Op EdsOP. ED.

   

The Companies Act, 20131 (Act) brought about several developments in the corporate governance regime, including the enhanced role of Company Secretaries in ensuring corporate governance in a company. In recognition of the crucial role played by them, the Act for the first time, placed Company Secretaries within the category of “key managerial personnel”, as defined under Section 2(51)2 of the Act, along with the ranks of the Chief Executive Officer, Managing Director, manager, and whole-time director. In addition to the above, Section 2053 of the Act further provides for the various functions to be carried out by a Company Secretary.

These developments are a testament to the increasingly important role now being played by a Company Secretary in a company, particularly in ensuring compliance with corporate governance principles and practices.

The National Company Law Tribunal, Chennai Bench (NCLT) on 1-7-20224 in Technology Frontiers (India) (P) Ltd. v. Global Sports Commerce Pte. Ltd.5, considered the contours of the role and powers of a Company Secretary under the Act. While the NCLT may not have gone into the entire scope and extent of a Company Secretary's role, responsibilities, and powers under the Act, it has indeed clarified and highlighted the importance and primacy of a Company Secretary in ensuring corporate governance in a company.

The NCLT while considering the extent of responsibility as well as the power imposed by the Act, on a Company Secretary, considered the definitions of certain key terms under the Act, which highlight the importance of a Company Secretary's role under the Act. The NCLT inter alia considered the definitions of “officer who is in default” and “key managerial personnel” under the Act and highlighted that the era of a Company Secretary occupying the post of a glorified clerk is long gone. The NCLT recognised that with the evolution of corporate governance and incorporation of various compliance requirements in a complex regime, there is a need to protect the interests of both the company as well as shareholders. The NCLT stressing on the prominent role played by Company Secretaries, observed that a Company Secretary is the “Watchdog of protecting the principles of corporate governance as well as the collective interest of all the stakeholders so also the company.”

The NCLT further observed that the law in terms of Section 205 of the Act, has given a statutory dimension to the Company Secretary's role in ensuring compliance and good corporate governance practice in a company. The NCLT identified that to this end, a Company Secretary in terms of Section 205 of the Act read with Rule 10 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 20146, is even authorised and in fact has a duty to represent the company “before various regulators, and other authorities under the Act in connection with discharge of various duties under the Act”. Moreover, the Company Secretary is answerable for any violation of compliance requirements by the company and is responsible even to face penal consequences if there is any non-compliance by the company.

While highlighting the importance and extent of a Company Secretary's role in a company, the NCLT however, clarified that a Company Secretary is not a “blood hound.”

Elaborating on the role played by a Company Secretary, the NCLT emphasised that a Company Secretary is required to act not only with “adequate” diligence but with “proper” and “necessary” diligence while discharging duties, “by sounding the knell” to bring to the attention of the Board and all concerned, instances wherein there is any apprehension of deviations from sound corporate principles and prudent governance practices. The NCLT went to the extent of stating that the Company Secretary must ensure mandatory compliance by approaching the competent authority if there is a lapse by the Board. In order to ensure compliance, the Company Secretary may not only approach regulators such as Registrar of Companies and Securities and Exchange Board of India (SEBI) but also “quasi-judicial” authorities such as the NCLT.

The NCLT's views shed light on the significant role played by a Company Secretary in the functioning of a company. Primarily, the NCLT recognises the role of a Company Secretary as a “watchdog” to ensure that the company complies with statutory requirements and accepts that the Company Secretary has the power to ensure such compliance as well. As key managerial personnel, a Company Secretary works closely with the management, attends meetings of the Board as well as the shareholders and is responsible for making and certifying the correctness of the statutory filings made on behalf of the company. Having a bird's eye view of the entire functioning of the company, the Company Secretary is in the most suitable position to identify if the company is on the verge of committing any default. Accordingly, if the Company Secretary is of the opinion that the directors have failed to fulfil their fiduciary duties resulting in the company being in default, the Company Secretary is also able to take steps in the interest of the company. Needless to say, a Company Secretary cannot and ought not to misuse their powers and is expected to use the same only in the interests of the company.

Additionally, a Company Secretary cannot be expected to be a “blood hound” in trying to sniff out issues which are neither known nor apparent from the record or facts as known to the Company Secretary. It only follows that a Company Secretary cannot be held liable for such defaults or failures. As a “watchdog” the Company Secretary is expected to be aware of and keep apprised of corporate governance issues in the event they arise and come to the knowledge of the Company Secretary. Once the Company Secretary becomes aware of a corporate governance issue and has relevant facts, the Company Secretary is expected to act in a manner to keep the company's interest paramount and to resolve/rectify the default/non-compliance. This is a crucial guardrail and will ensure that Company Secretaries do not end up becoming scapegoats for lapses committed by the Board of Directors in the fulfilment of their duties.

It is also to be highlighted that a Company Secretary is the Company Secretary of the company and is to assist the company and its Board of Directors as a unit. The Company Secretary cannot be treated as a secretary to an individual director and be expected to cater to their needs or compliances. Each individual is expected to be responsible for their own statutory obligations, including with respect to disclosure or other compliances, which obligation cannot become an obligation of the Company Secretary. While the Company Secretary may be expected to provide reasonable assistance to the individuals, the obligation necessarily still remains that of a particular individual. An apt illustration in this regard would be the duty of directors to disclose their interests in other entities in terms of Section 1847 of the Act read with the Rules. A bare perusal of the provision makes it abundantly clear that the obligation to make such a disclosure in the prescribed Form MBP-1 lies solely upon the director concerned. In such cases, one may not be able to shift the obligation of disclosure or any default in compliance on the Company Secretary, in case the director himself has not made the disclosure in the form and manner required under the Act.

The NCLT's decision8 is also important as it will serve as a crucial yardstick to test the exercise of powers by Company Secretaries under the Act. The courts in India, including the Supreme Court, have on multiple occasions considered and discussed the important role played by Chartered Accountants/Auditors in a company. In today's corporate structure, the company is headed by the Board of Directors and is to be operated for the interests and benefits of the shareholders and other stakeholders. In addition to the Executive Board of the company, the Act has identified and enhanced both the powers and responsibilities of key stakeholders in a company such as the Independent Directors, Auditors and Company Secretaries. The NCLT has acknowledged the importance placed by the Act on the role of a Company Secretary as a “watchdog” of governance in a company. It will be important to see how the High Courts and Supreme Court decide on the role, obligation, extent, limits, and guardrails applicable to a Company Secretary.


† Partner, AZB & Partners, New Delhi. Author can be reached at aditya.jalan@azbpartners.com.

†† Senior Associate, AZB & Partners, New Delhi. Author can be reached at urvashi.misra@azbpartners.com.

1. Companies Act, 2013.

2. Companies Act, 2013, S. 2(51).

3. Companies Act, 2013, S. 205.

4. Mayank Agarwal v. Technology Frontiers (India) (P) Ltd., 2022 SCC OnLine NCLT 223.

5. 2022 SCC OnLine NCLT 223.

6. Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, R. 10.

7. Companies Act, 2013, S. 184.

8. 2022 SCC OnLine NCLT 223.

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

   

National Company Law Appellate Tribunal (NCLAT): While deciding the instant appeal filed by Precious Energy Services Ltd., against the order of NCLT holding the reduction of share capital to be against the interests of the company; the Bench of Justice Anant Bijay Singh (Judicial Member) and Shreesha Merla (Technical Member) allowed theappeal by referring to the decision of Panruti Industrial Co., (Private) Ltd., 1959 SCC OnLine Mad 138 which stated that “reduction of share capital is a matter of domestic concern; one for the decision of the majority of the shareholders of the company”.

Background of the case: The Appellant Company, having an authorised capital as on 31-03-2019 of Rs 7.51,00,000/-; and Rs 6,98,50,050/- as the Issued, Subscribed and Paid-up Share Capital, passed a Board Resolution dated 30-09-2019 resolving to confirm the reduction of the Share Capital by cancelling Rs 69,75,000 Equity Shares of Rs 10 each, paying to the holders of such Equity Shares an agreed amount of Rs.74.49 per Equity Share totaling to Rs 54,04,92,750.

An Annual General Board Meeting of the Members was convened on 24-09-2019 for confirming the reduction of Share capital by cancelling Rs 69,75,000/- Equity Shares of Rs.10 each and paying to the holder of such Equity, the agreed amount of Rs 77.49 per Equity Share.

In view of the negative net worth as per Books, and negative Book value per share, The NCLT was of the view that the proposed capital reduction by way of return of capital to its shareholders was not in the overall interest of the Company and its stake-holders.

The appellant Company then preferred the instant appeal under Section 421 of Companies Act, 2013 against the afore-stated order passed by the National Company Law Tribunal, Ahmedabad Bench.

Contentions: The appellant’s Counsel submitted that the reduction of the Capital Share was approved by the shareholders of the company with the help of Special Resolution to decrease the capital and improve the earning. It was submitted that when the decision of reducing the capital share was passed unanimously then the decision of majority prevails and the decision of NCLT is conflicting to Section 66 of the Companies Act, 2013.

The appellant further submitted that the reduction of the Share Capital is the ‘domestic affair’ of the Appellant Company which ought to be permitted when there are no objections from the Shareholders and the Creditors.

Observations: Perusing the facts of the instant appeal, the Bench examined the relevant provisions of the Companies Act, 2013– namely Section 66 and a plethora of judicial pronouncements on the issue. The Bench quoted the decision of Madras High Court in Panruti Industrial Co., (Private) Ltd., 1959 SCC OnLine Mad 138 and a recent NCLAT decision in Economy Hotels India Services Private Limited v. Registrar of Companies, 2020 SCC OnLine NCLAT 653, wherein the Tribunal had clearly stated that “Reduction of Capital is a domestic affair of a particular Company in which, ordinarily, a Tribunal will not interfere because of the reason that it is a majority decision which prevails…

Furthermore the Bench observed that Reduction of the Share Capital was approved by the Shareholders of the appellant company unanimously by way of a Special Resolution with the objective of reducing the overall weighted average cost of Capital and improving the earnings per share.

It was further observed that appellant Company had complied with all the statutory requirements entailed in Section 66 of 2013 Act and had also filed necessary Affidavits to that effect. It was also pointed out that none of the Creditors objected to the reduction of the Capital.

The Bench also noted that the appellant Company had deposed in a Clarificatory Affidavit regarding its financial position which is not in the negative

Decision: With the afore-stated observations, the Tribunal held that the reduction of the Share Capital was approved by the Shareholders of the appellant Company unanimously and that the Creditors of the Company have also not objected to the same. Thus, this reduction does not cause any prejudice to any class of Creditors. The Tribunal therefore confirmed the reduction of share capital.

[Precious Energy Services Limited v. The Regional Director, COMPANY APPEAL (AT) No. 17 of 2021, decided on 28-07-2022]


Advocates who appeared in this case :

Arun Kathpalia, Sr. Advocate along with Hemant Sethi, Gaurav H Sethi, Diksha Gupta, Jay Mehta and Aditya Dhupper, Advocates, for the Appellant;

Ankit Shah, Advocate, for the Respondent.

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Kochi: Expressing that the management of business affairs in a company is not a sole duty of a Director, the results of a company’s performance is a team of work of Board of Directors, the Coram of Ashok Kumar Borah, Judicial Member and Shyam Babu Gautam, Technical Member, held that, Companies Act gives shareholders the right to remove the Directors of the company.

A company petition was filed under Sections 241 and 242 of the Companies Act, 2013 against respondents.

Background

In the context of EGM notice, the company petition was filed, and the respondents had proposed to convene the EGM for the removal of the petitioner from the directorship.

Respondent Company was formed by a group of 5 friends and the initial subscribers were respondent 3, Mr Hamsa Poothukudiyil and Mr Rajiv Malayil. All three subscribers were holding 333 shares each.

The crux was that the removal of the petitioner from directorship would be oppressive and such removal was only in the context of certain queries raised by the petitioner as also against the legitimate expectation of the petitioner to be part of the management.

Analysis, Law and Decision

  • Whether removal of petitioner from directorship will be oppressive or prejudicial to the interest of the company so as to attract Section 241-242 of the Companies Act?

As per the Supreme Court decision in TATA Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., (2021) 9 SCC 449, it was clearly stated that under Section 242(1) of the Company Act, the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit” cannot be interpreted as conferring on the Tribunal any implied power of directing reinstatement of a director or other officer of the company who has been removed from such office and also stated that even in cases where the Tribunal finds that the removal of a Director was not in accordance with law or was not justified on facts, the Tribunal cannot grant relief under Section 242 unless the removal was oppressive or prejudicial.

“…the management of business affairs in a company is not a sole duty of a Director, the results of company’s performance is a team work of Board of Directors.”

Therefore, respondents’ statement regarding the loss of the company, even though the Audited Financial Statements of 2019-2020 had been signed by the petitioner himself, shows the behaviour and nature of the petitioner, to escape from the responsibilities of a director and his fiduciary duties as a Director.

The Commission could not find any oppression and mismanagement in the Company with respect to removal of petitioner from directorship.

“…one of the crucial rights which Companies Act, 2013 gives to the shareholders is the right to remove the Directors of the Company, if they are not acting in consonance with the Articles of Association of the Company, but only utilizing their powers for their benefits.”

Hence petitioner’s removal was not an illegal act.

In view of the above, the company petition was dismissed. [Thaniyulla Parambath Jahafar v. Relax Zone Tourism (P) Ltd., CP/24/KOB/2021, decided on 17-1-2022]


Advocates before the Commission:

For the Petitioner: Shri. Shameem Ahmed, Advocate.

For the Respondents: Smt. Sreepriya Kalarickal, PCS.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT)- The Coram of Justice Jarat Kumar Jain (Judicial Member), Ashok Kumar Mishra (Technical Member), and Alok Srivastava (Technical Member) while dismissing an appeal summarily without notice to the Respondent was of the opinion, that there was no need to interfere with the impugned order since the adjudicating authority had rightly held that the petition was not maintainable.

In the pertinent matter, it was alleged that the adjudication authority had erroneously dismissed the Petition as not maintainable. Appeal was filed by the Shareholder of the Financial Creditor Company, and it was submitted that the petitioner can initiate action on behalf of the Company if the same is in the interest of the Company and the Board is not pursuing the same, as per the doctrine of derivative action. The adjudicating authority was of the opinion that such person does not come within the definition of aggrieved person under Section 61 of the IBC. Therefore, the Appeal was not maintainable. The adjudicating authority held that no Board Resolution was filed in regard to advance loan to Corporate Debtor Company as required under Section 186 of the Companies Act, 2013.

The Tribunal held that

“we have considered the submissions, undisputedly there is no board resolution authorising the appellant to file the petition under Section 7 of the IBC and filed this Appeal as there is deadlock in the Financial Creditors Company”.

The Court further held that,

“The facts of the cited cases are quite different and in theses citations it is held that a shareholder has no locus standi to maintain the suit, affirmed one of the exceptions to the aforesaid rule that where a shareholder can show that the wrong doers are in control of the defendant company and hence the company would be unable to maintain the action. So far as the Petition under Section 7 of the IBC is concerned, there is a specific notification by the Central Government under sub-section (1) of Section 7 of the IBC that on behalf of the Financial Creditor a guardian, an executor or administrator of an estate of a financial creditor, a trustee and a person duly authorized by the board of directors of a company may file Application for initiation of CIRP against the Corporate Debtor. In such situation, doctrine of derivative action cannot be applied in Petition under Section 7 of the IBC.”

[M Sai Eswara Swamy v. Siti Vision Digital Media Pvt. Ltd., Company Appeal (AT) (Ins) No. 706 of 2021, decided on 09-09-2021]


Counsel for the Parties:

For Appellant:

Mr. P Nagesh, Sr. Adv. with Mr. Harshal Kumar, Mr. Shivam Wadhwa

For Respondent:

Mr. Arvind Nayar, Sr. Adv. with Mr. Shivam Singh, Mr. Abhinav Singh, Advocates


Agatha Shukla, Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of SA Bobde, CJ and AS Bopanna and V. Ramasubramanian*, JJ has held that the proceedings for winding up of a company are actually proceedings in rem to which the entire body of creditors is a party and the words “party  or parties” appearing in the 5th proviso to Clause (c) of Sub-section(1) of Section 434 the Companies Act, 2013 would take within its fold any creditor of the company in liquidation.

Scheme of Section 434

  • For the purpose of transfer, Section 434 classifies the winding up proceedings pending before the High Courts into two categories namely:

(a)Proceedings for voluntary winding up where notice of resolution by advertisement has been given under Section 485(1) of the Companies Act, 1956, but the company has not been dissolved before 01.04.2017; and

(b) Other types of winding up proceedings.

  • The first of the above 2 categories of cases are covered by the fourth proviso under Clause (c) of Sub­section (1) of Section 434, which states:

“Provided also that proceedings relating to cases of voluntary winding up of a company where notice of the resolution by advertisement has been given under subsection (1) of section 485 of the Companies Act, 1956 but the company has not been dissolved before the 1st  April, 2017 shall continue to be dealt with in accordance with provisions of the Companies Act, 1956 and the Companies (Court) Rules, 1959”.

  • Such cases of voluntary winding up covered by the above proviso shall continue to be dealt with by the High court. It is only (i) cases of voluntary winding up falling outside the scope of the 4th Proviso and (ii) other types of winding up proceedings, that can be transferred by the High Courts to the Tribunal, subject however to the Rules made by the Central Government under Section 434 (2).
  • The transferability, by operation of law, of winding up proceedings, other than those covered by the 4th Proviso, depends upon the stage at which they are pending before the Company Court. But this is left by the law makers to be determined through subordinate legislation, in the form of Rules.
  • Apart from providing for the transfer of certain types of winding up proceedings by operation of law, Section 434 (1)(c) also gives a choice to the parties to those proceedings to seek a transfer of such proceedings to the NCLT. This is under the fifth proviso to Clause (c).
  • The 5th proviso uses the words “any party or parties to any proceedings relating to the winding up of companies pending before any Court. Hence, the right to invoke the 5th proviso is specifically conferred only upon the parties to the proceedings. Therefore, on a literal interpretation, such a right should be held to be confined only to “the parties to the proceedings.”

Scheme of Companies (Transfer of Pending Proceedings) Rules, 2016

The pending proceedings for winding up are classified into three types namely:

  • proceedings for voluntary winding up covered by the fourth proviso to Clause (c) of Subsection (1) of Section 434, which shall continue to be dealt with in accordance with the provisions of the 1956 Act;
  • proceedings for winding up on the ground of inability to pay debts; and
  • proceedings for winding up on grounds other than inability to pay debts.

The transferability of a winding up proceeding, both under Rule 5 as well as under Rule 6, is directly linked to the service of the winding up petition on the respondent under Rule 26 of the Companies (Court) Rules, 1959. The normal requirement of Rule 26 is that the copy of the petition under the Act shall be served on the respondent along with the notice of the petition, unless otherwise ordered. The notice of the petition, required under Rule 26 to be served along with the copy of the petition, should be in Form No.6, due to the mandate of Rule 27.

If the winding up petition has already been served on the respondent in terms of Rule 26 of the 1959 Rules, the proceedings are not liable to be transferred. But if service of the winding up petition on the respondent in terms of Rule 26 had not been completed, such winding up proceedings, whether they are under Clause (c) of Section 433 or under Clauses (a) and (f) of Section 433, shall peremptorily be transferred to the NCLT.

“Rules 5 and 6 of the Companies (Transfer of Pending Proceedings) Rules 2016, fix the stage of service of notice under Rule 26 of the Companies (Court) Rules, 1959, as the stage at which a winding up proceeding can be transferred. This is because the first proviso under Clause (c) of Sub-section (1) of Section 434 enables the Central Government to prescribe the stage at which proceedings for winding up can be transferred and subsection (2) of section 434 confers rule making power on the Central Government.”

Further, the restriction under Rules 5 and 6 of the 2016 Rules relating to the stage at which a transfer could be ordered, has no application to the case of a transfer covered by the 5th proviso to clause (c) of sub-section (1) of Section  434.

Who can be a “party to the proceedings”?

There are certain clues inherently available in the Companies Act, 1956, to indicate who can be a “party to the proceedings”. The provisions which contain such clues are as follows:

(i) Section 447 of the Companies Act, 1956, which is equivalent to Section 278 of the Companies Act, 2013 states that an order for winding up shall operate in favour of all the creditors and of all the contributories of the company as if it has been made on the joint petition of a creditor and of a contributory. There is a small change between the wording of Section 278 of the 2013 Act and the wording of Section 447 of the 1956 Act. Section 278 of the 2013 Act shows that any petition by a single creditor or contributory is actually treated as a joint petition of creditors and contributories, so that the order of winding up operates in favour of all the creditors and all the contributories.

(ii) Under Section 454(6) of the 1956 Act, any person stating himself in writing to be a creditor shall be entitled to inspect the statement of affairs submitted to the official liquidator. If the claim of such a person to be a creditor turns out to be untrue, such a person is liable to be punished under Section 454(7) of the 1956 Act.

(iii) The powers of the liquidator are enumerated in Section 457 of the 1956 Act. Section 457 actually divides the powers of a liquidator into two categories namely (i) those available with the sanction of the Tribunal and (ii) those generally available to the liquidator. But Section 290 of the 2013 Act has done away with such a distinction. However, the 1956 Act, as well as 2013 Act make the exercise of the powers by the liquidator, subject to the overall control of the Tribunal. This is made clear by Section 457(3) of the 1956 Act and Section 290(2) of the 2013 Act. Additionally, Section 457(3) of the 1956 Act enables any creditor or contributory to apply to the Court with respect to the exercise by the Liquidator, of any of the powers conferred by Section 457.

(iv) Section 460 of the 1956 Act and Section 292 of the 2013 Act make it clear that in the administration of the assets of the   Company   and   the   distribution   thereof   among   its creditors, the liquidator should have regard to any directions given by resolution of creditors at any general meeting. If the liquidator does something, in exercise of his powers, any person aggrieved by such Act or decision of the liquidator, is entitled to apply to the Company Court, under Section 460(6) of the 1956 Act and Section 292(4) of the 2013 Act.

(v) Section 466(1) of the 1956 Act enables any creditor to apply for stay of all proceedings in relation to the winding up. This right can be exercised by any creditor at any time after the making of a winding up order.

Hence, the proceedings for winding up of a company are actually proceedings in rem to which the entire body of creditors is a party. Such proceeding might have been initiated by one or more creditors, but by a deeming fiction the petition is treated as a joint petition. The official liquidator acts for and on behalf of the entire body of creditors. Therefore, the word “party” appearing in the 5th proviso to Clause (c) of Sub-section (1) of section 434 cannot be construed to mean only the single petitioning creditor or the company or the official liquidator.

Hence,

“If any creditor is aggrieved by any decision of the official liquidator, he is entitled under the 1956 Act to challenge the same before the Company Court. Once he does that, he becomes a party to the proceeding, even by the plain language of the section. Instead of asking a party to adopt such a circuitous route and then take recourse to the 5th proviso to section 434(1)(c), it would be better to recognise the right of such a party to seek transfer directly.”

[Kaledonia Jute and Fibres Pvt. Ltd v. Axis Nirman and Industries Ltd, 2020 SCC OnLine SC 943, decided on 19.11.2020]


*V. Ramasubramanian has penned this judgment

Advocates who appeared in the matter

For appellant: Senior Advocate Huzefa Ahmadi,

For 1st respondent: Senior Advocate A.N.S. Nadkarni

For Official Liquidator: Advocate-on-Record Gp. Capt. Karan Singh Bhati

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Division Bench of Justice Jarat Kumar Jain (Judicial Member) and Balvinder Singh (Technical Member) while addressing the present appeal observed that,

Scheme under Section 230 of the Companies Act, 2013 cannot be used as method of rectification of the actions already taken.

Appellant preferred the instant appeal under Section 421 of the Companies Act, 2013 challenging the impugned order passed by the National Company Law Tribunal, Mumbai.

What led to the filing of the present appeal?

Respondent 1 presented a Scheme of Arrangement under Sections 391-394 of Companies Act, 1956 (Existing Sections 230-232 of Companies Act, 2013) for sanction of the Arrangement embodied in the scheme originally filed before Bombay High Court which by virtue of MCA notification got transferred to NCLT, Mumbai.

Appellant pointed out certain irregularities and non-compliance and raised the objections that the Scheme of Arrangements is a mere rectification of action already taken by the respondent company without obtaining approval of Tribunal and other Regulatory Authorities as required under the provisions of Companies Act.

Since, NCLT, Mumbai in its order held that the scheme appeared to be fair and reasonable, the appellant being aggrieved with the same filed the present appeal.

Observations of the Tribunal

Bench noted that the in view of the records it was apparent that there were irregularities and non-compliances from a very long time due to which Stock Exchange took action against the respondent 1 company and suspended the trading of its securities in the year 2002.

No action being taken on behalf of the respondent 1 company had a serious impact on the investors who invested their hard-earned money in the company. The non-compliances and irregularities or any illegal act already committed cannot be ratified under the umbrella of “scheme” as envisaged under Section 230-232 of Companies Act, 2013.

Further, even if the objection of the Respondent 1 Company that the Appellant has no locus standi under Section 230 (4) to object the scheme is accepted but this will not affect the power of Regional Director as there is no such limitation prescribed for the Regional Director to file his objections as he is a public authority and has to look after the interest of the public/shareholders/investors at large.

Bench noted from the observations made by the Regional Director that there were irregularities and non-compliances that were present at the time of sanctioning of the scheme by the NCLT.

Company must be in compliance of the provision of law and cannot act just on the basis of a legal opinion.

The respondent 1 Company should have instantly rejected the application money for 10,375 shares as the Application applied were for less than the minimum lot size i.e. 100 shares.

Since the scheme appeared to be used as a course of action to rectify the irregularities previously done/committed by respondent 1 company, grounds raised by the regional director for dismissing the petition was just and reasonable.

Main objective behind the establishment of SEBI is to protect the interest of the investors and their hard-earned money trading in the stock exchanges, to regulate and facilitate efficient and flawless functioning of the securities market, to promote its development and to resolve the matters connected to it.

NCLT overruled the objections of the Regional Director in view of the said being procedural in nature.

Wrong Precedent

For the above aspect, Bench stated that even if the objections were procedural in nature, it is the jurisdiction of the Tribunal that such procedural aspects need to be duly complied with before sanctioning of the scheme as it would lay down a wrong precedent which would allow companies to do whatever acts without the compliance and confirmation of the Court and other sectoral and regulatory authorities and thereafter get it ratified by the Court under the Umbrella of “scheme”.

Decision

Tribunal held that before the sanctioning of Scheme under Section 230 of the Companies Act, 2013, no action should be pending against the company by the public authorities.

It is the duty of the Tribunal or any Court that their Orders should encourage compliances and not defaults.

Hence, the appeal was allowed and the impugned order set aside. [Ashish O. Lalpuria v. Kumaka Industries Ltd., 2020 SCC OnLine NCLAT 676, decided on 20-10-2020]

Case BriefsHigh Courts

Delhi High Court: Najmi Waziri, J., while addressing the present matter considered the following issues:

Whether elections to the Board of Directors of a company; allegations of oppression and mismanagement; wrongful appointment of an Ombudsman in violation of Articles of Association could be adjudicated by a civil court

OR

Whether jurisdiction vests exclusively with the National Company Law Tribunal?

Background

Appeal under Sections 104 and 151 read with Order XLIII Rule 1 CPC, impugns an order of the ADJ, Tis Hazari Courts, New Delhi whereby the appellant’s two applications were dismissed and the interim injunction sought by the plaintiff was granted.

Contention of the appellant

Appellant submits that the suit is not maintainable before a Civil Court because of the bar placed on Civil Courts by Section 430 of the Companies Act, 2013.

Section 430 of the Companies Act, 2013

Civil court not to have jurisdiction:

No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Tribunal or the Appellate Tribunal is empowered to determine by or under this Act or any other law for the time being in force and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or any other law for the time being in force, by the Tribunal or the Appellate.” The effect of the aforesaid provision is that in matters in respect of which power has been conferred on the NCLT, the jurisdiction of the civil court is completely barred.

Appellant also relied on the decision of this Court in SAS Hospitality Pvt. Ltd. v. Surya Constructions Pvt. Ltd., 2018 SCC Online Del 11909, wherein it was observed that,

“The bar contained in Section 430 of the 2013 Act is in respect of entertaining “any suit”, or “any proceedings” which the NCLT is “empowered to determine”.”

Appellant also relied on the decision of Madras High Court in Viji Joseph v. P. Chander, 2019 SCC OnLine Mad 10424 wherein the Court examined an election dispute under Section 20 of the Companies (Management and Administration) Rules, 2014, involving the maintainability of the election of the Board of Directors through electronic means.

After analyzing Section 242 and other circumstances pertaining to the case, Madras High Court concluded that only the Tribunal had powers to deal with the issue raised in the suit and the civil court had no jurisdiction to entertain the suit.

Issues raised in the present matter

Challenging matters relating to the AGM, the Board of Directors of the appellant company, the appointment of an ombudsman and other related issues.

The Madras High Court Decision as referred above has also discussed the expanse of Section 430 of the Companies Act, 2013.

Senior Advocate for the appellant submits that the Companies Act and the National Company Law Tribunal Rules, 2016, are together a complete code. Ample power has been provided to the NCLT – akin to a civil court – to deal with all issues for which powers have been conferred upon the Tribunal.

Further, the appellant submitted that, in the present case, the process of election to the Board of Directors/Members of the Apex Council, has been challenged because of it being allegedly contrary to the procedure laid down in the AoA and the notice calling for the AGM, and that the elections were held on the basis of a voice vote instead of paper ballot, contrary to what was mentioned in the AGM notice.

Hence, the High Court on perusal of the above stated that Sections 241, 242 and 244 of the Companies Act deal with the issues raised in the present suit.

NCLT has been specifically conferred powers to address grievances relating to the affairs of the company, which may be prejudicial or oppressive to any member of the company, or for issues of appointment of directors.

The appointment of an Ombudsman, would also form a part of the conduct and management of the affairs of the company.

Supreme Court in its’ decision in Shashi Prakash Khemka v. NEPC Micon, 2019 SCC Online SC 223 discussed the scope of Section 430 and stated the same to be vast and the jurisdiction of the civil court to be completely barred when the power to adjudicate vests in the Tribunal.

Therefore, the lis and grievances raised in the present suit can be agitated only before the NCLT as the civil court would have no jurisdiction.

The appeal was allowed. [Delhi & District Cricket Association v. Sudhir Kumar Aggarwal,  2020 SCC OnLine Del 1223, decided on 21-09-2020]

COVID 19Op EdsOP. ED.

Introduction

The Government has introduced various schemes, perhaps which can be called necessary reforms, in various sectors to deal with the situation created today by the COVID-19 pandemic[1] which can adequately be described as an unprecedented anomaly especially for the developing nations of the world. In the wake of the pandemic India is being introduced to various legal and socio-economic reforms by the Government of India to help the already struggling economy to gather the much sought after momentum. The 5th tranche of the press conference held on 17.05.2020 focused on bringing in reforms in specific laws which shall be brought to life through Ordinances in an attempt to provide businesses in India to recover from the aberrance caused by the pandemic.

Since Lockdown 1.0 the business owners  have been waiting with baited breath, for a financial  relief package to ease the growing stress especially on the Micro, Small and Medium Enterprises  (“MSME”)[2]. The Government has faced various difficulties as well, however, as we enter Lockdown 4.0 the Government has introduced certain amendments which was an imminent need of the hour to give a sigh of relief to the business fraternity in the country. Prima facie these amendments seem to provide short term as well as long term  stability  to businesses across India for a sustainable growth model which shall enable such business to revive from the losses suffered during the pandemic. An overview of the proposed amendments which are sought to be introduced are:

1. A fresh outlook on the Insolvency and Bankruptcy Code, 2016

The Government of India after taking into account the  backlog of pending cases mounting at  National Company Law Tribunal (“NCLT”) and the  National Company Law Appellate Tribunal (“NCLAT”) have proposed to introduce an Ordinance enunciating as under:

  1. No fresh matters shall be initiated of insolvency for a period of 1 year. This shall reduce the workload since due to the implementation of lockdown the companies have suffered grave loss.
  2. Any default caused in the event of death of a person due to COVID-19 shall strictly be prohibited to come under the definition of default as per Section 3(12) of the Insolvency and Bankruptcy Code, 2016[3].
  3. The limit of default for Micro, Small and Medium Enterprises shall be increased from one lakh to one crore for a specified time period which shall be specified in the notification by the centre in consonance with Section 240-A(2) which shall be in the interest of public.

These reforms shall give a breather to the MSMEs and even to other companies facing difficulties in carrying out their regular business due to the pandemic. It is pertinent to note that it was the present Government which had introduced the long sought after Insolvency and Bankruptcy Code (“IBC”) in 2016 to subdue the woes of the companies and their shareholders and equipped them with an efficient and reliable infrastructure to avail their legal remedies. This was done in an effort to reduce the burden from the various High Courts and  Bankruptcy Tribunals across the country and efficiently deal with matters relating to Companies Act, 1956 and bankruptcy laws. Since its inception the NCLT and the NCLAT have managed to dispose of 41% of the total matter filed matters which seems to be satisfactory and has greatly helped in  achieving the objective of the IBC[4]. However, the Government felt that in order to further increase efficiency and further reduce the burden mounting on the Tribunals the above- mentioned reforms were imperative especially in light of the COVID-19 pandemic.

This shall further ease the stress at least for a year, on start-ups and MSMEs who may now focus on the functioning and services to be provided which further may lead to increase their quality and efficiency of work. Further the increase in the default limit from 1 lakh to 1 crore will also put such Companies at ease and mitigate the risk of getting engaged in legal proceedings.

2. Amendments with reference to Companies Act, 2013

The Government has taken a step forward to de-criminalise various sections of the Companies Act, 2013 which criminalised procedural non-compliances. For example Section 99 of the Companies Act, 2013[5] states:

Section 99. Punishment for default in complying with provisions of Sections 96 to 98.–

If any default is made in holding a meeting of the company in accordance with Section 96 or Section 97 or Section 98 or in complying with any directions of the Tribunal, the company and every officer of the company who is in default shall be punishable with fine which may extend to one lakh rupees and in the case of a continuing default, with a further fine which may extend to five thousand rupees for every day during which such default continues.

This provision and likewise other penal provisions with respect to non-compliances shall be de-criminalised for a specified period which shall be mentioned in the Ordinance. Further the Government in an effort to further de-congest the Courts has stated that the expert panel already introduced by the Ministry of Corporate Affairs (“MCA”)  shall adjudicate matters regarding compoundable offences under the Companies Act, 2013[6]. Earlier, only 18 sections were under the jurisdiction of the said expert panel, which shall now increase to 58 and those particular provisions would be specified in the Ordinance.

These reforms may lead to easing the business to be carried out by the various companies in India and may increase the work efficacy which shall further lead to bring our economy at pace which is effected tremendously due to the pandemic.

3. Merger of PSUs/PSEs on the horizon?

An introduction of private sector companies to conduct business with respect to areas which earlier restricted Public Sector Undertaking (“PSUs”) and Public Sector Enterprises (“PSEs”) is another major reform brought in by the Government of India. The PSUs enjoyed a certain monopoly in these markets however with this fresh induction of private companies will disrupt their earlier enjoyed market share in these specified areas[7]. It was further specified in the press conference held by the  Finance Minister that only 4 or less PSUs/PSEs  shall function in strategic sector and the ones having more than 4 shall undergo mergers to form  a large scale PSU/PSE.

For instance, if there are 10 PSUs/PSEs in a particular sector, the extra 6 shall be merged with any of the others to form at least 1 or 4 large scale PSUs. In view of the above it is apparent that this shall lead to increase in mergers of several PSUs/PSEs in India.

Conclusion

Notwithstanding the fact that this is a great step forward to decrease the workload of the Courts in India this may lead to delay in legitimate insolvency proceedings further being a refuge/relief for wilful defaulters and a vice for bona fide financial and operational creditors[8]. Further this step of the Government of India shall be a robust mechanism for institution of new start-ups, the PSUs once ruling the coal/aviation and certain other sectors shall now have to share their market with the private companies and/or the start-ups which shall now enter the market increasing employment and quality of services provided by them. India is a developing nation and with the proliferation of the coronavirus which lead to causing this pandemic has brought the Indian economy to a standstill. These reforms have given a new hope to build the economy of our country with the neoteric structure introduced, which shall require cooperation of the public and private sector enterprises along with the judiciary and the public at large.


*Senior Associate at Vardharma Chambers and may be reached at vidula@vchambers.in

[1] https://www.undp.org/content/undp/en/home/coronavirus.html

[2].https://msm.gov.in/know-about-msme

[3] Insolvency and Bankruptcy Code, 2016 

[4] https://www.financialexpress.com/economy/two-years-of-ibc-early-harvest-extremely-successful-recovered-rs-80000-crore-says-arun-jaitley/1432363/

[5] Companies Act, 2013

[6] https://economictimes.indiatimes.com/news/economy/policy/panel-for-internal-e-adjudication-system-to-take-load-off-nclts/articleshow/65568134.cms?from=mdr

[7] https://economictimes.indiatimes.com/wealth/personal-finance-news/the-govt-should-quit-all-businesses-except-utilities-public-monopolies-view/articleshow/69699327.cms?from=mdr

https://www.financialexpress.com/industry/new-fuel-retail-rule-easier-entry-norms-may-dent-monopoly-of-psus/1744560/

[8] https://www.indianeconomy.net/splclassrooms/what-is-financial-creditors-andoperational-creditors-under-the-ibc/

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.

Legislation UpdatesRules & Regulations

Ministry of Corporate Affairs notifies — Companies (Winding-Up) Rules, 2020 through Notification No. G.S.R. 46(E).

The notification has been divided into 6 Parts, which comprises of the procedure of winding up in detail.

These rules shall apply to winding up under of Companies Act 2013.

These rules will come into force from 01-04-2020.

Winding Up: The process by which an insolvent estate is distributed, as far as it will go, amongst the persons having claims upon it. The term is most frequently applied to the winding-up of joint-stock companies.

*Please click on the link for detailed notification: Companies (Winding Up) Rules, 2020


Ministry of Corporate Affairs

[Notification dt. 24-01-2020]

Legislation UpdatesNotifications

S.O. 4570(E).—In exercise of the powers conferred by section 435 of the Companies Act, 2013 (18 of 2013) (hereinafter referred to as the said Act), the Central Government, with the concurrence of the Chief Justices of the High Court of Uttarakhand, Nainital and High Court of Jammu and Kashmir, hereby designates the following Courts mentioned in column (2) of the Tables below as Special Courts, namely:-

(a) for the purpose 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 said Act, namely:-

Table 1

(b) for the purpose of providing speedy trial of other offences as mentioned in clause (b) of sub-section (2) of section 435 of the said Act, namely:-

Sl. No.

page2image2832712560

Court

page2image2832716272

Jurisdiction as Special Court

(1)

page2image2832725872

(2)

page2image2832725152

page2image2832727728

(3)

page2image2832729760

1

Court of IV Additional District and Session Judge, Dehradun

page2image2832738272

State of Uttarakhand

page2image2832740000

2

Principal Sessions Judge, Leh

page2image2832747600

Union territory of Ladakh

 

Table 2

Sl. No.

page2image2832759120

Court

page2image2832762928

Jurisdiction as Special Court

(1)

page2image2792633136

(2)

page2image2791035824

page2image2792657904

(3)

page2image2792672336

1

Court of II Additional Chief Judicial Magistrate, Dehradun

State of Uttarakhand

2

Sub-Judge/Special Mobile Magistrates, Jammu and Srinagar

Union territory of Jammu and Kashmir

3

Chief Judicial Magistrate, Leh

Union territory of Ladakh

S.O. 4569(E).—In exercise of the powers conferred by sub-section (1) of section 435 of the Companies Act, 2013 (18 of 2013), the Central Government, with the concurrence of the Chief Justice of the High Court of Jammu and Kashmir, hereby makes the following amendments in the notification of the Government of India, Ministry of Corporate Affairs, number S.O. 1796(E), dated, the 18th May, 2016, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (ii), namely:-

In the said notification, in the Table, for serial number 1 and the entries relating thereto, the following shall be substituted, namely:-

Sl. No.

page1image2832404000

Existing Court

page1image2832416544

Jurisdiction as Special Court

(1)

page1image2832422208

(2)

page1image2832425264

page1image2832427728

(3)

page1image2832428432

“1

Courts of Additional Sessions Judges Anti- corruption, Jammu and Srinagar

page1image2832438128

Union territory of Jammu and Kashmir”.

page1image2832443232


Ministry of Corporate Affairs

[Notification dt. 19-12-2019]

Business NewsNews

The Ministry of Corporate Affairs, with the objective of strengthening the institution of Independent Directors under the Companies Act,  launched today the Independent Director’s Databank in accordance with the provisions of the Companies Act, 2013 and the rules made thereunder.

The Databank, which was launched by Shri Injeti Srinivas, Secretary Ministry of Corporate Affairs, can be accessed at www.mca.gov.in or www.independentdirectorsdatabank.in, is a pioneering initiative of the Ministry to provide an easy to access & navigate platform for the registration of existing Independent Directors as well as individuals aspiring to become independent directors.

            Powered by an Integrated Learning Management System, the various e-learning capsules and videos available in the system will enable Individual users to easily acquire knowledge from diverse resources, develop distinct skills and assess their understanding of company operations, regulations and compliances. Companies also may register themselves with the databank to search, select and connect with individuals who possess the right skills and attitude for being considered for appointment as Independent Directors as the Databank is expected to become a comprehensive repository of both existing independent directors as well as individuals eligible and willing to be appointed as Independent Directors.

The Databank portal which has been developed and will be maintained by the Indian Institute for Corporate Affairs (IICA), is a first of its kind initiative from the Ministry. It provides for a wide array of e-learning courses on various topics including the Companies Act, Securities laws, basic accountancy, board practices, board ethics and board effectiveness. A number of value-added services are expected to be rolled out through the portal for capacity building of Independent Directors.

As per the notified rules, all existing Independent Directors are required to register themselves in the databank within 3 months from 01 December 2019.
They are also required to pass a basic online proficiency self-assessment test which will available from March 2020 onwards within 12 months thereafter.  In order to provide sufficient practice to individuals, a number of online mock Tests have also been made available in the system.   The real test can be taken online through a simple scheduling process.  The real test would be remotely proctored.

            The registration process has been specifically designed to be quick and simple and has been divided into three simple steps:

  1. Log in through the user account on the Website of the Ministry
  2. Upon log in the user will be directed to the Databank
  3. Choose one of the Subscription Plans to access the e-learning and the e-proficiency assessment modules

Ministry of Corporate Affairs

[Press Release dt. 02-12-2019]

[Source: PIB]

Case BriefsHigh Courts

Madhya Pradesh High Court: S.K. Awasthi, J.  dismissed the petition on the ground that trial court and not Special Court are competent to take cognizance when offences were made under the Penal Code, 1860.

A petition was made under Section 397 read with Section 401 of Code of Criminal Procedure, 1973 against the order passed by Additional Sessions Judge.

Facts of the case were that Mukesh and Radheyshyam Mandwani and applicant Sunil were the directors of the company, having an immovable property at Indore. The applicant tried to grab the property without calling any meeting of the company and had also forged the resignation of the complainant and indicted his real brother as director of the company. An FIR was lodged against the applicant for offences under Sections 420, 467, 468, 471 and 120-B of the Penal Code, 1860 and charge sheet was filed. A discharge application on the ground that the trial court was not competent to take the cognizance and Special Court should take the cognizance was rejected by the trial court. Hence, the revision petition was made.

Vijay Asudani, counsel for the applicant argued that a special court can try offence other than offence under the provisions of Companies Act with which the accused may under the CrPC be charged. It was further submitted that the trial court failed to appreciate that the Complainant was the ex-director and shareholder of the company and the fact that the non calling of the meeting, preparation of forged resignation are offences under the Companies Act, 2013 and thus only special court were competent to take cognizance of the offence and thus impugned order should be set aside and applicant should be discharged from the charges made under the Penal Code.

Counsel for the complainant submitted that in order to gain the control over assets of the company and to deceive, betray and cheat the complainant made the complaint under the Penal Code. It was further submitted that the jurisdiction of the Special Court is limited to the offences punishable under the Companies Act, 2013 and not under the Penal Code or any offences committed under any other law. Thus, prayed for the dismissal of the revision petition.

The Court opined that provision of Section 436 (2) of the Companies Act, 2013 also provide that while trying an offence under the Companies Act, a Special Court may also try an offence other than an offence under this Act with which the accused may, under the Code of Criminal Procedure, 1973 be charged at the same trial. In this case, the police registered the offence punishable under the Penal Code and not under Companies Act, 2013. It was held that no criminal trial has been initiated against the applicants for any of the offence which is punishable under the provision of Companies Act, therefore, in absence of any offence punishable under the Companies Act, Special Court is not having jurisdiction to try the case which is punishable under the Penal Code and court of Indore has territorial jurisdiction to try the case for the commission of offence punishable under Sections 420, 467, 468, 471 and 120-B of IPC. Thus, the revision petition was dismissed. [Sunil Mandwani v. State of M.P., 2019 SCC OnLine MP 1248, decided on 27-06-2019]

OP. ED.Practical Lawyer Archives

The approval of Board of Directors and modes of obtaining such approval is one of the most critical aspects of corporate compliance management. The Companies Act, 2013 (“the Act”) provides for certain decisions to be taken by the Board of Directors in its meeting. The Act also provides for passing of resolution by circulation by the Board of Directors of the company.

According to Section 179 of the Act, the Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do. However, in exercising such power or doing such act or thing, the Board of Directors shall be subject to the provisions contained in that behalf in the Act, or in the memorandum of association or articles of association, including regulations made by the company in general meeting. Sub-section (3) of Section 179 of the Act provides for certain transactions or resolutions, wherein the Board of Directors of a company shall exercise by means of resolutions passed at Board meetings.

Section 175 of the Act relates to “passing of resolution by circulation”. This article analyses the provisions of Section 175 of the Act and provides for compliance checklist for passing of resolution by circulation. Necessary references are made to the secretarial standards issued by the Institute of Company Secretaries of India (ICSI).

  1. Meaning of “Circular Resolution”.—It is an alternative method of obtaining the approval of the Board of Directors. Section 175 of the Act creates an exception to the general rule that the Board of Directors of the company shall exercise their powers collectively by means of resolution passed at its meeting.
  2. Certain Resolutions that Cannot be Passed by Circulation.—Sub-section (3) of Section 179 of the Act and Rule 8 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides for certain transactions or resolutions, wherein the Board of Directors shall exercise by means of resolutions passed in its meetings. Such transactions/resolutions are: (a) to make calls on shareholders in respect of money unpaid on their shares; (b) to authorise buy-back of securities; (c) to issue securities, including debentures, whether in or outside India; (d) to borrow monies; (e) to invest the funds of the company; (f) to grant loans or give guarantee or provide security in respect of loans; (g) to approve financial statement and the Board’s report; (h) to diversify the business of the company; (i) to approve amalgamation, merger or reconstruction; (j) to take over a company or acquire a controlling or substantial stake in another company; (k) to make political contributions; (l) to appoint or remove key managerial personnel; and (m) to appoint internal auditors and secretarial auditor. For companies incorporated under Section 8 of the Act, the board of directors may decide the following matters by circular resolution (instead of meeting): (a) to borrow monies; (b) to invest the funds of the company; (c) to grant loans or give guarantee or provide security in respect of loans. [MCA Notiifcation No. GSR 466 (E)] dated June 5, 2015].
  3. Resolutions that can be Passed by Circulation.—Any resolution other than the abovementioned resolutions can be passed by circulation by Board of Directors. The Act has not prescribed for list of transactions that can be approved by passing a circular resolution. However, the Company Secretary or Chairman of the company shall ensure the nature of resolution before proposing before the Board of Directors or Committee.
  4. Applicability.—The Board of Directors or any committee (e.g. Audit Committee, Nomination and Remuneration Committee, Corporate Social Responsibility Committee, etc.) can pass a resolution by circulation.
  5. Decision to Pass a Resolution by Circular or Not.—According to the Secretarial Standard 1, the Chairman of the Board or in his absence, Managing Director or in their absence, any director other than an interested director, shall decide whether the approval of the Board for a particular business shall be obtained by means of a resolution by circulation.
  6. Explanation of Business by Note.—According to the Secretarial Standard 1, each business proposed to be passed by way of resolution by circulation shall be explained by a note setting out the details of the proposal, relevant material facts that enable the directors to understand the meaning, scope and implications of the proposal, nature of concern or interest, if any, of any director in the proposal, which the director had earlier disclosed and the draft of the resolution proposed. The note shall also indicate how a director shall signify assent or dissent to the resolution proposed and the date by which the director shall respond.
  7. Serial Numbering of Circular Resolution.—Secretarial Standard 1 mandates serial numbering of every circular resolution.
  8. Modes of Sending Necessary Documents.—The draft resolution together with necessary papers, if any, to all the directors, or members of the committee, as the case may be, shall be sent at their addresses registered with the company. The said documents can be sent by hand delivery or by post or by courier, or through such electronic means as may be prescribed [Section 175(1) of the Act]. A resolution in draft form may be circulated to the directors together with the necessary papers for seeking their approval, by electronic means which may include e-mail or fax [Rule 5 of the Companies (Meetings of Board and its Powers) Rules, 2014].
  9. Time-Limit for Approval.—The Act has not prescribed the time-limit for providing the approval of directors or committee members. However, according to the secretarial standards, not more than 7 days from the date of circulation of the draft of the resolution shall be given to the directors to respond. Additional 2 days may be provided, where the resolution and documents have been sent by the company by speed post or by registered post or by courier. However, in certain cases, the articles of association of the company may provide for such time-limits.
  10. Approval.—The?circular resolution shall be approved by a majority of the directors or committee members, who are entitled to vote on the resolution. After the time-limit is over, it is desirable that the outcome of resolution is communicated to the directors (i.e. whether the resolution is passed or not).
  11. Voting by Interested Director.— Section 175 of the Act does not provide for any reference to a situation wherein a director is interested in a circular resolution. However, according to the Secretarial Standard 1, an interested director shall not be entitled to vote on such resolutions.
  12. Recording the Resolution in Minutes of Meeting.—Where a resolution is passed by circulation, the same shall be noted in the minutes of the subsequent meeting of the Board of Directors. As a good corporate secretarial practice, it is desirable that following points are included in the minutes of the meeting: (i) date of circulation of draft resolution and papers; (ii) cut-off date for receiving the decision of directors; (iii) names of directors giving assent/dissent or abstain from voting; (iv) names of directors, if interested in the resolution; and (v) decision –whether the resolution is passed or not.
  13. Validity of Resolution by Circulation.—According to the secretarial standards, the passing of resolution by circulation shall be considered valid as if it had been passed at duly convened meeting of the Board of Directors. However, the said compliance shall not dispense with the requirement for the Board to meet at the specified frequency as prescribed under Section 173 of the Act.
  14. Discussion at Meeting, in Exceptional Cases.—In certain cases, where not less than one-third of the total number of directors of the company for the time-being require that any resolution under circulation must be decided at a meeting, the Chairperson shall put the resolution to be decided at a meeting of the Board. As a good corporate secretarial practice, such decision taken by the directors is noted in the minutes of the subsequent board meeting.
  15. Maintenance of Certain Documents.—The Company Secretary or the Chairman may maintain records of communication received from directors of company (i.e. with respect to assent/dissent or abstain from voting).

Generally, important matters are discussed at the meetings of Board of Directors and accordingly resolutions are passed. A resolution by circulation is passed when such approval is urgent in nature and cannot be kept on hold for passing such resolution in the ensuing Board meeting. Sometimes such matters are discussed in the earlier Board meetings but a resolution to that effect is not passed. Such decisions may include extension of lease agreement, opening bank account, changing signatories of the bank account, appointing consultants, etc. The passing of circular resolution and maintenance of corporate secretarial documents in relation to the resolution is important from the perspective of secretarial audit process, statutory audit process, internal audit process and issuance of certificate by practising Company Secretary under Section 92(2) of the Act.


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

Legislation UpdatesRules & Regulations

G.S.R. 377(E)—In exercise of the powers conferred by sub-section (10) of Section 132 read with Section 469 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following rules, namely:-

1. Short title and commencement – (1) These rules may be called the National Financial Reporting Authority (Meeting for Transaction of Business) Rules, 2019.

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

2. Definitions –

(1) In these rules, unless the context otherwise requires, –

(a) “Act” means the Companies Act, 2013 (18 of 2013);

(b) “Authority” means National Financial Reporting Authority constituted under sub-section (1) of Section 132 of the Act;

(c) “chairperson” means the chairperson of the National Financial Reporting Authority appointed under sub-section (3) of Section 132 of the Act;

(d) “full-time member” means a member who has been appointed as such under sub-section (3) of Section 132 of the Act and includes the chairperson;

(e) “member” means any member, including the chairperson, so appointed under sub-section (3) of Section 132 of the Act;

(f) “part-time member” means a member other than a full-time member, appointed as such under sub-section (3) of Section 132 of the Act;

(g) “Secretary” means the Secretary of the Authority appointed under sub-section (11) of Section 132 of the Act and includes an officer of the Authority authorised by the chairperson to function as Secretary.

(2) Words and expressions used and not defined in these rules but defined in the Act shall have the same meanings as respectively assigned to them in the Act.

*Please follow the link for detailed notification: Notification


[Notification dt. 22-05-2019]

Ministry of Corporate Affairs

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Appellate Tribunal: A Bench of Justice S.J. Mukhopadhaya, Chairperson and Justice A.I.S Cheema, Member (Judicial) and Kanthi Narahari, Member (Technical) admitted the appeal filed by the All India Online Vendors Association (“AIOVA”) against the order of the Competition Commission of India, dated 6-11-2018, whereby it held that no case of contravention of the provisions of Section 4 (abuse of dominant position) of the Competition Act, 2002 was made out against Flipkart and Amazon.

AIOVA’s case

AIOVA — company registered under the Companies Act, 2013 — is a group of more than 2000 sellers, selling on e-commerce marketplaces such as Flipkart, Amazon, Snapdeal, etc. It informed the CCI regarding abuse of dominant position by Flipkart alleging that small vendors have become allies of the big vendors and suppliers to leading sellers such as Cloudtail., WS Retail, etc. on the Flipkart and Amazon platforms, rather than selling directly to consumers through the online e-commerce marketplace sites. Further, it was apprehended that unfair trade practices were being carried and corporate veil on it was required to be lifted to assess the economic nexus and the wrongdoings being committed.

CCI’s Order

The Commission vide its order dated 6-11-2018, found no contravention of the provisions of Section 4 by Flipkart. Holding that the relevant market in the instant case may be defined as “services provided by online marketplace platforms for selling goods in India”, the Commission further held that “looking at the present market construct and structure of online marketplace platforms market in India, it does not appear that any one player in the market is commanding any dominant position at this stage of evolution of market.”

Finding that Flipkart was not a dominant player in the “relevant market”, it was held that the question of abuse of dominant position did not arise. Furthermore, it was held that the information provided by AIOVA was not sufficient to substantiate the allegations against Flipkart. Though the information was filed against Flipkart, the Commission held a conference with Amazon as well as it is also a key player in the relevant market. On the same reasoning, the Commission held that no contravention of the provisions of Section 4 could be said to be made out against either Flipkart or Amazon.

Appeal before NCLAT

Aggrieved by the decision passed by the CCI, filed a company appeal before the NCLAT challenging the same. Chanakya Basa along with Nidhi Khanna, Advocates, appearing for AIOVA argued on the errors in the impugned order. Per contra, Senior Advocate Amit Sibal is representing the opposite party along with Rajshekhar Rao, Yaman Verma, Sonali Charak and Neetu Ahlawat, Advocates.

The Appellate Tribunal has admitted the appeal for hearing. The respondents have been given 10-days time to file an affidavit in reply. The appeal is further posted for hearing on 30-07-2019.[All India Online Vendors Assn. v. CCI, Company Appeal (AT) No. 16 of 2019, decided on 15-05-2019]

Legislation UpdatesRules & Regulations

G.S.R. 273(E).—In exercise of the powers conferred by Section 133 read with Section 469 of the Companies Act, 2013 (18 of 2013), the Central Government, in consultation with the National Financial Reporting Authority, hereby makes the following rules further to amend the Companies (Indian Accounting Standards) Rules, 2015, namely:—

1. Short title and commencement: (1) These Rules may be called the Companies (Indian Accounting Standards) Amendment Rules, 2019.

(2) They shall come into force on 1st day of April, 2019.


Please refer the link for the detailed notification of the said rules: Notification

[Notification dt. 30-03-2019]

Ministry of Corporate Affairs

Case BriefsSupreme Court

Supreme Court: A Bench comprising of R.F. Nariman and M.R. Shah, JJ. allowed an appeal filed against the order of Rajasthan High Court whereby it refused to transfer winding up proceedings pending before it to National Company Law Tribunal (NCLT).

The account of Jaipur Metals and Electrical Ltd. had become a non-performing asset. A reference was made to Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act, 1985 (SIC Act), which forwarded opinion to the High Court that company ought to be wound up. Ultimately, the High Court appointed official liquidator and the winding up process has begun. Meanwhile, Alchemist Asset Reconstruction Co. (financial Creditor) filed an application under Section 7 of Insolvency and Bankruptcy Code, 2016 before NCLT for initiation of Corporate Insolvency Resolution Process which was admitted. Thereafter, the High Court passed the order impugned where it refused to transfer winding up proceedings pending before it and set aside NCLT’s order. Aggrieved thereby, the appellants preferred instant appeal.

The Supreme Court perused in detail various Sections of the Companies Act, 2013 as well as I&B Code. Focus was laid on Section 434 of Companies Act, 2013 which deals with “transfer of certain pending proceedings”. Section 238 I&B Code, Rules 5 & 6 of Companies (Transfer of Pending Proceedings) Rules, 2016 were considered in detail. The Court explained, “all proceedings under Section 20 of the SIC Act pending before the High Court are to continue as such until a party files an application before the High Court for transfer of such proceedings post 17-08-2018 (when Section 434, Companies Act was amended).  Once this is done, the High Court must transfer such proceedings to the NCLT which will then deal with such proceedings as an application for initiation of the corporate insolvency resolution process under the Code.” Furthermore, the proceedings under Section 7, I&B Code application were independent which had nothing to do with the transfer of winding up proceedings. It was open to Alchemist at any time before winding up order was passed to apply under Section 7 of the Code. It was also clarified that if there is any inconsistency between Section 434, Companies Act and provisions of the Code, the latter must prevail. In such view of the matter, it was held that NCLT was correct in admitting the application. The order of the High Court was set aside and NCLT proceedings were directed to continue from the stage where they had been left off. The appeal was allowed.[ Jaipur Metal & Electricals Employee Organization v. Jaipur Metals & Electricals Ltd.,2018 SCC OnLine SC 2801, decided on 12-12-2018]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial) dismissed an appeal filed seeking reduction in penalty imposed on the defaulting company and its Directors.

The penalty was imposed on the company and its Directors for defaulting in filing the annual return in time which attracted punishment under Section 92(5) of the Companies Act, 2013. Also, for violation of Section 137 as financial statements adopted in the annual general meeting was not filed with Registrar of Companies, punishment under Section 137(3) was attracted. The Registrar of Companies had proposed a penalty of Rs 10,64,000 on the company and Rs 10 lakhs on each of the Directors. On appellants’ (three Directors of the company) application under Section 441 for compounding of offences, the NCLT  reduced the amount of penalty to Rs 3 lakhs both for the company as well as each of the three Directors. The instant appeal was filed against this decision of NCLT for further reduction in penalty/compounding of the offences.

The Appellate Tribunal noted the submission made by the appellants the company and the Directors were not in a position to pay Rs 3 lakhs as their financial condition was not sound. In view of such submission, the Appellate Tribunal asked the Company Secretary concerned to file the statement of accounts of the Directors to support such a plea. However, the appellants did not want to disclose the respective amount available in their accounts. In such circumstances, it could not be believed that the appellants were not in a position to pay the amount or that they were bankrupt. This apart, as the NCLT had already reduced the amount of the penalty proposed by the Registrar of Companies which was just and fair, the Appellate Tribunal was not inclined to interfere in the order impugned. The appeal was dismissed holding it to be sans merit. [S.D. Bio-Tech Ltd. v. Registrar of Companies, Company Appeal (AT) No. 35 of 2018, dated 30-01-2018]