Central Government Notification
Legislation UpdatesRules & Regulations

The Central Government has notified the Companies (Registration of Charges) Second Amendment Rules, 2022 to amend the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016.

The amendment inserts a new rule 13 to the Companies (Registration of Charges) Rules, 2014 dealing with ‘Signing of charge e-forms by insolvency resolution professional or resolution professional or liquidator for companies under resolution or liquidation’. The Rule provides that the Form No.CHG-1, CHG-4, CHG-8 and CHG-9 shall be signed by Insolvency resolution professional or resolution professional or liquidator for companies under resolution or liquidation, as the case may be and filed with the Registrar.

Legislation UpdatesRules & Regulations

The Central Government notifies Companies (Incorporation) Third Amendment Rules, 2022 to amend the Companies (Incorporation) Rules, 2014.

In the Companies (Incorporation) Rules, 2014, Rule 25B relating to Physical verification of the Registered Office of the company has been inserted. The Rule provides that  the Registrar, based upon the information or documents made available on MCA 21, must visit at the address of the registered office of the company and may cause the physical verification of the said registered office in presence of two independent witness of the locality in which the said registered office is situated and may also seek assistance of the local Police for such verification, if required.

The Registrar shall carry the documents as filed on MCA 21 in support of the address of the registered office of the company for the purposes of physical verification and to check the authenticity of the same by cross verification with the copies of supporting documents of such address collected during the said physical verification, duly authenticated from the occupant of the property whereat the said registered office is situated.

The amendment also provides the format in which the report of the physical verification shall be prepared.

Legislation UpdatesRules & Regulations

On 05-08-2022, the Ministry of Corporate Affairs (MCA) has notified Companies (Accounts) Fourth Amendment Rules, 2022 in order to amend the Companies (Accounts) Rules, 2014. The amendments have been made in the provision relating to ‘Manner of books of account to be kept in electronic mode’.

Key points:

In the Companies (Accounts) Rules, 2014, in Rule 3 relating to Manner of books of account to be kept in electronic mode

  • In sub-rule (5), in the proviso, for the words “periodic basis”, the words “daily basis” shall be substituted.

    Provided that the back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a daily basis.

  • In sub-rule (6), the following clause shall be inserted, namely: –

    “(e) where the service provider is located outside India, the name and address of the person in control of the books of account and other books and papers in India.”.

SAT
Case BriefsTribunals/Commissions/Regulatory Bodies

   

Securities Appellate Tribunal, Mumbai (SAT): While dealing with the appeal preferred by the appellants against the order dated 08-06-2021 of the Whole Time Member (‘WTM'), the Coram of Tarun Agarwala, J. (Presiding Officer), M.T. Joshi, J. (Judicial Member), Meera Swarup (Technical Member) held that the directions of debarment and the penalty given by the WTM were harsh and excessive. Therefore, the Court, while partly allowing the appeal, reduced the penalty.

An instant appeal had been filed challenging the order of WTM through which the appellants were restrained from accessing the securities market for a period of 1 year and a penalty was also imposed.

Facts:

The appellant is a trading company dealing in investment in infrastructure development, investment in shares/ securities and also renders consultancy and advisory services on financial products.

On 09-06-2017, Ministry of Corporate Affairs issued a letter vide which 331 shell companies were listed against whom SEBI was directed to take appropriate action. On 07-08-2017, SEBI placed trading restrictions on the appellant company and its directors, which was challenged by the appellants through an appeal that was disposed of. On further investigation, an interim order was passed by SEBI on 09-11-2017 which included a direction to conduct a Forensic Audit.

Based on the Audit Report show cause notice was issued for violating provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, (‘LODR') 2015, non- furnishing of information to the forensic auditor, violation of other provisions of LODR Regulations and violation of Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Market (‘PFUTP') Regulations,2003.

The WTM found that the appellant violated provisions of LODR Regulations and violated Section 11(2)(I) of the SEBI Act by not furnishing information to the Forensic Auditor. But WTM did not find any violation of SEBI PFUTP Regulations, 2003 as there was no misappropriation of the funds nor had the Company or its Directors caused a fraud upon the investors. No unfair advantage was taken nor was any loss incurred by the investors. The WTM accordingly debarred the appellants from accessing the securities market for a period of one year and imposed different amounts of penalties.

Arguments:

The counsel for the appellants accepted that the Company has made certain lapses and failed to comply with LODR Regulations, but the lapse was not intentional and happened on account of procedural and technical issues. He contended that the entire enquiry was initiated with regard to the allegations that the company was a shell company which was false. He also brought to the notice of the Court that the WTM gave a clear chit of non-violation of the PFUTP Regulations., 2003

The counsel for the respondent contended that the directions and penalties imposed by the WTM were just and proper.

Observation and Analysis:

The Court observed that there was no misappropriation of the funds, and no fraud was done by the company or directors to its investors.

Further, it was observed that the company or the directors gained anything by violating LODR Regulations, 2015.

According to the Court's opinion, the directions of debarment and the penalty given by the WTM were harsh and excessive. It was observed that the period of debarment has already been undergone by the appellants, hence no orders were passed in that regard.

Further, the Court said that the penalty should be reduced. Therefore, a penalty of 25% of the penalty imposed by the WTM would be just and proper.

[V.B. Industries Limited v. SEBI, Appeal No. 750 of 2021, decided on 29-07-2022]


Advocates who appeared in this case :

Mr. Vinay Chauhan, Advocate with Mr. K.C. Jacob, Mr. Harish Khedekar and Ms. Dhvani Asher, Advocates i/b Vis Legis Law Practice, Advocates, for the Appellants;

Mr. Gaurav Joshi, Senior Advocate with Mr. Chirag Shah and Ms. Daksha Kasekar, Advocates i/b Mansukhlal Hiralal & Co., Advocates, for the Respondent.

Op Ed
Op EdsOP. ED.

Introduction

In its decision in Lalit Kumar Jain v. Union of India2, the Supreme Court allowed creditors like banks and other financial service providers to proceed against personal guarantors including promoters, MDs, and Chairmen of the corporate debtor for recovery of corporate loans under the Insolvency and Bankruptcy Code, 20163 (IBC). The common objection of the petitioners who had furnished personal guarantees was against the validity of the Central Government Notification dated 15-11-2019 (notification) which brought into force Part III of the IBC relating to insolvency and bankruptcy of individuals and partnership firms insofar as it is applicable to personal guarantors and corporate debtors. This piece seeks to examine the judgment in light of its consistency with Indian contract law and also analyse its impact on the sector.

Case outline

Post the release of the notification, several personal guarantees were invoked causing complications in insolvency proceedings at different stages since adjudication against both corporate debtor and personal guarantor were now clubbed under National Company Law Tribunal’s (NCLT) charge. The petitioners contended that the exercise of power by the Central Government conferred to it under Section 1(3)4 IBC was vitiated by excessive delegation, as it does not have the authority to impose conditions on the enforcement of the IBC. Thus, enforcing provisions of Part III only in relation to personal guarantors of the corporate debtors was a condition imposed by the Central Government which was ultra vires of its powers. Since it is not a compulsion under IBC for it to be applied to all individuals at the same time, the Supreme Court upheld the notification and held the exercise of power as intra vires. Another substantive question of law to be ascertained by the Supreme Court was whether the personal guarantor is also discharged of its liability on sanction of a resolution plan like the corporate debtor. The Court’s examination of the same is analysed in the following section.

Consistency with the contract law regime

A. Co-extensive liability

The petitioners urged that the application of IBC to only personal guarantors would override the protection of guarantors in contract of guarantee under the Contract Act, 18725 . Reliance was placed on the co-extensive principle under Section 1286 of the Contract Act, 1872, whereby, the liability of the surety is co-extensive with that of the principal debtor, and if the latter’s liability is discharged, so would the former’s. Thus, since the corporate debtor is discharged of any liability once a resolution plan is accepted, the personal guarantor’s liabilities must also be extinguished. Hence, by allowing creditors to separately proceed against the personal guarantors before the NCLT, the notification deprived them of their substantive statutory rights.

Rejecting this contention, the Supreme Court clarified that the sanction of a resolution plan and its finality under Section 317 IBC does not per se discharge the guarantor’s liability. Relying on Maharashtra SEB v. Official Liquidator8, the Court held that within the meaning of Section 128 of the Contract Act, in a case of an unequivocal guarantee, the liability of the guarantor continues as there is no discharge under Section 1349 of the Contract Act. It was observed that the principal debtor is discharged by an involuntary process of operation of law and not by an act or omission of the creditor and thus the creditor can proceed against the guarantor. Therefore, the discharge of liability of the corporate debtor due to an operation of law in liquidation proceedings does not ipso facto absolve the personal guarantor from its liability.

Reliance was also placed upon SBI v. V. Ramakrishnan10 wherein the Supreme Court held that a discharge of liability could not be sought by the guarantor upon approval of a resolution plan which could contain terms allowing continuation of debt of the guarantors. Moreover, since the liability of the personal guarantor arises from an independent contract, the nature and extent of the liability would depend on the terms under the contract. Therefore, conclusively, the creditors have the option to simultaneously proceed against the corporate debtor and its personal guarantor or they can choose to proceed in any order.

B. Principle of double dip

The continuation of a creditor’s claim against the guarantor does raise a legitimate concern over double recovery. The Solicitor General in Lalit Kumar case11 argued against this by relying on the principle of double dip, whereby the creditor can recover the same debt from two entities — principal debtor and guarantor or co-debtors or co-guarantors. Thus, until the creditor is paid the full amount, it can assert a claim for recovery against both or either of the entities or in case a portion is already paid by one, the other would be liable for the remaining amount as the liabilities of both are joint and several. Safeguards against double recovery are embedded in the contract law as also reiterated in the report of the Insolvency Law Committee that availability of simultaneous remedies against principal debtor and guarantor does not allow the creditor to recover more than the total debt due.12 Other safeguards can be found in IBC provisions itself. For example, Section 1413, under which a moratorium prohibiting institution of suits or continuation of pending suits/proceedings against the corporate debtor can be declared by the adjudicating authority.

Juxtaposing the principle of double dip with the principle of double proof, the Solicitor General in Lalit Kumar case14 contended that the latter is concerned with the claim of recovery of the same debt against the same estate twice, thereby leading to double payment out of one estate. On the other hand, the former involves claim of recovery of same debt against two separate estates, which is permissible under the insolvency laws. Accepting the arguments of the Solicitor General, the Supreme Court relied on Kaupthing Singer & Friedlander Ltd., (No. 2), In re15, wherein the UK Supreme Court had held that the principle of double proof does not prevent creditors to benefit from the principle of double dip and creditors can claim the same debt against two separate estates. The UK Supreme Court had further clarified that the creditors can proceed against either or both principal borrower and guarantor. However, if both are insolvent, then the creditor can proceed against each for the full amount but cannot recover more than the full amount in all. Therefore, the Supreme Court recognised the double dip principle and allowed the recovery of only the stipulated debt amount irrespective of who the creditor decides to proceed against and in which order.

In an earlier decision of Vishnu Kumar Agarwal v. Piramal Enterprises Ltd.16, the Nclat held that an application once admitted against one of the corporate debtors including principal debtor or corporate guarantor(s), the second application by the same creditor for the same set of claims and default cannot be admitted against the other corporate debtor. It was also held that a claim cannot be filed by the same creditor in two separate corporate insolvency resolution processes (CIRP) of principal borrower and corporate guarantor, for the same set of debt. However, advancing Rakhecha argument, this is a kind of double dip which is permissible in law as by following the rationale in Kaupthing Singer case17, if both the principal borrower and the guarantor are insolvent, then the creditor can proceed against each for the full amount but cannot recover more than the full amount.18 Pursuant to the evident violation of the principle of co-extensive liability of both the principal borrower and the guarantor under Section 128 of the Contract Act, an appeal against the decision is still pending before the Supreme Court. It infringes upon the statutory right of the creditors by restricting them to proceed against any corporate debtor.

The Supreme Court in Lalit Kumar case19 provided much needed clarity for personal guarantors, especially since Piramal judgment20 deals with corporate guarantors and not personal guarantors. The Supreme Court in Lalit Kumar case21 also held that the exception to moratorium envisaged under Section 14 extends to only corporate guarantors and not personal guarantors, thereby allowing a possibility of moratorium protection to personal guarantors unlike corporate guarantors. There is still an impending need for IBC to address such gaps in the legislation, especially in case of differential treatment of personal guarantors and corporate guarantors.

C. Right of subrogation

This statutory right under Section 14022 of the Contract Act puts the guarantor in the shoes of the creditor, allowing it to recover the amount paid on behalf of the principal debtor after the discharge of liabilities. A substantive question is whether a resolution plan allowing creditors to recover their dues from guarantors can, at the same time take away guarantor’s statutory right of subrogation. The IBC does not consider this right as an absolute right as it renders the process of insolvency pointless by further hampering the assets of the corporate debtor.

The petitioners in Lalit Kumar case23 argued that the creditors’ rights enjoyed by the guarantor would also include the right to file a resolution plan against the corporate debtor after the resolution process, which in the petitioners’ contention, the promoters (who are personal guarantors in most cases) are barred from filing under Section 29-A24 IBC. Thus, the petitioners criticised the impugned notification for the inability of personal guarantor to recover amounts from the corporate debtor.

The Court only briefly addressed this issue without delving into the fundamentals. Reliance was again placed on Kaupthing Singer & Friedlander Ltd. case25, wherein the UK Supreme Court had reiterated that the principal debtor has a primary obligation towards the creditor and only a secondary obligation to indemnify the guarantor if and so far, as it discharges the principal debtor’s liability. Similarly, the guarantor has an obligation to the creditor to pay on behalf of the principal debtor but has only a secondary right to recovery from the principal debtor. However, the Supreme Court in Lalit Kumar case26 left the argument at a vague note quoting UK Supreme Court’s observation in Kaupthing case27 that, if the principal debtor is already insolvent then the guarantor may not enforce its secondary right in competition with the creditor.

Thus, it can be modestly inferred that the Court’s assessment is biased towards the fulfilment of the sole purpose of debt recovery. In Essar Steel (India) Ltd. Committee of Creditors v. Satish Kumar Gupta28, the approval of Arcelor Mittal’s resolution plan providing deemed extinguishment of all claims of guarantors based on subrogation under the guarantee clearly indicated the prevalence of resolution plans over contractual rights of the personal guarantors. Such a right to denial vested with the corporate debtor is discriminatory as it advocates silencing of one set of guarantor’s rights to advance the rights of the creditors. Thus, effective safeguards need to be employed to prevent overriding of contractual rights.

Impact on the sector and concluding remarks

The judgment is beneficial to the creditors as it opens doors for them to access the asset pool of personal guarantors for debt recovery. However, it will also add to the already high bargaining power of the creditors against the corporate debtor leading to a concentration of powers with the creditors as now they have another route to recover loans besides the existing ones under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 200229 and debt recovery proceedings among other civil remedies. This might lead to a rise in quantity of litigation between the three stakeholders, creditors, corporate debtors, and their personal guarantors. The judgment may be worrisome for the promoters who act as personal guarantors for companies burdened with debt as they are not off the hook even after the acceptance of the resolution plan. In Ramanujam’s view, this violates the principle of limited liability and disincentivises entrepreneurial risk-taking which is equally important as comforting lenders for keeping the sector afloat.30 Thus, it is agreed that the promoters do take an additional risk by offering personal guarantee, however, for further nourishment of the sector, the focus must be on diligence on borrowing over giving additional comfort support to the creditors.

The unification of proceedings under NCLT will not only allow the adjudicating authority and committee of creditors to consider the complete picture while evaluating the nature of assets and framing of an optimal resolution plan, respectively, but also help in avoiding unnecessary delays in the recovery process. During the hearings, Attorney General K.K. Venugopal contended in support of the notification that roping in guarantors would incentivise them to pay off the debt faster in view of obtaining a quick discharge. However, the decision of non-discharge of personal guarantors even after acceptance of resolution plan would evidently disincentivise them to respond quickly, thereby leading to delays.

Overall, there is no doubt that the judgment is more inclined towards the debt recovery aspect of insolvency proceedings as opposed to encouragement of the prime objective of IBC i.e. rescue of corporate debtors in distress. Without concretising the boundaries of right to subrogation after the recovery of debt by invocation of the personal guarantee puts the already debt-laden corporate debtor in a more uncertain position vis-à-vis repayment to the personal guarantor. With the possibility of extinguishing this right of the guarantors in the aftermath of Essar decision31, the corporate debtors would increasingly rely on the assets of the personal guarantor which may result in an increased risk appetite for taking loans, owing to the added cushioning. On the other hand, some also contend that the inclusion of the personal guarantor’s assets to mitigate the corporate debtor’s liabilities might lower the total debt servicing of the corporate debtor.32

Post Supreme Court’s favourable decision, the creditors have invoked personal guarantees worth of Rs 34,000 crores in view of Rs 37,861 crores as the total debt default by companies.33 Thus, evidently, the majority of the burden is falling on the personal guarantors as lenders try to recover the total debt. Although this will improve the financial health of the banking sector, but the interests of the personal guarantors need to be the top priority in order to keep it afloat in the future.


† BBA LLB (Hons.), Jindal Global Law School, O.P. Jindal Global University, Haryana, India. Author can be reached at <muskaangarg2018@gmail.com>.

2. (2021) 9 SCC 321.

3. Insolvency and Bankruptcy Code, 2016.

4. Insolvency and Bankruptcy Code, 2016, S. 1(3).

5. Contract Act, 1872.

6. Contract Act, 1872, S. 128.

7. Insolvency and Bankruptcy Code, 2016, S. 31.

8. (1982) 3 SCC 358.

9. Contract Act, 1872, S. 134.

10. (2018) 17 SCC 394.

11. (2021) 9 SCC 321.

12. Ministry of Corporate Affairs, Report of the Insolvency Law Committee (February 2020).

13. Insolvency and Bankruptcy Code, 2016, S. 14.

14. (2021) 9 SCC 321.

15. (2012) 1 AC 804 : (2011) 3 WLR 939 : 2011 UKSC 48.

16. 2019 SCC OnLine NCLAT 81.

17. (2012) 1 AC 804 : (2011) 3 WLR 939 : 2011 UKSC 48.

18. Shradha Rakhecha, “Double Dip under IBC — A Tough Choice for Lenders — Contracts and Commercial Law — India” (Mondaq.com, 2019) <https://www.mondaq.com/india/contracts-and-commercial-law/864448/double-dip-under-ibc–a-tough-choice-for-lenders>.

19. (2021) 9 SCC 321.

20. 2019 SCC OnLine NCLAT 81.

21. (2021) 9 SCC 321.

22. Insolvency and Bankruptcy Code, 2016, S. 140.

23. (2021) 9 SCC 321

24. Insolvency and Bankruptcy Code, 2016, S. 29-A.

25. (2012) 1 AC 804 : (2011) 3 WLR 939 : 2011 UKSC 48.

26. (2021) 9 SCC 321

27. (2012) 1 AC 804 : (2011) 3 WLR 939 : 2011 UKSC 48.

28. (2020) 8 SCC 531.

29. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

30. S. Ramanujam, “Double Whammy for Personal Guarantors to Corporate Debtors” (Lawstreetindia.com, 2021) <http://www.lawstreetindia.com/experts/column?sid=571>.

31. (2020) 8 SCC 531.

32. Utkarsh Anand, “Personal Guarantors Accountable in IBC:  SC” (livemint.com, 2021) <https://www.livemint.com/news/india/personal-guarantors-accountable-in-ibcsc-11621618103236.html>.

33. Dev Chatterjee, “Banks Invoke Rs 34K-Crore Personal Guarantees in 200 Cases So Far” (Business-standard.com, 2021) <https://www.business-standard.com/article/finance/lenders-rush-to-invoke-personal-guarantees-of-promoters-121090701089_1.html>.

Legislation UpdatesRules & Regulations

The Central Government notifies National Financial Reporting Authority Amendment Rules, 2022 to amend the National Financial Reporting Authority Rules, 2018.

The Amendment introduces the penalty in case of non compliance of the provisions of the Rules.

“13. Punishment in case of non-compliance:-

Whoever contravenes any of the provisions of these rules, shall be punishable with fine not exceeding five thousand rupees, and where the contravention is a continuing one, with a further fine not exceeding five hundred rupees for every day after the first during which the contravention continues.”.

Business NewsNews

Central Government designates the Court of Additional Judicial Commissioner, Ranchi in the State of Jharkhand as a Special Court for the purposes of providing speedy trial of offences punishable with imprisonment of two years or more as per clause (a) of sub-section (2) of Section 435 of the Companies Act, 2013.


Ministry of Corporate Affairs

[Notification dt. 5-5-2022]

Legislation UpdatesNotifications

The Ministry of Corporate Affairs has extended the last date of filing of the Cost Audit Report to the Board of Directors under Rule 6(5) of the Companies (Cost Records and Audit) Rules, 2014 on September 27, 2021.

 

The circular states that if a cost-audit report for the financial year 2020-21 by the cost auditor to the Board of Directors of the companies is submitted by October 31, 2021 then the same would not be viewed as a violation of rule 6(5) of Companies (cost records and audit) Rules, 2014. Therefore, the cost audit report for the financial year ended on March 31, 2021 shall be filed in e-form CRA-4 within 30 days from the date of receipt of the copy of the cost audit report by the company. However, in case a company has got an extension of time for holding Annual General Meeting under section 96(1) of the Act then e-form CRA-4 may be filed within the timeline provided under the proviso to rule 6(6) of the Companies (Cost Records and Audit) Rules, 2014.

 


*Tanvi Singh, Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Coram of Justice Bansi Lal Bhat (Acting Chairperson), Justice Anant Bijay Singh(Judicial Member), Dr Ashok Kumar Mishra (Technical Member) while hearing two clubbed appeals challenging an order by NCLT, upheld the order, and modified the interim relief by directing suspension of the General Committee (GC) and appointment of an Administrator to be nominated by the Union of India to manage the affairs of the Club.

In the instant case, the 107 years old Delhi Gymkhana Club (registered under Section 8 of the Companies Act) was under a dispute involving allegations of mismanagement. The Club had its main objective to promote various sports and pastimes and other objectives set out in the Memorandum of Association and had limited membership. The number of permanent members was 5600. However, the users of the Club were stated to be double the number of permanent members. Following the Complaints from the government, Ministry of Corporate Affairs directed to take penal action against the Club management, auditors of the Club besides revocation of license of the Club, removal of the existing management, the appointment of Government Directors and carrying out a supplementary inspection to take up issues related to allotment of membership, money received from the new applicants as registration fee for membership, accounting treatment of the amount received from new applicants, investments made by the Club from such membership fee and with regard to the processing charges received from the Applicants.

Therefore, the Ministry of Corporate Affairs (MCA) had moved the NCLT alleging that the club’s affairs were being run in a manner “prejudicial to public interest”.

While opining in favour of the State, “Krishan Lal Gera v. State of Haryana (2011) 10 SCC 529 was referred to, which states, “If a chunk of a Government stadium, being prime land in the heart of the city meant for developing sports and 49 athletics is misused or illegally allowed to go into private hands, it cannot be said that no public interest is involved…”.

Certain points were stressed on while deciding the appeal and were remarked as:

“…It is abundantly clear that misuse of the Club meant for pastime and sports activities and denying access of membership even after accepting the enhanced membership fee and putting them in queue for decades together with utilization of the component of interest admissible on their invested membership fee for the benefit of permanent members and users seriously jeopardized interest of such prospective members and involved public interest…”.

“…that induction of two nominees by Central Government as members in the GC to monitor the affairs of Club and give suggestions to the GC is of no consequence as the voice of such nominees, on account of their inferior numerical strength in GC is bound to be lost in the din and the interim relief as granted would become meaningless…”.

[Ministry of Corporate Affairs v. Delhi Gymkhana Club Ltd., 2021 SCC OnLine NCLAT 76, decided on 15-02-2021]

Legislation UpdatesNotifications

S.O. 4638(E)— In exercise of the powers conferred by Section 10A of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), the Central Government hereby notifies further period of three months from the 25-12-2020, for the purposes of the said section.


Ministry of Corporate Affairs

[Notification dt. 22-12-2020]

Legislation UpdatesNotifications

S.O. 4646(E).—In exercise of the powers conferred by Section 1 (2) of the Companies (Amendment) Act, 2020 (29 of 2020), the Central Government hereby appoints the 21-12-2020 as the date on which the following provisions of the said Act shall come into force, namely:-

S. No. Sections
1. Section 1;

 

2 Section 3;

 

3 Sections 6 to 10 (both inclusive);

 

4 Sections 12 to 17 (both inclusive);

 

5 Clauses (a) and (b) of section 18;

 

6 Sections 19 to 21 (both inclusive);

 

7 Clause (i) of section 22;

 

8 Section 24;

 

9 Section 26;

 

10 Sections 28 to 31 (both inclusive);

 

11 Sections 33 to 39 (both inclusive);

 

12 Sections 41 to 44 (both inclusive);

 

13 Sections 46 to 51 (both inclusive);

 

14 Section 54;

 

15 Section 57;

 

16 Section 61; and

 

17 Section 63.

 


Ministry of Corporate Affairs

[Notification dt. 21-12-2020]

COVID 19Legislation UpdatesNotifications

Centre makes amendment to Schedule VII of Companies Act, 2013 to include “PM CARES Fund” as a Corporate Social responsibility.

Thus, any contribution made to the PM-CARES Fund shall qualify as CSR expenditure.


G.S.R. 313(E).—In exercise of the powers conferred by sub-section (1) of section 467 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following further amendment to Schedule VII of the said Act, namely:—

In Schedule VII, item (viii), after the words “Prime Minister’s National Relief Fund”, the words “or Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)” shall be inserted.

2. This notification shall be deemed to have come into force on 28th March, 2020.


Ministry of Corporate Affairs

[Notification dt. 26-05-2020]

COVID 19OP. ED.Practical Lawyer Archives

Under the extant provisions of the Companies Act, 2013 (“the Act”), approval of the shareholders can be obtained by passing a resolution in general meeting or voting through electronic means (i.e. e-voting) or postal ballot. The Act read with the relevant Rules made thereunder provide for detailed procedures for obtaining shareholders’ approval. Under the extant provisions, only meeting of the board of directors can be held through videoconferencing (VC) and other audio-visual means (OAVM). In view of the current extra-ordinary circumstances due to the pandemic caused by COVID-19 prevailing in the country, requiring social distancing, it is difficult for companies to obtain shareholders’ approval by conducting general meetings. Taking into consideration this situation, the Ministry of Corporate Affairs (MCA) had provided a framework for conducting extra-ordinary general meeting of the company through VC or OAVM[1]. MCA issued another Circular and permitted the companies to hold the annual general meeting through VC or OAVM during the calendar year 2020[2].

This article is an analysis of certain provisions of the MCA directions and also address certain challenges for listed companies in conducting AGM through VC or OAVM.

Rights of shareholders: Before we discuss the procedure for conducting general meetings through VC or OAVM, let us first discuss the rights of shareholders. Chapter II of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the SEBI Regulations) relates to ‘Principles governing disclosures and obligations of listed entity’. According to the provisions, the shareholders shall have the right to participate in, and to be sufficiently informed of, decisions concerning fundamental corporate changes. The shareholders shall also have an opportunity to participate effectively and vote in general shareholder meetings. Shareholders shall be informed of the rules, including voting procedures that govern general shareholder meetings. They shall have an opportunity to ask questions to the board of directors, to place items on the agenda of general meetings, and to propose resolutions, subject to reasonable limitations. Effective shareholder participation in key corporate governance decisions, such as the nomination and election of members of board of directors. The exercise of ownership rights by all shareholders, including institutional investors. Listed entity shall have adequate mechanism to address the grievances of the shareholders.

The SEBI Regulations also provide that the exercise of voting rights by foreign shareholders shall be facilitated and the processes and procedures for general meetings shall allow for equitable treatment of all shareholders. The procedures of listed entity shall not make it unduly difficult or expensive to cast votes. The listed entities shall also ensure the said rights prescribed in the SEBI Regulations are not affected when the AGM of the company is conducted through VC or OAVM.

The highlights of the MCA Circular permitting companies to hold AGMs through VC or OAVM and certain challenges are as follows:

  1. Taking into consideration the difficulties involved in dispatching of physical copies of financial statements (including Board’s Report, Auditor’s Report, or other documents required to be attached), MCA has permitted sending such documents by e-mail to the members, trustees for the debenture-holders, or any other person entitled to receive such documents. The companies are required to give public notice by way of advertisement in vernacular language of the district in which registered office is situated and at least once in English language in English newspaper (preferably both newspapers having electronic editions). Considering this, the cost of conducting general meetings is significantly reduced for such listed companies.
  2. One of the biggest challenges for listed companies is to get the e-mail addresses of the members (holding shares in physical form) registered for sending financial statements. This will also enable the shareholders to cast their vote through remote e-voting or through e-voting during the meeting. Presently, even in the lockdown, the depositories, Registrar and share transfer agents and companies are taking adequate steps for the registration of e-mail addresses of such shareholders. However, for certain listed companies some shareholders are either not traceable or their contact details are not updated.
  3. According to MCA directions, the listed company shall provide two-way tele-conferencing facility or webex for ease of participation of the members and the participants are allowed to pose questions concurrently or given time to submit questions in advance on the e-mail address of the company. Such facility must have a capacity to allow at least 500 members or members equal to the total number of members of the company. According to the principles governing disclosures and obligations of listed entity under the SEBI Regulations (as discussed above), the shareholders shall have right to participate in, and to be sufficiently informed of, decisions concerning fundamental corporate changes. The shareholders shall also have an opportunity to participate effectively and vote in general shareholder meetings. The shareholders shall have an opportunity to ask questions to the board of directors, to place items on the agenda of general meetings, and to propose resolutions, subject to reasonable limitations. Considering the total number of shareholders and their participation, it would be quite difficult for listed companies to provide two-way tele-conferencing facility in the general meetings. Considering the participation of members and question-answer session, such meetings would take a long time to conclude. Presently, the companies/Registrar and share transfer agents are in the process of developing a system to answer/reply to the queries asked in the general meeting through VC or OAVM.
  4. According to the MCA directions, the process for election of Chairman depends upon the members present at the meeting i.e. if members present are less than 50, then the Chairman is appointed in accordance with Section 104 of the Act. And if the members present are more than 50, then the Chairman shall be appointed by a poll conducted through electronic voting system during the meeting. i.e. generally, in the case of listed entities, it will be compulsory to have a system of ‘electronic voting during the meeting’ for members attending electronically (i.e. VC or OAVM). This mandatory agenda item of electing the Chairman would consume a lot of time before discussing the agenda for the meeting. For listed entities (at least for 500-BSE companies), the participation in general meeting would be more than 50 members. The MCA direction with reference to the appointment of Chairman for the meeting directly conflicts with the provision in the Act. It would be quite challenging for the companies to comply with the said provision.
  5. According to the MCA directions, where less than 50 members are present in a meeting, the Chairman may decide to conduct a vote by show of hands (i.e. one member is equal to one vote, irrespective of shareholding), unless a demand for poll (i.e. one share is equal to one vote) is made by any member in accordance with Section 109 of the Act. In the VC system or OAVM system, the listed companies would be required to have a mechanism for demanding poll and the shareholders should be equipped to participate in the demand. Considering that e-voting (i.e. one share is equal to one vote) is open not less than 3 days before the general meeting, the MCA should have provided uniform method of voting for the general meeting through VC or OAVM.
  6. Under the Act, the register of directors and KMP and their shareholding shall be kept open for inspection at every annual general meeting of the company and shall be made accessible to any person attending the meeting. The VC system may have a facility of the company to upload the scanned copy of the register and members during the meeting through VC or OAVM may inspect the same. Similarly, if the articles of association of the company are being amended, the draft articles of association can be made available for inspection in the VC system.
  7. According to the extant provisions of the Act, the annual general meeting of the company shall be called during business hours i.e. between 9 a.m. to 6 p.m. According to the MCA directions, the convenience of different persons positioned in different time zones shall be kept in mind before scheduling the meeting. Listed entities shall balance the two provisions for conducting the meeting, however ensuring convenience of shareholders in different time zones is difficult.
  8. In case of payment of final dividend, MCA has directed companies to pay dividend though electronic clearing service or any other means. Where the company is unable to pay the dividend to any shareholders by electronic mode, due to non-availability of bank details, the company are directed to dispatch the dividend warrant/cheque to such shareholder by post (i.e. upon normalisation of postal services). Post-lockdown and thereafter, if such dividend is not claimed by the shareholder then it may get credited in unpaid dividend account and then investor education and provident fund (IEPF) account which may be more difficult for the shareholders to claim such dividend.
  9. Considering the fact that the member would be attending the general meeting through VC or OAVM, the concept of proxy has become redundant. As per the MCA Circular, such member would be counted for the purpose of reckoning the quorum under the Act.
  10. Atleast an independent director and auditor/representative of auditor are mandated to attend the such meeting through VC or OAVM. Institutional investors are encouraged to attend and vote at the meeting.

Taking into consideration that MCA has permitted companies to hold the general meetings through VC or OAVM, SEBI may also relax certain provisions of the SEBI Regulations in due course. It will be interesting to see the effective implementation of the dynamic amendments introduced to the provisions of general meeting – i.e. calling of meeting, holding and conducting of meeting. Taking into consideration the current extra-ordinary circumstances due to the pandemic caused by COVID-19, for the general meetings for the year 2020 should be more of ‘shareholders co-operation’ than ‘shareholders activism’, except in exceptional circumstances.


*Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com

[1] MCA General Circular No. 14/2020 dated April 8, 2020.

[2] MCA General Circular No. 20/2020 dated May 5, 2020.

National Company Law Tribunal
Appointments & TransfersNews

Extension of tenure of BSV Prakash Kumar, Judicial Member, NCLT as Acting President — National Company Law Tribunal.

The extension period has been would come into effect from 05-04-2020 for 3 months to ill joining of new President or until further orders whichever is earlier.

The same was notified by Ministry of Corporate Affairs.


Ministry of Corporate Affairs

[Dated: 02-04-2020]

National Company Law Tribunal
Legislation UpdatesRules & Regulations

Ministry of Corporate Affairs notified the National Company Law Tribunal (Recruitment, Salary and other Terms and Conditions of Service of Officers and other Employees) Rules, 2020 on 21-01-2020 through Notification No. G.S.R. 42(E).

The said notification has 17 Rules laid down along with 2 Schedules.

Excerpt from the Notification is as follows:

4. Initial Constitution.—The incumbent of the post shown in the column 1 of the said Schedule-I, who is holding such post on regular basis by becoming employee/officer of the Appellate Tribunal on and from dissolution of Company Law Board /Competition Appellate Tribunal shall deemed to have been duly appointed under the Provisions of these rules and service rendered by him/her in said post before the said commencement shall be taken into account for the purpose of rights and privileges as to pension, gratuity and other like benefits.

5. Number of post, classification and level in pay matrix.—The number of post of officers and employees, their classification and level in pay matrix attached thereto shall be as specified in columns (2) to (4) of Schedule-I.

6. Method of recruitment, age-limit, qualifications, etc.—The method of recruitment, age limit, qualifications and other matters relating thereto shall be as specified in columns (5) to (13) of Schedule-I.

7. Appointment.—Appointment of Officers and other employees of Appellate Tribunal shall be made by Appointing Authority, provided that the appointments to the posts in Level 11 or above in Pay Matrix of Seventh Central Pay Commission shall be made with the approval of Central Government.

The detailed notification can be accessed here: NCLT (Recruitment, Salary and other Terms and Conditions of Service of Officers and other Employees) Rules, 2020


Ministry of Corporate Affairs

[Notification dt. 21-01-2020]

Legislation UpdatesRules & Regulations

Ministry of Corporate Affairs notified the amended Companies (Appointment and Remuneration of Managerial Personnel) Rules i.e. the Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules, 2020.

ln the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2O14 (hereinafter referred to as said rules), for rule 8A, the following shall be substituted as under:-

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

In the said rules, in Rule 9 of the said rules, in sub-rule (1),

(i) after clause (b), at the end the word “or” shall be inserted.

(ii) after clause (b), the following clause shall be inserted, namely:-

“(c) every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more.”.

(iii) the following Explanation shall be inserted, namely:-

“Explanation:- For the purposes of this sub-rule, it is hereby clarified that the paid-up share capital, turnover, or outstanding loans or borrowings as the case may be, existing on the last date of the latest audited financial statement shall be taken into account.”.


Ministry of Corporate Affairs

[Notification dt. 03-01-2020]

Legislation UpdatesRules & Regulations

G.S.R. 351(E).—In exercise of the powers conferred by sub-section (1) and sub-section (2) of Section 469 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following rules further to amend the National Company Law Tribunal Rules, 2016, namely:-

1. (1) These Rules may be called the National Company Law Tribunal (Second Amendment) Rules, 2019.

    (2) They shall come into force on the date of their publication in the Official Gazette.

2. In the National Company Law Tribunal Rules, 2016 (hereinafter referred to as the principal rules), in Rule 84, after sub-rule

    (2), the following sub-rules shall be inserted, namely: –

“(3) In case of a company having a share capital, the requisite number of member or members to file an application under sub-section (1) of Section 245 shall be –

(i) (a) at least five per cent. of the total number of members of the company; or

    (b) one hundred members of the company, whichever is less; or

(ii) (a) member or members holding not less than five per cent. of the issued share capital of the company, in case of an unlisted company;

     (b) member or members holding not less than two per cent. of the issued share capital of the company, in case of a listed company.

(4) The requisite number of depositor or depositors to file an application under sub-section (1) of Section 245 shall be –

  (i) (a) at least five per cent. of the total number of depositors of the company; or

      (b) one hundred depositors of the company, whichever is less; or;

(ii) depositor or depositors to whom the company owes five per cent. of total deposits of the company.”

3. In the principal rules, in the schedule of fees, serial No. 28 shall be omitted.


[Notification dt. 08-05-2019]

Ministry of Corporate Affairs

Legislation UpdatesRules & Regulations

Ministry of Corporate Affairs has revised the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011 (NVGs) and formulated the “National Guidelines on Responsible Business Conduct “(NGRBC). These guidelines urge businesses to actualise the principles in letter and spirit.

These principles are:

1.      Businesses should conduct and govern themselves with integrity in a manner that is Ethical, Transparent and Accountable.

2.      Businesses should provide goods and services in a manner that is sustainable and safe

3.      Businesses should respect and promote the well-being of all employees, including those in their value chains.

4.      Businesses should respect the interests of and be responsive to all their stakeholders.

5.      Businesses should respect and promote human rights.

6.      Businesses should respect and make efforts to protect and restore the environment.

7.      Businesses, when engaging in influencing public and regulatory policy, should do so in a manner that is responsible and transparent.

8.      Businesses should promote inclusive growth and equitable development.

9.      Businesses should engage with and provide value to their consumers in a responsible manner.

In furtherance to updation of NVGs and formulation of the NGRBCs, the Ministry of Corporate Affairs has constituted the Committee on Business Responsibility Reporting (BRR) to develop BRR formats for listed and unlisted companies. Non financial reporting is increasingly forming the basis for enhancing investor confidence in businesses and increasing their creditworthiness. The Committee is to develop comprehensive yet simple formats situating the various stakeholders at the center so as to not increase or duplicate reporting burden. The proposed formats are to reflect linkages to prevalent non-financial reporting formats, viz, Global Reporting Initiative (GRI), Integrated Reporting (IR) etc., and SDGs from a NGRBC perspective.

The Ministry of Corporate Affairs is also in the process of developing India’s National Action Plan on Business & Human Rights (NAP) in consultation with various Ministries and State Governments by 2020. A Zero Draft of India’s NAP demonstrating implementation of the three pillars of UNGPs has also been released and uploaded on the website of the Ministry.

[SOURCE: PIB]

Ministry of Corporate Affairs

Hot Off The PressNews

Supreme Court: The Bench comprising of CJ Dipak Misra and AM Khanwilkar and Dr DY Chandrachud, JJ., sought centre’s response on the plea seeking court-monitored CBI probe into the alleged suicide of BK Bansal, Ministry of Corporate Affairs’ official.

BK Bansal was the former Director General Corporate Affairs, who had hanged himself along with his son with a suicide note stating the reason to be “harassment” by CBI. Bansal was on bail when he committed suicide.

Further, a notice was issued to Centre in the same regard after the PIL was mentioned.

[Source: PTI]

Hot Off The PressNews

Supreme Court: Admitting the petition against the order giving relief to the directors of the companies struck off by the Registrar of Companies last year, Supreme Court stayed Bombay High Court’s order on the special leave petition filed by the Ministry of Corporate Affairs.

In accordance to the stated order of the Bombay High Court, the companies’ directors who had been disqualified by the Ministry of Corporate Affairs (MCA) no longer stood to be disqualified as had been directed to the Registrar of Companies.

Further, if any other High Court had issued any such order as that of the Bombay High Court, then all of those similar orders would stand stayed in around 2000 cases.

It is pertinent to note that in September last year the Ministry of Corporate Affairs had disqualified more than 3 lakh directors of various companies that failed to file financial statements and annual returns for 3 consecutive years.

[Source: moneycontrol.com]