National Consumer Disputes Redressal Commission
Case BriefsTribunals/Commissions/Regulatory Bodies

National Consumer Disputes Redressal Commission (NCDRC): The Coram of Justice R.K. Agarwal (President) and Dr S.M. Kantikar (Member) expressed that, customer avails of Locker hiring facility is so that they may rest assured that their assets are being properly taken care of, but in the present matter, OP Bank failed to take care of the assets.

Instant appeals were filed against the order passed by the State Consumer Disputes Redressal Commission, Jharkhand whereby the complaints filed were partly allowed and the State Bank of India was directed to pay a lump sum compensation of Rs 30,00,000.

In the present matter, the complainants had Saving Bank Account and several High Value Fixed Deposit Accounts for nearly last four decades with the State Bank of India (OP Bank). They were also allotted Safe Deposit Locker by the OP Bank.

During the intervening night, a theft took place in the OP Bank as a result of which various items including jewellery and postal deposit instruments which were kept in the Safe Deposit Locker by the complainants were taken away by the miscreants/thieves.

The OP Bank did not intimate about the above-stated and on reaching the bank they got to know that their Safe Deposit Locker had been broken open and burgled. Further, the complainants met the Officer of the OP Bank, who confirmed the incident and asked them to furnish a list of their valuables.

Complainants alleged deficiency in service on the part of the OP Bank, the complainants filed a consumer complaint before the State Commission seeking compensation.

On being aggrieved with the impugned order passed by the State Commission, while the OP-Bank had filed appeals for setting aside the order by the State Commission, complainants preferred the cross-appeals for enhancement of the compensation awarded by the State Commission.

Analysis and Decision


Commission expressed that the purpose for which the customer avails Locker hiring facility is so that they may rest assured that their assets are being property taken care of, but in the present matter, OP Bank failed to take care of the assets/valuable articles of the Complainants which were lying in the Lockers provided by the OP Bank.

Further, the Coram added that although the stolen goods were seized by the Police and the complainants could identify only small quantity of their jewellery because most of the jewellery was in distorted shape due to rough handling by the burglars and a substantial quantity of jewellery was melted and transformed into gold biscuits, yet the OP Bank cannot be absolved from the deficiency in service on their part.

Therefore, no interference with the well-reasoned order was required. [SBI v. Gopal Prasad Mahanty, 2022 SCC OnLine NCDRC 48, decided on 7-4-2022]


Advocates before the Commission:

For the State Bank of India: Mr. Jitendra Kumar, Advocate

For the Complainants: Mr. Gopal Prasad Mahanty, in-person

Mr. Shashi Bhushan Kr., in person

Bombay High Court
Case BriefsHigh Courts

Bombay High Court: The Division Bench of G.S. Patel and Madhav J. Jamdar, JJ., held that Asif i.e. son has no rights in his father’s flats.

As per the petition, Fazal Khan was living in a vegetative state for the last decade and he not only had dementia but has had multiple strokes also. The crux of the petition was the appointment of Fazal’s wife, Sonia as the 1st petitioner, as the guardian of Fazal’s personal and property.

It was noted from the medical report of Fazal that he was totally dependent on his caregivers.

In the present case, the Court was concerned with a Bank Account wherein Fazal was the first holder and Sonia, i.e. his wife the joint holder. The second asset was a property which was a residential flat.

An intervention application as pointed by the Court, which was filed by Asif Fazal Khan, the “de facto” guardian of Fazal for many years and there was absolutely nothing in the said application to show that.

Further, Asif submitted that although his parents were alive, there are two flats and both are what he describes as “a shared household” therefore he, the son, had some sort of enforceable legal right or entitlement to either or both of these flats.

High Court expressed that,

“In any conceptualization of succession law for any community or faith, Asif can have no right, title or interest whatsoever in either of these flats — one in his father’s name and other in his mother’s name — so long as his parents are alive. The suggestion that Asif has a settled and enforceable share in either of the flats in the lifetimes of the real owners, his parents, is laughable.”

Therefore, the intervention application filed by the son was rejected.

High Court permitted the wife of Fazal Khan to operate the Bank account and added that she may draw amounts in the said account to meet all and any of Fazal’s expenses, though she can’t use that money for her personal expenses nor she can transfer the said amount to her personal account and once a year, the wife is required to file a statement of account.

The wife proposed to sell the flats so that the proceeds could be used to look after Fazal, hence the Court permitted the same and directed that without prior leave to this Court she can execute an MoU or an agreement for sale.

In view of the above -said the petition is kept pending. [Sonia Fazal Khan v. Union of India, 2022 SCC OnLine Bom 627, decided on 16-3-2022]


Advocates before the Court:

Mr Nikhil Wadikar, i/b Ganesh Dhonde, for the Petitioner.
Mr Maneesh Trivedi, i/b LR & Associates, for Intervenor/Applicant

in IA/2411/2021.
Mr Adavit Sethna, i/b Anusha P Amin & Tanay M Mandot, for

Respondent 1-UOI.
Mrs Uma Palsuledesai, AGP, for State.

Experts CornerPramod Rao

Ravenclaw door-knocker: “Where do vanished objects go?”

Prof McGonnagall : “Into non-being, which is to say, everything.”

Harry Potter and the Deathly Hallows, J.K. Rowling, 2007

Background

Students of Indian history will be aware that one of the means which fuelled the rise of British paramountcy in India was the doctrine of lapse[1]. In terms of the doctrine, a princely State without a male heir (or competent heir) would be subsumed into the British Indian empire. The doctrine supplanted the long-established right of an Indian sovereign without an heir to choose a successor.

The principle of bona vacantia, escheat or lapse[2] works similarly: If an asset has no legal heir or claimants, then either the permanent ownership, or the temporary custodianship, of the asset is assumed by the State.

What can lead to an asset having no owner or being abandoned, or if the owner has passed away, with no legal heir or claimant?

As unlikely as it sounds, a possibility is that the individual forgot about the assets or it has been lost, or even mistakenly or wilfully abandoned. What is much more possible is that the individuals have passed on, and their legal heirs and successors are unaware about these assets and hence cannot make the claim. Hence such assets remain unclaimed over extended periods of time. Finally, the individual has passed on and did not have any legal heirs or successors.

What happens to such unclaimed assets? Do they vanish into non-being i.e. into everything? Do the rightful owners, heirs or claimants find or receive such assets eventually?

In this paper your columnist examines the Indian legal regime governing such unclaimed assets.

Indian Legal Position

The principle of bona vacantia or escheat or lapse was declared to be a part of the law in India by the Privy Council as early as in 1860[3]. The Privy Council also held that the general law having universal application is that “private ownership not existing, the State must be the owner as the ultimate Lord”.

Calcutta High Court separately observed (whilst noting the Privy Council judgment) as follows:

“Not that such a doctrine was unknown in India, for our ancient lawgiver Manu, for example, declared more than 2000 years ago thus in Manusawhita (Chapter DC, Verse 189):

Aharajyam Brahmanadravyam Rajna Nityamiti Sthiti, Itareshantu Varnanam Sarbabhave Harenripa.

This (verse), while negativing the king’s right to brahminical property even on failure of all heirs, affirmed the king’s title to all the properties belonging to persons of other classes dying leaving without any heir.”[4]

The principle thereafter finds a mention in the Indian Constitution. Article 296 specifies as follows:

  1. Property accruing by escheat or lapse or as bona vacantia.— Subject as hereinafter provided, any property in the territory of India which, if this Constitution had not come into operation, would have accrued to His Majesty or, as the case may be, to the ruler of an Indian State by escheat or lapse, or as bona vacantia for want of a rightful owner, shall, if it is property situate in a State, vest in such State, and shall, in any other case, vest in the Union:

Provided that any property which at the date when it would have so accrued to His Majesty or to the ruler of an Indian State was in the possession or under the control of the Government of India or the Government of a State shall, according as the purposes for which it was then used or held were purposes of the Union or a State, vest in the Union or in that State.

Explanation.— In the article, the expressions “ruler” and “Indian State” have the same meanings as in Article 363.

 

In essence, Article 296 makes it clear that the principles applicable to bona vacantia, escheat or lapse, prior to commencement of the Constitution of India, would continue. It also draws on the English law principles on escheat that the Crown is regarded as “the Lord paramount of the whole soil of the country”[5] which succeeds to the asset in absence of any legal heir[6]. The article also follows the federalist approach in terms that assets situated in a State that would have accrued to the State, shall vest in the State, and in any other case, shall vest in the Union.

Several States have laws governing bona vacantia, escheat or lapse[7]. Such laws, by and large, specify the official or the authority which have general superintendence of escheat assets, the manner of inquiry, giving of notice, taking of possession, disposal of claims or challenges, etc. In general, the vesting of such assets in the State is of permanent nature.

The assets that vest in the Union, while not specified, can be taken to follow the legal position prior to the Constitution coming into force, and also in terms of matters legislated pursuant to Article 246 (and List 1 and List 3 of the Seventh Schedule) of the Constitution.

Escheat also finds mention in the personal laws governing succession. Section 29 of the Hindu Succession Act, 1956 states:

  1. Failure of heirs.— If an intestate has left no heir qualified to succeed to his or her property in accordance with the provisions of this Act, such property shall devolve on the Government; and the Government shall take the property subject to all the obligations and liabilities to which an heir would have been subject.

Similarly, in Section 34 of the Succession Act, 1925[8], it states:

  1. Where intestate has left no widow, and where he has left no kindred.— Where the intestate has left no widow, his property shall go to his lineal descendants or to those who are of kindred to him, not being lineal descendants, according to the rules hereinafter contained; and, if he has left none who are of kindred to him, it shall go to the Government.

Courts have noted that Section 29 comes into operation only on there being a failure of heirs. Section 29 shall not operate in favour of the State if there is any other heir of the intestate. Failure means a total absence of any heir to the person dying intestate[9].

It is posited that “Government” as referred to in the above two statutes, would follow the constitutional mandate, and that the unclaimed assets vest in one or more State Governments and in the Union Government in terms of the relevant State legislations and Union legislations[10].

It is important to note that if there are legal heirs or a will has been made, then the principles of bona vacantia, escheat and lapse and the statutory framework dealing with the same have no applicability.

Furthermore, there are safeguards and essential conditions which have been specified, including proving absence of heir and of giving public notice for claimants to step forward.

The Supreme Court has noted that when a question of escheat arises,

  1. 20. … the onus rests heavily on the person who asserts the absence of an heir qualified to succeed to the estate of the individual who has died intestate to establish the case. The law does not readily accept such a consequence.

*           *          *

  1. The principle that the law does not readily accept a claim to escheat and that the onus rests heavily on the person who asserts that an individual has died intestate, leaving no legal heir, qualified to succeed to the property, is founded on a sound rationale. … This principle is based on the norm that in a society governed by the rule of law, the court will not presume that private titles are overridden in favour of the State, in the absence of a clear case being made out on the basis of a governing statutory provision[11].

It has been again reiterated[12]:

  1. It is well settled that when a claim of escheat is put forward by the Government the onus lies heavily on the appellant to prove the absence of any heir of the respondent anywhere in the world. Normally, the court frowns on the estate being taken by escheat unless the essential conditions for escheat are fully and completely satisfied. Further, before the plea of escheat can be entertained, there must be a public notice given by the Government so that if there is any claimant anywhere in the country or for that matter in the world, he may come forward to contest the claim of the State.

It is noted that heirs or claimants can be anywhere in the world, and hence heirs or claimants need not be within the territorial jurisdiction of India or of the relevant State. This also would enhance the burden on the State to establish having met the essential conditions.

The Supreme Court, also building on the rule of law, noted that:

  1. 25. To allow administrative authorities of the State — including the Collector, as in the present case — to adjudicate upon matters of title involving civil disputes would be destructive of the rule of law. The Collector is an officer of the State. He can exercise only such powers as the law specifically confers upon him to enter upon private disputes.[13]

Hence, it would be necessary to ensure that the courts of competent jurisdiction make the necessary determination on whether or not the State has adequately established that principles of bona vacantia, escheat and lapse can be applied and has followed all essential conditions.

Properties and Assets

The kind of properties and assets within the sweep of the principle of bona vacantia, escheat and lapse are examined in this section.

“Property” is a term of the widest import, and subject to any limitation or qualification which the context might require, it signifies every possible interest which a person can acquire, hold and enjoy[14].

Accordingly, the principles of bona vacantia, escheat and lapse have been applied to a variety of properties and assets. These have included:

(i) the property of a dissolved corporation[15];

(ii) the property of a company struck off by the Registrar for non-filing of statutory returns[16];

(iii) if a dissolved corporation had a subsisting interest in the lease on the date of dissolution, then such interest[17];

(iv) tenancy interest, howsoever limited[18];

(v) debts, being a species of property[19]; and

(vi) shebait of mandir[20].

The principles of bona vacantia, escheat and lapse have also been, inter alia, applied to the financial assets[21] such as dividends on shares, matured deposits with companies (other than banks), matured debentures with companies, redemption amount of preference shares and credit balances in any bank account and deposits.

 

Points to Ponder

Given the federal approach to applying principles of bona vacantia, escheat and lapse envisaged in the Constitution, a variety of State legislations, case law which have developed, the overall approach of the polity as well as the institutional underpinning appear to be underdeveloped, inconsistent and requiring review.

Certain points to consider in respect of applying the principles of bona vacantia, escheat and lapse, are:

  • Property or assets do not appear to have a uniform definition across the State legislations.
    • A model legislation, with clear definitions, could be considered and which the States use to align their current laws and legislations.

 

  • Lack of recognition or clarity in the State legislations of the fact that certain types of properties or assets would accrue to the Union Government or as per legislations made by the Parliament.
    • The model legislation could also specify the federal approach expected in Article 296 in clear manner.
    • The Parliament can also enact a legislation that enunciates the approach for Union Government to implement Article 296.

 

  • Lack of public notice to claimants or heirs on a nationwide and worldwide basis (as laid down by the Supreme Court), and limiting notice obligation to the locality where the property is situate.[22]
    • Giving of global or national level notice is necessary to be consistent with the Supreme Court decisions, generally accepted legal practice and societal expectations, and in ensuring due opportunity to legal heirs or claimants to make due claims. This could be vide an internet site or portal that hosts the notices and details of unclaimed assets.

 

  • Lack of consistency across different types of assets in respect of whether the unclaimed asset passed into permanent ownership, or into temporary custodianship, of the Government (State or Union).
    • Temporary custodianship, which terminates on handover of the asset to rightful claimants appears to be a much fairer approach to specify. This should be the approach adopted by the Governments; to these ends, extended period of time for the custody, undertaking measures for reaching out to rightful claimants or heirs as well as strong diligence on the claims received prior to handover would be desired.
    • Perishable unclaimed assets, or when costs of custody can exceed the cost of assets, the assets could be sold or disposed of, and the proceeds held for the rightful claimants.
    • Passage into permanent State ownership should be avoided.
      1. Ultimately, the State has fiscal powers – to tax, to levy duty, to levy fees – that underpin the revenues and expenditures of the Government. Acquiring assets purely by chance, and primarily due to lack of knowledge of the rightful claimant or heirs about the assets is a practice that deserves deprecation and being discouraged.
      2. Separately, tracing the evolution of bona vacantia, escheat and lapse also led us to its origins in systems of monarchy or feudalism and assertion of sovereign’s paramountcy. In a modern democracy and republic, such a concept of accrual of unclaimed assets to the sovereign should not survive.
      3. The aim of the State should be to preserve and protect the unclaimed assets (or if perishable or costly to keep in custody, dispose of the same and hold the proceeds), and identify and hand over to rightful claimants. Currently, the approach at least as seen in the State legislations is far more adversarial and acquisitive.

 

  • Absence of independent institutional framework for dealing with unclaimed assets. The States largely depend on and require the Collectors or district administration to deal with unclaimed assets. These authorities may both lack the bandwidth and also the expertise in handling unclaimed assets, or applying the approach outlined above.
    • Creation of an independent institutional focus, geared towards objectives as outlined above – preserving and protecting the unclaimed assets, identifying and handing over to rightful claimants – and doing so in a citizen-centric, claimant-friendly, methodical manner, which inspires confidence of the citizenry that right will be done by them (as heirs and claimants or for their own heirs and claimants). Such an institution can also become the administrative machinery for the assets of a company dissolved under the Companies Act or other similar such incorporated bodies (absence of which machinery had been noted way back in 1959).[23]

 

  • Determination of bona vacantia, escheat and lapse by the authorities comprising the executive branch of the State.
    • In keeping with the Supreme Court decision[24], whilst the executive can conduct inquiries and initiate a claim of bona vacantia, escheat and lapse, the determination that indeed the claim is sustainable should be by a court of competent jurisdiction.

 

Even as the above propositions, and further propositions (dealing with treasure troves, lost and found objects, abandoned assets, conduct of public auctions or, giving of notices and so on) could be embedded into a model legislation, and movement towards ensuring that the assets are in the hands of the rightful heirs or claimants of a deceased. In a world where the degrees of separation keep reducing, being able to trace and locate the heirs and claimants can prove far easier.

Concluding Remarks

The key takeaways for the readers should be:

(i) For your own assets and properties, ensure your chosen heirs are fully aware and informed about the same, (and how to claim or obtain the same on demise or becoming incapacitated).

(ii) Make due nominations – especially for financial assets and employee benefits, and wherever else possible.

(iii) Make a will. The principles of bona vacantia, escheat and lapse and the laws outlined apply when a person dies intestate – without a will.

 


Pramod Rao, Group General Counsel at ICICI Bank. Views are personal. Assisted in certain research by Dikshi Arora.

[1] See HERE, also noted in Prayas Buildcon (P) Ltd. v. State of U.P., (2021) 144 ALR 496 : “We may recollect, having gone through history, that prior to 1857, several estates were taken over by British Company i.e. East India Company by way of annexation. Doctrine of lapse applied in Jhansi was another kind of above-mentioned two principles.

[2] Distinctions between bona vacantia” and “escheat” or “lapse” may be exceedingly fine. Bona vacantia means “ownerless goods” or “vacant goods” and can connote abandoned, lost, mislaid or forgotten property, whilst escheat is when no legal heir to a deceased’s property exists: both however result in permanent ownership or temporary custodianship of the Government, and hence are often used interchangeably. Cited from: <HERE >.

[3] Collector v. Cavary Vancata Narrainappah, (1859-61) 8 Moo IA 500 at pp. 525.

[4] Biswanath Khan v. Prafulla Kumar Khan, 1988 SCC OnLine Cal 48 : AIR 1988 Cal 275

The judgment goes on to hold: Hindu law was to be administered in the case of succession to properties of a Hindu dying intestate, it was to be so administered only when he had any heir to succeed thus providing occasion for private succession. But on a total failure of all private heirs, the properties and the succession thereto ceased to be governed by any personal law of succession and, therefore, a case of a Hindu, whether a Brahmin or a non-Brahmin, dying leaving no heirs, was not to be governed by the Sastric Hindu law as enunciated by Manu, but was to be governed by the general law of universal application and that general law was that “private ownership not existing, the State must be the owner as the ultimate Lord. This right to acquire by way of escheat or as bona vacantia is not a creature of any private law of succession but is an attribute of sovereignty. It is true that statutory provisions of private law of Succession e.g. S. 29, Hindu Succession Act, 1956, sometimes expressly recognised right of the State to acquire properties by escheat or as bona vacantia. But that right would have been very much there even without any such provisions”.

[5] Halsbury’s Laws of England, 4th edn., Vol. 17, para 1439, as cited in State of Rajasthan v. Lord Northbrook, 2019 SCC OnLine SC 1117: In view of difference of opinions and the distinguishing judgments (R. Banumathi, J. allowed the appeal and Indira Banerjee, J. dismissed the appeal), the matter is to be placed before the Chief Justice of India for referring the matter to the larger Bench.

[6] Prior to the Constitution coming into force, following statutes can be traced: Statutes 16 and 17 Victoria, c. 95, S. 27, an Act to provide for the Government of India asserted that “all real and personal estate within the said territories escheating or lapsing for want of an heir or successor, and all property within the said territories devolving, as bona vacantia for want of a rightful owner, shall (as part of the revenues of India) belong to the East India Company in trust for Her Majesty for the service of the Government of India”. Thereafter, S. 54 of the Government of India Act, 1858, the existing provision was continued in force and was construed as referring to the Secretary of State in Council in place of East India Company. Thereafter, S. 20(3)(iii) of the Government of India Act, 1915, provided that the revenues of India received for His Majesty would include, “all movable or immovable property in British India escheating or lapsing for want of an heir or successor, and all property in British India devolving as bona vacantia for want of a rightful owner”. Finally, S. 174 of the Government of India Act, 1935 contained a provision similar to the text of Art. 296.

[7] Examples of State legislation’s can be seen:

Andhra Pradesh:<HERE >

Rajasthan:<HERE >

Kerala: <HERE > ,

Telangana: <HERE>,

Orissa: <HERE >,

West Bengal: <HERE >

In some States, the Land Revenue Code may contain the provisions on bona vacantia, escheat and lapse.

[8] This part of the Act does not apply to Parsi intestates; for Parsi intestates, see S. 56 of the Succession Act, 1925. Muslim personal law embeds the principle of escheat: the State is regarded as the ultimate heir of every deceased Muslim without any heir, see also: <HERE >. Such escheated land is also called nazul land: “Land or buildings in or near towns or villages, which have escheated to the Government; property escheated or lapsed to the State: commonly applied to any land or house property belonging to Government either as an escheat or as having belonged to a former Government.” (Narain Prasad Aggarwal v. State of M.P., (2007) 11 SCC 736.  It is such land which is owned and vested in the State on account of its capacity of sovereign, and application of right of bona vacantia, which is covered by the term “nazul”, as the term is known for the last more than one and half century. The nazul properties form the assets owned by the State in trust for the people in general who are entitled for its use in the most fair and beneficial manner for their benefit. See also: Prayas Buildcon (P) Ltd. v. State of U.P., (2021) 144 ALR 496 : “In Uttar Pradesh, management of ‘nazul properties’, in absence of statutory provisions, is governed by various administrative orders compiled in a manual called ‘nazul manual’. The Government has made provisions of management of ‘nazul’ through its own authorities, namely, District Magistrate or Commissioner, or, in some cases, through local bodies. In relation to nazul properties situated in Lucknow, the role of Lucknow Development Authority, Lucknow (LDA) is only to the extent of management and preservation thereof. LDA is not the owner of the nazul land/property, which vests only in the State Government. Governments have given nazul properties on lease to private persons/entities under the Government Grants Act, 1895.”

[9] State of Punjab v. Balwant Singh, 1992 Supp (3) SCC 108 : AIR 1991 SC 2301 : (1991) 1 SCR 458.

[10] That it can only be the State Government or the Union Government, and not a local authority or municipal authority can be noted from the text of Art. 296 and the decision in Ram Prasad v. Gram Panchayat, 1956 SCC OnLine Raj 106 : AIR 1957 Raj 43.

[11] Kutchi Lal Rameshwar Ashram Trust v. Collector, (2017) 16 SCC 418, 429, 430  and 432.

[12] State of Bihar v. Radha Krishna Singh, (1983) 3 SCC 118, 216.

[13]  Kutchi Lal Rameshwar Ashram Trust v. Collector, (2017) 16 SCC 418, 432.

[14] J.K. Trust v. CIT, AIR 1957 SC 846.

[15] Peirce Leslie and Co. Ltd. v. Violet Ouchferlong Wapshare, AIR 1969 SC 843 : (1969) 39 Comp Cas 808 : 1969 3 SCR 203. However, this seems to lack statutory provisions in support. See S. 352 of the Companies Act, 2013 (in pari materia to S. 555 of the Companies Act, 1956 or section 244B of the Companies Act, 1913) which deal with distribution of money to creditors or contributors and in specifying that the rightful claimant can receive back moneys after due process being followed (without the elapse of time having any adverse implication and hence an example of temporary custodianship by the Government); Noting this, Calcutta High Court observed in Rai Saheb U.N. Mandal’s Estate Ltd., In re, 1958 SCC OnLine Cal 137 : AIR 1959 Cal 493 : (1960) 30 Comp Cas 172 Cal : (1958-59) 63 CWN 889:  “If, therefore, without the express statutory provisions of Ss. 354 and 355 of the English Companies Act, 1948, the doctrine of bona vacantia applied in England, it would be all the more so herein India because of Art. 296 of the Constitution of India, which uses the words any property in the territory of India which if this Constitution had not come into force would have accrued to His Majesty. Now if this property of a dissolved company could accrue formerly to the Crown in India then as bona vacantia it now belongs to and vests in the Union of India under Article 296 of the present Constitution. Normally a defunct company would hardly have any assets or property, but there may in few cases be some, however negligible. I asked Mr Basu, who was the counsel appearing for the Registrar of Joint Stock Companies to find out whether on the point the office of the Registrar, had already any procedure, and I was told that there was none. Parliamentary legislation appears to be necessary to evolve an administrative machinery for the protection and disposal of the assets of a company, dissolved under S. 560 of the Companies Act, 1956. For unclaimed dividends and undistributed assets of companies in liquidation there is provision for their going to the public account of India in the Reserve Bank under S. 555 of the Companies Act. But there appears no comparable provision for assets of dissolved Companies under S. 560 of the Act.

[16] TEE-EM (P) Ltd. v. Tata Consultancy Services Ltd (though the company was finally restored on the register after due application to the court and its orders in such behalf.

[17] Narendra Bahadur Tandon v. Shankar Lal, (1980) 2 SCC 253.

[18] Biswanath Khan v. Prafulla Kumar Khan, 1988 SCC OnLine Cal 48 : AIR 1988 Cal 275.

[19]  Arvind Mills Ltd. v. State of Gujarat, 1965 SCC OnLine Guj 225, with also a finding that when the debtor is a resident of a State, the situs of the debt would also be within the State and if the debt becomes bona vacantia, it would vest in the State under Art. 296.

[20] From Tagore Law Lectures (1936) published in “Hindu Law of Religious and Charitable Trust”, Justice B.K. Mukherjee (former Chief Justice): “As there is always an ultimate reversion to the founder or his heirs, in case the line of shebaits is extinct, strictly speaking no question of escheat arises so far as the devolution of shebaitship is concerned. But cases may be imagined where the founder also has left no heirs, and in such cases the founder’s properties may escheat to the State together with the endowed property. In circumstances like these, the rights of the State would possibly be the same as those of the founder himself, and it would be for it to himself, and it would be for it to appoint a shebait for the debutter property. It cannot be said that the State receiving a dedicated property but escheat can put an end to the trust and treat it as secular property”, cited in Rambir Das v. Kalyan Das, (1997) 4 SCC 102.

[21] Your columnist will endeavour to examine the treatment of financial assets in a separate paper.

[22] Even if such notice is by “an announcement of the declaration to be made by beat of drum in the village in which the property is situated or lies”, (extract from S. 12 of Telangana Escheats and Bona Vacantia Act, 1974, accessible Here, while creates a vivid imagery and throwback to the days of the announcements made in the days of rajas and nawabs, it does not satisfy the Supreme Court dictum.

[23] Rai Saheb U.N. Mandal’s Estate Ltd., In re, 1958 SCC OnLine Cal 137 : (1960) 30 Comp Cas 172 Cal: AIR 1959 Cal 493 : (1958-59) 63 CWN 889, also see footnote 14 above.

[24]  Kutchi Lal Rameshwar Ashram Trust v. Collector, (2017) 16 SCC 418.

Op EdsOP. ED.

Introduction

The Insolvency and Bankruptcy Code, 2016 came as a ray of hope amidst the deteriorating condition of the recovery mechanisms available to the creditors in the Indian market. Recovery rates had sunk to new lows, and the need to hit the refresh button to reset the entire system was paramount.

The intent behind any legislation can be truly brought from the Preamble, something that the entire text of the legislation follows. The Preamble of the Insolvency and Bankruptcy Code envisages it as an Act which will primarily look into the aspects of consolidation and updating of the numerous laws regarding insolvency and resolution of the same for corporate entities, partnership firms and individuals as well. It has to be carried out within strictly defined time-frames, so that the value of the assets is maximised. All of this is done to promote the entrepreneurial ventures and to equitably serve the interest of the various stakeholders.

In  Binani Industries Ltd. v. Bank of Baroda,[1] the National Company Law Appellate Tribunal (NCLAT) held that:

  1. … The first order objective is “resolution”. The second order objective is “maximisation of value of assets of the ‘corporate debtor’ and the third order objective is promoting entrepreneurship, availability of credit and balancing the interests”. This order of objective is sacrosanct.[2]

The point that has to be kept in mind is that the Preamble explicitly mentions of the maximising of the value of the assets. Over the course of this article, an evaluation has been attempted regarding whether the provisions in the Code dealing with the aspect of the valuation of assets have stayed true to what was first mentioned in the Preamble of the Act.

The primary foundation towards the valuation of assets is laid down as soon as with the appointment of Valuer. Valuer stands for a registered valuer, who can be a resolution professional as well. They are tasked with putting a monetary value on the debtor’s properties, securities, other assets and liabilities as well.

However, our primary concern here is the aspect of valuation of assets. To understand this part of the liquidation process, it is essential to have a thorough understanding of how the value is to be estimated and certain other related concepts.

Valuation Standards

Under Section 247 of the Companies Act, 2013, the Ministry of Corporate Affairs has notified Companies (Registered Valuers and Valuation) Rules, 2017. The valuation standards are to be set up in accordance with Rule 18 of the aforementioned Rules. These standards are notified by the committee as constituted under Rule 19. As of now, the standards issued by Institute of Chartered Accountants of India (ICAI) in its 375th meeting are said to be in force in India.

This system of valuation speaks of valuation bases, approaches, scope of work, reporting, business valuation, intangible assets and financial instruments. These standards are aimed at bringing uniformity in the system, so as due to anarchy, one valuer is leaps and bounds ahead in giving a monetary value to the same asset as opposed to another valuer.

However, by establishing valuation standards, sometimes the motive of “value maximisation” takes a back seat as the valuation standards are not one dimensional in approach. They also take the interest of the buyer into account and are justified in doing so as well. But an argument can be made to make the entire standards lean in favour of the debtor, as the standards being followed are domestic in nature, and the domestic agency should prioritise the notion of keeping the standards in such a manner that they encourage the continuation in one form or the other to help the growing economy of the country.

Sale of Assets under the Code

The Act in itself does not shed much light upon how assets can be sold by the liquidator. However, to clarify the same, the Board, in Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, has laid down the manner in which the assets can be sold.

According to Regulation 32 of the above mentioned Regulations, the assets of a corporate debtor can be sold in various ways, such as on a standalone basis, in a slump sale, collectively as a set, in parcels, the corporate debtor as a going or the business of corporate debtor as a going concern.

Regulation 32-A further states that when in the opinion of the committee of creditors or the liquidator himself, it is beneficial for the corporate debtor to be sold as a going concern i.e. the sale as a going concern under Regulations 32(e) and (f) is only allowed if its allows value maximisation of the assets of the corporate debtor.

The Regulations provide with two methods in which the sale of assets can be carried about. The primary methods under Regulation 33 read with Schedule I is by the way of an open online bidding process. However, in special circumstances, such as in the case of perishable goods, the sale can be made by the way of a private sale as well, when it is understood that private sale will be more beneficial in realising the maximum value of the assets.

Apart from the legislative input, certain principles laid down by the judiciary are also safeguarding the interest of the buyers and sellers as well. In Gordhan Das Chuni Lal Dakuwala v. T. Sriman Kanthimathinatha Pillai[3], the Court held that when the property is sold by a private contract, then it is the duty of the court to satisfy itself that the price offered is the best that could be offered, because, the court is the custodian of the interest of the company.

In TCI Distribution Centres Ltd. v. Official Liquidator,[4] the Court held that the liquidator should not keep any information to himself, and shall convey any information he has regarding nature, description, extent of property, non-availability of title deeds, etc.

Asset Sale Report: A Mere Formality

Regulation 36 mandates that a liquidator has to prepare an asset sale report as a part of the progress reports. This regulation also spells out the contents of the asset sale report, however, the list is merely indicative, further details regarding the sale can be furnished in the report, what the liquidator feels may be of relevance.

The following details are a mandatory part of the asset sale report, as per the ambit of Regulation 36:

(a) the realised value;

(b) cost of realisation, if any;

(c) the manner and mode of sale;

(d) if the value realised is less than the value in the asset memorandum, the reasons for the same; and

(e) the person to whom the sale is made.[5]

However, the Code and the accompanying Regulations are silent on the purpose of this report. It might lead one to think that this report is a mere formality. Another reasonable presumption which can be drawn from the fact that it is to be enclosed with the progress report is that the function of this report is to make the entities concerned aware of the situation of the assets during the liquidation process.

Suggested Reforms

To achieve the elusive dream of “value maximisation”, the Code and the supplementary Regulations have laid down various provisions, such as the idea of private sale. Private sale has been allowed by the Code and the Regulations in certain cases. For example, in case the assets are of a perishable nature, or, the value of the assets will diminish with the passage of time, in such situation, a departure from the online bidding process, in the form of a private sale is allowed.

On a second look and on reading between the lines, one can easily infer that the kind of sale mentioned above is set to serve the primary purpose of “value maximisation”. Allowing the sale of the assets as a whole, or in parts, or even as a going concern is also based on the same narrative.

Hence, the Code has indeed made an effort to stick to the principle of “value maximisation”, as given in the Preamble. However, certain changes can be brought about in the legal framework of insolvency and bankruptcy in India to give a better justification to the aforementioned principle of the Preamble.

The idea of sale of assets is only introduced during the liquidation process. But during the resolution process, the interim resolution professional and the resolution professional are empowered to sell the assets of the company. But, the Code is silent on whether the sale is allowed as a part of the resolution plan. If it is explicitly laid down that the sale of assets can be made during the resolution stage, a better value can be attached to the assets, as, the fair value of the assets is generally more than the liquidation value. The value of the assets which are prone to perish or deteriorate over time can also be maximised.

During the sale of assets by the way of online bidding, an average of the value estimated by the registered valuers is taken as the base price. Instead of the average value, there is no harm in taking the base price as the fair value of the asset. This is due to the fact that there already are provisions which provide for reduction in base price in case the bidding process fails. Hence, starting from a higher base can actually fetch a higher price to the assets.

Also, if the non-disclosure of the highest bid is made the go-to format during an online bidding process, instead of it being used in exceptional circumstances, the uncertainity amongst the bidders can lead to a higher bid, and serve the principle of asset maximisation better.

Lastly, another reform which can have a positive impact on the aspiration of “value maximisation” is by introducing strict timelines with respect to Section 52 of the Code. Section 52 provides for a choice to the secured creditor as to either enforce his secured interest or to relinquish it and get his money’s worth through the liquidation process. The Code does not provide for the time within which this choice has to be made. It might happen that the asset on which the interest of the secured creditor lies is the kind that diminishes in value with the passage of time.

If the secured creditor informs of his choice to the liquidator weeks after the liquidation process has begun and by that time, a substantial value of the asset has evaporated, the Preamble of the Code will not be satisfied. Hence, the provision should be amended to include a strict timeline within which such choice is to be made, and also, a presumption that the creditor has relinquished his interest in case he fails to convey his choice.


†  IVth Year B.A. LLB (H) Student NUALS, Kochi, e-mail: puruv31@gmail.com.

[1]  2018 SCC Online NCLAT 521

[2]  Ibid

[3]  1920 SCC OnLine Mad 166

[4]  2009 SCC OnLine Mad 1481 : (20 09) 4 LW 681.

[5]  Regn. 36, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.


Image credits: economictimes.com

Legislation UpdatesNotifications

In order to encourage investment in the capital market, it has been decided to withdraw the enhanced surcharge levied by Finance (No. 2) Act, 2019 on tax payable at special rate on income arising from the transfer of equity share/unit referred to in Section 111 A and Section 112 A of the Income-tax Act,1961 (the ‘Act’) from the current FY 2019-20. The following capital assets are mentioned in Section 111A and Section 112A of the Act:

i) Equity shares in a company;
ii) Unit of an equity-oriented fund; and
iii) Unit of a Business Trust

The derivatives (Future & options) are not treated as a capital asset and the income arising from the transfer of the derivatives is treated as business income and liable for a normal rate of tax. However, in the case of Foreign Institutional Investors (FPI), the derivatives are treated as capital assets and the gains arising from the transfer of the same is treated as capital gains and subjected to a special rate of tax as per the provisions of Section 115 AD of the Act. Therefore, it is also decided that the tax payable on gains arising from the transfer of derivatives (Future & options) by FPI which are liable to a special rate of tax under Section 115 AD of the Act shall also be exempted from the levy of the enhanced surcharge.

Therefore, the enhanced surcharge shall be withdrawn on tax payable at special rate by both domestic as well as foreign investors on long-term & short-term capital gains arising from the transfer of equity share in a company or unit of an equity-oriented fund/business trust which are liable for securities transaction tax and also on tax payable at special rate under Section 115 AD by the FPI on the capital gains arising from the transfer of derivatives. However, the tax payable at the normal rate on the business income arising from the transfer of derivatives to a person other than FPI shall be liable for the enhanced surcharge.


[Notification dt. 24-08-2019]

Ministry of Finance

Central Board of Direct Taxes

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India: G. Mahalingam (Whole Time Member) partly modified its order against Religare Finvest Limited (RFL) in the matter of Fortis Healthcare by allowing the firm to dispose of its assets subject to certain conditions.

The securities market regulator vide its order dated 19-03-2019, had barred Singh brothers – Shivinder Mohan Singh and Malvinder Mohan Singh (former promoters of Fortis Healthcare) – from selling any of their assets till they, along with seven other companies associated with them pay back Rs 403 crore that they had taken out from the hospital chain. The said order was passed when it came to notice that Fortis Hospitals had entered into multiple structured transactions from 30-06-2016 to 30-06-2017, which were prima facie fictitious and fraudulent in nature as the ultimate beneficiaries of these transactions were Singh brothers. The Board had also directed RFL (of which Singh brothers were the promoters) to not dispose of, alienate or divert any of its assets except for complying with a corrective action plan as stipulated by Reserve Bank of India (RBI).

The instant order was passed in an application filed by RFL on 20-06-2019, whereby it sought relaxations from SEBI in order to execute revival plan for the betterment of the company by taking required steps, including the restructuring of loans and securitization/ assignment of its assets to Asset Reconstruction Companies (ARCs) to reduce its standing liability.

SEBI noted that RFL was a Non-Banking Financial Company (NBFC) registered with RBI, and functioned under its overall regulatory supervision. Further, RFL’s current cash flows were insufficient to meet the immediate one-year debt obligations; banks had the first charge over all its assets and coercive steps of a bank for recovery of dues were highly possible. Also, RFL was prohibited from the expansion of credit/ investment portfolios other than investment in government securities.

In view of the above, it was opined that RFL was under severe financial strain and was staring at the possibility of default in meeting its debt obligations to the lender banks. Thus, proposed measures like the restructuring of RFL’s debt with lender banks, assignment of its SME gross NPAs to ARCs and raising of capital to meet capital adequacy norms were essential for survival and revival of the company.

Thus, the Board modified the directions contained in its 19-03-2019 order holding that RFL shall not dispose of or alienate funds assets without the prior permission of SEBI, “except for meeting expenses of day-to-day business operations and taking all measures as it deems fit for revival of RFL (including restructuring of its debts/loans, assignment of its financial assets to ARCs, raising of capital, borrowing, etc.), subject to strict adherence to the terms of “Corrective Action Plan”.[Fortis Healthcare Ltd., In Re, 2019 SCC OnLine SEBI 55, decided on 28-06-2019]

Case BriefsHigh Courts

Bombay High Court at Goa: C.V. Bhadang, J., discharged the petitioner (proprietor of the defendant Company) of the notice served upon him in an execution case.

The respondent filed a civil suit against one Harshad Trading Company a company incorporated under the Companies Act. As per the suit title, the Company was not shown to be represented by any person. The suit was decreed ex-parte against the defendant company. Thereafter, the respondent filed an application for execution of the decree pursuant to which a notice was served on the petitioner. He filed for discharge on the ground that he was neither a Director nor an employee of the Company. It was contended that he was the proprietor of the Company, which are two separate entities. However, Executing Court dismissed the petitioner’s application.

The High Court noted that the decree was passed against  Harshada Trading Company alone. It was well settled:  “where the decree is against the Company, which is an independent entity, the decree cannot be executed against any individual, being a Director or a person responsible for the conduct of the business of the Company.”

On the factual score, the Court said, “It was for the respondent to point out as to what are the assets of the Company, against which the decree can be executed. Such details can be obtained by the decree-holder from the office of the Registrar of Companies (RoC). Without doing any such exercise, the respondent is trying to execute the decree against an individual and that too, without showing that the petitioner is in anyway related to the Company-Harshada Trading Company.”

In such view of the matter, the impugned order of the Executing Court was set aside and the petitioner was discharged. [Belarmina Gowda v. Ranjith Nath, 2019 SCC OnLine Bom 588, Order dated 04-04-2019]

Legislation UpdatesRules & Regulations

S.O. 1023(E)—In the exercise of the powers conferred by Section 169 read with Section 33 of the Representation of People Act, 1951 (43 of 1951), the Central Government after consulting the Election Commission hereby makes the following rules further to amend the Conduct of Elections Rules, 1961, namely:––

1. (1) These rules may be called the Conduct of Elections (Amendment) Rules, 2019.
(2) They shall come into force on the date of their publication in the Official Gazette.

2. In the Conduct of Elections Rules, 1961 in FORM 26,––
I. in PART A—
(i) for paragraph (4) and the Table thereunder, the following shall be substituted, namely:—
“(4) Details of Permanent Account Number (PAN) and status of filing of income tax return:

[Refer link for detailed notification: Notification]

Ministry of Law and Justice


Note: In accordance to the amended Form 26, five years’ returns are to be furnished, along with details of offshore assets. Along with this,  it would also require details under various heads of the candidate’s spouse, members of the Hindu Undivided Family (if the candidate is a ‘karta’ or coparcener) and dependents.

Patna High Court
Case BriefsHigh Courts

Patna High Court: The Division Bench of Amreshwar Pratap Sahi, CJ and Anjana Mishra, J. dismissed an appeal challenging election of a village mukhiya.

Appellant herein had filed an election petition assailing the election of Respondent 3 as mukhiya of a village on the ground of non-disclosure of his assets and liabilities as per the Bihar Panchayat Raj Act, 2006. This petition was dismissed and the writ petition challenging Election Commission’s order was also dismissed. Hence, the present appeal.

Counsel for the appellant contended that nomination paper of Respondent 3 was improperly accepted as he had not filled up details of his assets and liabilities. An affidavit was filed later declaring such assets and liabilities to supplement respondent’s nomination papers but the same was a manipulated document inasmuch as it had been manually stamped while other documents were stamped through a franking machine.

Learned counsel for the respondent objected to the maintainability of election petition for not being verified in accordance with Rule 108 of the Bihar Panchayat Raj Rules, 2006. Further, the sole ground raised in the petition was non-disclosure of assets; no challenge was raised in relation to the affidavit filed by the respondent. The subject affidavit was accepted with the nomination papers before the Assistant Returning Officer who scrutinized the same and thereafter declared Respondent 3’s nomination valid. The nomination could not have been declared to be valid in the absence of requisite declaration and therefore there was a valid presumption under the law regarding the existence of this fact.

The Court observed that the casual manner in which petition had been verified was a serious defect. Argument regarding the non-existence of affidavit could not have been appreciated without a petition being verified on the basis of records available. Further, once the defense of supplemental affidavit had been raised, then the burden lay on the election petitioner to dislodge the same by summoning the Assistant Returning Officer.  It was held that the acceptance of affidavit by the Returning Officer without any objection from the appellant or election petitioner provided a clear presumption of fact regarding the validity of nomination of Respondent 3. Lastly, since the issue regarding stamping of an affidavit was not pleaded or advanced either before the learned Single Judge or the Election Tribunal, therefore it could not be raised at this juncture.

In view of the above, the appeal was dismissed for being bereft of merits.[Ram Roop Devi v. State of Bihar, 2019 SCC OnLine Pat 44, Order dated 11-01-2019]

Case BriefsForeign Courts

Supreme Court of Pakistan: A Three-Judge bench comprising of Umar Ata Bandial, Faisal Arab and Sajjad Ali Shah, JJ. while hearing an appeal in relation to disqualification of a parliamentarian, ruled that a parliamentarian can be disqualified under Article 62 (1)(f) of the Constitution of Islamic Republic of Pakistan only when he has dishonestly concealed his assets.

Petitioner’s appointment to public office was challenged by the respondent before the Islamabad High Court alleging that while holding office in Pakistan, petitioner was serving a UAE based company as its full-time employee. Respondent’s constitution petition for quo warranto was allowed by the High Court and the petitioner was disqualified as a member of the National Assembly. This order was challenged in the instant petition.

Petitioner submitted that he only rendered advice on the phone to the company and was not required to be physically present in UAE. Also, since the salary received from the company had already been spent by him, therefore its details were not mentioned in his nomination paper.

The Supreme Court observed that the entire purpose behind seeking details of assets and liabilities under election laws is to discourage persons who have wrongfully acquired assets, from contesting elections. Therefore, in a proceeding brought under Article 62 (1)(f) of the Constitution, Court must first call upon the elected member to explain the source from which the alleged undisclosed asset was acquired. Where no satisfactory explanation is forthcoming from him and the undeclared asset is not commensurate with his known sources of income, a presumption of unlawful means having been used in relation to that asset arises. Relying on its decision in Muhammad Hanif Abbasi v. Imran Khan Niazi (PLD 2018 SC 189) the Court held that unless a member is found guilty of dishonest concealment of assets in appropriate judicial proceedings, Article 62(1)(f) cannot be invoked to disqualify him for life.

It was observed that though it was highly inappropriate for a parliamentarian to take a full-time job in a foreign country, but it seemed highly improbable that a person holding such a position would actually be rendering his services as a full-time employee elsewhere. Thus, the petition was allowed holding that since no undeclared proceeds from UAE company existed at the time of filing of petitioner’s nomination papers, therefore no case of concealment of assets was made out. [Khawaja Muhammad Asif v. Muhammad Usman Dar, Civil Petition No.1616 of 2018, decided on 19-10-2018]

High Courts

Delhi High Court: Answering the question, whether the transaction of sale and purchase of shares of an overseas company deriving only a minor part of its value from assets located in India, would be taxable in India, the Court held that after amendment of S. 9(1)(i) Explanations 4, 5 Income Tax Act, 1961, post the “Vodafone case” Vodafone International Holdings BV v. Union of India: (2012) 6 SCC 613, any share/interest in a company registered outside India, shall be deemed to be situated in India, if such share derives (directly/indirectly) its value “substantially’” from assets located in India. The Court further clarified that as per the Shome Committee report on retrospective amendment relating to indirect transfer of assets and Direct Tax Code Bill, 2010, the gains arising from sale of shares of a company incorporated overseas, deriving less than 50% of its value from assets situated in India, would not be taxable u/S. 9(1)(i) of the Act r/w Explanation 5. 

In this case the Copal group (an overseas company) sold shares of an Indian company, to Moody’s Cyprus and shares of a US company (having an Indian subsidiary) to Moody’s USA. The group sold 67% of its shareholding in Copal-Jersey (the ultimate holding company) to Moody UK for $93,509,220. While 33% stake was held by banks and financial institutions. This purchase price was not inclusive of any value in Indian companies as 100% economic interest in these companies was already acquired by Moody’s group. On applications filed by these companies for above transactions, the Authority of Advance Rulings (AAR), ruled that such transactions were not taxable in India and Moody’s group, as buyers, had no obligation to withhold tax. This ruling was challenged by the Revenue. 

Agreeing with AAR’s view, the Court reasoned that since, value of shares derived from assets outside India was $93,509,220, and that from assets situated in India was $28,530,435.8, only a fraction of the value of shares of Copal-Jersey was derived indirectly from the value of shares of the Indian companies. Such transactions would not attract tax in India and Moody’s group did not have any withholding tax obligations. Director of Income Tax (International Tax) v. Copal Research Limited, Mauritius, W.P.(C) 2033/2013, decided on 14-08-2014

To read the full judgment, refer SCCOnLine