should have been put on notice and being provided a reasonable opportunity of hearing as to why and on what grounds it was being suspected to be a Shell Company. Only if the response was found to be not satisfactory, then such a finding could have been recorded. Besides, initiating proceedings after branding M/s ACIL as a Shell Company virtually amounted to giving a finding first and thereafter initiating a proceeding to justify the finding like a post-decisional hearing. One cannot be declared guilty first and thereafter subjected to a trial to justify or uphold finding of such guilt. The letter dated 09th June, 2017 was very clear that M/s ACIL was a Shell company and not a suspected Shell company.

Therefore, upon thorough consideration of the matter, writ petition was not only maintainable but also deserved to be allowed.

Impugned letter dated 09th June, 2017 in respect of M/s ACIL was accordingly interfered with and was set aside.

8 M/s. Oscar FX Pvt Ltd
U72900TG2014PTC094237/Telangana/152 of 2013/2023/4139 to 4141
Adjudication Order
Registrar of Companies, Hyderabad
Date of Order: 24th January, 2023.

Order under section 454 read with Section 159 of the Companies Act, 2013 for the violation of section 152(3) of the Companies Act, 2013 i.e. in case of appointment of any person as director in the company who does not have a valid director identification number (DIN) at the time of his/her appointment.

FACTS

M/s OFPL (hereinafter referred as ‘Company’) is registered in the State of Telangana on 29th May, 2014, having its registered office in Telangana. M/s OFPL had filed an application in Form GNL-1 dated 16th January, 2023 along with its officers in default under section 159 for adjudication of violation of Section 152(3) read with Section 454 of the Companies Act, 2013 (the Act) seeking necessary orders.It was submitted that erstwhile Board of Directors of the Company comprising Mr. KKP (Managing Director) and Mr. RPK (Director) at its Board Meeting held on 30th March, 2021 had appointed Ms. VBP as an Additional Director with effect from 30th March, 2021. However, Ms. VBP did not have a valid Director Identification Number (DIN) at the time of appointment to become the director on the Board of the company, which was a violation of the provisions of Section 152(3) of the Companies Act, 2013; and liable for penalty under Section 159 of the Companies Act, 2013.

It was further submitted that such appointment of Ms. VBP was unintentional and inadvertent due to lack of knowledge of provisions of the Companies Act, 2013.. Immediately upon realisation, Ms VBP, had applied to the Ministry of Corporate Affairs (“MCA”) for allotment of DIN on 15th September, 2021 and was allotted DIN on the same day by MCA. Immediately upon allotment of DIN to Ms. VBP, M/s OFPL had filed e-form DIR-12 with the Registrar of Companies dated 28th September, 2021 to give effect to her appointment as additional director. Section 152(3) of the Companies Act, 2013 states the following:

(3) No person shall be appointed as a director of a company unless he has been allotted the Director Identification Number under section 154:”

Section 159 of the Companies Act, 2013 contemplates the following:

“If any individual or director of a company makes any default in complying with any of the provisions of section 152, section 155 and section 156 such individual or director of the company shall be liable to a penalty which may extend to fifty thousand rupees and where the default is a continuing one, with a further penalty which may extend to five hundred rupee for each day after the first during which such default continues “.

HELD

After considering the submissions made in the application made by M/s OFPL and the facts of the case it is proved beyond doubt that M/s OFPL and the officers of the company have defaulted in complying the provisions under Section 155(3) of the Act. In this regard, M/s OFPL being a small company, and its officers in default (within the meaning of section 2(60) of the Companies Act, 2013) are hereby directed to pay the following penalty from their own sources.

Name of the Company	Penalty under section 159 r/w s. 446B of the Act.
	On default	On continuous default, with a further penalty which may extend to R 500 for 169 days (date of allotment of DIN).	Total penalty
Oscar FX Private Limited	Rs. 25,000/-	169 @ 100 = 16,900/-	Rs. 41,900/- (Rupees Forty-One Thousand Nine Hundred only)

Officer in Default	Penalty as per Act.
	On default	On continuous default, with a further penalty which may extend to five hundred rupees for 169 days (date of allotment of DIN).	Total penalty
Mr. KKP (MD)	Rs. 25,000/	Rs. 169 @ 100 = Rs. 16,900/-	Rs. 41,900/- (Rupees Forty-One Thousand Nine Hundred only)

It was directed that the penalty be paid within 30 days from the date of issue of the order.

shailesh.kwebmaker

Corporate Law Corner Part A : Company Law

5 M/s Herballife Healthcare Pvt Ltd

No. ROC/D/Adj/2023/defective/HerbalLife/1622-1624

Office of Registrar of Companies, Delhi & Haryana

Adjudication order
Date of Order: 21st April, 2023

Adjudication Order for penalty pursuant Rule 8(3) of the Companies (Registration Offices and Fees) Rules, 2014

FACTS

M/s HHPL was incorporated at New Delhi. Registrar of Companies, Delhi & Haryana (“RoC”) received an application from Ms. SY, Director of M/s HHPL regarding adjudication of the defect in filing of E-form DIR-11. In this regard, it was observed that as per column 4 of the E-form, date of filing of resignation from M/s HHPL, was shown as 30th November, 2016 but in resignation letter attached therewith the date of submission of resignation to M/s. HHPL was mentioned as 9th September, 2020.

RoC on examination of the document/information submitted observed that a default /non-compliance of the provisions of Rule 8(3) of the Companies (Registration Offices and Fees) Rules, 2014 had been made and there was no specific penalty under relevant rule. Thus, provisions of section 450 of the Companies Act, 2013 get attracted.

Rule 8(3) of the Companies (Registration Offices and Fees) Rules, 2014 provides that:

The authorised signatory and the professional, if any, who certify e-form shall be responsible for the correctness of the contents of e-form and correctness of the enclosures attached with the electronic form.

RoC issued a show cause notice to M/s. HHPL and Ms. SY in response to which, Ms. SY submitted a reply vide email wherein it was admitted that default has occurred due to some inadvertent typographical error.

It was noted that E-Form DIR-11 had been filed with wrong date of resignation. M/s. HHPL fulfils the requirements of a small company as defined under section 2(85) of the Companies Act, 2013. Thus, the penalty would be governed by Section 446B of the Act.

HELD

RoC, in exercise of the powers conferred vide Notification dated 24th March, 2015 and having considered the reply submitted imposed the penalty of Rs. 5,000 on the signatory for defect in e-form DIR-11 pursuant to Rule 8(3) of the Companies (Registration Offices and Fees) Rules, 2014 read with relevant provisions of the Companies Act, 2013.

6 M/s Chaitanya India Fin Credit Pvt Ltd

9/23/ADJ/SEC.161/2013/KARNATAKA/RD(SER)/2022/5496

Office of the Regional Director (South East Region)

Appeal against Adjudication order

Date of Order: 29th December, 2022

Appeal against Adjudication order under section 454 passed by the Registrar of Companies, Karnataka for default in compliance with the requirements of Section 161 of the Companies Act, 2013.

FACTS

M/s CIFCPL had appointed Mr. SB as the Managing Director and CEO of the Company (KMP) vide its Board Resolution dated 27th February, 2020 for a period of five years from 6th March, 2020. However, by inadvertence, the Board omitted to co-opt him as Additional Director before appointing as Managing Director.

As a consequence of the Board having so omitted to appoint Mr. SB as Additional Director, the approval for the appointment by the shareholders (regularisation) at the annual general meeting of the company held on 18th August, 2020 was omitted to be obtained. Consequently, Mr. SB was deemed to have vacated the office with effect from 18th August, 2020 in terms of Section 161 of the Companies Act, 2013. However, M/s. CIFCPL did not notice this omission till 18th October, 2021 and took on record the cessation of the office of Mr. SB with effect from 18th August, 2020 in its Board Meeting held on 19th October, 2021. M/s. CIFCPL had thus violated the provisions of Section 161 of the Act from 06th March, 2020 to 18th October, 2021.

Registrar of Companies, Karnataka (‘RoC’) had levied a penalty on M/s CIFCPL of Rs. 3,00,000, Mr. AR, Managing Director, Mr. SB, CEO (KMP), Mr. SCV, CFO (KMP), Ms. DS, Company Secretary, Mr. AS, CFO (KMP), Mr. AA, Additional Director and Mr. AKG, Company Secretary of amounting to Rs.1,00,000 each. M/s CIFCPL filed an appeal under section 454(5) of the Companies Act, 2013 against the adjudication order passed by the Registrar of Companies, Karnataka for default in compliance with the requirements of Section 161 of the Companies Act, 2013.

An opportunity of being heard was given on 27th October, 2022. The authorised representative Mr. SR, Practicing Company Secretary appeared and reiterated the submissions made in the application and requested to reduce the quantum of penalty as levied by RoC.

HELD

The Regional Director, after considering the submissions made by Mr. SR, facts of the case and taking into consideration the Order of Adjudication of Penalty under section 454 of the Companies Act, 2013 issued by RoC, deemed that it would meet the ends of justice if the penalty levied by the Registrar of Companies, be appropriately reduced, as a mitigation.

The order of the RoC was modified and penalty was reduced for violation of section 161 of the Companies Act 2013, as mentioned below:

Penalty imposed on	Penalty imposed by Registrar of Companies, Karnataka	Penalty imposed by the Regional Director (South East Region)
M/s CIFCPL	Rs. 3,00,000	Rs. 1,00,000
Mr. AR, Managing Director, Mr. SB, CEO (KMP), Mr. SCV, CFO (KMP), Mr. AA, Additional Director Ms. DS, Company Secretary	Rs. 1,00,000 each * 5 = Rs. 5,00,000/-	Rs. 50,000 each * 5 = Rs. 2,50,000
Mr. AS, CFO (KMP) of M/s CIFCPL	Rs. 1,00,000	Rs. 5,000
Mr. AKG, CS of M/s CIFCPL	Rs. 1,00,000	Rs. 20,000
Total Penalty	Rs. 10,00,000	Rs. 3,75,000

shailesh.kwebmaker

Corporate Law Corner Part B: Insolvency and Bankruptcy Law

9. NCLAT, Principal Bench

New Delhi

Company Appeal (AT) (Insolvency) No. 241 of 2022

Arising out of order dated 10th February, 2021 passed by the National Company Law Tribunal, Guwahati Bench, Guwahati in IA No. 32 of 2020 in C.P. (IB) No. 20/GB/2017.

1. Principal Commissioner of Income Tax,

2. Assistant Commissioner of Income Tax,

…Appellants.

vs.

M/s Assam Company India Ltd …Respondent.

FACTS

Corporate Insolvancy Resolution Process (CIRP) under Section 7 was admitted against the Assam Company/Corporate Debtor (“CD”) on 20th September, 2018. Appellants filed their claim under Form B and claimed the Income Tax for the A.Y. 2013-14 for Rs. 6,69,84,657 and A.Y. 2014-15 for Rs. 9,50,41,296 totalling Rs. 16,20,25,953 before the Resolution Professional (RP). RP via email informed that the NCLT, Guwahati Bench may consider payment of Rs. 1,97,92,084 being 15 per cent of the outstanding dues owed to the Appellants since the Respondent had filed petition for stay of demand before the AO. RP made a payment of Rs. 1,20,23,691 as a tranche payment to the Appellants and told that the rest of the amount would be contingent on the outcome of the appeal filed before the IT appellate authority.

The appellants filed an application for review of the order of the Hon’ble NCLT dated 20th September, 2018 with necessary directions to the Resolution Professional for submission of the revised resolution plan incorporating the entire amount alleged to be due to the Appellants. NCLT, in its order dated 22nd October, 2019 stated that since the RP intimated the Department that the demand after finalization of appeal by CIT(A) would be payable by the new promoter, such a written intimation of the RP is to be read with the new resolution plan and the demand of the Appellants is duly considered and they have a right to lay their claim before the new promoter of the Respondent Company. NCLT dismissed the claims of the Appellants vide its order dated 10th February, 2021.

QUESTION OF LAW

This appeal lies against the order dated 10th February, 2021 with respect to extinguishment of appellants claim. In that order, the Hon’ble NCLT, failed to take into consideration that vide its earlier order dated 22nd October, 2019 it had stated that since the RP intimated the Appellants that the demand after finalisation of appeal by CIT(A) would be payable by the new promoter, such written intimation of the RP is to be read with the new resolution plan; and the demand of the Appellants is duly considered and the Appellants have a right to lay their claim before the new promoter of the Respondent Company.

RULING IN CASE

NCLAT held that as per the judgment passed by the Hon’ble Supreme Court in the case of “State Tax Officer (1) vs. Rainbow Papers Ltd, Civil Appeal No. 1661 of 2020 dated 06th September, 2022”, the dues of the Appellants are ‘Government dues’ and they are Secured Creditors.

HELD

That the impugned order dated 10th February, 2021 passed by the Adjudicating Authority (National Company Law Tribunal, Guwahati Bench, Guwahati) in IA No. 32 of 2020 in C.P. (IB) No. 20/GB/2017 is hereby set aside and the matter is remitted back to the Adjudicating Authority (National Company Law Tribunal, Guwahati Bench, Guwahati) with a request to hear the parties (Appellants and Respondent herein) considering the aforesaid facts and also judgment passed by the Hon’ble Supreme Court in the case of ‘Rainbow Papers Ltd Case (supra)’ and pass fresh orders as expeditiously as possible.

shailesh.kwebmaker

CORPORATE LAW CORNER PART B : INSOLVENCY AND BANKRUPTCY LAW

8 Shekhar Resorts Ltd (Unit Hotel Orient Taj) vs. Union of India & Ors (CIVIL APPEAL NO.8957 OF 2022)

FACTS

The corporate debtor was engaged in the business of proving hospitality services and therefore was registered with Service Tax Department. On evasion of taxes by the Corporate Debtor, show cause notices were issued by the Service Iax Department. In interregnum, one Financial Creditor had filed an application under section 7 of the Code and vide order dated 11th September, 2018 and therefore moratorium kicked in which got over on 24th July, 2020 when plan of a resolution applicant was approved by the Adjudicating Authority. The Corporate Debtor had filed an application through Form 1 under the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 within the due date as prescribed and the application was accepted and necessary forms were issued for payment of the tax due by Designation Committee i.e. Rs. 1,24,28500. However, due to moratorium imposed under section 14 of the Code, the corporate debtor was unable to deposit the tax within the due date. When he approached the Joint Commissioner CGST, he was told that as the payment was not made within the due date, the benefit of scheme could not be availed. Aggrieved by the order, the corporate debtor approached the Allahabad High Court but the Court refused to entertain the writ as the Designation Committee was not in existence.

Question of law

a) Whether it was impossible for the corporate debtor to deposit the settlement amount due to restrictions under the IB Code and whether the corporate debtor can be punished for no fault of his?

b) Whether the High Court was right in quashing the petition on the basis of non-existence of the Designation Committee?

HELD

It was evident from the backdrop that the Corporate Debtor cannot e deposit the sum due to the operation of law in place. The Corporate Debtor was unable to make the payment due to the legal impediment and the bar to make the payment during the period of moratorium. Even if the Corporate Debtor wanted to deposit the sum before 30th June, 2020,, it would be against the provisions of the Insolvency and Bankruptcy Code because of the calm period in action. Once a moratorium is kicked in, any existing proceeding against the Corporate Debtor shall stand prohibited and it is a well-settled law that IBC shall have precedence over any inconsistent legislations. When the Form No.3 was issued under the Scheme 2019, the Corporate Debtor was subjected to the rigors of process of IBC by virtue of the moratorium. In such a scenario, the Corporate Debtor cannot be rendered remediless and should not be made to suffer due to a legal impediment which was the reason for it and/or not doing the act within the prescribed time. The Corporate Debtor could not make the payment due to legal disability and no one can be expected to do the impossible.

It was also held that the High Court shall grant relief to the Corporate Debtor when there are valid reasons or causes for his inability to make the payment. The High Court cannot extend the time period of the Scheme under section 226 of Constitution of India but it can consider extra ordinary circumstances where there is a legal disability on the part of the Corporate Debtor for the interest of justice. The Designated Committee under the Scheme had been constituted on a need basis to comply with the orders of the courts across the country and in many cases they have rejected the applications under the Scheme, 2019 erroneously.

The Apex Court is of the view that the corporate debtor cannot be remediless just because he is restrained by law. It is a pity if a person is accused wrongly when he is willing to not do that wrong thing. The orporate Debtor cannot make the payment due to legal disability and therefore, he is entitled to claim benefits under the Scheme.

shailesh.kwebmaker

CORPORATE LAW CORNER PART A : COMPANY LAW

15 Hydro Prokav Pumps India Pvt Ltd ROC/CBE/A.O./10A/9881/2022 – Office of the Registrar of Companies, Tamil Nadu-Coimbatore Adjudication order Date of Order: 10th October, 2022

Adjudication order: Penalty for violation of not attaching notes to the financial statements which is the mandatory requirement as per section 134 (7) (a) of the Companies Act, 2013.

FACTS

HPPIPL was having its registered office at Coimbatore in the state of Tamil Nadu.

HPPIPL realised that the financial statements along with the Director’s report filed with the Office of the Registrar of Companies, Tamil Nadu-Coimbatore (‘RoC’) for the financial years ended as on 31st March, 2017, 31st March, 2018, 31st March, 2019, 31st March, 2020 and 31st March, 2021 did not contain the notes to the financial statements which is a mandatory requirement as per section 134 (7) (a) of the Companies Act, 2013.

Thereafter, HPPIPL and its directors filed a suo-moto application before the office of the Registrar of Companies, (‘RoC’) for Adjudication of the penalty for violation of provisions of Section 134 of the Companies Act, 2013.

Provisions of Sub-section (7) of Section 134 of the Companies Act, 2013; 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

Further, penal provision for any default/violation of Section 134 of the Companies Act, 2013 are provided under Sub-section (8) of section 134;

that if a company is in default in complying with the provisions of this section, the company shall be liable for a penalty of ₹3 lakhs and every officer of the company who is in default shall be liable to a penalty of ₹50,000.

HELD

The Adjudication Officer was of the view that HPPIPL had defaulted in complying with provisions of Section 134 (7) (a) by not attaching/annexing the notes to the financial statements. Hence, he imposed penalty on HPPIPL and every officer of the company in default in a manner as provided under provisions of Section 134 (8) of the Companies Act, 2013 as mentioned below:

Sr. No.	Penalty imposed on	Maximum penalty imposed
1.	HPPIPL	Rs. 3,00,000
2.	Officers in default (Total 3 Officers of Company i.e. 3 Directors)	Rs. 1,50,000 (Rs. 50,000 each)
	TOTAL	Rs. 4,50,000

It was further directed that the company and its director(s) rectify the defect immediately on receipt of copy of the order.

16 Kosher Realhome Pvt Ltd ROC/D/Adj Order /defective/2022 Office of the Registrar of Companies, NCLT of Delhi & Haryana Adjudication order Date of Order: 16th November, 2022

Adjudication order: Penalty for violation of Rule 8(3) of (Registration Offices and Fees) Rules 2014 under Section 450 and 446 B of the Companies Act, 2013 for filing incorrect attachments along with e-form AOC-4 with the Registrar of Companies.

FACTS

KRPL was having its registered office at Delhi.

The Registrar of Companies, Delhi & Haryana (‘RoC’) had issued a show cause notice to the Company and its Directors stating that the financial statements attached by KRPL in E-form AOC-4 with RoC were the financial statements of “IGCPL” i.e., Transferee Company instead of financial statements of “KRPL”.

Further KRPL and its officer in default submitted their reply to the RoC admitting the fact that financial statement of “IGCPL” were attached to e-form AOC-4 instead of “KRPL.”

The following provisions were violated by the KRPL and its officer/s in default;

Rule 8 (3) of Companies (Registration Offices and Fees) Rules, 2014; The authorised signatory and the professional if any, who certify e-form shall be responsible for the correctness of its contents and the enclosures attached with the electronic form
Rule 8 (7) of Companies (Registration Offices and Fees) Rules, 2014; It shall be the sole responsibility of the person who is signing the form and professional who is certifying it to ensure that all the required attachments relevant to the form have been attached completely and legibly as per provisions of the Act and rules made thereunder to the forms or application or returns filed.

Section 450 of the Companies Act, 2013 for penal provision for any default / violation where no specific penalty is provided in the relevant section / rules;

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, any 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 Rs. 10,000 and in case of continuing contravention, with a further penalty of Rs. 1,000 for each day after the first during which the contravention continues, subject to a maximum of Rs. 2,00,000 in case of a company and Rs. 50,000 in case of an officer who is in default or any other person.

Further, KRPL being a Small Company, applicability of Section 446B of the Companies Act, 2013 provides for lesser penalties for certain companies and the relevant provision is as given below:

Section 446B – Notwithstanding anything contained in this Act, if a penalty is payable for non-compliance of any of the provisions of this Act by 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 Rs. 2,00,000.

HELD

The Adjudication Officer held that the concerned director i.e. Mr. VP was authorized by the board of directors for certifying the financial statements in e-form AOC 4 with complete and legible attachments and therefore he was liable under section 450 of the Companies Act 2013, for the in-correctness of the content of e-form AOC-4 and enclosures attached with the same pursuant to Rule 8 of the Companies (Registration Offices and Fees) Rules, 2014.

The Adjudication Officer also considered the provision of section 446 B of the Companies Act, 2013, r.w.s2(85) of the Companies Act, 2013, as the company fulfilled the requirements of the small company. Therefore, lesser penalty was levied as mentioned below:

Violation of section/rule	Penalty imposed on Company / directors	Penalty specified under section 450 of the Companies Act 2013	Penalty imposed by the Adjudicating Officer under section 454 r.w.s 446B of the Companies Act 2013
Rule 8 (3) of the Companies (Registration Offices and Fees) Rules 2014	Mr. VP, Director	Rs. 10,000	Rs. 5,000

Further it was held that Mr. VP, who was the authorized signatory shall have to make the payment of penalty individually out of his funds.

The AO order also directed Mr. VP to rectify the default immediately from the date of receipt of copy of this order.

shailesh.kwebmaker

CORPORATE LAW CORNER PART B : INSOLVENCY AND BANKRUPTCY LAW

5 Vidarbha Industries Power Limited vs.
Axis Bank Limited
Supreme Court of India Civil Appellate Jurisdiction
Civil Appeal No. 4633 of 2021

FACTS
This case is an appeal u/s 62 of the Insolvency and Bankruptcy Code 2016, against a judgment and order dated 2nd March, 2021 passed by the NCLAT, New Delhi in Company Appeal (AT) (Insolvency) No. 117 of 2021, whereby the ld. Tribunal refused to stay the proceedings initiated by the Respondent, Axis Bank Limited, against the appellant for initiation of the Corporate Insolvency Resolution Process (CIRP) u/s 7 of the IBC as the Tribunal was of the opinion that the appellant has no justification in stalling the process and seeking a stay of CIRP, which in essence has manifested in blocking the passing of the order of admission of application of the respondent u/s 7 of I&B Code.

QUESTION OF LAW
Is section 7(5)(a) of IBC a mandatory or a discretionary provision?

RULING
In this case, the Adjudicating Authority (NCLT) and the Appellate Tribunal (NCLAT) proceeded on the premise that an application must necessarily be entertained u/s 7(5)(a) of the IBC if a debt existed and the Corporate Debtor was in default of payment of debt. In other words, the Adjudicating Authority (NCLT) found Section 7(5)(a) of the IBC to be mandatory, with which the Appellate Tribunal (NCLAT) agreed since the Adjudicating Authority (NCLT) did not consider the merits of the contention of the Respondent Corporate Debtor. In other words, is the expression ‘may’ to be construed as ‘shall’, having regard to the facts and circumstances of the case?

Even though Section 7(5)(a) of the IBC may confer discretionary power on the Adjudicating Authority, such discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances warrant the exercise of discretion in a particular manner, discretion would have to be exercised in that manner.

The existence of financial debt and a default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP. The Adjudicating Authority (NCLT) was required to apply its mind to the relevant factors, including the feasibility of initiation of CIRP against an electricity generating company that operated under statutory control, the impact of MERC’s appeal pending in this Court, the order of APTEL and the overall financial health and viability of the Corporate Debtor under its existing management.

HELD
In the present case, the Supreme Court has set aside the verdicts of NCLT and NCLAT, refusing to stay the insolvency proceedings sought to be initiated by Axis Bank. The Court held that the power of the NCLT to admit an application for initiation of the CIRP by a financial creditor u/s 7(5)(a) of IBC is discretionary and not mandatory.

shailesh.kwebmaker

CORPORATE LAW CORNER

ADJUDICATION MECHANISM UNDER THE COMPANIES ACT, 2013

Adjudication mechanism is covered under the Jurisdiction of Regulator to impose penalty on the defaulting Companies and its officers for non-compliance with the provisions of the Companies Act, 2013.

The reason for the introduction of the in-house Adjudication Mechanism is to promote ease of doing business, to reduce the burden of National Company Law Tribunal (NCLT) and Special Court. Since adjudication mechanism is handled by the bureaucrats, the Central Government (CG) has delegated its power to respective Registrar of Companies (RoC) who are acting as Adjudication Officers (AO).

The provisions of Section 454 of the Companies Act, 2013 read with Companies (Adjudication of Penalties) Amendment Rules, 2019 provide for adjudication mechanism.

Companies (Amendment) Act, 2019 and 2020, has recategorized various sections/ provisions which were punishable with “Fines” with “Penalties”.

The Difference between “Fine” and “Penalty” is as under:-

Fine	Penalty
As per the definition provided in Oxford Dictionary: “Fine” is a sum of money exacted as a penalty by a court of law or other authority.	As per the definition provided in Oxford Dictionary “Penalty is “a punishment imposed for breaking a law, rule, or contract.”
Fine is the amount of the money that a court can order to pay for an offence after a successful prosecution in a matter.	Penalties do not require court proceedings and are imposed on failing to comply with a provision/s of an Act.
Where any offence is punishable with; i. “Fine or imprisonment or both” or ii. “Fine or imprisonment” iii. Only Fine are compoundable offences under Section 441 of the Companies Act, 2013 by filing application before NCLT/ RD /any officer authorised by Central Government.	Whereas offences which are Non-Compoundable offences under the Companies Act, 2013, are punishable with Penalties Hence, Adjudication Order can be issued/imposed by the Respective Registrar of Companies (RoC). An appeal against such an order can be preferred before office of the Respective Regional Director (RD).

Fine

Penalty

As per the definition
provided in Oxford Dictionary: “Fine” is a sum of money exacted as a
penalty by a court of law or other authority.

As per the definition
provided in Oxford Dictionary “Penalty is “a punishment imposed for
breaking a law, rule, or contract.”

Fine is the amount of
the money that a court can order to pay for an offence after a successful
prosecution in a matter.

Penalties do not
require court proceedings and are imposed on failing to comply with a
provision/s of an Act.

Where any offence is punishable
with;

i. “Fine or imprisonment or both”
or

ii. “Fine or imprisonment”

iii. Only Fine

are compoundable offences under
Section 441 of the Companies Act, 2013 by
filing application before NCLT/ RD /any officer authorised by Central
Government.

Whereas offences
which are Non-Compoundable offences under the Companies Act, 2013, are
punishable with Penalties

Hence, Adjudication Order can be
issued/imposed by the Respective
Registrar of Companies (RoC).

An appeal against such an order
can be preferred before office of the Respective Regional Director (RD).

Hence, for various non-compliances, a Company may need not go to NCLT with compounding applications and can settle such offences through an in-house mechanism, where a penalty could be levied on violations of the provisions of the Companies Act, 2013.

If one has a look at the recent Adjudication Orders passed by various offices of Registrar of Companies (RoC), one will observe and experience that massive Penalties are levied even on Private Limited Companies. Hence, it is very useful to circulate such orders amongst our esteemed readers, especially amongst professionals and small and medium-sized firms who will be well equipped to advise their clients regarding such matters.

Accordingly, we intend to cover Adjudication Orders on a regular basis henceforth.

PART A | COMPANY LAW

5 Central Cottage Industries Corporation of India Limited RoC Adjudication Order ROC/D/ADJ/92&137/Central Cottage/185 Date of Order: 13th January, 2022

RoC, Delhi order for violation of Section 92 (4) (Annual Return e-form MGT-7) & 137(3) (e-form AOC-4 XBRL) of Companies Act, 2013

FACTS
M/s CCICIL is a Government Company incorporated under the relevant provisions of the Companies Act, 1956 ( The Act).

M/s CCICIL, along with its Managing Director (MD) and Company Secretary (CS) had suo-moto filed application vide e-form GNL-1 for adjudication of penalty under the provisions of Section 454 of the Act and rules thereunder and stated therein inter alia that:

a. M/s CCICIL could not file its e-form AOC-4 XBRL (Financial Statements) and e-form MGT-7 (Annual Return) for the Financial Year ended on 31st March, 2020 as its Annual General Meeting could not be held in time.

b. After holding the Annual General Meeting on 16th June, 2021, M/s CCICIL had filed e-form MGT-7 (Annual Return) for the Financial Year ended 31st March, 2020 on 28th June, 2021 and e-form AOC-4 XBRL (Financial Statement) for the Financial Year ended 31st March, 2020 on 20th July, 2021 and made good the default.

c. M/s CCICIL had prayed to pass an order for adjudicating the penalty for such violations of the provisions of the Sections 92 & 137 of the Act.

d. M/s CCICIL had complied with the provisions of Section 92(4) and 137(1) of the Act by filing its due annual return and financial statement for the Financial Year 2019-20 on 28th June, 2021 and 20th July, 2021 respectively as stated above.

e. Since the proviso in sub-section (3) of Section 454 of the Act had been inserted by the Companies (Amendment) Act, 2020 which had come into force w.e.f. 22nd January, 2021, the Authorized Representative contended that no penalty for such violation of Sections 92(4) & 137(1) of the Act should be imposed on the applicants and all proceedings under this section in respect of such default shall be deemed to be concluded.

HELD
Adjudicating Office took into consideration the insertion of proviso of sub-section (3) of Section 454 of the Companies Act, 2013 which inter alia provides that no penalty shall be imposed in this regard and all proceedings under this section in respect of such default shall be deemed to be concluded in case the default relates to non-compliance of sub-section (4) of Section 92 and sub-section (1) of Section 137 of the Act and such default has already been rectified either prior to, or within thirty days of the issue of the notice by the adjudicating officer.

a) In this case, M/s CCICIL and its Director(s) had suo-moto filed an application for adjudication of penalties under section 454 of the Companies Act, 2013 on 23rd November, 2021. Accordingly, in the interest of natural justice, a reasonable opportunity of being heard under section 454(4) of the Companies Act had been given to the M/s CCICIL before passing the relevant order under section 454(5) of the Act taking into consideration the amendment by the Companies (Amendment) Act, 2020 No. 29 of 2020 in Companies Act, 2013 which was inserted and, later on, came into force w.e.f. 22nd January, 2021 vide Notification No. 1/3/2020-CL.I dated 22nd January, 2021.

b) In exercise of the powers conferred on the Adjudication Officer vide Notification dated 24th March, 2015 and after considering the facts and circumstances of the case besides oral submissions made by the representative of applicants at the time of the hearing and after taking into account the factors mentioned in the relevant Rules followed by amendments in Section 454(3) of the Companies Act, 2013, Adjudication Officer was of the opinion that no penalty shall be imposed for the default which relates to non-compliance of Section 92(4) & 137 of the Act as the said default had been rectified by filing the annual return and financial statement for the financial year 2019-20 on 28nd June, 2021 and 20th July, 2021, repectively, i.e. prior to the issue of notice by adjudicating officer.

c) The order was passed in terms of the provisions of sub-rule (9) of Rule 3 of Companies (Adjudication of Penalties) Rules, 2014 as amended by Companies (Adjudication of Penalties), Amendment Rules, 2019.

6 Tangenttech Infosoft Private Limited RoC Adjudication Order No. RoC-GJ/ADJ. ORDER-2/ Tangenttech/ Section 12(3)(c)/ 201-22 Registrar of Companies, Gujarat, Dadra & Nagar Haveli Date of Order: 6th April, 2022

RoC, Gujarat, Dadra & Nagar Haveli order for violation of Section 12(3)(c) of Companies Act, 2013 – Not mentioning CIN and Registered Office Address on its Letterhead

FACTS
a) Company had filed a certified true copy of Board’s resolution dated 28th December, 2017 as well as letter dated 28th December, 2017 addressed to M/s Himanshu Patel and Company. The said documents were attached with ADT-1 filed on 1st January, 2018 on the MCA21 portal. It was further observed that the company has not mentioned CIN and Registered Office Address on its Letter Head as required under the provisions of Section 12(3)(c) of the companies Act, 2013, which is a violation attracting penal provisions of Section 12(8) of the Companies Act, 2013.

b) Similarly, it was also observed that CIN & Registered Office address of the company have been not mentioned on letter dated 23rd February, 2021, attached with ADT-2 filed on 24th February, 2021 on the MCA, 2l portal.

c) The Ld. Regional Director, NWR, Ahmedabad vide order dated 5th October, 2021 had issued direction to ROC, Ahmedabad to take necessary action and submit action taken report.

d) An adjudication notice was issued to the Company and its officers for aforementioned violations.

e) In reply and at the time of personal hearing company submitted as under :

“Company is an abiding corporate body and has no motive to disregard any of the compliances. The absence of the CIN and Registered office Address was absolutely unintentional and due to the mistake done by one of employee of the company while scanning the document. ClN and Registered address of the company was mentioned on the letter head but while scanning the documents employee hastily did not take that part which created misinterpretation of that letter.”

The authorised representative further submitted that the “company has also filed various documents to Registrar of Companies (ROC) where company has also mentioned CIN and registered office address as required for Section 12(1) of the Companies Act, 2013.”

It was further requested that before passing any adjudication order, the authorities may take into consideration financial position etc. as the company had incurred heavy financial losses and also the Company’s business suffered due to Covid-19 outbreak and lockdown around the country during the financial year 2020-21.

f) It was further observed that MGT-7 was filed on 23rd October, 2019, Company had mentioned CIN and Registered Office Address on the Shareholders’ List attached thereto. Thus, it revealed that the Company has failed to comply with the relevant provisions occasionally.

HELD
a) It was observed from the Balance Sheet of the Company as at 31st March, 2021, that the paid-up capital of the Company was Rs 1 Lakh and Turnover was Rs 95.68 Lakhs. Hence, Company was a small Company. Therefore, the provisions of imposing lesser penalty as per the provisions of Section 446B of the Companies Act, 2013 apply to the company.

b) Considering the facts and circumstances, submissions made and further considering number of defaults, a Penalty of an amount of Rs 6000 was imposed on Company and its Directors. (Penalty of Rs 1000 on Company and Rs 1000 on each of 5 directors)

c) Company was directed to pay the penalty within 90 days of the receipt of the order.

FEW NOTES:
1. Appeal lies against the order and is required to be filed within 60 days from the date of receipt of the order.

2. If penalty is not paid within 90 days from the date of receipt of the order, Company shall be punishable with fine which shall not be less than Rs 25000 but may extend to Rs 5,00,000.

3. If officer in default does not pay penalty within 90 days from the receipt of the order, such officer shall be punishable with imprisonment which may extend to 6 months or with a fine which shall not be less than Rs 25000 but may extend to Rs 1,00,000 or with both.

4. Non-Compliance of the order including non-payment of penalty entails prosecution under section454(8) of the Companies Act, 2013.

PART B | INSOLVENCY AND BANKRUPTCY LAW

4 Vallal RCK vs. M/s Siva Industries and Holdings Ltd and others Civil Appeal Nos. 1811-1812 of 2022 Date of Order: 3rd June, 2022

FACTS
In relation to the Corporate Debtor, IDBI Bank Ltd submitted an application under section 7 of the IBC to initiate CIRP. The NCLT granted the application on 4th July, 2019. M/s Royal Partners Investment Fund Ltd had submitted a Resolution Plan to the RP, which was approved by the CoC. The stated plan, however, could not be accepted because it obtained just 60.90% of the CoC’s votes, falling short of the required 66%. On 8th May, 2020, the RP filed an application under Section 33(1)(a) of the IBC, requesting that the Corporate Debtor’s liquidation procedure be started. The promoter of the Corporate Debtor, the appellant, submitted a settlement application with the NCLT under Section 60(5) of the IBC, indicating his willingness to offer a onetime settlement plan. The RP filed an application before the learned NCLT seeking required directions based on the request of IARCL (one of the Financial Creditors, namely International Assets Reconstruction Co. Ltd. (“IARCL”), which has a voting share of 23.60% and opted to adopt the aforementioned Settlement Plan). The NCLT rejected the application for withdrawal of CIRP and adoption of the Settlement Plan in an order dated 12th August, 2021, holding that the aforementioned Settlement Plan was not a settlement simpliciter under Section 12A of the IBC but a “Business Restructuring Plan.” The NCLT began the liquidation procedure of the Corporate Debtor as well, pursuant to another ruling dated the same day. As a result of this, the appellant filed two appeals with the learned NCLAT. The same was dismissed pursuant to the common impugned judgment dated 28th January, 2022.

ISSUE RAISED
Whether AA/Appellate Authority can sit in appeal over commercial wisdom of CoC? When 90% or more of the creditors, after careful consideration, determine that allowing settlement and withdrawing CIRP is in the best interests of all stakeholders, the adjudicating authority or the appellate authority cannot sit in an appeal over CoC’s commercial wisdom. This Court has consistently concluded that the CoC’s commercial judgment has been given precedence over any judicial involvement in ensuring that the stipulated processes are completed within the IBC’s timeframes. The premise that financial creditors are adequately informed about the viability of the corporate debtor and the feasibility of the proposed resolution plan has been upheld. They act based on a thorough review and assessment of the suggested settlement plan by their team of experts. Only where the adjudicating authority or the appellate authority judges the CoC’s judgement to be entirely capricious, arbitrary, irrational, and in violation of the statute or the Rules would interference be justified.

HELD
In this case, the CoC made its decision after deliberating over the benefits and drawbacks of the Settlement Plan and using their commercial judgment. The Court is of the considered opinion that neither the learned NCLT nor the learned NCLAT were justified in not assigning due weight to CoC’s commercial wisdom, according to the Court. The Court has often highlighted the importance of minimal judicial interference by the NCLAT and NCLT in the context of the IBC. The Court allowed the appeals, the NCLAT’s challenged judgment of 28th January, 2022, and the NCLT’s directives of 12th August, 2021, are quashed and set aside and the Resolution Professional’s application to withdraw CIRP before the learned NCLT was granted.

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Buy Back of Shares by Private and Public unlisted Companies under the Companies Act, 2013

This artice is intended as a basis for understanding the provisions in brief and does not claim to be a critical analysis of the provisions – Editorial Note.

1. What is Buy Back?

A share of an incorporated company is a property transferable between people entitled to hold the same, by following a set of procedures. Shares are of different types – Equity, Preference, Convertible, quasi debt, having differential voting rights, etc. These shares when issued provide a bundle of rights to the Subscriber, Purchaser or Registered Holder of shares as the case may be. These rights include, right to receive dividend, right to participate in the decision making of the Company to the extent permitted by Law.

Buy back is a term specifically used when shares are repurchased by the issuing Company. Buy back reduces the number of shares outstanding; it increases earnings per share and tends to increase the market value of the remaining shares.

2. What are the statutory provisions related to buy back of shares?

The provision related to buy back were introduced in the Companies Act, 1956 u/s. 77A, 77AA and 77B vide Companies (Amendment) Act, 1999 with retrospective effect from 31-10-1998. These provisions have been incorporated in the Companies Act, 2013 effective from 1st April, 2014 in sections 68, 69 and 70. Apart from the said sections 68 to 70 which provide for pre-conditions, limits, prohibitions and post buy- back compliance, Rule 17 of the Companies (Share Capital and Debentures) Rules 2014 mandates the procedure to be followed to carry out buy-back of shares.

3. What are the broad conditions of the Act on buy-back?

Any company undertaking a buy-back has to have its compliance up-to-date. Mainly such compliance falls in two categories (i) pre-conditions facilitating buy-back and; (ii) conditions on the basis of which buy-back is actually carried out. These conditions are like pre-operative check-up :

(i) pre-conditions facilitating buy-back:

i) Express provision in the Articles of Association of the Company empowering buy-back. It is well known fact that provisions of the Act override the provisions of Memorandum of Association- MoA and Articles of Association-AoA (section 6 of the Companies Act, 2013), but wherever the Act requires a specific provision in the Company’s constitutional document i.e. MoA AoA, it is necessary that the Company’s AOA should contain the same. It is therefore advisable that the Company should check that its AoA contains clear provision for buying back its securities. In the event the buy-back is not authorised by the Articles, steps should be taken to amend the same. A simple provision in the Articles which merely states “the Company may be subject to following requisite procedure of law can buy-back its securities” is sufficient empowerment for the Company to initiate buy-back.

ii) Up-to-date submission of returns with Registrar: The Company should check that all its returns mandatorily required to be filed every year i.e. Annual Accounts, Auditors report with Directors Report and other enclosure and Annual Returns have been submitted. With 100% e-filing of MCA returns, it is easy for the Registrar to check at a click of a mouse about e-filing position of every Company. Therefore, if the Registrar flags this matter as pending, the process of buy-back will be in question.

iii) Strict compliance with the provisions of the Act related to acceptance of deposits and repayment of Loans taken from Bank and Financial Institutions: The Company should ensure that it has adhered to the strict compliance related to acceptance of deposits as envisaged in section 73 to 76 (as applicable) and Companies (Acceptance of Deposits) Rules 2014. Any violation pertaining thereto or any default in respect of payment of interest on deposits or debentures or default in redemption of principal amount or any default in repayment of installment of loan or interest thereon will be termed as violation of the provisions of the Act and such Company will not be allowed to undertake buy-back.

Though the Act provides for prohibition of buy-back by Companies who have defaulted in repayment of loan or interest thereon, it will have to be viewed on a case-to-case basis. In case of a Company availing cash credit and overdraft facility, it is not a term loan or there is no default which can be linked, unless the Company has no turnover or is unable to, in time, convert its debtors into cash.

iv) Compliance with the provisions related to declaration and payment of dividend: The Company undertaking buy-back should ensure that, it has complied with conditions for issue of dividend and has not violated the timeline for issuing dividend payment instruments. In case of a question raised by any shareholder entitled for dividend about non-receipt of dividend, the Company should be in a position to prove beyond doubt that, it has adhered to the procedure u/s. 123 and 127 read with Rules pertaining to declaration and payment of dividend.

v) Adherence to provisions related to Financial Statement as provided in section 129 of the Act: The Company should ensure that provisions related to Financial Statements, disclosure requirements, approval and adoption thereof by the Board and the Members at AGM, disclosure about subsidiary, associate and joint venture Companies as applicable are adhered to, before commencing buy-back.

In our view, adherence to the compliance of this section is possible when a Company maintain its accounts according to standards set by ICAI and that there are no material adverse comments by the Auditors in its report.

vi) Indirect buy-back: The Company undertaking buy-back should not carry out the same though its’ subsidiary and/or through investment Company or group of investment companies.

According to one view, the condition of Company buying-back its shares through its subsidiary is not possible now in view of the provisions of section 19, which prohibits a subsidiary Company from holding shares of its Holding Company.

(ii) Conditions on the basis of which buy-back is actually carried out. After the Company has confirmed that it complies with all pre-conditions empowering itself for undertaking a buy back, the following aspects should be ensured by the Company;

Authorisation by the members in the General Meeting by way of special resolution for carrying out buy-back with complete details of shares to be bought back and other aspects as mentioned in Rule 17 of the Cos (Share capital & Debentures) Rules 2014.
Shares to be bought back should be fully paid up;
No further issue of shares by the Company whether by way of rights issue, preferential issue or bonus shares after getting authorisation for buy-back from members, till the issue process is complete. However, any quasi–debts instrument issued by the Company, which are convertible into equity are exempt from this condition. Thus, conversion by third party on the basis of pre-granted rights is possible.
Shares to be bought back can be from:

(i) existing shareholders or security holders on a proportionate basis;
(ii) from open market;
(iii) securities issued under Employee Stock Option Scheme/Plan (ESOS/ESOP) or sweat equity

Funding for buy-back can be made from any one or combination of following sources:

a) Free reserves;
b) Balance in securities premium account; or
c) Proceeds of the issue of any shares or other specified securities.

However, the Company cannot issue shares for buying back shares of same type or issue specified securities for buying-back the same type of securities

4. What are the limits on buy-back of shares by the Company?

The Company buying back its shares has two options;

a) Buy-back on the basis of only resolution of the Board:- A buy-back on the basis of Board Resolution can be upto 10% of the paid up capital and free reserves;

b) Buy-back on the basis of Members’ Special resolution : A buy-back on the basis of Members ‘special resolution can be upto 25% of the paid up capital and free reserves.

5. Gist of other terms and conditions for buyback. A Company undertaking a buy-back has to keep in mind the following terms and conditions:

Every buy-back authorised by the Members or Board shall be completed within a period of one year from the date of passing the relevant resolution;
Once the offer of buy-back is announced to the shareholders, the same cannot be withdrawn;
A minimum period of one year should have elapsed from the closure date of previous buyback and date of offer of present buy-back;
The debt to equity ratio of a Company post buyback should not be more than 2:1; or such other ratio as may be prescribed by the Govt. for that class of Companies; It is to be noted here that debt includes secured and unsecured debts;
If the Company has used its free reserves or securities premium account for funding buyback consideration, then a sum equal to nominal value of the shares so purchased is required to be transferred to the capital redemption reserve account;
Company buying back its shares is required to make complete disclosure of information in the Explanatory statement issued to members and is required to follow process and documentation as provided in rule 17 of the Companies (Share Capital and Debentures) Rules 2014;

6. What is Letter of Offer (L of O) and Compliance related thereto?

Letter of Offer is a document which is issued to shareholders disclosing all information about buy-back process, schedule and mandatory information which will help the shareholder to take a decision on exercising his buy-back option. The Company is required to electronically file this document with the RoC in format SH-8, before offer opens for shareholders. The Letter of Offer shall be dispatched to all shareholders immediately after the same is filed with the RoC but not later than 21 days of filing.

7. What are the other obligations on the Part of Company once Letter of Offer is filed with RoC?

Once the Letter of Offer is filed with the Registrar, it is information in the public domain and the Company has to adhere to disclosures made therein to complete the process of buy-back. Broad obligations of the Company are as follows;

(i) Keep open offer for buy-back for minimum period 15 days but not more than 30 days from the date of dispatch of Letter of Offer to shareholders;

(ii) Verification of details of shareholders on the basis of KYC data to be completed by the Company within fifteen days. If Company wishes to communicate the rejection of shares offered, the same should be communicated with 21 days of closure of offer. This also means that in case of pro-rata buy-back the Company is required to communicate to the shareholder accordingly.

(iii) Separate Bank account to be opened for depositing total consideration payable to all shareholders whose offer has been accepted.

8. What is the post buy-back closure compliance?

(i) The Company shall destroy securities certificate/ share certificates for the securities bought back or where the securities are in a dematerialised form, it should place a request through Depository for cancellation for the same. The company should keep record of securities destroyed in Register in form SH-10

(ii) File Return of Buy-back in Form SH-11 along with Certificate signed by 2 Directors confirming compliance with the provisions of Act and Rules pertaining to buy back in Form SH-15

shailesh.kwebmaker

Practical aspects of acceptance of deposits by Private Companies and Non-Eligible Companies1 – Part-II

In this Article, we will deal with testing a few transactions, as to whether they fall in the category of deposits, Compliance aspects of post-acceptance of deposits, penal provisions in case of violation of the provisions of Companies Act 2013 (”the Act”) and Companies (Acceptance of Deposits) Rules 2014 (“the Rules”)

1. In respect of the following transactions entered by the Company, whether the amount received can be termed as a Deposit?

a) Amount received from Foreign Company, Body Corporate, Foreign Citizen, and Foreign Collaborators in the course of business transactions;

Ans: Before one can take a shelter of any exemption available under Rule 2 (1) (c) of the Companies (Acceptance of Deposits) Rules 2014, the purpose of the transaction needs to be understood. Although in terms of Rule 2 (1) (c) (ii) of the Rules any amount received from Foreign Company, Body Corporate, Foreign Citizen, and Foreign Collaborators inter-alia is exempt from definition of deposit and thus will fall outside the purview of section 73 -76 of the Act; the amount received as a loan from a Director who is a foreign citizen will not be exempt as a deposits if brought without prior approval of Reserve Bank of India (RBI). Thus loan received from Director who is a foreign citizen out of funds maintained in the account outside India or out of funds in NR(E) or FCNR Account maintained in India without RBI approval will be termed as deposit.

b) Amount received as subscription money for allotment of securities

Ans: A Company allotting securities will have to follow the procedure for allotment of securities as envisaged in section 62 (1) or section 42 read with applicable Rules. In case the Company fails to make allotment of securities within 60 days of receipt of money the amount received will be treated as deposit and the Company will have to refund the amount within 15 days of the permissible period of 60 days to the person who has paid such subscription money. It may not thus be possible in future to keep loan or deposit from an outsider as a deposit on the ground that the shares were intended to be allotted to him.

c) Amount received from Relative of Director

Ans: Amount received from a relative of Director will be exempt in terms of recently amended2 provisions of Rule 2 (1) (c) (viii) provided the relative gives a declaration that the amount given to Company is from his own sources and not borrowed from any other source. Thus the Company’s ability to gather financial resources from close sources has increased multifold, since the amount received from following person defined as relative (Section 2 (77) of Act3) will not be treated as deposit from now:

(i) M embers of a Hindu Undivided Family of a Director (HUF);
(ii) Spouse of Director;
(iii) Father including step father;
(iv) Mother including step mother;
(v) Son, including step son;
(vi) Son’s wife
(vii) Daughter
(viii) Daughter’s Husband;
(ix) Brother including step brother;
(x) Sister including step sister;

2. What is a “ Circular and Circular in form of Advertisement (CoFA )” in terms of deposit Rules

Rule 4 of Companies (Acceptance of Deposits) Rules 2014 provides for Circular and Circular in the form of Advertisement. A Private Company, Non-Eligible Company or Eligible Company4 intending to accept a deposit is required to issue a document disclosing various details as prescribed in Form DPT-1 of the Rules. The main difference is in the mode of placing this information in public domain before issue, which is as follows:

1) Private Companies and Non-Eligible Companies issue circular since they can accept deposits only from Members and thus the circular issued, has a limited sphere of application.

2) Eligible Company who can accept deposits from outsiders (not necessarily its Members) will have to issue Circular in the form of an Advertisement in English language and vernacular language newspaper having wide circulation in the state where Company’s registered Office is situated;

Thus what is Circular in DPT-1 for a Private Company; Non-Eligible Company is a Circular in form of Advertisement in case of Eligible Company

3. Is it necessary to file the Circular/Circular in form of Advertisement with the Registrar and what is the validity thereof

The Circular/Circular in Form of Advertisement (CoFA) is required to be filed with the Registrar of Companies having jurisdiction over the Registered Office of the Company 30 days before the date of its issue to members or release in the newspaper as the case may be. Every Circular or CoFA shall remain valid till:

1) Six months from the date when Company’s financial year ends; or

2) Date of AGM when Accounts are adopted by the Members; or

3) Last date by which AGM should have been held in case the same is not held; Whichever is earlier

In every Financial Year, the Company shall issue a fresh Circular/or fresh CoFA for facilitating acceptance deposit.

4. What are the post acceptance compliances in respect of Deposits as prescribed by Deposit Rules 2014

Following are the post acceptance compliance in respect Private Companies/Non-Eligible Companies and Eligible Companies.

a) Rule 5 (1) (2) of the Rules requires that every Company including Private Company shall enter into a contract, 30 days before the date of issue of Circular or CoFA with a Deposit Insurance Service Provider for securing re-payment of deposits in case of default in re-payment by the Company. Sub- Rule (3) provides that cost of premium should be borne by the Company, and its burden should not be passed on to depositors; Sub-Rule (4) provides for penal interest payment liability on the part of Company in case of failure of Company to renew/ default in compliance with terms of contract for availing deposit insurance services and repayment of deposit in case of continuing non-compliance with terms of contract;

b) Rule 6 (1) of the Rules provides for creation of security in the form of charge on the tangible assets mentioned in Sch III of the Act for due repayment principal amount and interest thereon. At any given point of time, the value of assets charged shall not be less than the amount not covered by deposit insurance as mentioned in Rule 5; Further the amount of deposits shall not exceed the market value of assets charged as security, based on valuation made by the registered valuer. Effectively all deposits should be secured by way of either deposit insurance or by way of charge on the assets of the Company;

c) R ule 7, 8 and 9 provide for appointment of Trustee for Depositors, Duties of Trustees and Meeting of Depositors. If the Company is accepting only unsecured deposits, then appointment of Trustee is not mandatory

d) Rule 10, 11,12 14 provide for form of application for deposits; Power of depositor to nominate person in case of death of depositor; obligation of Company to provide deposit receipts and Maintenance of Register of Deposits;

e) Rule 13 provides for creation of Deposit Repayment Reserve Account and maintenance of Liquid Assets. According to this Rule, every Company shall on or before 30th April of every year, deposit an amount not less than 15% of the deposits maturing during the financial year and the financial year next following, in a separate Bank account opened with schedule bank. The amount so deposited shall always remain at least 15% of the total amount of deposits maturing during the financial year and the financial year next following

f) Rule 15-21 deals with following aspects:

(i) General provisions regarding pre-mature repayment – Rule 15
(ii) Compliance pertaining to filing of Return with Registrar of Companies – Rule 16
(iii) Penal rate of interest payable to depositor in case of overdue deposits – Rule 17
(iv) Power of Central Govt – Rule 18

(v) Applicability of section 73-74 to eligible companies – Rule 19

5. What are the Penal Provisions of the Companies Act 2013 and Companies (Acceptance of Deposits) Rules 2014?

The Companies (Amendment) Act 2015 vide section 76A has provided that, in case of violation of provisions of section 73-76 or Rules made thereunder or deposits accepted in violation of the said section or default made in repayment of the same, the Company shall be liable for the following:

(a) Repayment of entire amount of deposit, including interest remaining unpaid to the depositors; and

(b) Fine which shall not be less than Rs. 1 crore but which may extend upto Rs. 10 crore

Every Officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than Rs. 25 lakh but which may extend to Rs. 2 crore, or with both.

In case of violation of the provisions of the Companies (Acceptance of Deposits) Rules 2014 the penalties are as follows:

(a) Rule 5 (4) default in complying with terms & conditions of contract for maintaining deposit insurance cover or failure to correct the non-compliance in given time – all deposits covered under the Insurance Scheme including interest payable thereon becomes due for repayment;

(b) Failure to make repayment of such deposits as stated in (a) above, the Company shall be liable for penal interest @ 15 % p.a. for the period of delay and penalty u/s. 76A shall be attracted;

(c) Rule 17 provides for payment of interest @ 18% p.a. as penal interest in case of overdue deposits which are matured, claimed but unpaid;

(d) Rule 21 of provides that in absence of provision of any specific penalty Company and every officer in default shall be punishable with fine which may extend to Rs. 5,000/- and where the contravention is continuing one with a further fine of Rs. 500/-for every day after the first during which the contravention continues.

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Practical aspects of acceptance of deposits by Private Companies and Non-Eligible Companies

This article is divided into two Parts. This Part deals with conditions and restrictions on Private Companies and Non-Eligible Companies while accepting deposits from its Members. The subsequent later part will deal in acceptance of deposits by “Eligible Companies” compliance thereof and peculiar cases.

Background:
Every business requires funds, and all funds cannot be owned funds. Borrowing is an essential aspect of any business and debt servicing cost is a very common factor in any Company’s financial statements. A Company which is able to borrow, and is regular in servicing its debt with residual profits in its hand, can be said to be in good financial health. All forms of businesses, whether a Proprietorship or Partnership, borrow money, but the quantum of borrowing will always depend on the ability of the business to provide security for the money borrowed. In a corporate form of organisation, a deposit2 accepted by the Company is a way of borrowing money which is basically unsecured in nature. It is also an area where most violations, technical or otherwise, occur. In the following paragraphs, we have tried to answer questions pertaining to regulations on acceptance of deposits and related compliance.

1) What is a Deposit?

Section 73 of the Companies Act 2013 (Referred to hereinafter as the “Act”) has used the word Deposit but the same has been explained in Rule 2 (1) (c) of the Companies (Acceptance of Deposits) Rules 2014. (Referred hereinafter to as the “Rules”). According to the definition in the said Rule, “Deposits” includes any receipt of money by way of deposit or loan, or in any other form by a Company. From this inclusive definition it appears that, to tag any receipt of money as “deposit” the real intention of parties, the Company and person making deposit has to be ascertained. For better clarity, it is always advisable to have this understanding documented and signed as this will provide strong defence in case of objections or doubts raised in respect of such transactions. This is so because the definition in Rule 2 (1) (c) specifically excludes certain transactions described therein from the purview of deposits and thus they do not require compliance with the provisions of the Act3.

2) What are the specific pre-conditions applicable to Private Limited Companies pertaining to acceptance of Deposits:

In terms of provisions of section 73 of the Act, a Company, whether private or public, can accept deposits from its members only subject to compliance of the Rules. Deposits from persons other than members can now be accepted by “Eligible Companies” only. In terms of provisions of section 76 read with definition of an Eligible Company (Rule 2 (1) (e)), only a Public Company with net worth of Rs.100 crore or more or turnover of Rs.500 crore or more, and which has passed a Special Resolution at a meeting of its members, and has filed the same with the Registrar, may accept deposits from the public, these Companies are referred to as the Eligible Companies. Thus Private Companies and “Non-Eligible Companies” can accept deposits from members only. Pre-conditions for accepting deposits from members:

a) Amount as deposit can be accepted from person whose name appears on the Register of Members (RoM) of the Company, if a person whose name appears on RoM has transferred his shares but the transfer is pending registration, then the Company should take steps to re-pay deposits which it has accepted from such members;

b) Company must pass an ordinary resolution at a meeting of its members seeking authorisation for acceptance of deposits and should file the same with the Registrar. It is advisable that the Company should pass the res olution at every Annual General Meeting instead of a blanket resolution without any defined validity.

3) What is the quantum of amount that can be accepted as a Deposit by Private Companies and Non-Eligible Companies?

Non-Eligible Company
In terms of Rule 3 (1) (a) of the Rules, following are the limits for Companies for acceptance of deposits:

(a) D eposits which are secured or unsecured but amount accepted, is not payable on demand or is not payable before 6 months from the date of acceptance or after 36 months thereof including renewal, an amount not exceeding 10 % of the aggregate of paid up share capital and free reserves,

Provided that such deposits are not payable within 3 months of acceptance or renewal

In terms of Rule 3 (3) of the Rules, following are the limits on Companies for acceptance of deposits:

(b) Total deposits including other deposits and renewed deposits from members only shall not exceed 25% of the aggregate of the paid-up share capital and free reserves of the company;

Private Company:
(c) In terms of specific exemption vide Notification MCA GSR 464 (E) dated June 05, 2015, a Private Company can accept deposits ONLY from its Members upto 100% of its Paid up Capital and Free Reserves provided it files with the Registrar information about such acceptance.

Note: The above limit of 25% or 100% as the case may be should be reckoned on the basis of last audited Financial Statements adopted by the members

4) What are the Procedural aspects for Private Companies/ Non-Eligible Companies in the course of acceptance of Deposits?

Following are the Procedural requirements to be complied with:

(i) Hold a Board meeting for proposing acceptance of deposit and issue of notice for holding general meeting for obtaining approval of the shareholders for the proposal;

(ii) Hold general meeting and seek approval of the shareholders by means of a special or ordinary resolution for authorising the Board to accept deposits and file a copy of such resolution within 30 days of date of passing with RoC in e-Form MGT 14;

(iii) Hold the Board meeting to obtain the approval for the draft Circular in Form DPT-1 of the Rules and the get the draft Circular signed by majority of the directors of the Company, and file a copy of such signed circular with the Registrar of Companies in Form GNL-2 for registration; ensure that the circular issued for acceptance of deposits is sent by electronic mail or registered post A.D or speed post to Members only;

(iv) Appoint Deposit Trustees for creating security for the secured deposits by executing a deposit trust deed in Form DPT-2 at least seven days before issuing the circular;

(v) Enter into contract with Deposit Insurance services providers at least thirty days before the issue of the circular;

(vi) Issue deposit receipts in the prescribed format and under the signature of an officer duly authorised by the Board, within a period of two weeks from the date of receipt of money or realisation of the cheque.

(vii) Make entries in the Register of deposits accepted rules within seven days from the date of issuance of the deposit receipt and arrange to get such entries authenticated by a director or secretary of the Company or by any other officer authorised by the Board.

(viii) File deposit return in Form DPT-3 by furnishing information contained therein as on the 31st day of March, duly audited by the auditors before 30th June every year.

5) Following question was posed to us by parents of a young IIT graduate which will highlight the problem that the provision creates.

Q : My Son is an IIT graduate from IIT Powai and he has a girl friend who happens to be his classmate. They have incorporated a new private limited company in which both of them are directors. They do not have their own funds. Since it is a start-up company with a new idea, banks are not willing to finance them within their norm. Contrary to PM Modi’s pronouncement of “Make in India,” the Companies Act, 2013 is creating a hurdle because loan from either members or outsiders is not possible. What should we do to help him while ensuring that he remains within the framework of law?

Ans. : It is unfortunate that the law does not recognise the Indian tradition of family business although it is sometimes envied world over. In the circumstances of the case, both the parents, that is, yourself and your wife and the parents of your son’s girlfriend can give a loan to your son’s company as a deposit. In our opinion, in terms of banking terminology, this could be treated as “Quasi Equity” and not refundable until the repayment of loan of banks and financial institutions. You may need to obtain such a letter from the Bank as a precondition for considering their loan proposal, which in our opinion will not be difficult for the bank to issue. They would avoid possible classification of NPA in respect of the advances given by them. Please advise your son to follow this route as a matter of least resistance, precaution and still it could be argued that it is within the framework of the law and ..

Editors Note: A Company is a very important form of business organisation. Despite the advent of Limited Liability Partnerships, this form is still the most accepted one by most stakeholders. The coming into force of the Companies Act, 2013 has created a large number of problems. In this feature commencing from this issue, the authors will address them. Initially, the focus will be on problems faced by small and medium sized private limited Companies, for it is these bodies and their advisors/ consultants that need the maximum support. As the feature develops, other issues could be taken up. We welcome your suggestions.

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Practical aspects of acceptance of deposits by Private Companies and Non-Eligible Companies1 – Part-II

Practical aspects of acceptance of deposits by Private Companies and Non-Eligible Companies