Case BriefsSupreme Court

Supreme Court: The Division Bench comprising of Dr. Dhananjaya Y Chandrachud* and B V Nagarathna, JJ., partly allowed the petition challenging Union Government’s disinvestment of its shareholding in Hindustan Zinc Ltd. (HZL). The Bench, though held that the government was within its powers to disinvest its shares, it was of the opinion that a full-fledged CBI enquiry was required regarding previous disinvestment by the government. The Bench stated,

“There is no bar on the constitutional power of this Court to direct the CBI to register a regular case, in spite of its decision to close a preliminary enquiry.”

HZL was incorporated as a public sector company to develop the mining and smelting capacities, so as to substantially fulfil the domestic demand for zinc and lead. In 1991-92, the Union Government disinvested 24.08 per cent of its shareholding in HZL and again in 2002 it disinvested 26 per cent of its shareholding in HZL to a ‘strategic partner, Sterlite Opportunities & Ventures Ltd. (SOVL). Consequently, the Union Government was left with an equity holding of 49.92 per cent.

Res Judicata and PILs

While determining the issue that the first relief sought by the petitioners, i.e. residual disinvestment can occur only after the amendment of the Nationalisation Act 1976 was  substantially similar to the reliefs sought by Maton Mines Mazdoor Sangh when the disinvestment of 2002 and 2014, the Bench opined that the Court must be alive to the contemporary reality of “ambush Public Interest Litigations” and interpret the principles of res judicata or constructive res judicata in a manner which does not debar access to justice. The Bench expressed,

“While determining the applicability of the principle of res judicata under Section 11 of the Code of Civil Procedure 1908, the Court must be conscious that grave issues of public interest are not lost in the woods merely because a petition was initially filed and dismissed, without a substantial adjudication on merits.”

Considering that the three judges Bench had rejected the petition filed by Maton Mines Mazdoor Singh in limine, without a substantive adjudication on the merits of their claim, the Bench held that the instant petition was not barred by res judicata.

Whether disinvestment was barred by the Nationalisation Act 1976?

Relying on the object of the Nationalisation Act, 1976 which was to acquire control over the strategic mineral deposits of lead and zinc, since zinc plays important role in the country’s economy, the petitioners contended that disinvestment could not be made without amending the Nationalisation Act 1976. Assailing the contention of the petitioners, the Union Government made following submissions:

  1. After 16 March 1999, the mining of zinc has ceased to retain a strategic character, given the changes in industrial policy.
  2. There was no challenge to the disinvestment which took place in 1991-92 or in 2002.
  3. The HZL had ceased to retain its status as a government company within the meaning of Section 617 of the Companies Act 1956.

In view of the above, the Bench opined that it would be inconsistent to read an implied limitation on the transfer by the Union Government of its residual shareholding in HZL representing 29.54 per cent of the equity capital. Considering that HZL was not a government company, the Bench stated, when a decision has been taken by the government as a shareholder of a company to sell its shares, it acts as any other shareholder in a company who makes the decision on the basis of financial and economic exigencies.

Whether the decision in Centre for Public Interest Litigation would result in a bar on the disinvestment of the residual shareholding?

In Centre for Public Interest Litigation v. Union of India, (2003) 7 SCC 532, the Court had held that that the divestment of the shareholding of the Union Government in HPCL and BPCL, as a result of which the companies would cease to be government companies, could not be undertaken without amending the statutes under which they were nationalized. Distinguishing the decision in Centre for Public Interest Litigation, the Bench stated that HPCL and BPCL were government companies when the disinvestment action was challenged while HZL ceased to be a government company as a consequence of the disinvestment in 2002, since its shareholding fell below 51 per cent. The Bench opined,

“The fact that the Union Government is amenable to the norms set out in Part III of the Constitution would not impose a restraint on its capacity to decide, as a shareholder, to disinvest its shareholding, so long as the process of disinvestment is transparent and the Union Government is following a process which comports with law and results in the best price being realized for its shareholding.”

Hence, the Bench held that the decision of the Union Government, as an incident of its policy of disinvestment, to sell its shares in the open market, could not be questioned by reading a bar on its powers to do so, from the provisions of the Nationalisation Act 1976.

CBI’s preliminary enquiry

Evidently, in spite of conflicting opinion of the Director of CBI and the Director of Prosecution, CBI regarding the closure of the preliminary enquiry and conversion of it into a regular case; and the fact that the matter was referred to the Attorney General but the Court was not apprised of the status of referral, the preliminary enquiry was closed.

Upon perusal of reports and recommendations in favour of registration of a regular case, which indicated irregularities in the decision to disinvest 26 per cent, instead of 25 per cent, in the bidding process and the valuation of 26 per cent equity for disinvestment, the Bench opined that the disinvestment in 2002 evinced a prime facie case for registration of a regular case. The Bench stated,

“We are desisting from commenting on some crucial facts and names of individuals involved, so as to not cause prejudice to the investigation of the matter.”

Accordingly, opining that there was a prima facie case for cognizable offence, as mandated in para 9.1 of the CBI Manual, the Bench held that a full-fledged investigation must be conducted.

Hence, the petition was partially allowed. The CBI was directed to register a regular case and periodically submit status reports of its investigation to the Court.

[National Confederation of Officers Association of Central Public Sector Enterprises v. Union of India, 2021 SCC OnLine SC 1086, decided on 18-11-2021]

Kamini Sharma, Editorial Assistant has put this report together 

Appearance by:

For the Petitioners: Prashant Bhushan, Senior Counsel

For Union of India: Tushar Mehta, Solicitor General

For Sterlite Opportunities & Ventures Ltd. (SOVL): Harish Salve, Senior Counsel

*Judgment by: Justice Dhananjaya Y Chandrachud

Know Thy Judge| Justice Dr. DY Chandrachud

Op EdsOP. ED.


With the introduction of the Insolvency and Bankruptcy Code, 20161 (the Code) and the consequential amendments made to Sections 2702, 2713 and 2724 of the Companies Act, 2013 (the Act),5 a winding-up petition under the Act cannot be filed against a company for inability or failure to pay debts. However, in terms of Section 271, a winding-up proceeding may still be initiated under the Act against a company on the following grounds:

  • the company has, by special resolution, resolved that the company be wound up by the Tribunal;
  • if the company has acted against the interests of the sovereignty or integrity of India, national security, friendly relations with foreign States, public order, decency or morality;
  • if on an application made by the Registrar of Companies or such person authorised by the Central Government to do so, the Tribunal is of the opinion that affairs of the company are being conducted in fraudulent manner, that the company was formed for a fraudulent purpose or the management of the company has been guilty of fraud, misfeasance or misconduct, and the Tribunal believes it proper that the company be wound up;
  • if the company has defaulted in filing its annual returns with the Registrar of Companies for the preceding five consecutive years; or
  • if the Tribunal is of the opinion that it is just and equitable that the company be wound up.

The provisions of Section 271(1)(a) of the Act i.e. “winding up by special resolution” ought not to be confused with a voluntary application for initiation of corporate insolvency resolution process under Section 10 of the Code6 or an application for voluntary liquidation under Section 597. Unlike other proceedings, the reason for the existence of the remedy under Section 271(1)(a) of the Act is to facilitate the execution of the will of the shareholders of companies. It is based on the understanding that a company has a right to apply for its own winding up if its shareholders wish to and, by means of a special resolution, elect to discontinue the company.8 As Lord Cairns in Suburban Hotel Co., In re:9 observed:

…a certain number of persons are willing to undertake to supply a limited amount of capital upon the terms of the business being managed by persons who shall be elected in a particular manner…. They have certain means by which the business can be put an end to. If the requisite majority wish it to be discontinued a special resolution can at any time be passed to wind up the company. On the other hand, if any of the tests of insolvency or the impossibility of carrying on business, which are mentioned in 79th section of the Act [Section 122 of the Insolvency Act], occur, then the shareholders have a further right to have the company wound up accordingly. But subject to the wishes of the majority, and subject to the occurrence of any of those tests mentioned in the Act, I apprehend that the contract means that the shareholders will supply the specified amount of capital for the purpose of carrying on business as long as it can be carried on.

Winding up by special resolution

A company by a special resolution can decide that it would be wound up by the tribunal. The resolution can be passed for any reason.10 This clause is based on the premise that, the shareholders being corporate entities have the requisite skill to judge and decide as to whether or not the company should go out of existence. Further, as noted above, a company has the right to apply for its own winding up and this right is generally exercised by its directors. However, the directors do not have the right to seek for such winding up without the express permission of the general body of shareholders in the form of a special resolution.11However, the directors may file this application, subject to the ratification of proposal.12

The company has to call general body meeting and pass a special resolution specifically setting out grounds in the explanatory statement attached thereon explaining why winding up of the company is necessary. A resolution of the company’s Board of Directors is not a substitute for shareholders’ resolution. The appointment of a provisional liquidator does not by itself necessitate an order of winding-up.13Where the notice for an extraordinary meeting neither provide the actual wordings of the resolution nor state that the resolution was to be passed as an extraordinary resolution, the court held that the resolution for the winding up of the company was not passed in accordance with law.14

A company which applies for a winding-up order is not confined to relying upon the fact that a special resolution for winding up has been passed,15 but may invoke other grounds contained in Section 271.16 This must, of course, be established in the ordinary way and it is therefore not enough to show that a simple majority of members is in favour of winding up.17Further, the procedure to be followed for passing such a special resolution may also depend on the articles of association of a company. Although the articles cannot alter the statutory majority prescribed for special resolutions, there seems to be nothing to prevent the company from making it difficult to pass a resolution for the purpose of winding up voluntarily. A company is, therefore, entirely within its powers to mandate a larger quorum for such occasions.18 Similarly, it may require a high majority for such special resolutions. In Ramakrishna Industries (P) Ltd. v. P.R. Ramakrishnan,19 the articles of the company required “every member shall vote in favour of the resolution for winding up when such contingencies arise”. This requirement was challenged on the ground that provision in articles was void in view of Section 9 of the Companies Act, 195620 vis-à-vis Section 433(f) of that Act. The Court, however, held that, the provision was not void inasmuch as the articles of association have a contractual force between the company and its members as also between the members inter se and that the said provision in the articles was what is provided in Section 433(a) of the Companies Act, 1956. It was not contrary to the provision in Section 433(f) of the Companies Act, 1956.

Winding-up orders on this ground are uncommon as companies usually resort for the cheaper and less complicated voluntary liquidation. The proceedings under Section 271(1)(a) and its earlier versions seem to have been invoked only where other liquidation proceedings provided a particular group of creditors an unfair advantage over others. For instance, in United Investments Co., In re,21an application for voluntary winding up by special resolution was filed so as to reduce the assets available for distribution on winding up to preference shareholders. In that case, the company’s articles distinguished the amounts shareholders would receive based on whether such shares were preference shares or ordinary shares. The ordinary shareholders took advantage of the equivalent of Section 122(1)(a)22 in order to bring about a form of liquidation which was more favourable to their own interests.

It is also important to note that the power of the Tribunal to order winding up is generally considered as being discretionary and the Tribunal may not exercise it where winding up is considered as being opposed to the public or the company’s own interests. Generally, unless there are such special circumstances, the Tribunal will allow the petition and make an order for winding up of the company.23In United Fuel Investments Ltd., In re24, the Court refused to interfere with a special resolution for compulsory winding up in the absence of proof that the action of the majority was fraudulent or something akin to it. However, the Tribunal must see that the winding up is not opposed to public interest or the interest of the company as a whole.25The Tribunal is also to take into account the possibility of the company to have a financial revival, when the company is incurring loss that led the company to pass special resolution for winding up.26

Reasons and motives in relation to a special resolution

In a petition under Section 271(1)(a), the Tribunal is essentially asked to terminate a contract that the shareholders of the company entered into when they became members of the company. Thus, to that extent, the tribunal must decide on an issue that is at its core contractual. Consequently, the Tribunal has to decide the question in terms of that contract and the memorandum of association and articles of association which prescribe the limits of rights of members. However, the tribunal may go into the reason behind the company’s decision to wind up by means of a petition under Section 271(1)(a). It is not bound to order winding up merely because the company has so resolved.27

Where a company is unable to pay its debts, or where its substratum is gone, the company may choose to file a winding-up petition even if it is presented by the company itself after a special resolution to that effect. In such cases, the motive may be irrelevant. Equally, the reason for the strained circumstances that a company may face is irrelevant even if such circumstances are due to mismanagement.28

Where a company by a special resolution filed a petition for winding up, the Official Liquidator objected that the directors had defrauded the depositors. The Court, observed that the company owed huge debts with no prospects of survival, ordered for the company to be wound up. It, however, observed that the directors would not be absolved of their legal responsibilities merely on account of such an order.29 In another case, a government company had several decrees that has been passed against it in suits for repayment of various loans. But the company was unable to discharge its liabilities and was found to have lost its financial substratum. The Court ordered windingup.30 However, a company may not be entitled to bring a petition merely because it is finding it difficult to dispose assets in the open market.31

Checklist for filing a petition under Section 271 of the Companies Act, 2013

  • A petition under Section 271 shall be presented only by persons mentioned in Sections 272(1)(a)-(f).
  • A petition under Section 271(1)(a) can be presented by the company, subject to the company duly passing a special resolution at a validly convened meeting of the company.
  • A petition under Section 271(b) can only be presented the Central Government or a State Government in terms of Section 272(f) of the Act.
  • A petition under Section 271(1)(c) may only be presented by the persons prescribed under Section 272(1)(d) or Section 271(1)(e) provided the prerequisites mentioned under Section 271(1)(c) are duly satisfied.
  • A petition under Section 271(1)(d) can be made by the company itself, any contributory, the Registrar of Companies.
  • A petition under Section 271(1)(e) can be made either by the company, any contributory or any person authorised by the Central Government on their behalf.

[Note: In Antrix Corpn. Ltd. v. Devas Multimedia (P) Ltd.32, the Court noticed that the consolidated petition under Sections 271-273 of the Companies Act, 2013 was maintainable and the ingredients under Sections 271(1)(e) were clearly satisfied];

Note: Sub-section (4) of Section 272 of the 2013 Act addresses the ability of the Registrar to file a petition. A Registrar evidently cannot file a petition for winding up on the special resolution passed by the company, or where winding up of the company is on the orders of the tribunal under Section 265 of the 2013 Act33.

The ground under Section 271(1) provides for winding up of the company on the special resolution of the shareholders, to be done by the Tribunal, and is to be distinguished from the voluntary winding up of the company in terms of Section 270(1)(b), the procedure for which is enumerated below in Sections 304 to 323 in Part II of Chapter XX34.]

7) Every petition, application or reference shall be submitted in Form WIN-1 or Form WIN-2 (as the case may be) as prescribed under Rule 3 of the Companies (Winding Up) Rules, 202035. In addition to the same, the same shall be coupled with:

  • (i) A notice of admission in Form NCLT-2 (as per usual NCLT practice in every fresh application) and Form NCLT-5 as per the provisions of Rule 34 of the National Company Law Tribunal Rules, 201636.
  • (ii) A verifying affidavit in Form WIN-3.

8) Where the petition is being filed by the company, the company also has to file its “statement of affairs” in Form WIN-4, and the same is a mandatory enclosure which has to be enclosed either with Form WIN-1 or Form WIN-2.

9) Copies of the memorandum and articles of association of the company must be annexed.

10) Copies of latest annual report and balance sheet.

11) Copy of special resolution [if being filed under Section 271(1)(a).]

12) Copies of the notice calling the meeting in which the special resolution of the company las required under Section 271(1)(a)] was convened and duly passed.

13) It should be indexed and stitched together in a paper book form.

14) One copy should be given to the opposite party. Notice to opposite party should be issued in Form NCLT-5.

15) The fees payable is prescribed in Rule 165 of the NCLT Rules, 2016 and may be paid by way of a demand draft or through BharatKosh or through the NCLT e-filing website.

16) Fee: Rs 1000 (This is the prescribed fee for an application under Sections 271-273 of the Companies Act, 2013 as can be seen from the drop down menu in the NCLT e-filing website.).

*  Authors are advocates based out of Chennai and practice on the company/commercial side.





5With effect from 15-11-2016.



8Patiala Banaspati and Allied Products Co. Ltd., In re, AIR 1953 Pepsu 195; Oriental Navigation Co. v. BhanaramAgarwalla, 1921 SCC OnLine Cal 264.

9(1867) 2 Ch App 737, 742-743 (CA) (“The reasoning in that case has stood the test of time’’: Bondi Better Bananas Ltd, Re [1951] 3 D.L.R. 522 at 529, per Ferguson, J.)

10For the provision relating special resolution see, S. 433(a) of the Companies Act, 1956; S. 271(1)(b) of the 2013 Act.

11State of Madras v. Madras Electric Tramways (1904) Ltd., 1956 SCC OnLine Mad 150.

12Galway & Salt Hill Tramways Co., In re, (1918) 1 IR 62/521 LG 93.

13Asra Estates Ltd., In re, 2007 SCC OnLine AP 1046.

14 Swadeshi Cotton Mills Ltd, In re, [1932] Comp Cas 411 (All).

15State of Madras v. Madras Electric Tramways (1904) Ltd., 1955 SCC OnLine Mad 182; Ex p. Edenvale Wholesalers Ltd, 1959 (2) S.A. 477.

16Langham Skating Rink Co, In re, (1877) 5 Ch D 669 (CA); Smith v.Duke of Manchester, (1883) 24 ChD 611; Emmadart Ltd, In re, 1979 Ch 540 :(1979) 2 WLR 868 : (1979) 1 All ER 599.

17Anglo-Continental Produce Co. Ltd., In re, (1939) 1 All ER 99.

18Ayre v. Skelskey’s Adamant Cement Co. Ltd.,(1904) 20 TLR 587; Cambrian Peat Fuel Co, De La Mott’s Case, Re (1875) 31 L.T. 773; Grand Lodge of N.S.W. Masonic Hall Co v. Sly, (1913) 13 S.R. (N.S.W.) 512.

191985 SCC OnLine Mad 260.


21(1961) 31 D.L.R. (2d) 331. See also, Fallis & Deacon v. United Fuel Investments Ltd., (1963) 40 DLR (2d) 1 (Can. Sup. Ct); Byrom Motors Ltd.v. Dolphin House Ltd.,(1958) 3 SA 52 (S.R.).


23Hillig v. Darkinjung Pty Ltd., [2006] NSWSC 137; (2006) 205 F.L.R. 450 [S Ct (NSW)].

24Hillig v. Darkinjung Pty Ltd., [2006] NSWSC 137; (2006) 205 F.L.R. 450 [S Ct (NSW)].

25B. Viswanathan v. Seshasayee Paper and Boards Ltd. 1991 SCC OnLine Mad 525.

26Advance Television Network Ltd. v. Registrar of Companies, 2011 SCC OnLine Del 2673.

27New Kerala Chits & Traders (P) Ltd. v. Official Liquidator, 1979 SCC OnLine Ker 202.

28Bombay Metropolitan Transport Corpn. Ltd. v. Employees of Bombay Metropolitan Transport Corpn. Ltd., 1990 SCC OnLine Bom 237.

29Antariksh Credit and Commercial Ltd. v. Union  of India, 1999 SCC OnLine All 1286.

30Gujarat Small Industries Corpn. Ltd. v.Borsad Urban Coop. Credit Society Ltd., 2008 SCC OnLine Guj 245.

31Compare Anglo-Continental Produce Co., In re, (1939) 1 All ER 99.

32 CP No. 06/BB/2021, order dated 19-1-2021 [NCLT, Bengaluru].





Op EdsOP. ED.

Oppression and mismanagement

Time and again there have been discussions on whether petitions filed for reliefs sought under Sections 241[1] and 242[2] of the Companies Act, 2013 (CA, 2013), corresponding to Sections 397[3] and 398[4] of the Companies Act, 1956 (CA, 1956), could be referred to arbitration in case if there was an arbitration agreement between the parties to such petition. The Supreme Court of India, coming to the rescue as always, has presented us with an infallible test for resolving this issue, enabling the courts and tribunals make swift decisions in such matters.


The paroxysm of decisions commenced post the Delhi High Court’s decision in Kare (P) Ltd., In re[5] where the Delhi High Court observed that the jurisdiction of the Company Law Board (CLB) under Sections 397 and 398 of the CA, 1956 is a statutory jurisdiction that cannot be ousted by arbitration clause.

In 1999, the Supreme Court was presented with a petition [Haryana Telecom Ltd. v. Sterlite Industires (I) Ltd.6] where the appellant had challenged a decision by the Punjab and Haryana High Court rejecting an application filed by the appellant, under Section 8 of the Arbitration and Conciliation Act, 19967 (ACA) for referring a winding-up petition to arbitration. The Punjab and Haryana High Court had reasoned this decision by stating that matters under the CA, 19568 for such reliefs were not arbitrable. The Supreme Court while rejecting the appeal, opined that Section 8 of the ACA postulates that what can be referred to the arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide. The Supreme Court further opined that the power to order winding up of a company is contained under the CA, 1956 and is conferred on the court, as such an arbitrator, notwithstanding any agreement between the parties, would have no jurisdiction to order winding up of a company.

The Supreme Court in Sumitomo Corpn. v. CDC Financial Services (Mauritius) Ltd.9 upheld the order of the CLB rejecting a reference to international arbitration under Section 4510 of the ACA stating that the subject-matter of the petition under Sections 397 and 398 before the CLB was pertaining to the affairs of the company and not covered under the arbitration agreement.

Probably picking up this trail of thought, in 2011, the Supreme Court, in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd.11, set out further clarification and test to examine arbitrability of a dispute. The Supreme Court simplified the test stating that generally and traditionally all disputes relating to right in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals. In this manner, Booz Allen12 judgment crystallised an apparatus to test whether a dispute should or ought to not be referred to arbitration. The Supreme Court, however, has clarified that this is not a rigid or inflexible rule.

The Supreme Court has also confirmed in its decision in Aruna Oswal v. Pankaj Oswal13 that jurisdiction of National Company Law Tribunal (NCLT) in respect of oppression and mismanagement, does not extend to determination of disputes as to succession or ownership of shares, proper forum for which is civil court and that jurisdiction under Sections 241 to 244 must be exercised strictly in terms of provisions of CA, 201314. This makes it clear that disputes regarding succession and ownership of shares, which could be considered as rights in personam, do not fall within the ambit of the jurisdiction of the NCLT.

Now this could have led to an interpretation that the reliefs in personam could be carved out of reliefs in rem and referred to arbitration. However, the Supreme Court in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya15 the Supreme Court observed that there is no provision in the ACA that when the subject-matter of the suit includes subject-matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. The Supreme Court further held that: (a) if bifurcation of the subject-matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course; and (b) since there is no such indication in the language, it follows that bifurcation of the subject-matter of an action brought before a judicial authority is not allowed.


Going by the reasoning provided by the Supreme Court in Haryana Telecom16 judgment and Booz Allen17 judgment it could be argued that in the event a court or a tribunal has been specifically bestowed with the power to decide any disputes or matters falling under the CA, 1956 and CA, 201318, such disputes or matters ought to be decided by the court so authorised even if there is an arbitration agreement between parties to such dispute. This would evidently render such disputes non-arbitrable.

To continue this line of argument and its application to petitions filed against oppression and mismanagement, it could be noted that Section 242 of the CA, 2013 (corresponding Section 397 of the CA, 1956) bestows a unique observational power upon the NCLT being the Tribunal appointed under the CA, 2013. This section empowers the NCLT to pass any order that it deems fit if, in its opinion, the company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company and it would unfairly prejudice a petitioning member or members to wind up the company, but otherwise the facts justify that it was just and equitable that the company should be wound up. Section 244 of the CA, 2013, also specifies reliefs that the NCLT has the power to be provided in such circumstances.

In view of the Haryana Telecom19 judgment, the Booz Allen20 judgment and the sections mentioned above governing oppression and mismanagement petitions, the following is discernible:

(a) the right provided under these sections are a right in rem;

(b) the NCLT has the exclusive jurisdiction for entertaining petitions seeking reliefs under these sections;

(c) such disputes are non-arbitrable and as such cannot be referred to arbitration; and

(d) bifurcation of the subject-matter of an action brought before a judicial authority is not allowed.


This interpretation has been affirmed and asserted in the landmark judgment of the Bombay High Court in Rakesh Malhotra v. Rajinder Kumar Malhotra21 where the Bombay High Court held that: (a) a petition that is merely “dressed up” and seeks, in the guise of an oppression and mismanagement petition, to oust an arbitration clause, or a petition that is itself vexatious, oppressive, mala fide (or, at any rate, not bona fide) cannot be permitted to succeed; (b) in assessing an allegation of “dressing up”, the Sections 397/398 petition must be read as a whole, including its grounds and the reliefs sought; (c) it cannot be carved up and deconstructed so as to bring some matters within the arbitration clause and leave other matters out; and (d) where there are reliefs that are not arbitrable because they fall within Section 402 of the CA, 195622, there is no question of a dismissal of the petition on the ground that there exists an arbitration clause.

The Bombay High Court at Goa, while following this principle in Emgee Housing (P) Ltd. v. ELS Developers (P) Ltd.23 held that even if, there is an arbitration agreement between the parties and even if, the dispute is covered by the arbitration agreement, the court/judicial authority will refuse the application under Section 8 of the ACA, if the subject-matter of the dispute is capable of adjudication only by a public forum.

The National Company Law Appellate Tribunal has also supported this stand in Dhananjay Mishra v. Dynatron Services (P) Ltd.24 and held that on a plain reading of Section 242 of the CA, 2013, it is manifestly clear that the facts should justify the making of a winding-up order on just and equitable grounds and admittedly, arbitrator would have no jurisdiction to pass a winding-up order on the ground that it is just and equitable which falls within the exclusive domain of the NCLT under Section 271(e) of the CA, 201325.


It can be seen from the plethora of decisions mentioned above, that the evident takeaway and the solidified legal position as regards this issue is that reliefs against oppression and mismanagement sought under Sections 241 and 242 of the CA, 2013 cannot be referred to arbitration even if there is an existing arbitration agreement between the parties to such dispute. However, as always, legal positions are not set in stone and are subject to changes pursuant to judicial or legislative overrule.

Partner, Litigation and Dispute Resolution, ANB Legal

[1] <>.

[2] <>.

[3] <>.

[4] <>.

[5] 1974 SCC OnLine Del 101.

6 (1999) 5 SCC 688.

7 <>.

8 <>.

9 (2008) 4 SCC 91.

10 <>.

11 (2011) 5 SCC 532.

12 (2011) 5 SCC 532.

13 (2020) 8 SCC 79.

14 <> <>.

15 (2003) 5 SCC 531.

16 (1999) 5 SCC 688.

17 (2011) 5 SCC 532.

18 <>.

19 (1999) 5 SCC 688.

20 (2011) 5 SCC 532.

21 2014 SCC OnLine Bom 1146 : (2015) 192 Comp Cas 516.

22 <>.

23 2016 SCC OnLine Bom 2391.

24 2019 SCC OnLine NCLAT 163.

25 <>.

OP. ED.Practical Lawyer Archives

Remuneration to executive and non-executive directors has always one of the most deliberated and debated topics in corporate governance. The topic gains importance as there it involves outflow of money from the company, calculation of net profits, disclosures to its shareholders, approval of directors, shareholders and remuneration Committee. Remuneration to directors of loss-making company or company which is very sensitive to the economy or sector performance is always in the limelight. This article is an analysis of the important and relevant provisions of the Companies Act and the Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations, 2015 w.r.t. remuneration to non-executive directors. There is also a reference to the recent amendment introduced to Schedule V of the Companies Act.

Limits on the remuneration to directors

According to the provisions of Section 197 of the Act, the total managerial remuneration payable by a public company, to its directors (including managing director, whole-time director, non-executive directors whether independent or not), and its manager in respect of any financial year shall not exceed 11% of the net profits of that company for that financial year. The net profits shall be computed in the manner laid down in Section 198 of the Act.

The company in general meeting may, authorise the payment of remuneration 11% of the net profit of the company. Earlier this required the approval of the Central Government. But now, the approval of Central Government is not required by the amendment introduced by Companies (Amendment) Act, 2017. By this provision, the company can take an approval of the shareholders in general meeting and authorise payment of remuneration up to 30% (an example) of the net profit of the company.

Limits on the remuneration to non-executive directors under the Companies Act

According to Section 197 of the Act, except with the approval of the company in general meeting by passing a special resolution, the company can pay remuneration to its non-executive directors as follows:

(a) 1% of the net profit of the company, if there is an existing managing or whole-time director or manager. Here “1% of the net profit” means for all non-executive directors of the company (whether independent or not).

(b) 3% of the net profit in any other case i.e. where there is no managing or whole-time director or manager. In situation is very rare, where all the directors are non-executive directors. Here “3% of the net profit” means for all non-executive directors of the company (whether independent or not).

With the amendments introduced by the Companies (Amendment) Act, 2017, with the approval of shareholders in general meeting by special resolution, the above percentages can be changed. However, in such case, the company would be required to obtain few more approvals. Where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.

The above percentages do not include sitting fees. Such payment is excluded from the calculation of the remuneration to directors.

Section 197(6) of the Act provides that a director (i.e. any director–executive director or non-executive director) or manager may be paid remuneration either by way of a monthly payment (i.e. salary) or at a specified percentage of the net profit of the company (i.e. commission) or partly by one way and partly by the other (i.e. combination of both).

Remuneration to non-executive directors in a loss-making company

Till the Companies (Amendment) Bill, 2020 [now, Companies (Amendment) Act, 2020], there was no specific provision in the Act to pay non-executive directors by way of commission, in the event of loss or inadequate profits of the public company.  Section 197(3) of the Act was amended by the Companies (Amendment) Act, 2020, wherein a company having no profits or inadequate profits, can pay to all its directors (executive and non-executive directors) by way of remuneration any sum in accordance with the provisions of Schedule V to the Act.

It is important to note here that even in the case of inadequate profits or losses, the sitting fees paid by the company is not a part of the remuneration to directors.

The Ministry of Corporate Affairs (MCA) has amended[1] Schedule V of the Companies Act, 2013, in Part II, under the heading—“Remuneration” and allowed companies to pay remuneration to non-executive directors or independent directors. The limit of yearly remuneration payable to such directors shall not exceed prescribed amount. The maximum amount of remuneration depends upon the effective capital of the company. Where in any financial year during the currency of tenure of non-executive directors or independent directors, a company has no profits or its profits are inadequate, it may, pay remuneration to such director not exceeding, the limits given below:

Sl. No. Where the effective capital

(in rupees) is

Limit of yearly remuneration payable shall not exceed (in rupees) in case of non-executive directors or independent directors
1 Negative or less than 5 crores. 12 lakhs
2 5 crores and above but less

than 100 crores.

17 lakhs
3 100 crores and above but less

than 250 crores.

24 lakhs
4 250 crores and above. 24 lakhs plus 0.01% of the effective capital in excess of Rs 250 crores.

Relevant provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI Listing Regulations)

Regulation 17 of the SEBI Listing Regulations relates to “Board of Directors”. It provides for composition, Board meetings, appointment of non-executive directors, succession planning, code of conduct, remuneration, Board evaluation, etc.

Following are the key points relating to the remuneration to directors under SEBI Listing Regulations:

(a) The Board of Directors shall recommend all fees or compensation, if any, paid to non-executive directors, including independent directors and shall require approval of shareholders in general meeting. Therefore, approval of shareholders in mandatory for remuneration to non-executive directors, irrespective of the provisions of the Companies Act.

(b) The requirement of obtaining approval of shareholders in general meeting shall not apply to payment of sitting fees to non-executive directors, if made within the limits prescribed under the Companies Act, 2013 for payment of sitting fees without approval of the Central Government. Therefore, shareholders approval is not required for payment of sitting fees to non-executive directors. Similar provisions are provided in the Companies Act. According to Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, a company may pay a sitting fee to a director for attending meetings of the Board or Committees thereof, such sum as may be decided by the Board of Directors thereof which shall not exceed Rs 1 lakh per meeting of the Board of Directors or Committee thereof. However, for independent directors and women directors, the sitting fee shall not be less than the sitting fee payable to other directors.

(c) The approval of shareholders shall specify the limits for the maximum number of stock options that may be granted to non-executive directors, in any financial year and in aggregate. However, independent directors shall not be entitled to any stock option;

(d) The SEBI Listing Regulations introduce a very interesting provision for payment of remuneration to non-executive directors. According to the relevant provisions approval of shareholders by special resolution shall be obtained every year, in which the annual remuneration payable to a single non-executive director exceeds 50% of the total annual remuneration payable to all non-executive directors, giving details of the remuneration thereof. It is necessary to understand this provision in light of 2 situations:

(i) Company having adequate profits: In this case, a company can pay up to 1% or 3% of the net profit for that financial year. Here, it would be necessary to calculate the profits of the company and then confirm the share of any specific non-executive director(s) in the profit in the form of remuneration.

(ii) Company having inadequate profits: In this case, to calculate the effective capital and the remuneration paid to any non-executive director of the company. It is important to note here that specific approval would be rarely applicable as the remuneration of a non-executive director is compared to the remuneration of all non-executive directors and not all executive directors (under SEBI Listing Regulations).

In both the above cases, the remuneration shall not include sitting fees paid to the directors in accordance with the provisions of the Companies Act.

In these challenging times of Covid-19, its impact on the economy and companies, the amendment to Schedule V of the Companies Act will be very helpful for companies to pay all its directors.

Practising Company Secretary, Pune

[1]      MCA Notification dated 18-3-2021, S.O. 1256(E) [F. No. 1/5/2013-CL-V].

Op EdsOP. ED.


More than twenty years since liberalisation, as the Indian economy matured and marched towards global competitiveness, a dire need was felt to overhaul the existing legal regime governing the corporate and commercial sector and make it more modern and robust. This led to the enactment of several new legislations and significant amendments in existing legislations impacting these sectors. These include the Companies Act, 2013[1], the Commercial Courts Act, 2015[2], statutes incorporating the Goods and Service Tax, the Insolvency and Bankruptcy Code, 2016 (IBC)[3], the Arbitration and Conciliation (Amendment) Act, 2015[4], the Specific Relief (Amendment Act), 2018[5], etc. all of which were aimed at streamlining the functioning of business, simplifying the tax structure and payment of taxes, enabling easier enforcement of contracts and quicker resolution of disputes. These legislations enabled India to leap frog its way to 77th place in the Work Bank’s “Ease of Doing Business” rankings in 2019[6] from a dismal 142nd place in 2015.[7]

While the intent and substance of these legislations may be noble, there are a few transitional glitches which have impaired their effective implementation. As a matter of fact, transitions in law always bring about some uncertainties requiring judicial or parliamentary clarifications. However, the transitional phase in respect of these legislations has been more disruptive than one would have imagined.


Where an Act contains substantive, amending or repealing enactments, it commonly also includes provisions which regulates the coming into operation of those enactments and modify their effect during the period of transition.[8] These provisions generally are intended to take care of the events during the period of transition. This article undertakes a critical analysis of the transitional provisions of three recent legislations, more particularly the Goods and Service Tax Acts, the Insolvency and Bankruptcy Code, 2016 and the Arbitration and Conciliation (Amendment) Act, 2015. The article opines how the transitional provisions in these legislations have been drafted with a lack of foresight and vision, which in turn has led to multiple litigations and manifold issues in interpretation of these provisions. The article highlights the immediate need for legislative review and revision of these transitional provisions so as to infuse some much-needed clarity, avoid multiple litigations and ensure a smoother transition to a new legal and regulatory regime.

Part I Goods and Service Tax

A. Brief legislative history

India’s move towards a unified and comprehensive goods and service tax (GST) regime took concrete shape with the enactment of the Constitution (101st Amendment) Act, 2016 [9] (the “Amending Act”) notified in the Official Gazette on 8-8-2016. The Amending Act made suitable changes to the Constitution to pave way for implementation of GST.

Pursuant to the redefining of legislative powers between the State and the Centre under the aforesaid Amending Act, Parliament enacted the Central Goods and Services Tax Act, 2017[10] (CGST), the Integrated Goods and Services Tax Act, 2017[11] (IGST) and the Union Territory Goods and Services Tax Act, 2017[12] (UGST) and the States also enacted their respective State Goods and Services Tax Acts (SGST). Consequently, GST was launched at midnight on 1-7-2017 bringing into effect all these statutes with the hope of creating a simple and integrated system of indirect taxation in India. Almost all indirect taxes (apart from customs) including excise, sales tax, service tax, etc. were sought to be done away with and subsumed under one umbrella head of “Goods and Service Tax”.

B. The transitional provision

Section 19 of the Amending Act[13] sets out the overarching transitional clause and provides as under:

  1. Transitional provisions.Notwithstanding anything in this Act, any provision of any law relating to tax on goods or services or on both in force in any State immediately before the commencement of this Act, which is inconsistent with the provisions of the Constitution as amended by this Act shall continue to be in force until amended or repealed by a competent legislature or other competent authority or until expiration of one year from such commencement, whichever is earlier.

The aforesaid provision is a sunset clause which mandates the State/Parliament to either repeal or amend all existing indirect tax laws (including sales tax/value added tax, excise, service tax etc.) and make them consistent with the Amending Act within a period of one year from 8-9-2016 (the date of notification of the Amending Act) after which all such laws would cease to remain operational.

 C. Cause for concern

It is pertinent to note that while the Amending Act saves the applicability of the erstwhile indirect tax laws up to 8-9-2016, there are no provisions saving actions initiated/proposed to be initiated under such laws against erring assessees. Most State Sales Tax/VAT Acts permit assessment up to 3-5 years from the date of assessable tax[14]. Similarly, the Central Excise Act, 1944[15] permits initiation of proceedings up to 2 years from the incidence of non-payment of duty[16] and up to 5 years in cases where extended period of limitation can be invoked[17]. There is no clarity on whether such right to initiate action/undertake assessment for past years (provided for under the earlier indirect tax laws) survives after GST is brought into effect.

In order to safeguard the rights of initiating actions/continuing proceedings already initiated under the erstwhile indirect tax laws, Parliament and the State Legislatures sought to incorporate wider transitional clauses in the principal Acts introducing GST. For instance, the CGST Act incorporates a wide savings clause under Section 174[18] which is similar to Clause 6 of the General Clauses Act, 1897 and provides for saving of all actions initiated, rights accrued and remedies proposed to be instituted under the repealed Central Acts including Excise Act, Chapter 5 of the Finance Act, 1994[19] (Service Tax) etc. Furthermore Section 174(3) also saves the applicability of Section 6 of the General Clauses Act, 1897[20]. Similarly, even the various SGST Acts provide for wide transitional clauses under Section 174 of their respective State GST legislation, saving all actions undertaken/proposed to be undertaken thereunder the erstwhile State tax laws including the Sales Tax/VAT Act, tax on entry of goods, etc.

Thus, on account of the absence of a wide, all encompassing transitional clause under the Amending Act, Parliament and the State Legislatures have provided for additional transitional clauses (under the head of repeal and savings clauses) in the CGST Act and respective SGST Acts. This gives rise to a debatable issue as to whether a principal Act, which owes its genesis to a constitutional Amendment Act, can incorporate provisions which not only go beyond such an Amending Act but are also seemingly in variance with the provisions of the Amending Act.

Moreover, different States have incorporated different repeal and savings clauses in their respective SGST legislations. For instance, the Value Added Tax Acts in Kerala, Karnataka and Delhi are repealed under Section 173 of the Maharashtra Goods and Services Tax Act, 2017 of their respective SGST legislations. On the other hand, the Value Added Tax Acts in Gujarat and Maharashtra do not find a mention in the list of repealed Acts under their respective SGST legislations. While the savings provisions under Section 174 of most of these SGST statutes are identical, these savings provisions only save actions undertaken/proposed to be undertaken under the repealed statutes (referred to in Section 173). Conversely, if a statute is not repealed under Section 173, actions undertaken/proposed thereunder are not saved under Section 174. Therefore, while pending and proposed actions under the State VAT Act may get saved in Kerala, Karnataka and Delhi similar actions under the Gujarat VAT Act, 2003 may not be saved based on a literal interpretation of the repeal and savings provisions of the respective SGST Acts of these States. While even the Maharashtra VAT Act, 2002 (MVAT Act) is not repealed under Section 173 of the Maharashtra Goods and Services Tax Act, 2017 (MGST Act). The MGST Act carves out an extremely wide-ranging savings provision which saves the levy, returns, assessment, reassessment, etc. of taxes under all erstwhile laws in force immediately before the enactment of the MGST Act[21]. Thus, the difference in the repeal and savings provisions in different SGST legislations is likely to lead to an unwelcome situation where the impact of GST on the applicability of erstwhile indirect tax laws will have to be looked into separately for each individual State based on its respective SGST legislation and the repeal and savings clauses incorporated therein. This, in turn leads to multiplicity in litigations and brings about ambiguity, uncertainty and inefficiency in the implementation of the GST regime.

D. Judicial opinion

A plethora of litigations in relation to the transitional issues arising pursuant to implementation of GST have been filed across various high courts. The Kerala High Court recently disposed of 3250 petitions (the lead matter being Sheen Golden Jewels (India) (P) Ltd. v. State Tax Officer[22]) upholding the right of the State Authorities to proceed against pre-existing VAT liability even after the introduction of the GST regime on the strength of the savings provision incorporated in Section 174 of the State GST Act.  A similar view was taken by the High Court of Karnataka in Prosper Jewel Arcade LLP v.  CCT[23], although on the basis of different reasoning. It was observed that it is the law applicable on the date of the taxable event which is relevant for the purpose of imposition of tax and therefore the introduction of GST cannot weigh down the legality of orders passed under the Karnataka VAT Act for taxable events of the past, even if such orders were passed after the introduction of the GST regime. The Gauhati High Court, in Laxminarayan Sahu v. Union of India[24] was called upon to determine the validity of show-cause notices issued for non-payment of service tax under the Finance Act after the introduction of GST. In conjunction with the rulings of the Karnataka High Court and the Kerala High Court, the Gauhati High Court upheld the validity of such notices. The reasoning adopted however, was that the actions under the erstwhile laws get saved under Section 6 of the General Clauses Act, 1897.  Thus, the view taken by a majority of courts, although based on different reasoning, is that the revenue authorities retain the power to levy appropriate taxes under the erstwhile indirect tax laws for events prior to the introduction of GST.

A similar challenge to the authority of the State to levy, assess and collect tax under the State GVAT Act, 2003 after the introduction of the GST regime was brought before the High Court of Gujarat[25] but vide order dated 26-2-2020 the petitions were withdrawn without any arguments on merits.

E. Analysis and way forward

Section 19 of the Amending Act sets out the date when the new GST regime comes into effect and at the same time provides for continuance of operation of provisions of erstwhile indirect laws up to a period of 1 year from 8-9-2016. The provision contains elements of both, a transitional clause and a savings clause. One of the generally accepted norms of legislative drafting is that lumping transitional and savings provisions in a single section is never a good idea[26].

As stated earlier, most taxing statutes envisage a substantial time gap between occurrence of cause of action against assessees and actual institution of proceedings. In such a scenario, if the power to initiate proceedings/levy taxes under the erstwhile laws for past events of default/past assessment years, is taken away upon the introduction of GST, it will practically create a legal vacuum in respect of levy, assessment and collection of taxes for a certain time period prior to the introduction of the GST. This would deprive the revenue of legitimate and tax arrears, interest and penalty and enable assessees to unjustifiably escape from the tax network, which certainly could not have been the legislative intent. In this background, clubbing a savings provision with a transitional clause, and failing to provide a comprehensive savings provision in the Amending Act, is absurd and irrational, more so when the country is on the cusp of a revolutionary overhaul of the entire indirect tax regime

While it may be argued that States/Centre have the right to incorporate appropriate repeal and savings provisions in their respective GST legislations, the same may lead to a lot of ambiguity and discrepancies as observed earlier. It is suggested that in order to remove any scope for ambiguities and uncertainties, it would be advisable to amend the Amending Act so as to incorporate a broad, comprehensive savings clause akin to Section 6 of the General Clauses Act in order to save actions/proposed actions under all the erstwhile indirect tax laws. Section 19 of the Amending Act ought to be immediately amended to provide for an additional savings sub-clause, which may read as under:

Section 21(2)-Notwithstanding anything contained in clause (1) above, the coming into operation of this Act shall not affect the previous operation of any enactment relating to tax on goods or services or on both in force in any State for the purpose of or the purposes of determination of the levy, returns, assessment, reassessment, appeal, revision, rectification, reference or any other proceedings initiated or proposed to be initiated under the said enactments within the period of limitation as envisaged under the said enactments.

 Part II Insolvency and Bankruptcy Code, 2016

A. Legislative history

In order to address the concerns of an inadequate framework governing bankruptcy in India, a Bankruptcy Law Reforms Committee (BLRC) was constituted in October 2014 and tasked with drafting a single unified framework which provides for a quick and effective insolvency process for individuals, partnerships, companies, etc. In November 2015, the BLRC came out with a report which proposed a complete institutional overhaul of the existing framework and suggested a quick, time-bound, creditor controlled and regulator driven insolvency process[27].  This led to the enactment of the Insolvency and Bankruptcy Code, 2016.

B. Transitional provisions

The enactment of the Insolvency Code led to repeal and amendments of several enactments in order to unify a fragmented network of laws dealing with insolvency. The repealed enactments include the Presidency-Towns Insolvency Act, 1909[28], the Provincial Insolvency Act, 1920[29] and the Sick Industrial Companies Act, 1985[30]. Unlike the repeal and savings provision of the Amending Act heralding GST, Section 243 of the IBC[31] provides for an exhaustive savings clause clearly specifying what is proposed to be saved under the repealed statutes.

In addition to repeal of the aforesaid statutes, the Insolvency Code also provided for amendments to approximately 11 other statutes, most significant amongst those being amendments to the Companies Act, 2013.[32]

Since the CA 2013 and the IBC function in overlapping areas, more particularly in the area of winding up of companies, there is a likelihood of transitional conflict over the pending cases with regard to the appropriate forum as well as the applicable statute. In order to deal with such conflict, the Central Government notified the Companies (Transfer of Pending Proceedings) Rules, 2016[33] (the “Rules”) in exercise of powers under Section 434 of the CA, 2013[34] and Section 239 of the IBC[35]. The Rules provide for the bifurcation of proceedings between the CA, 1956[36]/CA, 2013 and the IBC and between Court and National Company Law Tribunal (NCLT). So far as treatment of pending winding-up petitions is concerned, based on the nature stage of the proceedings, some winding-up petitions were to be retained by the High Court while others were to be transferred to NCLT[37]

 C. Cause for concern

The aforesaid Rules brought into place a splintered structure for dealing with the transition of various proceedings from the CA 1956/CA 2013 to the IBC. The overlapping of jurisdiction as well as subject-matter is riddled with severe concerns and needs to be addressed urgently.

The constitutional validity of these Rules was challenged by Nissan Motor India and Renault Nissan Automotive before the High Court of Madras. It was alleged that on account of operation of the Rules, winding-up petitions filed against these companies in the High Court were transferred to the NCLT in spite of the fact that the entire pleadings were already over, and the matter was about to conclude, thereby causing severe prejudice to these companies. The High Court granted an interim order in favour of the companies by staying the NCLT proceedings against them.[38]

Furthermore, there is no clarity on a scenario where multiple proceedings in respect of the same company have arisen before different forums. For instance, in a situation where a notice for winding-up petition has been served upon the respondent prior to 15-12-2016, the same is retained by the Court for adjudication as per the stipulations under the Rules and is not transferred to the Tribunal. Now, if a fresh petition for winding up against the same company is filed by a financial or operational creditor or the corporate debtor itself under the provisions of IBC, it gives rise to several questions including:

  • Whether such a fresh petition is maintainable notwithstanding the pendency of another winding-up petition against the same company in the Court?
  • If maintainable, whether the parallel proceedings before the Tribunal under the IBC and those before the court under the Companies Act, 1956 can proceed simultaneously?
  • If simultaneous proceedings are permitted, would the proceedings under the Companies Act, 1956 stall in the event of a moratorium under Section 14 of the IBC[39]? On the other hand, would proceedings under IBC stall in the event a winding-up order is passed under Companies Act, 1956 on account of the operation of a moratorium under Section 446 of the Companies Act?
  • If simultaneous proceedings are not permitted, which statute is to be given a primacy over the conduct of winding-up proceedings?

D. Judicial opinion

The aforementioned issue as to whether the IBC can be triggered in the face of a pending winding-up petition has led to wide-spread litigations seeking judicial clarification on the quandary being faced by all stakeholders in an insolvency proceeding.

The NCLT Benches at Chennai (Alcon Laboratories (India) (P) Ltd. v. Vasan Health Care (P) Ltd.[40]) and Ahmedabad (SBI v. Alok Industries Ltd. [41]) took the view that the pendency of a winding-up petition cannot be a bar under the Code for initiating a corporate insolvency resolution process unless a winding-up order is passed by the  High Court or Official liquidator is appointed.   On the other hand, the Hon’ble NCLT Bench at Delhi (Nauvata Engg. (P) Ltd. v. Punj Llyods Ltd.[42]) took the view that in cases where winding-up petitions are pending against a company, it would not be conducive for the NCLT to trigger insolvency resolution process against that very company and therefore, the proceedings instituted earlier in point of time may constitute a better basis for adjudication. On account of the aforesaid divergent views taken by coordinate benches of the NCLT, a Special Bench at NCLT, Delhi referred the issue to a larger Bench in Union Bank of India v. Era Infra Engg. Ltd.[43]. The Hon’ble three-member larger Bench came to the conclusion that there is no bar on NCLT against triggering an insolvency resolution process even when a winding-up petition is pending, unless an official liquidator is appointed and winding-up order is passed.

Apart from various NCLT Benches, the issue has also been raised before the  High Court of Bombay on several occasions. In Ashok Commercial Enterprises v. Parekh Aluminex Ltd.[44] the  Court was pleased to pass a winding-up order notwithstanding the pendency of the IBC proceedings, observing that as per the Rules, not all winding-up proceedings are to be transferred to NCLT. The legislative intent was that two sets of winding-up proceedings would be heard by two different forum i.e. one by NCLT and another by the High Court depending upon the date of service of petition.

On the other hand, in Jotun India (P) Ltd. v. PSL Ltd.[45], the Bombay High Court observed that there was no bar on NCLT from proceeding with an application filed by a corporate debtor under Section 10 of IBC[46] even though a winding-up petition was admitted against the same corporate debtor in the High Court. It was observed that “Till the company is ordered to be wound up i.e. the final order is passed, NCLT can entertain a petition or an application.

In order to address the ambiguities arising as a consequence of divergent judicial opinions, the Insolvency Law Committee in its report of March 2018 proposed amendments to the CA, 2013 to clarify that there was no bar on the application of the Code to winding-up petitions pending under prior legislations before any court of law. However, to avoid duplication of proceedings, it was suggested that the leave of the High Court or NCLT, if applicable, under Section 446 of the CA, 1956[47] or Section 279 of the CA, 2013[48], must be obtained, for initiating corporate insolvency resolution process (CIRP) under the Code, if any petition for winding up is pending in any High Court or NCLT against the corporate debtor.[49]

In pursuance of the aforesaid recommendation, Section 434 of the Companies Act, 2013[50] was amended with effect from 6-6-2018[51] and a proviso was added permitting parties to approach the High Court and request for transfer of a pending winding-up proceeding to the NCLT under the IBC regime. However, it is pertinent to note the amendment is not in consonance with the recommendation of the Committee. The recommendation of the Committee was to seek permission of the High Court/NCLT, if applicable, for initiation of CIRP under the Code. Therefore, the recommendation presupposes the grant of permission for even initiation of CIRP. However, the amendment proposes that the High Court is to be approached only for the purpose of seeking a transfer of proceedings and not for initiation of CIRP per se.

Pursuant to the amendment to Section 434 of the CA, 2013 the Supreme Court in Forech India Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.[52], somewhat settled the issue with regard to the apparent transitional conflict between the IBC and the Companies Act holding that an insolvency resolution may be filed against a corporate debtor notwithstanding the pendency of a winding-up petition before the High Court, since proceedings under IBC are independent proceedings. It further gave liberty to the party that had filed the pending petition before the  High Court to seek transfer of the petition to NCLT in accordance with the amendment to Section 434 of the Companies Act, 2013.

While the aforesaid judgment lends clarity on the right to initiate CIRP under the IBC during the pendency of a winding-up proceedings in the High Court under the CA 1956, there is no clarity on the probable issues that are bound to arise as a consequence of the duality in proceedings under the IBC and the Companies Act. Questions with regard to the impact of moratorium period on the winding-up proceedings in the High Court, potential revival of winding-up proceedings at the end of the moratorium period in case of failure of resolution, etc. remain unanswered. Furthermore, there is no clarity with regard to the stage of winding-up proceedings at which fresh applications may be made under the IBC and proceedings before the High Courts may be allowed to be transferred to the NCLT. In Sicom Ltd. v. Hanung Toys & Textiles  Ltd.[53], the High Court of Delhi observed that if the process is at a nascent stage and only a provisional liquidator is appointed, proceedings before the High Court may be transferred to the NCLT, but if the proceedings are at an advanced stage and the chances of insolvency resolution process are bleak, proceedings are not to be transferred to the NCLT.  Recently, the Supreme Court, in the case of Action Ispat and Power Pvt. Ltd. v. Shyam Metalics and Energy Ltd.[54] held that even post-admission and appointment of Official Liquidator transfer of winding up petition to NCLT may be permitted, if no irreversible steps have been taken in relation to the properties of the company in liquidation i.e. so long as no actual sale of movable or immovable properties has taken place.

E. Analysis and way forward

The Rules failed to clarify if fresh proceedings could be initiated under the IBC even where there were pending winding-up proceedings against the same debtor company being heard by Court and left the same to judicial discretion. After divergent views taken by different forums, the Supreme Court in Forech International case[55] (supra) finally took the position that the pendency of winding-up proceedings under the CA, 1956/CA, 2013 has no bearing on fresh proceedings under the IBC. However, this stand taken by the Supreme Court does not appear to be in tune with legislative intent and raises other important issues as a consequence.

First and foremost, it is questionable as to what purpose the savings provision in the Rules retaining certain proceedings in the High Court would serve if the legislative intent was to anyway permit fresh proceedings under the IBC notwithstanding the pending proceedings in the High Court. The interpretation sought to be given by the Supreme Court destroys the very purpose and essence of saving proceedings under the Rules.

Secondly, the Rules were amended vide Notification dated 29-6-2017[56]. Pursuant to the same a proviso was added under Section 5 of the Rules clearly laying down that where a winding-up petition is retained by the High Court in accordance with the Rules, all other winding-up petitions against the same company pending on the cut-off date would also be retained by the High Court, regardless of service/non-service of such petitions.[57] The proviso appears to indicate that the legislative intent is to ensure that once the High Court is seized of a winding-up matter of a particular debtor company in accordance with the Rules, it should operate as the sole forum to adjudicate upon all winding-up petitions pertaining to such debtor company. However, the  Supreme Court has taken a different view which appears to be contrary to legislative intent.

Furthermore, even from a practical perspective, this duality in regime for dealing with winding-up matters has harsh consequences for all stakeholders involved. Petitioner creditors who have spent a considerable amount of time and resources in a winding-up petition may have to restart all over again and prove their claims before the insolvency resolution professsional and the Committee of creditors.  Corporate debtors may be burdened with the task of defending themselves in two parallel proceedings of a similar nature. Even resolution applicants will be circumspect and cautious in submitting resolution plans during the moratorium period under the IBC, if faced with the prospect of revival of a winding-up petition against the corporate debtor under the CA, 1956/CA, 2013, after the end of the moratorium period/approval of the resolution plan.

In order to avoid multiple proceedings, ensure a smooth transition and avoid the risk of contrary orders by different forums in parallel winding-up petitions, it would be advisable to suitably amend the Rules in such a manner that the transitional/savings provision in the Rules operate upon the debtor company as a whole and not only upon a particular winding-up proceeding against that debtor company. In other words, once winding proceedings against a particular debtor company are retained by the High Court in terms of the Rules, all other pending winding-up petitions, if any, as well as fresh proceedings under the IBC in respect of the same debtor company ought to be consolidated and continued before the said High Court. Furthermore, in order to ensure that the benefit of a time-bound process is not lost out in the course of a winding-up proceeding, it would be apt to amend the law in a manner so as to ensure that all pending winding–up proceedings are completed within a period of one year from a particular cut-off date, failing which the proceedings pertaining to the corporate debtor concerned would automatically be transferred to the Tribunal. In light of the aforesaid, it would be appropriate to suitably amend Rule 5 of the Transfer Rules and add an additional proviso, in the following manner:

Provided also that where a petition relating to winding up of a company is not transferred to the Tribunal under this rule and remains in the High Court and where there is another petition under clause (e) of Section 433 of the Act for winding up against the same company pending as on 15-12-2016 or a fresh petition under Sections 7, 9 or Section 10 of the 1BC is initiated in respect of the same company after 15-12-2016, such other petitions shall not be transferred to or heard by the Tribunal, even if the petition has not been served on the respondent.

 Provided that all pending winding-up petitions pending and retained before the High Court pursuant to the commencement of these Rules shall be disposed of by the Hon’ble Court by (cut-off date) failing which such proceedings shall be converted to IBC proceedings and transferred to the Tribunal.[58]

A legislative clarification in accordance with the aforesaid terms will ensure that winding-up proceedings in the High Court do not get delayed indefinitely. Moreover, certainty in forum of adjudication will also resolve jurisdictional conflict, reduce the burden on NCLTs and ensure finality and conclusiveness in adjudication of winding-up matters.

Part III –Arbitration and Conciliation (Amendment) Act, 2015

 A. Legislative history

The Arbitration and Conciliation (Amendment) Act, 2015 (the “Amendment Act”) was enacted on the basis of the proposals made by the Law Commission of India in its 246th Report on “Amendments to the Arbitration and Conciliation Act, 1996”[59].  The Commission was tasked with reviewing the provisions of the Arbitration and Conciliation Act, 1996 (the “Act”) in view of the several inadequacies observed in the functioning of the Act, which included exorbitant costs, protracted proceedings, excessive court intervention, etc. In order to address these issues and promote India as an arbitration friendly regime, the Commission recommended ample amendments to the Act.

The amendments are promising and in sync with the larger objectives of bringing about expediency, transparency and efficiency in arbitral proceedings. However, as was the case with GST and the IBC, the lack of clarity in transitional provisions led to a flurry of litigations on technical and transitional issues, which somewhat constricted the impact and essence of the Amendment Act.

 B. Transitional provisions

The transitional provision, provided for under Section 26 of the Amendment Act[60], reads as under:

  1. Act not to apply to pending arbitral proceedings.—Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of Section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act.

 On a prima facie reading, it appears as though the Amendment Act is to apply prospectively to arbitrations commencing after the date of enforcement of the Amendment Act i.e. 23-10-2015. However, there is no clarity on whether the Amendment Act applies to court proceedings emanating from arbitral proceedings commenced under the Act prior to 23-10-2015. The Act envisages court intervention at various stages before, during and after the commencement of arbitral proceedings.[61] Considering the same, it is baffling as to how and why the Amendment Act is silent on the said issue.

It is pertinent to note that the Law Commission of India, which proposed the amendments in the Act had recommended the insertion of Section 85-A, a comprehensive transitory provision that provided clarity to the effect that the Amendment Act was prospective in nature and was to apply only to fresh arbitrations and to fresh applications filed before the court or a tribunal after the date of enforcement of the Amendment Act. However, for some inexplicable reason, the proposed Section 85-A never found its way into the Act and instead the legislature enacted Section 26 in the Amending Act.

 C. Cause for concern

The lack of clarity in Section 26 of the Amendment Act highlights the apparent lack of legislative foresight to consider three peculiar but extremely foreseeable issues:

  • Applicability of the Amendment Act to court proceedings initiated prior to 23-10-2015 under the Act;
  • Applicability of the Amendment Act to court proceedings initiated/proposed to be initiated on/after 23-10.- the Act,
  • Applicability of the Amendment Act to fresh applications before the Arbitral Tribunal for pending arbitrations initiated prior to 23-10-2015; (for instance whether an application filed under Section 17 of the Act[62] after 23-10-2015 in a pending arbitration which has commenced prior to 23-10-2015 would be governed by the old provision or the amended provision)

Since the Amendment Act has made some significant and substantial changes in the arbitration regime, the aforesaid issues have caused confusion and chaos in pending arbitrations. The lack of procedural clarity has led to multiple litigations for determining the appropriate applicable provisions under the Act in pending arbitrations at the cost of the merits of disputes being sidetracked. This in turn has caused unnecessary delays in arbitrations, which ironically, was one of the primary issues sought to be addressed by the Amendment Act.

D. Judicial opinion

One of the foremost issues that has arisen on account of the ambiguity in Section 26 of the Amendment Act is with regard to the applicability of Section 36 as substituted under the Amendment Act to (1) court proceedings initiated prior to the enforcement of Amendment Act; and (2) court proceedings initiated after the enforcement of the Amendment Act.

Prior to the Amendment Act, Section 36 provided that an arbitral award shall be enforced only after the time-limit for filing an application for setting aside the award under Section 34 of the Act has expired, or such application having been made has been refused. Thus, this implied that there would be an automatic stay on enforcement of the award as soon as an application is filed under Section 34 for setting aside the award. The Amendment Act sought to do away with such automatic stay on enforcement by appropriately substituting Section 36. The substituted Section 36 provided that in order to stay enforcement of an arbitral award, it was necessary for the party seeking to set aside the award to file a separate application for stay of enforcement. Further, upon filing of the application, the stay is not to be granted as a matter of right, but the Court “may” in its discretion grant such a stay, subject to such conditions, and on recording of specific reasons.

In light of such substitution of Section 36, various courts have given divergent opinions with regard to the application of substituted Section 36 to court proceedings initiated/proposed to be initiated in respect of arbitrations which took place prior to the enforcement of the Amendment Act i.e. prior to 23-10-2015.

The view taken in Electrosteel Castings Ltd. v. Reacon Engineers (India) (P) Ltd.[63], and Ardee Infrastructure Pvt. Ltd. v. Anirudh Bhatia[64] was that that if an arbitration has commenced before 23-10-2015, the entire gamut court proceedings in respect of such arbitrations will be governed under the old regime and will not be covered by the Amendment Act. As a consequence, the unsubstituted Section 36 would continue to apply to such court proceedings, and this would amount to an automatic stay on enforcement of award pursuant to filing of a Section 34 petition. On the other hand, a starkly contrasting view was taken in New Tirupur Area Development Corporation Ltd. v. Hindustan Construction Co. Ltd. and Rendezvous Sports World v. Board of Control for Cricket in India[65] (Bombay High Court) that that the Amending Act will be applicable to all court proceedings pending on 23-10-2015 or filed after 23-10-2015 in relation to arbitration proceedings initiated prior to the enforcement date of the Amendment Act. As a consequence, Section 36 in its substituted form would be applicable to such court proceedings and there would be no automatic stay on enforcement of an arbitral award.

The divergent views taken by different high courts culminated into a series of special leave petitions before the  Supreme Court of India, which heard these petitions together with the lead matter being Board of Control for Cricket in India v. Kochi Cricket (P) Ltd.[66]

Analysing the language of Section 26 of the Amending Act, the Supreme Court came to the conclusion that a careful reading of the section indicates that :-(1) the Amendment Act will not apply to arbitrations that commenced prior to 23-10-2015, unless the parties agree; but (2) the Amendment Act will apply to court proceedings initiated after 23-10-2015 emanating from arbitrations that commenced prior to 23-10-2015.

With regard to the question as to whether the Amendment Act will retrospectively apply to court proceedings initiated before 23-10-2015, the Court observed that Section 36 embodies the procedure of enforcement. The same being procedural in nature any change/amendment in Section 36 does not affect any accrued/vested substantive rights of the judgment-debtor and therefore, the substituted Section 36 ought to be applied retrospectively. The Court further opined that if the substituted Section 36 is not applied retrospectively, it would defeat the very object of the Amendment Act, which is to ensure speedy dispute resolution and reduce court interference at various stages.

Thus, pursuant to the aforesaid judgment, the position with regard to the applicability of the Amended Act was clarified in the following manner:

  • The Amended Act will not apply to arbitration proceedings instituted prior to 23-10-2015 unless parties agree otherwise.
  • The Amended Act will apply to all court proceedings instituted on or after 23-10-2015 in relation to arbitration proceedings which commenced prior to 23-10-2015
  • Section 36 as substituted under the Amended Act will apply retrospectively to all court proceedings instituted before 23-10-2015 in relation to arbitration proceedings which commenced prior to 23-10-2015

E. Analysis and way forward

While the aforesaid judgment rendered by the Supreme Court rendered some much-needed clarity on the interpretation of Section 26 of the Amendment Act, the issue was rekindled when in 2017, a High-Level Committee headed by Justice (Retd.) B.N. Srikrishna suggested that the Amendment Act should apply only to arbitral proceedings commenced on or after the enforcement of the Amendment Act and to court proceedings arising out of or in relation to such arbitral proceedings.[67] The proposal found its way in the Arbitration Amendment Bill, 2018 which provided for insertion of Section 87 in the principal Act[68] as per which, in the absence of an agreement between the parties, the Amendment Act shall not apply to: (1) arbitral proceedings that have commenced prior to 23-10-2015; and (2) court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after 23-10-2015. The said Bill received assent from the President on 9-8-2019 and led to the enactment of Arbitration and Conciliation (Amendment) Act, 2019. (2019 Amendment Act).  As a consequence, the Act stood amended with effect from 30-8-2019 (date of notification in Official Gazette) with a newly inserted Section 87 which specified that:

Unless the parties otherwise agree, the amendments made to this Act by the Arbitration and Conciliation (Amendment) Act, 2015 shall—

(a) not apply to––

(i) arbitral proceedings commenced before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015;

(ii) court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015;

(b) apply only to arbitral proceedings commenced on or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 and to court proceedings arising out of or in relation to such arbitral proceedings.

The aforesaid legislative clarification with regard to the applicability of 2015 Amendment  completely diluted the ratio of the Kochi Cricket case[69] and reversed the position in respect of applicability of the 2015 Amendment Act. In other words, pursuant to the 2015 Amendment Act would no longer apply to any proceedings under the Act initiated prior to 23-10-2015, regardless of whether such proceedings were arbitral proceedings or court proceedings in relation to such arbitral proceedings.  This led to a scathing criticism of the 2019 Amendment Act, which was derided by jurists and practitioners for completely watering down the beneficial impact of the 2015 Amendment Act, which aimed at reducing court interference and improving the speed and efficacy of proceedings under the Act. The constitutional validity of Section 87 of the 2019 Amendment Act was subsequently challenged in the case of Hindustan Construction Company v. Union of India[70] and vide a unanimous verdict of a 3-judge bench of the Hon’ble Supreme Court, the said Section was set aside on the ground of being manifestly arbitrary, and the position as propounded by the Kochi Cricket case was restored.

Thus, as seen in the case of other legislations, failure to draft a conspicuous transitional provision in the Arbitration Amendment Act, 2015 led to confusion regarding the applicability of the amendments proposed therein, which in turn led to multiple litigations as discussed hereinabove. While the dust seems to have been finally settled on the issue with the Supreme Court’s seminal verdict in the Hindustan Construction Company case, one cannot help but ponder how a needless squandering of judicial time and resources could have been avoided with clear, concise and unambiguous legislative drafting.


Transitional provisions in a legislation play a key role in regulating its coming into operation and effect. A carefully worded transitional provision is therefore an indispensable necessity to ensure a smooth change in a legal regime with minimum disruption of existing rights and liabilities. Transitional provisions, may affect relatively few cases, but they are extremely complicated; and they can be important to the cases affected.[71] The absence of clarity in transitional provisions causes chaos and confusion leading to multiple litigations requiring the judiciary to draw inferences based on apparent legislative intent.

The newly enacted commercial legislations in India aim at making business easier, transparent, and efficient by providing for simplicity in taxation structure, facilitating easy exits and offering a speedier mode for dispute resolution. However, loosely worded transitional provisions in these legislations coupled with baffling judicial opinions have substantially diluted the impact of positive changes sought to be brought about by these legislations. The colossal litigations that have arisen in respect of these transitional provisions stand as a testimony to the poor draftsmanship. As discussed in the chapters hereinabove, the judiciary often outweighs practical considerations in the eagerness to give effect to the so-called object and purpose of a newly enacted legislation. Based on the developments so far, it appears as though the judiciary as well as the Government are bent upon simply ensuring quick operationalisation of these legislations at the cost of their effective implementation. Such an approach will defeat the very purpose and essence of these legislations. It is imperative for India to immediately address these transitional issues through appropriate legislative amendments and clarifications, failing which, the true potential of these newly enacted legislations are likely to get sidetracked in the face of a convoluted web of unnecessary and avoidable litigations.

* Advocate, High Court of Gujarat.







[7] World Bank Group Project Report, Doing Business 2015: Going Beyond Efficiency, 12th Edition, sourced from:

[8]  Francis Bennion, Bennion on Statutory Interpretation, 14th Edn., LexisNexis, p. 442 (as cited in Union of India v. Filip Tiago De Gama of Vedem Vasco, (1990) 1 SCC 277






[14] See Gujarat Value Added Tax Act, 2003-, S.38(9); Karnataka Value Added Tax, 2003-,S. 40


[16] See Central Excise Act, 1944, S. 11-A(1) 

[17] See Central Excise Act, 1944, S. 11-A(4) 




[21] See Maharashtra Goods and Services Tax Act, 2017, S. 174(g)

[22] 2019 SCC OnLine Ker 973

[23] 2018 SCC OnLine Kar 3887

[24] 2018 SCC OnLine Gau 1457

[25] Preston India (P) Ltd. v. State of Gujarat, 2020 SCC OnLine Guj 3048

[26]  Prof. Henlen Xanthaki, Thornton’s Legislative Drafting, Bloomsbury Professional, 5th Edn., 2013 (as cited in Sheen Golden Jewels (India) (P) Ltd. V. State Tax Officer, supra note 22, para 98).

[27] <>.


[29] S. 243, IBC, 2016.

[30] Sick Industrial Companies (Special Provisions) Repeal Act of 2003 notified on 1-12-2016


[32] S. 255 of the Code read with Sch. 11, provides for about 36 amendments to the Companies Act, 2013.





[37] See Rr. 4 and 5 of the Companies (Transfer of Pending ProFceedings) Rules, 2016



[40]  2017 SCC OnLine NCLT 547

[41] 2017 SCC OnLine NCLT 7586

[42] 2017 SCC OnLine NCLT 16255

[43] 2018 SCC OnLine NCLT 813

[44] 2017 SCC OnLine Bom 421

[45] 2018 SCC OnLine Bom 1952  .




[49] Report of the Insolvency Committee, March 2018, Para 25.7 accessed at:


[51] Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, S. 39 – Amendment of Section 434 of CA 2013: “Provided further that any party or parties to any proc eedings relating to the winding up of companies pending before any Court immediately before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, may file an application for transfer of such proceedings and the Court may by order transfer such proceedings to the Tribunal and the proceedings so transferred shall be dealt with by the Tribunal as an application for initiation of corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016.”

[52] (2019) 18 SCC 549

[53]  2019 SCC OnLine Del 10399

[54] 2020 SCCOnline SC 1025

[55] (2019) 18 SCC 549

[56] Companies (Transfer of Pending Proceedings) Second Amendment Rules, 2017, Ministry of Corporate Affairs, Notification dated 29-6-2017

[57] R. 5; The proviso states that “Provided also that where a petition relating to winding up of a company is not transferred to the Tribunal under this rule and remains in the High Court and where there is another petition under cl. (e) of Section 433 of the Act for winding up against the same company pending as on 15-12-2016, such other petition shall not be transferred to the Tribunal, even if the petition has not been served on the respondent..”

[58] The portion highlighted in bold is the suggested amendment



[61] See, S. 8 (reference to arbitration) , S. 9 (grant of interim measures) , S. 11 (appointment of arbitrator) , S. 34 (Setting aside of arbitral award), S. 36 (enforcement of awards)


[63] 2016 SCC OnLine Cal 1257

[64] 2017 SCC OnLine Del 6402

[65] 2016 SCC OnLine Bom 16027

[66] (2018) 6 SCC 287

[67] Report of the High Level Committee to Review the Institutionalisation of Arbitration Mechanism in India

accessed at <>.

[68] Unless parties agree otherwise the Amendment Act, 2015 shall not apply to the following:

(1) arbitral proceedings that have commenced prior to the Amendment Act, 2015 coming into force i.e. prior to 23-10-2015; (2) -court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Amendment Act, 2015.

[69] (2018) 6 SCC 287 

[70] 2019 SCC OnLine SC 1520, Decided on 27th November, 2019

[71] Craies on Legislation, Sweet & Maxwell, South Asian Edn. 2010, p. 399 (cited in Sheen Golden Jewels (India) (P) Ltd. v. State Tax Officer, supra note 22,para 97).

Op EdsOP. ED.

Special Purpose Acquisition Company (SPACs) have been gaining popularity since the past few years in the international capital markets regime. SPACs have been in existence for a very long time, however, the growth in SPACs that the markets have seen recently especially in the United States of America is tremendous. In India, SPACs have been a hot topic ever since the renewable energy giant ReNew Power has used the SPAC strategy to get itself listed in the Nasdaq exchange.

A SPAC is a special purpose acquisition company formed in order to raise capital funds through initial public offering (IPO). These are also commonly known as blank cheque companies. A SPAC is initially a shell corporation and the amount generated from the IPO is then stored in a trust fund account until the target operating business is identified. After the target company is identified, the consent of the SPAC’s shareholders is sought and those shareholders who do not want to sell their holdings are given an option to redeem them. Finally, the de-SPAC phase begins, wherein the acquisition transaction is completed.

The SPAC regime in India is once again in talks, especially after ReNew Power’s combination with RMG Acquisition Corporation II — which is a US-based SPAC Companies like Grofers, Flipkart, Videocon D2H and the travel agency Yatra have also indulged in or are in talks of indulging into US based SPACs, wherein the acquisitions would be multi-million-dollar deals. SPACs are generally used by start-ups to get listed easily. In light of these circumstances, it is imminent for India to redesign the SPAC regulations and GoPro SPAC, which currently is not the scenario in India.

Regulatory framework in India

  1. Companies Act, 2013[1]: After demonetisation, the Government has been keeping shell corporations under their thumbs. A Parliamentary Committee in 2018 had asked the Government to provide a proper definition for the term “shell corporation” to avoid any form of legal ambiguity to avoid unnecessary litigation. It generally takes 18-24 months to complete SPAC transactions. However, as per Section 248[2] of the Companies Act, 2013, the Registrar of Companies can eliminate a company’s name from registration if they fail to commence business operations within 12 months of its incorporation. This would lead to a lot of legal issues for the directors and promoters of the corporation. But, this problem can be easily avoided by revisiting the regulations and introducing amendments in Companies Act, providing exemptions to SPACs if the purpose of their registration is already made clear to the Registrar of the Companies, thereby clearing up any ambiguity which might arise due to the business operations not being able to commence within 1 year of the SPAC’s incorporation.
  2. Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009[3]: The SEBI regulations do not provide any relief to SPACs as well. According to Section 6(1)[4] of ICDR Regulations, as amended in 2018, state the eligibility criteria for public listing. For an IPO, a company must have[5]:

(i) Net tangible assets of at least Rs 3 crore for the preceding 3 years.

(ii) Average operation profits of the corporation must be at least Rs 15 crores during the preceding three years.

(iii) The net worth of the corporation must be at least Rs 1 crore in each of the preceding years.

SPACs definitely cannot meet these requirements and thereby get no acceptance under the SEBI regulations. SEBI has, however, since 2017 taken a leaf out of USA’s book and is starting to give recognition to SPACs. The Securities and Exchange Commission (SEC) of the United States of America supervises all SPAC transactions, SEBI must also take this into consideration and come up with a framework to regulate all SPAC transactions in India. This will lead to better augmentation of start-ups as SPACs are much more lucrative to investors than traditional IPOs. To achieve this, SEBI has mobilised a Committee to scrutinise the feasibility of pro-SPAC regulations in India.

Risk factors involved and the possible future of SPACs

Although, SPACs leads to easier and faster listing of start-ups, however, it means that the cumbersome and expensive listing process is not followed, thereby making it a huge risk for retail investors. As India lacks a specific framework for SPACs, the redemption of shares by the listed companies might not be permissible under the current regulations. Once again, India could take inspiration from the United States of America and bring about amendments in regulations to enable the investors to either redeem their holdings or claim a refund of the amount they have invested prior to the acquisition of the target corporation.

Another massive regulatory challenge that SPACs face in India are the stamp duty requirements. The SPAC route of listing is taken by start-ups as they are cost-effective in nature. However, the transactions through SPACs occur by way of reverse merger, which attracts heavy stamp duties. Due to this, the scheme of mergers also has to be floated and affirmed by the tribunals, which then leads to a lot of compliance issues of Companies Act, 2013. A possible exemption to SPAC transactions vis-à-vis stamp duties, could be an effective way of promoting the SPAC route of listing.

The abovementioned issues are further complemented by the RBI regulations for inbound mergers. It is most likely for the merger between SPAC and target company to be a form of cross-border merger. Therefore, this attracts various regulations as prescribed by RBI while dealing with inbound mergers. It is necessary for the transferee company to issue or transfer security to persons which are not residing in India as per the sectoral caps provided by the RBI guidelines. However, since SPACs do not have a specific business model to operate upon, the sector to which such SPAC belongs is subject to conjecture and speculation.

The taxation regime of India is also anti-SPAC in many ways. For example, the Indian tax authorities do not allow foreign listed SPACs to acquire Indian start-ups without capital gain tax. So, the capital gain is ensued at the hands of the shareholders. It is necessary to allow SPAC transactions in India. This would mean that both the SPAC and the target corporation would be based in India, therefore, such transaction would take the form of merger under a scheme of amalgamation. Such transactions are tax neutral in nature. This will also make sure that no tax liability is levied upon the shareholders involved.

On 10-3-2021 the consultation paper[6] on proposed International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 was released. The provisions in this regulation do talk about SPAC listings under Indian Financial System Code (IFSC). As per the consultation paper, for a SPAC listing to be valid, the minimum amount of the offer should be USD 50 million. However, there is only one IFSC in India to date, in GIFT City, Gujarat, which is also not fully established and is still in the development phase.


It is about time for the Indian market regulators to adapt with the dynamics of modern market instruments and come up with pro-SPAC regulations, if India is to achieve its full capital market potential. Other Asian markets like Hong Kong and Singapore are already working on the regulations regarding SPAC listings and countries like USA, Australia, etc., have already seen a huge rise in SPAC listings eversince they came up with stringent regulations governing SPACs. As per Mckinsey’s research paper[7], India’s capital market has been sized up at a USD 140 billion. Further, through SPAC listings, it would be possible for India to bring its capital market potential to the fullest and being able to release USD 100 billion worth of funding each year.

Implementing de-SPAC transactions might seem to be very challenging, but it is not impossible and through proper amendments in the existing regulations and by rectifying the compliance and cost issues, India will soon see a rise in the numbers of SPAC listings.

Pursuing BBA LLB with Business Law (Hons.), 4th-year student of law at ICFAI Law School, Dehradun, e-mail:

[1] <>.

[2] Ministry of Corporate Affairs, GoI, (last visited 13-5-2021) <>.

[3] <>.

[4] <>.

[5] Securities and Exchange Board of India, (last amended on 8-1-2021) <>.

[6] International Financial Services Centres Authority (10-3-2021) <>.

[7] Nitin Jain, Fumiaki Katsuki, Akash Lal and Emmanuel Pitsilis, Deepening Capital Markets in Emerging Economies, (12-4-2017) <>.

Op EdsOP. ED.

“Unwomanly” and “arrogant”: These were some of the comments which Valli Arunachalam, the fourth-generation scion of the Murugappa group (Group), would have to face when she presented her candidature for possibly becoming the first woman director at Ambadi Investments Limited (AIL), the holding company of the Group. As Valli rested her candidature on the combined 8.15% stake inherited from her father in light of Vineeta Sharma v. Rakesh Sharma[1], her campaign came to an abrupt end when 91% of the Board voted against[2] her  candidature in its 79th AGM held on 21-9-2020. While such gender disparity scandals on the Boards of Indian family conglomerates are not unheard of, the issue seems grave when viewed in light of the oft-flouted corporate governance policies established for the same with regards to the listed entities.

The policy measures adopted by the Indian Government and the Securities and Exchange Board of India (SEBI) have led to an increment[3] in the number of women Board members in India from a lowly 5% in 2013 to a moderate 15% in 2019. However, Indian companies have rarely inducted more women on their Boards than the minimum stipulated requirement; only 2.2%[4] of the Nifty-500 firms had more than three women in their boardrooms (2019). Despite various studies[5] showing a positive correlation between the number of women in senior positions and the firm’s performance, there were less than 5% women CEOs in India in 2019[6]. As per the NSE (National Stock Exchange) Infobase (data as on 21-4-2021), there are presently only 2044 women directors in NSE-listed companies as compared to 11416 directors in total. 1235 out of 5524 independent directors are female while 75 NSE-listed companies have no women directors on their Boards.[7]

Apropos of the above, the authors have herein tried to highlight the current mandate of gender diversity in Indian boardrooms and the shortfalls in the present framework along with providing probable suggestions to promote gender diversity at the top echelon of Indian corporate structures.

Extant framework

As examined below, the current framework is a mix of statute, rules and guidelines:

(a)  The Companies Act, 2013 (Act) first introduced a provision mandating a woman director and laid the groundwork for the beginning of adequate representation in Indian boardrooms. The second proviso to Section 149(1) of the Act specifies that such class or classes of companies as may be prescribed shall have at least one-woman director.[8]

(b)  The Companies (Appointment and Qualification of Directors) Rules, 2014 (Rules) elucidates on the statutory provisions enshrined in the Act and specifies the classes of companies that shall have at least one-woman director. As per Rule 3[9], these are:

  1. Every listed company.
  2. Every other public company with either a paid-up capital of INR 100 crores or more, or a turnover of INR 300 crores or more.

A specified company under the provisions of the rule has six months from the date of incorporation to comply with the provisions. Furthermore, in case such a woman director resigns then the company has to fill the vacancy at the earliest but not later than 3 months or the next meeting of the Board, whichever is later.

(c) Section 450 of the Act deals with “punishment where no specific penalty or punishment is provided”.[10] While the second proviso to Section 149(1) and Rule 3 both do not specify any penalty or punishment for non-compliance, Section 450 prescribes punishment for contravention of such provisions. It lays down a structure of fines for companies, officers of such companies or any other person which can extend to INR 2 lakhs for companies and INR 50000 for individuals/officers.

(d) An Equity Listing Agreement is a 54-clause agreement executed between the stock exchange and the entity which is being listed on it. The main purpose of this agreement is to ensure that companies follow good corporate governance practices. The stock exchange on behalf of the market regulator (SEBI) ensures that listed entities comply with the agreement. Clause 49(II)(A)(1) of the agreement specifies that the Board of Directors (BoD) of the company shall have at least one-woman director.[11] The timeline to comply with the same was till 31-3-2015. SEBI vide its circular dated 8-4-2015 prescribed a fine structure for non-compliance with Clause 49(II)(A)(1).[12] Pursuant to this circular, several listed entities were fined by stock exchanges.[13]

(e) The market regulator, SEBI, has a series of regulations to govern and regulate listed entities. Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Regulations) is one such set of regulations used by SEBI to regulate listed entities. Regulation 17(1)(a) provides that a listed entity should have at least one-woman director on its Board.[14]

To facilitate the implementation of these Regulations, SEBI released a circular dated 22-1-2020 on streamlining of fines for non–compliance of listing obligations and disclosure requirements (LODR) by listed entities and standard operating procedure (SoP) for suspension and revocation of trading of specified securities (circular).[15] Annexure I of this circular prescribes a fine of INR 5000 per day for non-compliance by a listed entity with the provisions of Regulation 17(1). As per Annexure II, non-compliance, and non-payment of fine can result in freezing of shares of the promoter(s). Non-compliance with the provisions of Regulation 17(1) for two consecutive quarters can result in the scrip (share/stock of a listed entity) of the entity being placed in category Z. This means that the scrip is suspended from trading and cannot be traded intraday. The scrip is thus traded on a “trade for trade” basis only on selected days which are specified by the regulator. Pursuant to this, a number of entities were fined[16] under a previous version[17] of these SOPs issued in 2018 for not complying with the Regulations.

The way forward

Based on the above regulatory framework, the authors have observed certain areas which, if given further focus, could help in moving the mandate beyond mere representation, towards equality.

(a) The Ministry of Corporate Affairs, by way of a notification dated 4-1-2017 excluded “Specified International Financial Services Centres (IFSC) Companies” from the purview of the second proviso to Section 149(1) of the Act.[18] While the overall purpose of the said notification was to reduce statutory compliances/hurdles that specified IFSC Companies have to deal with, the issue of ensuring adequate representation of women in BoD should not be reduced to something that is looked upon as a mere statutory compliance/hurdle for a company.

(b) As per the second proviso of Rule 3 of the Rules, any intermittent vacancy of a woman director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later. A maximum period of 120 days is permissible between two board meetings. Thus, any intermittent vacancy of a woman director must be filled up between 90-120 days by the Board. However, Annexure II, Paragraph 2 point (a) of the SEBI circular dated 22-1-2020[19] allows listed companies a period of 180 days (two consecutive quarters) to not comply with LODR Regulation 17(1) before action is initiated for suspension of trading of shares of the said entity. This period in the circular should be reduced to be in consonance with the period stated in Rule 3.

(c) Although the provisions for both independent and women directors are corporate governance measures, however, the dissonance therein is apparent. Rule 3 of the Rules mandates that every public company with either a paid-up capital of INR 100 crores or more or a turnover of INR 300 crores or more must have at least one female director. Rule 4 mandates that every public company with either the paid-up share capital of INR 10 crores or more or turnover of INR 100 crores or more must have independent directors.[20] Thus, in order to widen the base of companies having the gender diversity mandate, it is advisable to lower the pecuniary threshold limits in Rule 3 in a phased manner to a level similar to that in Rule 4.

(d) At present, the Companies Act, associated rules, and SEBI Regulations prescribe one woman director. To increase the number of women directors, this number can be revised to a proportion or a fraction of the Board for certain specified entities.

Concluding remarks

As is indicated from the aforesaid discussion, a holistic framework has been developed in the nation to encourage the representation of women in key positions at corporates. However, the latest figures given by the NSE suggest a stark contrast between the ideated measures and ground realities. The need of the hour is strict implementation of the above framework and modification of the same to increase compliance and coverage rates.

4th year BA, LLB (Hons) student at Rajiv Gandhi National University of Law, Punjab.

†† 4th year BA, LLB (Hons) student at Rajiv Gandhi National University of Law, Punjab.

[1] (2020) 9 SCC 1

[2] See, “Murugappa Group Family Feud Rages On; Valli Arunchalam Denied Board Position

[3] See, “More Women are Joining Boards but Few Get Corner Office

[4] Ibid.

[5] See, IMF Working Paper titled “Gender Diversity in Senior Positions and Firm Performance: Evidence from Europe

[6] Supra note 3.

[7] See, NSE Infobase

[8] S. 149(1), Companies Act, 2013

[9] R. 3, The Companies (Appointment and Qualification of Directors) Rules, 2014

[10] S. 450, Companies Act, 2013 

[11] Cl. 49(II)(A)(1), Equity Listing Agreement

[12] SEBI Circular dated 8-4-2015

[13] See, “Woman Directors: 1,375 BSE, 191 NSE Companies Fined for Non-Compliance”

[14] Regn. 17(1)(a), Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015

[15] SEBI Circular dated 22-1-2020

[16] See, “NSE Penalises 250 Companies for Non-Compliance with Listing, Disclosure Norm”

[17] SEBI Circular dated 3-5-2018

[18] Ministry of Corporate Affairs Notification dated 4-1-2017

[19]Supra note 15.

[20] R. 4, Companies (Appointment and Qualification of Directors) Rules, 2014

Case BriefsSupreme Court

Supreme Court: In a corporate dispute case, the 3-Judge Bench comprising of R.F. Nariman, B.R. Gavai* and Hrishikesh Roy, JJ., held that,

“The company Court while exercising its powers under sections 433 and 434 of the Companies Act would not be in a position to decide, as to who was at fault in not complying with the terms and conditions of the deed of settlement and the compromise deed.”

The respondent–M/s Indian Acrylics Ltd. was a manufacturer of acrylic yarn which had entered into a transaction with the appellant–M/s Shital Fibers Ltd., under which the respondent was to supply acrylic yarn to the to the appellant on credit basis. As per the arrangement, the respondent supplied material worth Rs.81,98,014.45 regarding which there was an outstanding balance of Rs.8,92,723 to be paid to the respondent. As the payment was not made despite notice being duly served on the appellant, the respondent filed a Company Petition seeking winding up of the present appellant for its inability to pay admitted debts.

Findings of the Courts Below

The Company Judge granted an opportunity to the appellant to settle the accounts with the respondent and in case of failure to make the settlement; the citation was directed to be published. The order of Company Court was challenged before the High Court by the appellant. Meanwhile, the disputed amount was paid by the appellant. The High Court held that there was no bona fide dispute as the appellant had satisfied the respondent’s claim. Although, the High Court denied to enter into the claim with regard to interest at the rate of 24% per annum, as to whether the appellant was liable to pay interest to the respondent, it granted liberty to the respondent to seek interest amount by way of application or appeal.

Issues Before the Court

The appellant claimed that his defense was bona-fide as the respondent had supplied defective material. On account of which, the appellant had suffered huge losses and as such, he was  entitled to receive the damages from the respondent.

Observations and Analysis by the Court

The Bench observed that it is well settled that where the debt is undisputed, the court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt. The principles on which the court acts are firstly, that the defence of the company is in good faith and one of substance, secondly, the defence is likely to succeed in point of law and thirdly the company adduces prima facie proof of the facts on which the defence depends. Relying on the decision in Madhusudan Gordhandas & Co. vs. Madhu Woollen Industries Pvt. Ltd., (1971) 3 SCC 632, the Bench stated that, If the debt is bona fide disputed and the defense is a substantial one, the court cannot wind up the company.

Regarding the claim of the appellant that defective material was supplied by the respondent; the Court concurred with the findings of the Company Judge and the High Court that the defence sought by the appellant was an after­thought, as no document was placed on record in support of such contention.  

The Bench stated that the defence of the appellant was neither bona-fide nor substantial as no prima facie evidence was produced by the appellant to buttress his claim. Lastly, the Court held that, “The company Court while exercising its powers under sections 433 and 434 of the Companies Act would not be in a position to decide, as to who was at fault in not complying with the terms and conditions of the deed of settlement and the compromise deed.”

Hence, holding the defence of the appellant not to be bona fide, in good faith and of substance, the Bench dismissed the appeal for being devoid of merit.

[Shital Fibers Ltd. v. Indian Acrylics Ltd., 2021 SCC OnLine SC 281, decided on 06-04-2021]

Kamini Sharma, Editorial Assistant has put this story together 

*Judgment by: Justice B.R. Gavai

Know Thy Judge| Justice B.R. Gavai

Appearance before the Court by:

For the Appellant: Adv. Karan Nehra

For the Respondent: Adv. Tarun Gupta

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of RF Nariman, BR Gavai and Hrishikesh Roy, JJ has held that an entry made in the books of accounts, including the balance sheet, can amount to an acknowledgement of liability within the meaning of Section 18 of the Limitation Act, 1963.

The Court referred to a number of authorities and in particular the decision in Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, 1961 SCC OnLine Cal 128, wherein it was held that though the filing of a balance sheet is by compulsion of law, the acknowledgement of a debt is not necessarily so. In fact, it is not uncommon to have an entry in a balance sheet with notes annexed to or forming part of such balance sheet, or in the auditor’s report, which must be read along with the balance sheet, indicating that such entry would not amount to an acknowledgement of debt for reasons given in the said note.

The bench explained that the filing of a balance sheet in accordance with the provisions of the Companies Act, 2013 is mandatory, any transgression of the same being punishable by law. However, what is of importance is that notes that are annexed to or forming part of such financial statements are expressly recognised by Section 134(7) of the Companies Act, 2013. Under Section 134, financial statements are to be approved by the Board of Directors before they are signed, and the auditor’s report, as well as a report by the Board of Directors, is to be attached to each financial statement. Equally, the auditor’s report may also enter caveats with regard to acknowledgements made in the books of accounts including the balance sheet.

The Court, hence, held that,

“… it would depend on the facts of each case as to whether an entry made in a balance sheet qua any particular creditor is unequivocal or has been entered into with caveats, which then has to be examined on a case by case basis to establish whether an acknowledgement of liability has, in fact, been made, thereby extending limitation under Section 18 of the Limitation Act.”

[Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal, 2021 SCC OnLine SC 321, decided on 15.04.2021]

*Judgment by: Justice RF Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by

For appellant: Senior Advocate Ramji Srinivasan, learned Senior Advocate appearing on behalf of the appellant,

For respondent: Advocate Abhijeet Sinha

Case BriefsSupreme Court

Supreme Court: In a long awaited verdict in the Tata-Mistry Row, the 3-judge bench of SA Bobde, CJ and AS Bopanna and V. Ramasubramanian, JJ has upheld the removal of Cyrus Mistry as Chairman by the Tata Sons and has also answered all questions in favour of Tata Sons. The Court said that NCLAT has, by reinstating Mistry without any pleading or prayer, has forced upon the appellant an Executive Chairman, who now is unable to support his own reinstatement.” 

The Court said,

“The relief of reinstatement granted by the Tribunal, was too big a pill even for the complainant companies, and perhaps Cyrus Mistry, to swallow.”

The dispute

From 25.06.1980 to 15.12.2004 Shri Pallonji S. Mistry, the father of Cyrus Pallonji Mistry was a Non-Executive Director on the Board of Tata Sons. On 10.08.2006 Cyrus Mistry was appointed as a Non¬Executive Director on the Board and by a Resolution of the Board of Directors of Tata Sons dated 16.03.2012, Mistry was appointed as Executive Deputy Chairman for a period of five years from 01.04.2012 to 31.03.2017, subject however to the approval of the shareholders at a General Meeting.

He was then redesignated as the Executive Chairman with effect from 29.12.2012, even while designating Ratan Tata as Chairman Emeritus.

On 24.10.2016, the Board of Directors of Tata Sons replaced Mistry with Ratan Tata as the interim NonExecutive Chairman. It is relevant to note that Mistry was replaced only from the post of Executive Chairman and it was left to his choice to continue or not, as Non¬Executive Director of Tata Sons.

As a follow up, certain things happened and by separate Resolutions passed at the meetings of the shareholders of Tata Industries Limited, Tata Consultancy Service  Limited and  Tata Teleservices Limited, Mistry was removed from Directorship of those companies.

Mistry then resigned from the Directorship of a few other operating companies such as the Indian Hotels Company Limited, Tata Steel Limited, Tata Motors Limited, Tata Chemicals Limited and Tata Power Company Limited, after coming to know of the impending resolutions to remove him from Directorship.

Thereafter, 2 companies by name, Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited, in which CPM holds a controlling interest, filed a company petition before the National Company Law Tribunal under Sections 241 and 242 read with 244 of the Companies Act, 2013, on the grounds of unfair prejudice, oppression and mismanagement.

NCLT on Mistry’s removal

  • The removal of CPM as Executive Chairman of Tata Sons on 24.10.2016 and his removal as   Director on 06.02.2017, were on account of trust deficit and there was no question of a Selection Committee going into the issue of his removal. n
  • There was no material to hold that CPM was removed on account of purported legacy issues. CPM created a situation where he is not accountable either to the majority shareholders or to the Trust nominee Directors and hence his removal.
  • The letter dated 25.10.2016 issued by CPM could not have been leaked to the media by anyone other than CPM and hence his removal from Directorship on 06.02.2017 became inevitable.

NCLAT on Mistry’s removal

  • Ratan Tata was determined to remove Mistry even prior to the meeting of the board and the majority shareholders of Tata Trust knew that there was a requirement of advance notice before the removal.
  • There is nothing on the record to suggest that the Board of Directors or any of the trusts, namely— Sir Dorabji Tata Trust or the Sir Ratan Tata Trust at any time expressed displeasure about the performance of Mistry.
  • The record suggests that the removal of CPM had nothing to do with any lack of performance. On the other hand, the material on record shows that the Company under the leadership of Mistry performed well which was praised by the ‘Nomination and Remuneration Committee’ a Statutory Committee under Section 178, on 28th June, 2016 i.e. just few months before he was removed.

Supreme Court on NCLT and NCLAT’s approach

NCLT dealt with every one of the allegations of oppression and mismanagement and recorded reasoned findings. But NCLAT, despite being a final court of facts, did not deal with the allegations one by one nor did the NCLAT render any opinion on the correctness or otherwise of 64 the findings recorded by NCLT. Instead, the NCLAT summarised in one paragraph, its conclusion on some of the allegations, without any kind of reasoning.

“The allegations relating to (i) over priced and bleeding Corus acquisition (ii) doomed Nano car project (iii) undue favours to Siva and Sterling (iv) loan by Kalimati to Siva (v) sale of flat to Mehli Mistry (vi) the unjust enrichment of the companies controlled by Mehli Mistry (vii) the Aviation industry misadventures (viii) losses due to purchase of the shares of Tata Motors etc., were not individually dealt with by NCLAT, though NCLT had addressed each one of these issues and recorded findings in favour of Tata Sons. Therefore, there is no escape from the conclusion that NCLAT did  not expressly overturn the findings of facts recorded by NCLT, on these  allegations.”

Supreme Court on NCLAT’s decision to reinstate Mistry

Sections 241 and 242 of the Companies Act, 2013 do not specifically confer the power of reinstatement, nor is there any scope for holding that such a power to reinstate can be implied or inferred from any of the powers specifically conferred.

The following words at the end of sub¬section (1) of 242 “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 a 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.

“These words can only be interpreted to mean as conferring the power to make such order as the Tribunal thinks fit, where the power to make such an order is not specifically conferred but is found necessary to remove any doubts and give effect to an order for which the power is specifically conferred.”

Hence, the architecture of Sections 241 and 242 does not permit the Tribunal to read into the Sections, a power to make an order (for reinstatement) which is barred by law vide Section 14 of the Specific Relief Act, 1963 with or without the amendment in 2018.

Further, NCLAT appears to have granted the relief of reinstatement gratis without any foundation in pleadings, without any prayer and without any basis in law, thereby forcing upon the appellant an Executive Chairman, who now is unable to support his own reinstatement.

Not just this, but NCLAT has gone to the extent of reinstating Mistry not only on the Board of Tata Sons, but also on the Board of Tata group companies, without they being parties, without there being any complaint against those companies under section 241 and without there being any prayer against them. These companies have followed the procedure prescribed by Statute and the Articles and they have validly passed resolutions for his removal.

For instance, TCS granted an opportunity to CPM and held a general meeting in which 93.11% of the shareholders, including public institutions who hold 57.46% of shares supported the resolution. In any case CPM’s tenure itself was to come to an end on 16.06.2017 but NCLAT passed the impugned order reinstating him “for the rest of the tenure”.

“Now by virtue of the impugned order, CPM will have to be reinstated even on the Board of companies from which he has resigned. This is why even the complainant companies have found it extremely difficult to support the order.”

Interestingly, one of the grounds of challenge to the order of NCLAT, raised by SP group in their appeal is that the Tribunal ought not to have granted the relief of reinstatement. Mistry has himself stated clearly that he had no intent to once again taken charge of Executive Chairman and Director of the Tata Group companies.

[Tata Consultancy Services Ltd. v. Cyrus Investments Private Ltd., 2021 SCC OnLine SC 272, decided on 26.03.2021]

Experts CornerSaakshya Law

A. Introduction – Historical background and context

The kernel of the legal regulation of a company’s authority to purchase its own shares – the power of  “buy-back”[1] – has, in English law, traditionally always been founded upon the legal system’s well-established imperative to protect, primarily, the rights and interests of creditors of the company – in other words, those who are “owed” by the company. Nowadays, those considered as creditors covers a much wider scope of persons than just secured creditors – ranging across a broad spectrum of persons from Government (including Revenue), through employees to unsecured or trade creditors.

This broadening of the types of creditors for whose protection mainly, the law as to buy-back is embodied in our statute, also underscores the historical reluctance of the common law to recognise the concept of a company being permitted to repurchase or buy-back its own shares.  This reluctance stems – in part, and from the past – from the common law’s hesitation to allow the consequential diminution of the capital of the company to potentially seriously impair, in most cases, the ability of the company to honour its debt-servicing obligations to those who have extended loans to the company based on their assessment of the long-term viability and continuing financial ability of the company to repay its debts; a critical aspect of the judicially developed, common law principle known as the “capital maintenance” rule – a subject which warrants a subsequent article and a fuller analysis of its own. Suffice it to say, that such a concept has, in this particular context, come to be embodied in the Indian statute as well.[2]

This need to prevent the company defeating its creditors by recourse to such means as repurchase of its own shares, has been most lucidly stated by Lord Justice Green in Guinness v. Land Corpn. of Ireland:

… In my opinion, it … follows that what is described in the memorandum as the capital cannot be diverted from the objects [of the company].  It is, of course, liable to be spent or lost in carrying on the business of the company, but no part of it can be returned to a member so as to take away from the fund to which the creditors have a right to look as that out of which they are to be paid.[3]

In the leading English case of Trevor v. Whitworth, the court was tasked with determining whether a claim by certain executors of a pre-deceased former shareholder, for the balance of the price of the shares of the company sold by them, back to the company prior to the initiation of insolvency proceedings, was valid – in other words, whether a company can validly and legally purchase its own shares.[4]

Lord Macnaghten summed up the position succinctly:

… If shareholders think it worth [their] while to spend money for the purpose of getting rid of a troublesome partner who is willing to sell, they may put their hands in their own pockets and buy him out, though they cannot draw on a fund in which others as well as themselves are interested. That, I think, is the law, and that is the good sense of the matter.[5]

 In summary, the issue was “whether it is competent for a limited company … to invest any portion of its capital in the purchase of a share of its own capital stock, or to return any portion [of such capital] … without following the course which Parliament has prescribed”.[6] The court appears to have reached the conclusion that, despite the memorandum of association of the company authorising the buy-back, such trading represented an indirect method of reducing the capital of the company, without recourse to the proper method of doing so, as permitted and indeed, sanctioned, by the English Companies Act then in force.[7]

English law also encapsulates what one may consider the “reverse of the coin” to that of buy-back; an allied principle that travels (at least as intended) in step with the former – the rule against “financial assistance”, which prohibits (in Section 678 of the English Companies Act, 2006) a public company (or its subsidiary) from giving financial assistance to a person for the acquisition by that person of the company’s shares, whether the assistance is given in advance of, or at the same as, the acquisition taking place. Such financial assistance encompasses (amongst other types, as specified in Section 677 of the English Companies Act, 2006) that given by way of gift, by way of guarantee, security or indemnity, and by way of loan or other such assistance where the provider’s net assets (in case it is a company) are reduced to a material extent by the granting of such assistance.

Crucially, unlike the rule against buy-back which we have seen, the rule against financial assistance was not developed by the 19th century Judges as part of the capital maintenance regime; but rather it was a statutory reform introduced in the early 20th century.[8]  As the leading English commentary on company law, wryly notes:

“The history of this rule does not constitute one of the most glorious episodes in British company law. The rationale for its introduction was under-articulated; it has proved capable of rendering unlawful what may seem from any perspective to be perfectly innocuous transactions; and it has proved resistant to a reformulation that would avoid these problems.”[9]

With this context and historical background in mind, we now therefore, turn to the statutory provisions in India and examine certain anomalous positions that emerge, under Indian law in particular, as regards the concept of financial assistance (crucially the extent of its coverage and application to private companies), as well as the indirect purchase of shares – the two central issues considered and analysed in this article.

B. Buy-back of its own shares

Section 67(1) of the Companies Act, 2013[10] prohibits companies limited by shares or by guarantee and having a share capital, from buying its own shares, unless the consequent reduction of share capital is effected under the provisions of the Act. As emphasised earlier, the intention behind such a seemingly blanket prohibition on a company purchasing its own shares is to preserve and protect, and not dissipate, the share capital of the company as representing the pool of funds against which (amongst others), the creditors of the company may seek satisfaction of the debts or the claims owed to, or in favour of, such creditors by such company – the “capital maintenance” rule, with the exception of certain permitted purchases of its own shares [a concept that in Section 68(1) is defined as a “buy-back”[11]], as provided for in, and in accordance with, the conditions and restrictions stipulated in Section 68.

In addition to the permitted buy-back exception mentioned above in Section 68, a company may purchase its own shares by ensuring that the resultant reduction of its share capital due to such purchase is in accordance with and subject to the conditions under Section 66[12] relating to share capital reductions. It has been made clear, judicially, that the conditions applicable to the formal process of reducing a company’s share capital in the statute cannot be imported into or made applicable to a buy-back, and vice versa; the two statutory concepts and processes operate in independent fields.[13] In furtherance of these purposes, the Companies Act, 2013 specifically prohibits under Sections 67 and 70, any other buy-back or purchase by a company of its own shares (what the headnote to Section 70[14] calls, “prohibition of buy-back in certain circumstances”) – the impact of which provisions we will further study and examine below.

C. Financial assistance

Section 67(2)[15] prohibits public companies from providing, whether directly or indirectly, any “financial assistance” such as the giving of any loans, guarantees or the provision of any security or otherwise, for the purpose of, or in connection with, a purchase or subscription made or to be made, by any person of (in the case of secondary purchase), or for (in the case of primary subscription), such company’s shares (or, of the shares in its holding company). It is pertinent to note that the statute itself, and not any delegated legislation thereunder, specifically carves out and excludes private companies from the prohibition in Section 67(2), on the granting by a company of such financial assistance to any person for the acquisition of such company’s shares.[16]

Admittedly, the Ministry of Corporate Affairs in its Notification dated 5-6-2015, specified certain exemptions or exceptions available to private companies, including the exemption of private companies from the applicability of the provisions of Section 67, subject however, to the fulfilment of the following conditions:

(a) The company shall have no shareholder which is a body corporate.

(b) Borrowings of the company from banks, financial institutions or body corporate should not exceed twice the amount of its paid-up share capital or INR 500 million, whichever is lower.

(c) There shall be no subsisting defaults in repayment of such borrowings at the time of the making of any transaction under Section 67.

This is an unfortunate situation – leading to an unhappy and uncertain outcome, importantly for purposes of this article, as regards the extent and scope of the coverage and application of the financial assistance prohibition. Without the 2015 notification, the statute in Section 67(2) is crystal clear – only public companies are prohibited from granting financial assistance to other persons to acquire its own shares. The 2015 notification muddies those waters by purportedly exempting private companies from this prohibition, provided they satisfy the above conditions – a conditional exemption which at the threshold at least, is not warranted by the express provisions of Section 67(2).

On the face of it, the conclusion is perhaps inescapable that, as the provisions of Section 67(2) of the parent legislation itself, which specifically and expressly provides that the prohibition on the granting of such financial assistance for the purpose of the purchase of its shares only applies to public companies, the section in the statute must prevail over any delegated legislation such as the 2015 notification – on the well-settled principle of statutory interpretation that subordinate legislation cannot trump or go beyond the statute itself; especially by including applicability of provisions with exemptions based on certain conditions to certain types of companies, already expressly excluded (or, at the very least, not included) in the principal legislation.

From a critical analysis point of view, however, it behooves us to ask and seek to answer the question whether the 2015 notification goes beyond its legal remit, in providing such a conditional exemption, as regards the applicability of the prohibition in Section 67(2) to private companies.

The answer to that conundrum must lie in the interpretation of Section 462(1) – a provision which did not exist in the Companies Act, 1956; and, therefore, its introduction in the 2013 statute must be treated as deliberate.[17] This statutory provision empowers the Central Government in exercise of its admittedly delegated or subordinate powers, to direct by notification in the public interest, that any of the provisions of the statute shall not apply to such class or classes of companies; or, shall apply to such class or classes of companies, with such exceptions, modifications and adaptations as may be specified in such notification itself.

At the outset, Section 462 appears to be what some would call a “Henry VIII” clause in primary legislation.[18] While a full discussion on what such “Henry VIII” clauses are, or what they purport to do, or what their ramifications are, falls beyond the scope of this article, it is pertinent to mention that the Notes on Clauses of the Companies Bill, 2011 (to Clause 462, which was ultimately adopted as Section 462, in the 2013 statute) records that “this clause gives power to [the] Central Government by notification [to direct] that any provisions of this Act … apply or not … apply to such class or classes of companies as specified in the public interest”.[19]

In light of the foregoing discussion, the crux of this issue to our mind, to reiterate, turns on a plain reading of Section 462(1), read with the 2015 notification, insofar as it relates to the treatment of Section 67(2) as regards private companies. Framed thus, two key points of analysis emerge:

Firstly, the 2015 notification, as regards the application of Section 67, is structured as an exemption [that does not by the express words of Section 461(1)(a), permit any qualifications to such exemptions] and not as an extension to application [which alone carries with it, under Section 462(1)(b), the right to prescribe exceptions, modifications and adaptations] – in other words, while exempting private companies from the provisions of Section 67, such an exemption could only properly in law, be a blanket one, which is tautological given that the principal statute in Section 67(2) anyways so expressly exempts private companies from its application.

Secondly, is it at all possible that the 2015 notification has an error in referencing?  In that, the exemption sought to be made is to Section 67(1) – while the notification simply states Section 67.  The logic for this stems from the fact that, since Section 67(2) anyways excludes in its very terms, all other companies other than public companies, the only other provision in Section 67 that is capable of receiving such an exemption is Section 67(1) – although the validity of even that exemption, assuming it is correct, remains to be judicially tested, in particular; as is the 2015 notification, more generally. As an aside, the 2015 notification stipulates the condition that no other body corporate has invested any monies in the share capital of the private company – a condition that appears to apply only when an overseas corporation and not another Indian company, has invested in the equity share capital.[20] The logic for such a stipulation is also unclear.

Our conclusion tends towards the view that the Central Government in exercise of its admittedly delegated or subordinate powers under Section 462(1), cannot properly in law direct either:

(i)      the non-applicability to private companies of a provision of the principal statute [such as for instance, Section 67(2)], which is anyways by its very express terms mandated by Parliament itself, as not being applicable to such private companies; or

(ii)     the applicability of the provisions of Section 67(2), subject to such exceptions, modifications or adaptations as the Central Government may specify, to private companies, since such entities are by the principal statute itself, already exempt therefrom;

and, as a result, the stipulated conditions of the 2015 notification above, have we strongly believe, no basis in law for the present purposes – that, private companies are entitled to render financial assistance in terms of Section 67(2), regardless of the 2015 notification and its conditions or stipulations.

D. Other purchases of its shares; indirect purchases

This article does not examine or analyze the buy-back provisions of Section 68 (and the associated rules), in and of themselves – that again is to be left to another occasion; and, indeed, forms the subject-matter of a plethora of other articles. We are concerned here with indirect purchases. Section 70(1) prohibits inter alia the purchase by a company – and this prohibition applies across all types of companies – of its own shares either directly or indirectly, through a subsidiary company (including its own subsidiary company) or through any investment company (or group of investment companies).

The provisions of Section 70(1) need careful reading and analysis – it is clear the statute is seeking to impose a condition that the purchase by the subsidiary or the investment company (for ease of reference, let us call that as the “acquiring company”) of the shares of its parent company (or any other company; for ease of reference, we will refer to that as the “target company”), must involve the acquiring company purchasing the shares of the target company, in its (i.e. the acquiring company’s) own name, and not as a nominee of, nor for or on behalf of, the target company – in other words, it is important that the shares so purchased are held as of the record and beneficially by the acquiring company, without any beneficial interest of the target company in such shares, in order to obviate the impact of the prohibition contained in Section 70(1).

There is, however, an aspect of Section 70(1) that is troubling in the way it is drafted.  The reference to “own subsidiary company” is unclear – for that term is neither defined or used elsewhere in the statute, nor does its usage sit well in sub-clause (a) of the provision.  Surely, it was not intended that the subsidiary company of any other parent company falls within the prohibition on the indirect purchase of shares through any subsidiary, including one’s own subsidiary. The intention may have been to refer to direct subsidiary companies, where the holding company itself holds the required shareholding, and not such subsidiaries which are next level subsidiaries arising out of a chain holding.[21]

What is clear though, is that the proscription of Section 70(1) lies in the indirect purchase of a company shares “through” any subsidiary or investment company[22] – terminology that is also used in Section 19(1) where a company (whether by itself or through its nominees) cannot hold shares in its holding company (of course, excepting situations where such shares were acquired prior to the company becoming such a subsidiary of its parent company).  Section 70(1) therefore imposes no blanket ban on indirect purchase – only those that are beneficially acquired for the target company, which is prohibited.[23]

It appears that the scheme of the Act as regards the issue of the permitted purchases by a company of its shares is a threefold one – firstly, that any company’s buying of its own shares can only be achieved legally either through the routes of permitted share capital reductions (Section 66) or permitted buy-backs (Section 68); secondly, that public companies alone are prohibited from providing “financial assistance” in connection with or for the purposes of a purchase by a company of its shares by any person [Section 67(2)], as dealt with in detail above; and thirdly, that any company is prevented, by means of a nominee relationship or through any beneficial interest by or on behalf of the company itself, from indirectly purchasing its own shares through a subsidiary or an investment company.

Before parting with this issue, one must examine the prohibition on the purchase by a company of its own shares, indirectly through an investment company. Explanation (a) to Section 186 defines the term “investment company” (albeit only for the purposes of that section), as a company whose principal business is the acquisition of shares, debentures or other securities, or a company will be deemed to be principally engaged in such business, if its assets in the form of investment in shares, debentures or other securities constitute not less than 50% of its total assets, or if its income derived from such investment constitutes not less than 50% as a proportion of its gross income. The determination of an “investment company” is therefore, a factual or objective one – in any event, even if the acquiring company is treated as an investment company, the prohibition on indirect purchase by a target company of its own shares in Section 70(1) is only relevant or arises where there exists a nominee or a beneficial relationship between the acquiring company and the target company.

E. Conclusion

This article has considered two issues of interpretation that arise in the context generally of shares buy-back – indirect purchases through or using the vehicles of subsidiaries or investment companies, and the financial assistance rule’s coverage to private companies. Clearer and more specific drafting (in the case of indirect purchases) and greater tabs on delegated legislation (when it comes to the financial assistance rule) would have obviated both issues – and made life much more certain and stable for contracting parties. Perhaps what is required is to suppress the mischief and advance the benefits that both these constructs truly provide to corporate India.

By Siddharth Raja, Partner at Saakshya Law 

Note: The article and its contents do not constitute legal advice, and readers are urged to seek specific legal advice and inputs to their particular issues, facts and circumstances.

[1] See, Ss. 77-A, 77-AA and 77-B, as first introduced and inserted into the Companies Act, 1956 by the Companies (Amendment) Act, 1999.  These provisions have largely been retained as Ss. 68, 69 and 70, respectively, of the Companies Act, 2013, other than some textual modifications.

[2] See, S. 68(6) of the Companies Act, 2013 [analogous to S. 77-A(6) of the Companies Act, 1956], requiring every company proposing a buy-back to file with the Registrar and the Securities and Exchange Board of India, a declaration of solvency in specified form and content, to the effect that its Board of Directors has made a full inquiry into the affairs of the company, as a result of which they have formed an opinion that the company is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from the date of such declaration.

[3] See, (1882) 22 Ch D 349, 375; emphasis supplied. Cited and quoted with approval in the leading English case on buy-back, namely, Trevor  v. Whitworth, (1887) 12 App Cas  409, by both Lords Herschell (at pp. 419-20) and Macnaghten (at p. 433).

[4] (1887) 12 App Cas 409: the company’s memorandum of association did not authorise the company to purchase its own shares, although several articles in its articles of association, did – one article empowered the Board to purchase “any share” at such price “not exceeding the then marketable value thereof”.  The decision on merits proceeded only on the general question of whether the company did have a power of repurchase in the first place – the court unanimously holding that it did not, and thereby Lord Herschell (at p. 414) and Lord Watson (at p. 421), in particular, avoiding the question whether the purchase had indeed taken place in accordance with the articles of association.

[5] (1887) 12 App Cas 409, 436; emphasis supplied.  See also, Lord Watson (at p. 430) and Lord Herschell (at p. 417).

[6] (1887) 12 App Cas 409, 432.

[7] See, Lord Herschell (at p. 417) and Lord Watson (at p. 423).  See also, Lord Macnaghten: “When Parliament sanctions the doing of a thing under certain conditions and with certain restrictions, it must be taken that the thing is prohibited unless the prescribed conditions and restrictions are observed.” – in an obvious reference to the statutory procedure for the reduction of capital.

[8] See, Paul L. Davies QC, et al.; Gower’s Principles of Modern Company Law; 10th edn., South Asian Edition, Sweet & Maxwell, 2018, at p. 333.

[9] Id., at p. 332.

[10] Analogous to S. 77(1) of the Companies Act, 1956.

[11] Earlier, S. 77-A(1) of the Companies Act, 1956.

[12] Analogous to S. 100 through S. 105 of the Companies Act, 1956.

[13] See, SEBI v. Sterlite Industries (India) Ltd., 2002 SCC OnLine Bom 1411 : (2003) 113 Comp Cas 273, A.P. Shah, J., at para 22 – albeit, while dealing with the provisions of the erstwhile Companies Act, 1956, which specifically in S. 77(1), called out the provisions of Ss. 100 to 104 or of S. 402, to which the reduction of capital was to be subject to.

[14] Earlier, S. 77-B of the Companies Act, 1956.

[15] Analogous to S. 77(2) of the Companies Act, 1956.  The erstwhile provision also covered within the prohibition on financial assistance a private company which is a subsidiary of a public company – a concept that has been done away with in our new law, and a subject worthy of an independent, separate and holistic analysis by itself.

[16] See, as and by way of contrast: erstwhile S. 90(2) of the Companies Act, 1956 statutorily exempted pure private companies (i.e. which are not subsidiaries of public companies) from the application of erstwhile Ss. 85 to 89; a position that is no longer extant in the Companies Act, 2013, unless specifically exempted by subordinated rules under the statute.

[17] See, Ss. 620 and 620-A through S. 620-C, of the erstwhile Companies Act, 1956 – which inter alia only empowered the Central Government to modify the statute in its application to certain specified types of companies (such as government companies); or, to companies in certain parts of the country (like Jammu & Kashmir), but which did not grant far-reaching powers to exempt any class or classes of companies, as is contained in S. 462(1) of the Companies Act, 2013.

[18] See, generally, Priya Garg and Amrita Ghosh, The Henry VIII Clause: Need to Change the Colour of Our Shades, CALQ (2017) Vol. 3.3, accessed on 10-2-2021.

[19] See, Sudipto Sarkar and Arvind P. Datar, Chief Editors; A. Ramaiya: Guide to the Companies Act; 19th edn.

[20] See, S. 2(11), as to the definition of  “body corporate” – as contrasted with S. 2(20), as to the definition of  “company”.

[21] See, S. 2(87) as to the definition of “subsidiary”, read with the Companies (Restriction on Number of Layers) Rules, 2017.

[22] Note the difference in drafting – ordinarily shares are acquired “by” a company; not “through” – the latter’s usage thereby indicates beneficial interest, where the acquisition must be one on behalf of the other.

[23] Prof Gower draws the connection between the financial assistance rule and indirect purchases, thus (emphasis supplied): “If a company lends £100,000 to someone to purchase its shares from another investor and that person does not act as a nominee for the company but acquires the shares beneficially, the company’s share capital, share premium account and capital redemption reserve will not be in any way altered by that loan or the subsequent purchase of shares.”  See, supra note 8, at p. 333.

Op EdsOP. ED.

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”

“The question is,” said Alice, “whether you can make words mean so many different things.”

“The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

Who is the master of them all? The written letter of the law, or the subjective whim of an investigator?

This is the question that Section 447 of the Companies Act (CA, 2013) poses.

Section 447 makes fraud a penal offence. Prior to introduction of Section 447, provisions under the Penal Code, 1860 (IPC) such as Sections 406, 420, 465, 477-A, etc. would normally be pressed into action in such cases. But, given the complex nature of corporate frauds, their sheer impact, and the heightened need to investigate and punish them more effectively, the need for a special provision was felt.

This is the genesis of Section 447 of the CA, 2013. So far so good.

The definition of “fraud” under CA, 2013, however, leaves a lot to be desired. In fact, it is a definition that fails to define. Let us see how.  Section 447 reads:

  1. Punishment for fraud.—Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud involving an amount of at least ten lakh rupees or one per cent of the turnover of the company, whichever is lower,  shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud: 

Interestingly, the section itself does not define what fraud is. This is what takes us to the Explanation.

Explanation.—For the purposes of this section—

(i) “fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;

On a mere glance, two things immediately stand out:

  1. There is no definition of fraud in the main provision. It is the Explanation to the section that seeks to define what fraud is. The definition in the Explanation is – and wait for it – an inclusive one. It is merely illustrative. Simply put, this means that the section does not define fraud exhaustively and there can be other acts which may qualify as “fraud”, over and above those stated in the section.
  2. Finally, the last part of the section which renders culpable the act of injuring of the “interests” of “any other person” is simply too wide.

Let us unpack each of the above briefly:

First things first, the definition comes out of the Explanation and not the section itself. There is substantial jurisprudence on the purpose of an “Explanation” to a provision. An Explanation is supposed to clarify. But here the Explanation does just the opposite. It obfuscates. It does illustrate what would qualify as “fraud” but leaves the door wide open. Put differently, it says “x, y, and z” would be fraud, but, wait a minute, there may be other things that may qualify as “fraud”  too. Now, this is where the problem lies.  Who decides what those other things may be? The investigator? And that too post facto. This is not how criminal laws are supposed to work.

The provision is astonishingly open ended, and in my humble opinion, unconstitutionally vague. It is an established legal position that there cannot be blurred signposts to criminality. There is a constitutional requirement that a criminal statute be precise, specific, and unambiguous. The idea being that a citizen cannot be kept guessing about what is criminal and what is not and should be able to understand as to what exactly constitutes a crime. Criminal laws which do not explicitly and definitively state which conduct/omission attracts criminal sanctions – may be challenged on the ground of being void for vagueness. This is because vague statutes can lead to arbitrary and discriminatory prosecutions and concentrate too much power in the hands of the investigators.

A definition such as the one for fraud that we saw above would leave the investigators with way too much latitude to, mean what they mean out of the term. Such breadth may lead to over-criminalisation and abuse.

In Skilling v. United States1, it was held that:

… a penal statute [must] define the criminal offense (1) with sufficient definiteness that ordinary people can understand what conduct is prohibited; and (2) in a manner that does not encourage arbitrary and discriminatory enforcement.

Closer to home, in Shreya Singhal v. Union of India2, the infamous Section 66-A IT Act was struck down for over-breadth and held to be unconstitutionally vague.  Similarly, in State of M.P. Baldeo Prasad3, the Court struck down a law criminalising “goondas” on the basis that it did not really define who a “goonda” was. In this case, the definition of a goonda laid down by the Central Provinces and Berar Goondas Act, 1946, was of an inclusive character, and indicated no definitive tests for deciding whether the person was a “goonda” or not.

Section 447 of the CA, 2013 suffers from a similar anomaly.

The way it is worded and the kind of discretion it gives an investigator reminds one – of what Bentham calls – dog law:

“Just as a man makes laws for his dog. When your dog does anything you want to break him of, you wait till he does it, and then beat him for it. This is the way you make laws for your dog….” 

This cannot be the way laws are made for men, especially in a jurisprudence governed by the rule of law, and not the rule of men. And, for greater reason, when personal liberty is at stake.

 The vagueness of what “fraud” is under Section 447 of the Act is further compounded by the use of expressions such as: acts/omissions injuring the “interests” of “any other person”. Now what are these “interests” and who all can fall within the scope of the expression “any other person” are left to the investigator, and then – the court. The inclusive nature of the definition and both these expressions are capable of too wide a meaning, and add to the vagueness of the section, and possibility of abuse.


Given the above, there is a need to either read down, or statutorily amend Section 447 of CA, 2013 and tailor it narrowly – and with precision and clarity. In the present shape, the section is unconstitutionally vague, subjective, open ended and prone to misuse and over-criminalisation. In our enthusiasm to check the scourge of white-collar crime and corporate frauds, we must not cut corners with fairness and due process. A just, fair and reasonable criminal justice system mandates clear signposts to criminality. In other words, what we need is: the rule of law, and not the rule of the investigator.

† Former Judge and Independent Counsel, e-mail

1 2010 SCC OnLine US SC 82 : 177 L Ed 2d 619 : 561 US 358, 402-403 (2010).

2 (2015) 5 SCC 1.

3 AIR 1961 SC 293.

Business NewsHot Off The PressNewsTaxation

Finance Minister, Nirmala Sitharaman presented the Union budget 2021-22 in the Parliament Today.

6 Pillars:

  • Health and Well-Being
  • Physical and Financial capital and infrastructure
  • Inclusive Development for Aspirational India
  • Reinvigorating Human Capital
  • Innovation and R&D
  • Minimum Govt., Maximum Governance


  • Three areas – Preventive health, curative health and well-being – to be strengthened
  • Urban Swachh Bharat Mission 2.0 will be implemented with more budget
  • New Centrally Sponsored Scheme PM Aatmanirbhar Swasth Bharat Yojana to be launched, outlay of ₹ 64,180 crore over 6 years To develop capacities of health care systems, develop institutions for detection & cure of new and emerging diseases
  • Main Interventions under the above Scheme: Support for Health and Wellness Centres, Setting up Integrated Public Health labs in all districts,  Critical care hospital blocks,  Strengthening of NCDC
  • Supplementary Nutrition Programme & POSHAN Abhiyaan to be merged, Mission POSHAN 2.0 to be launched
  • To strengthen nutritional content, delivery & outcome
  • Intensified strategy for improving nutritional outcomes in aspirational districts
  • Proposals in Part A will strengthen the Sankalp of NATION FIRST 1. Doubling farmers’ income 2. Strong Infrastructure 3. Healthy India 4. Good Governance 5. Opportunities for Youth 6. Education for All 7. Women Empowerment, and 8. Inclusive Development
  • Urban Swachh Bharat Mission 2.0 with outlay of ₹ 1,41,678 crore over 5 years from 2021 Focused on complete fecal sludge management, waste water treatment, source segregation, management of waste from urban construction, bioremediation of legacy dump sites
  • ₹ 2,217 crore for 42 urban centres with million plus population, to tackle burgeoning problem of air pollution
  • Voluntary vehicle scrapping policy to phase out old and unfit vehicles Vehicles to undergo fitness test in automated fitness centres after 20 years (personal vehicles) and 15 years (commercial vehicles)
  • The pneumococcal vaccine, limited to only 5 states at present, to be rolled out across the country Will avert more than 50,000 child deaths annually.
  • ₹ 1.97 lakh crore over 5 years starting this FY, for Production Linked Incentive Schemes to create manufacturing global champions
  • Scheme of Mega Investment Textile Parks to be launched, in addition to PLI scheme, to create world class infra in textile sector, with plug-and-play facilities, to create global export champions 7 textile parks to be set up over 3 years
  • To give further thrust to National Infrastructure Pipeline, three concrete actions to be taken: Creating institutional structures, Monetizing assets, Increasing the share of capital expenditure in central and state budgets.
  • Professionally managed Development Financial Institution to be set up, to provide, enable & catalyze infra financing | ₹ 20,000 crore to capitalize this institution | Aim is to have lending portfolio of at least ₹ 5 lakh crore in 3 years.
  • National Monetization Pipeline of potential brownfield infrastructure assets to be launched, for monetizing operating public infra assets
  • Asset Monetization Dashboard to track progress and provide visibility to investors
  • Five operational roads being transferred to NHAI | ₹7,000 crore assets to be transferred to PGCIL | Railways to monetize dedicated freight corridor assets for O&M, after commissioning | Next lot of airports to be monetized for ops & mgmt. concessions
  • Sharp increase of 34.5% in capital expenditure as compared to previous budget estimates – resulting in the allocation of ₹ 5.54 lakh crore
  • ₹ 40,000 crores for programmes, projects and departments which show good progress in capital expenditure and which may be in need of further funds | More than ₹ 2 lakh crore for states and autonomous bodies for CAPEX (Capital Expenditure)
  • By March 2022, another 8,500 km of road projects to be awarded, additional 11,000 km of NH corridors to be completed, under Bharat Mala Pariyojna project
  • Enhanced outlay of ₹ 1,18,101 crore for
    MORTH India out of which ₹ 1.08 lakh crore is for capital, the highest ever provided
  • Western Dedicated Freight Corridor and Eastern Dedicated Freight Corridor to be commissioned by June 2022
  • 100% electrification of rail broad gauge routes to be completed by December 2023
  • High-density rail networks and highly utilized rail routes to be provided with indigenously developed automatic train protection system which will eliminate train collision due to human error
  • a record sum of Rs 1,10,055 crores for Railways of which Rs. 1,07,100 crores is for Capital Expenditure only
  • New scheme at a cost of ₹ 18,000 crore for augmentation of public bus transport services will facilitate deployment of innovative PPP models enabling private players to finance, acquire, operate and maintain over 20,000 buses
  • MetroLite and Metro New Technologies to be deployed to provide metro rail systems in tier 2 cities and peripheral areas of tier 1 cities, at much lesser cost, with same experience, convenience and safety
  • Framework to be put in place, to provide consumers with alternatives to choose from, from among more than one power distribution company
  • Revamped, reforms-based, result-linked Power Distribution Sector Scheme to be launched, with outlay of ₹ 3,05,984 crore over 5 years
  • Seven port projects worth more than ₹ 2,000 crore to be offered by major ports in PPP Mode, in FY 2021-’22. To move to a model where private partner will manage operations of ports
  • Scheme for promoting flagging of merchant ships in India to be launched, by providing subsidy support to Indian shipping companies in global tenders floated by Ministries and CPSEs. ₹ 1,624 crore over 5 years for this.
  • Ship Recycling Capacities of around 4.5 million Light Displacement Tonnage to be doubled by 2024, expected to generate around 1.5 lakh jobs for youth.
  • Independent Gas Transport System Operator to be set up, for facilitation and coordination of booking of common gas carrier capacity, in all-natural gas pipelines, on a non-discriminatory and open access basis
  • A single and rationalized Securities Markets Code to be set up, by consolidating provisions of SEBI Act 1992, Depositories Act 1996, Securities Contracts Regulation 1956 and Govt. Securities Act of 2007.
  • Permanent institutional framework to set up, to instill confidence in corporate bond market participants during times of stress and enhance secondary market liquidity
  • To set up a system of regulated gold exchanges in the country, SEBI will be notified as regulator and Warehousing Dev. and Regulatory Authority will be strengthened ||For investor protection, Investor Charter as a right of all financial investors across all financial products to be introduced.
  • Additional capital infusion of ₹ 1000 crore to Solar Energy Corporation of India and ₹ 1500 crore to IREDA
  • Insurance Act 1938 to be amended, to increase permissible FDI limit in insurance companies from 49% to 74% and allow foreign ownership and control with safeguards.
  • FM states: Asset Reconstruction Company Ltd. to be set up to consolidate and take over existing stressed debts and manage and dispose of assets for eventual value realization
  • Deposit Insurance Cover for bank customers to be increased from ₹ 1 lakh to ₹ 5 lakh, provision to be streamlined to enable depositors get access to funds within insurance coverage limit.
  • Minimum loan size eligible for debt recovery under SARFAESI Act 2002, to be reduced from ₹ 50 lakh to ₹ 20 lakh, for NBFCs with minimum asset size of ₹ 100 crores.
  • Definition of small companies under Companies Act 2013 to be revised Companies with paid-up capital up to ₹ 2 crores & turnover up to ₹ 20 crores will fall under small companies, benefiting more than 2 lakh companies in compliance req.
  • To incentivize incorporation of one-person companies, such companies will be allowed to grow without any restriction on paid-up capital or turnover and to convert into any other type of company at any time.
  • NCLT framework will be strengthened, e-court system to be implemented, alternate debt resolution mechanism and special framework for MSMEs to be introduced, Data Analytics and AI-driven, MCA 21 version 3.0 to be introduced
  • Two public sector banks apart from IDBI and one general insurance company to be taken up for strategic disinvestment in 2021-’22 IPO of LIC also to be brought in.
  • Policy on Strategic Disinvestment of Public Sector Enterprises has been approved.
  • To further streamline Ease of Doing Business for cooperatives, a separate administrative structure for them to be set up.
  • Agricultural credit target enhanced to ₹ 16.5 lakh crore, focus will be on ensuring increased credit flow to animal husbandry, dairy and fisheries sectors.
  • Allocation for Rural Infrastructure Development Fund to be enhanced from ₹ 30,000 crores to ₹ 40,000 crore ₹ 5,000 crore Micro Irrigation Fund to be augmented by another ₹ 5,000 crores.
  • 1,000 more mandis to be integrated with National Agriculture Market or eNAM.
  • Agricultural Infrastructure Fund to be made available to APMCs for augmenting their infrastructure facilities.
  • Portal that will collect relevant information on gig workers, building and construction workers and others to be launched, to help formulate health, housing, skill, food, credit and insurance schemes for all migrant workers.
  • To further facilitate flow of credit to SCs and STs and women, margin money required to be reduced from 25% to 15%.
  • 100 new Sainik schools to be set up.
  • Higher Education Commission to be set up, legislation to be introduced this year for the same.
  • Central University to be set up in Leh, for providing accessible higher education in Ladakh.
  • Unit cost for setting up 750 Eklavya Model Residential Schools in tribal areas, increased from ₹ 20 crores per school to ₹ 38 crores, and to ₹ 48 crores per school in hilly and difficult areas.
  • ₹ 35,219 crores allocated for 6 years till 2025-26, to provide post-matric scholarship to 4 crore Scheduled Caste students.
  • National Apprenticeship Promotion and Training Scheme to be realigned, for providing post-education apprenticeship and training for graduates and diploma holders in engineering, over ₹ 3,000 crores to be provided for this.
  • National Research Foundation outlay will be ₹ 50,000 crores over 5 years
  • ₹ 1,500 crore for a new scheme which will provide financial incentives to promote digital payments.
  • National Language Translation Mission to be launched.
  • First unmanned launch of space flight ‘Gaganyaan’ slated for December 2021.
  • Public-Private Partnership mode for Operational Services at major ports. ₹1,624 crore subsidy support to Indian shipping companies to promote flagging of merchant ships in India.
  • Functioning of Tribunals to be further rationalized for speedier delivery of justice.
  • National Commission for Allied Healthcare Professionals Bill introduced, to ensure transparent and efficient regulation of 56 allied healthcare professions.
  • Customs duty hiked proposed on some mobile parts, auto parts and cotton.
  • National research foundation outlay to be Rs 50,000 crore, over 5 years.
  • Senior citizens above 75 years of age, having pension & interest income exempted from filing the tax return.
  • Decriminalization of the limited liability partnership (LLP) act, 2008 proposed.
  • Establishment of National Faceless Income Tax Appellate Tribunal Centre.
  • Rs 1000 crore to be provided for welfare scheme for tea workers of Assam & West Bengal especially women & children.
  • 7 new textile parks to be launched over 3 years.
Case BriefsHigh Courts

Karnataka High Court: Suraj Govindraj J., dismissed the writ petition on grounds of maintainability.

The facts of the case are such that the petitioner is a not for profit company registered under Section 8 of the Companies Act 2013 with the object of working in the areas of governance and in transparency. The Respondents 2 and 3 being directors of various companies were carrying on non-banking financial business without registration and hence had committed offences under Section 45 IA of the RBI Act. A private complaint was filed by the petitioner seeking direction to the RBI to initiate proceedings against respondents for offences under Section 45 IA r/w 58B (4A) of the RBI Act. The Magistrate dismissed the complaint stating that the prayer sought in the complaint is only a direction to the RBI to take cognizance and investigate and the representation submitted earlier was still pending with the Governor of the RBI for consideration whose status is unknown and hence no direction can be issued to the Governor of the RBI. Aggrieved by the said dismissal present petition was filed for setting aside the impugned order and restore the private complaint.

Counsel for the petitioners submitted that the proceedings filed before the Delhi High Court are different from the one filed before the Magistrate and the prayer sought for is also different. It was further submitted that there is no order which can operate as res judicata as the present writ petition is not one under Article 226 but is more under Article 227 of the Constitution of India seeking for supervisory jurisdiction as also one under Section 482 of CrPC to exercise inherent power to set aside the order passed by the Magistrate.

Counsel for the respondents submitted that the relief sought for in the complaint is identical to that sought for in the writ petition and as complaint itself was not maintainable therefore the present petition will not be maintainable as well. It was further submitted that PIL was filed and later withdrawn and hence once the proceeding has been filed making allegations and the same is withdrawn, the filing of the present writ petition is barred. It was also submitted that the claim of the petitioner is hit by res judicata and hence the petitioner cannot reagitate the same.

The Court relied on judgment Sarguja Transport Service v. State Transport Appellate Tribunal (1987) 1 SCC 5 and observed that the allegations made and prayer sought in private complaint or PIL is as regards the alleged violation by respondents of Section 45 IA punishable under Section 58 B (4C) of the RBI Act. Thus it cannot be disputed that the relief sought is one and the same though by legal and linguistic gymnastics they have been worded differently. It was further observed that “clever drafting and or subterfuge resorted to in such drafting would not take away the fact that the allegations made in all three proceedings are one and the same.”

 The Court held that in the present case the grievance of the petitioner being the same in all the proceedings, the actions sought also being the same i.e. for the RBI to take necessary action against the respondents hence the present writ petition is not maintainable in view of the various orders passed by the High Court and also the withdrawal made by the petitioner of the PIL.

In view of the above, the writ petition was dismissed.[India Awake for Transparency v. Azim Hasham Premji, 2021 SCC OnLine Kar 200, decided on 18-01-2020]

Arunima Bose, Editorial Assistant has put this story together.

Case BriefsSupreme Court

Supreme Court: B.R. Gavai, J., while addressing a contempt petition expressed that:

“…contempt proceeding is not like an execution proceeding under the Code of Civil Procedure.”

“…contempt proceedings are quasi-criminal in nature and the standard of proof required is in the same manner as in the other criminal cases.”

“A mere objection to jurisdiction does not instantly disable the Court from passing any interim orders.”

Contempt Petition | Father v. Sons

The instant contempt petition arose out of an unfortunate family dispute between a father and his two sons from his first wife.

Petitioner in the contempt petition Rama Narang was married to Smt. Motia. The respondent’s 1 and 2 i.e. Ramesh Narang and Rajesh Narang so also Rakesh Narang are sons of the petitioner and Smt. Motia. The petitioner and Smt. Motia divorced in 1963. The petitioner thereafter married Smt. Mona. Out of the said wedlock, two sons Rohit and Rahul, as well as a daughter Ramona, were born.

Family Settlement

In accordance with the family settlement, that insofar as ‘Narang International Hotel Limited’ and its subsidiaries were concerned, Rama Narang, Ramesh Narang and Rajesh Narang were to be the only Directors.

Further, it was added that any decision by the Board of Directors was to be taken by the mutual consent of Rama Narang on one hand and Ramesh and Rajesh, on the other hand. Though if the amount of any transaction was exceeding Rs 10 lakhs, then the same could be undertaken only through a cheque signed jointly by Rama Narang on one hand and Ramesh or Rajesh on the other hand.

Though the matter was settled in terms of minutes of Consent Order, there was no quietus to the dispute between the parties.


Rama Narang alleged that Ramesh and Rajesh had violated the terms of Consent Order stipulated in clause 3 (c), (d), (e) and (f) of the Minutes of the Consent Order. Violation of the said order amounted to clear disobedience and thus punishable under the Contempt of Courts Act, 1971.

Contempt Proceedings against the Respondents

Court initiated contempt proceedings and requested Justice V.A. Mohta, retired Chief Justice of Orissa High Court to act as a Mediator for settlement of disputes between the parties. However, despite serious efforts made by the Mediator, the settlement could not be arrived at.

A three-Judge Bench of this Court in Rama Narang v. Ramesh Narang, (2006) 11 SCC 114, observed the following:

“32. The object of entering into consent terms and jointly filing the undertaking was to run the family business harmoniously with the active participation of all as a family business but the respondents had taken absolute control of the Company NIHL to the total exclusion of the petitioner.

 33.The respondents have erroneously submitted that joint management and control of the Company means giving veto power to the petitioner. According to the terms of undertaking the petitioner and the respondents were under an obligation to run the Company harmoniously with the active participation of all as a family business but unfortunately the respondents have taken absolute control to the total exclusion of the petitioner. This is contrary to the terms of the undertaking given to this Court.”

The Court in the earlier Order held the respondents guilty of contempt, taking into consideration the fact that immediately sending respondents to jail would create total chaos in the Company and it would also vitally affect the interest of large number of people including the employees of the Company the sentence of imprisonment imposed on the respondents was kept in abeyance.


On account of non-cooperation by Rama, the functioning of the Company had come to a standstill. It was contended in the said company petition, that due to non-cooperation by Rama in signing cheques, the employees could not be paid their salaries from November 2007 onwards. It was also contended, that bills for payment to supplier could also not be paid, due to which, the entire functioning of the various units of the Company had been seriously affected.

Company Law Board

CLB noticed, that due to differences among the Directors, many operational issues like payment of salaries/wages, payment to supplier etc. were pending, leading to agitation by employees and irregularities in supply.

The CLB found it appropriate, that till the petition was disposed of, as an interim measure, in the interests of the Company and more than 3000 employees/workers, there should be a mechanism by which the day-to-day operations of the Company were carried on without any hitch.

Petitioner alleged that the CLB Order was violative of the order of the Supreme Court and nothing but an attempt to legalize their conduct of contempt but the petitioner approached the Court by the instant contempt petition.


Section 2(b) of the Contempt of Courts Act, 1971:

2. Definitions. – …..
(b) “civil contempt” means wilful disobedience to any judgment, decree, direction, order, writ or other process of a court or wilful breach of an undertaking given to a court.”

Civil Contempt

It is clear that for bringing an action under the ambit of civil contempt, there has to be a wilful disobedience to any judgment, decree, direction, order, writ or other process of a court or wilful breach of an undertaking given to the Court.

Respondents submitted that the petitioner was attempting to use the consent terms as a veto to stall the functioning of the Company.

Bench referred to Sections 397, 398 and 403 of the Companies Act, 1956.

Respondents legitimately invoked the jurisdiction of Company Law Board invoking the powers under Sections 397, 398 and 403 of the Companies Act, to which they were entitled to in law and were not restrained to do so by any competent Court/forum.

 CLB had passed interim orders in exercise of its powers under Section 403 of the Companies Act. Petitioner had approached the Court immediately after the order dated 10-04-2008, was passed by the CLB by way of present contempt petition.

Main Contention

Petitioner’s primary contention was that invoking the jurisdiction of the CLB and entertaining the said proceedings by the CLB, itself amounts to contempt.


Court referred to the observations of in Pratap Singh v. Gurbaksh Singh, 1962 Supp (2) SCR 838:

“The principle behind all these cases is that such action of the person which he takes in pursuance of his right to take legal action in a Court of law or in just making a demand on the other to make amends for his acts will not amount to interfering with the course of justice, even though that may require some action on the part of the other party in connection with his own judicial proceeding, as a party is free to take action to enforce his legal rights.”

 Supreme Court stated that in the present case, the respondents were entitled to invoke the jurisdiction of the CLB under Sections 397, 398 and 403 of the Companies Act. Respondents had to take recourse to that remedy in compelling circumstances to safeguard the interest of the Company and its stakeholders.

Further, the Court added that merely taking recourse to the statutory remedy available to the respondents would not amount to contempt.

“…for bringing an action for civil contempt, the petitioner has to satisfy the court that there has been a willful disobedience of any judgment, decree, direction, order, writ or other processes of the Court.”

Requisite in a contempt proceeding

In a contempt proceeding, before a contemnor is held guilty and punished, the Court has to record a finding, that such disobedience was wilful and intentional.

Adding to the above, it has also been stated that if from the circumstances of a particular case, though the Court is satisfied that there has been disobedience, but such disobedience is the result of some compelling circumstances, under which it is not possible for the contemnor to comply with the same, the Court may not punish the alleged contemnor.

Bench also referred to the decision of Supreme Court in Kanwar Singh Saini v. High Court of Delhi, (2012) 4 SCC 307.

Situation in the present case

Court held that the petitioner failed to make out a case of wilful, deliberate and intentional disobedience of any of the directions given by the Court or acting in breach of an undertaking given to the Court.

“…where an objection is taken to the jurisdiction to entertain a suit and to pass any interim orders therein, the Court should decide the question of jurisdiction in the first instance. However, that does not mean that pending the decision on the question of jurisdiction, the Court has no jurisdiction to pass interim orders as may be called for in the facts and circumstances of the case.”

Further, the Bench expressed in light of jurisdiction that,

“…question of jurisdiction should be decided at the earliest possible time, the interim orders so passed are orders within jurisdiction, when passed and effective till the court decides that it has no jurisdiction, to entertain the suit. It has been held, that those interim orders would undoubtedly come to an end with the decision that the Court had no jurisdiction.”

 Violation of Interim Orders

 While in force, the interim orders passed by such Court have to be obeyed and their violation can be punished even after the question of jurisdiction is decided against the plaintiff, provided violation is committed before the decision of the Court on the question of jurisdiction.

 Another Observation made by the Court was that in the present case, the petitioner qualified under Section 399 of Companies Act and that the Company Law Board had jurisdiction to deal with the petition under Sections 397 and 398 of the Companies Act.

“…in the proceedings under Sections 397/398, it is the interest of the Company which is paramount.”

Bench expressing no more opinion in the present matter held that the contempt petition deserves to be dismissed and added that parties may invoke the jurisdiction of NCLT for seeking orders as deemed fit in the facts and circumstances. [Rama Narang v. Ramesh Narang, 2021 SCC OnLine SC 29, decided on 19-01-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT), New Delhi: The Bench of Justice Bansi Lal Bhat (Acting Chairperson) and Justice Venugopal M. (Judicial Member), Justice Anant Bijay Singh (Judicial Member), Kanthi Narahari (Technical Member) and Shreesha Merla (Technical member), while addressing the present matter observed that:

“…for purpose of computing the period of limitation under Section 7 of I&B Code, the date of default is NPA.”


The three-member Bench of this Appellate Tribunal had opined that the decision rendered by the 5-member Bench of this Appellate Tribunal in V. Padmakumar v. Stressed Assets Stabilization Fund (SASF),2020 SCC OnLine NCLAT 417required reconsideration.

Issue formulated by the three-member Referral Bench, as noticed in the reference order was as follows:

“Hon’ble Supreme Court and various Hon’ble High Courts have consistently held that an entry made in the Company’s Balance Sheet amounts to an acknowledgement of debt under Section 18 of the Limitation Act, 1963, in view of the settled law, V. Padmakumar’s Case requires reconsideration.”

Facts and Contentions

Corporate Debtor had defaulted in repaying the dues availed as a loan from the Consortium Lenders leading to recalling of the loan facility by the Financial Creditor — State Bank of India and the Consortium Lenders issuing notices under Section 13(2) of the SARFAESI Act, 2002 demanding total amount of Rs 59,97,80,02,973. 
Corporate Debtor failed to discharge its liability.
When the Financial Creditor initiated CIRP under Section 7 of the Insolvency and Bankruptcy Code, 2016 against the Corporate Debtor, Lenders had assigned the debt in favour of ‘Asset Reconstruction Company (India) Ltd. NCLT, Kolkata Bench on being satisfied that debt and default were established, admitted the application. Further on being aggrieved with the same, Ex-Director of Corporate Debtor filed an appeal against the admission order in light of Corporate Debtor’s account being declared as NPA in 2014 and application under Section 7 was filed in 2018 after a delay of around 5 years, hence the same was barred by limitation.
Financial Creditor contended that the right to sue for the first time accrued to it upon the classification of the accounts as NPA in 2013 but thereafter, Corporate Debtor had admitted time and again and unequivocally acknowledged its debt in the Balance Sheets for the years ending 31st March, 2015, 31st March, 2016 and 31st March, 2017.
Hence, the right to sue stood extended in terms of Section 18 of the Limitation Act, 1963.
Referral Bench had declined to accept the argument that Section 18 of the Limitation Act, 1963 is not applicable Insolvency Cases and proceeded to record the reasons for reconsideration of V. Padmakumar’s Judgment.

Analysis, Law and Decision

Bench noted that in ‘V. Padmakumar’s Case’, IDBI had advanced financial assistance of Rs 600 Lakhs by way of Term Loan Agreement dated 02-03-2000 to the Corporate Debtor and the loan was duly secured.
Further, the Corporate Debtor’s account was classified as NPA in 2002, later IDBI initiated recovery proceedings in 2007. Recovery Certification was issued in 2009 which was reflected in the Balance Sheet dated 31-03-2012.
Limitation Period
This Appellate Tribunal noted the decisions delivered by Supreme Court in Jignesh Shah v. Union of India(2019) 10 SCC 750, Gaurav Hargovindbhai Dave v. Asset Reconstructions Company (India) Ltd.  – (2019) 10 SCC 572, Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Ltd.(2019) 9 SCC 158, and the decision of this Appellate Tribunal in V. Hotels Ltd. v. Asset Reconstruction Company (India) Ltd.– Company Appeal (AT) (Insolvency) No. 525 of 2019, decided on 11-12-2019, was of the view that for the purpose of computing the limitation period for application under Section 7 the date of default was NPA and hence a crucial date.
5-Member Bench further dealt with the acknowledgement of claim in audited Balance Sheet of Corporate Debtor to arrive at a finding as to whether such acknowledgement would fall within the ambit of Section 18 of Limitation Act, 1963.
Bench expressed that the Referral bench failed to take note of the fact that the 5-Member Bench Judgment rendered in ‘V. Padmakumar’s Case’ with a majority of 4:1 was delivered to remove uncertainty arising out of the conflicting verdicts of Benches of co-equal strength in ‘V. Hotel’s Case’ and ‘ Ugro Capital Ltd.’s Case’.

Once a Larger Bench of this Appellate Tribunal came to be constituted in the wake of two conflicting judgments rendered by Benches of co-equal strength on the issue, one of the two Benches having failed to notice the judgment of the Supreme Court on the subject, the issue raised by the Referral Bench can no more be said to be res integra, in so far as the jurisdiction exercised by this Appellate Tribunal under I&B Code is concerned.


  • For purpose of computing, the period of limitation under Section 7, the date of default is NPA.
  • In Supreme Court’s decision of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Ltd., Civil Appeal No. 6347 of 2019, it was observed that Section 18 of the Limitation Act, 1963 would have no application to proceedings under the I&B Code. Therefore the issue raised as regards acknowledgement of liability by reflection in the Balance Sheet/Annual Return would be irrelevant.
  • The remedy available under the I&B Code is a remedy distinct from remedy available in civil jurisdiction/ recovery mechanism and since the I&B Code is not a complete Code, provisions of Limitation Act are attracted to proceedings under it before NCLT and NCLAT as far as applicable i.e. in regard to matters not specifically provided for in I&B Code.
  • The whole mechanism of triggering of Corporate Insolvency Resolution Process revolves around the concept of ‘debt’ and ‘default’.
  • There is no room for doubt that the date of default in regard to an application under Section 7 of I&B Code is the date of classification of the account of Corporate Debtor as NPA.
  • The date of default is extendable within the ambit of Section 18 of Limitation Act on the basis of an acknowledgement in writing made by the Corporate Debtor before the expiry of the limitation period.

Whether a reflection of debt in the Balance Sheet/ Annual Return of a Corporate Debtor would amount to acknowledgement under Section 18 of the Limitation Act?

“…the finding has been recorded by the five Member Bench in the context of a judgment or a decree passed for recovery of money by Civil Court/ Debt Recovery Tribunal which cannot shift forward the date of default for purposes of computing limitation for filing of an application under Section 7 of the I&B Code and the fact that filing of Balance Sheet/ Annual Report being mandatory under Section 92(4) of Companies Act, failing of which attracts penal action under Section 92(5) & (6).”

Tribunal also added to its observations that Referral Bench failed to draw a distinction between the ‘recovery proceedings’ and the ‘insolvency resolution process’.

I&B Code provides timelines for resolution of insolvency issues and proceedings thereunder cannot be equated with the ‘recovery proceedings’.

Hence, in view fo the above discussions, Bench opined that :

the order of reference which, in letter and spirit, is more akin to a judgment of an Appellate Court appreciating the findings and judgment in ‘V. Padmakumar’s Case’ is incompetent and deserves to be rejected.

Judicial Indiscipline

Tribunal went on to express that ‘Judicial indiscipline’ creates uncertainty and impairs public faith in the Rule of Law.

Crossing the red line by disregarding the binding precedent results in making the legal proposition uncertain. Such misadventure creates uncertainty as regards the settled position of law.

Cases referred by the Tribunal for the above-stated:

  • Central Board of Dawoodi Bohra Community v. State of Maharashtra, (2005) 2 SCC 673: It was held that a decision delivered by a Bench of larger strength is binding on any subsequent Bench of lesser or coequal strength.

A Bench of co-equal strength can only express an opinion doubting the correctness of the view taken by the earlier Bench of co-equal strength.

  • Keshav Mills Co. Ltd. v. CIT, (1965) 2 SCR 908: It was held that the nature of infirmity or error would be one of the factors in making a reference. Whether patent aspects of question remained unnoticed or was the attention of Court not drawn to any relevant and material statutory provision or was any previous decision of the Supreme Court not noticed would be the relevant factors.
  • In Supreme Court Advocates on Record Association v. Union of India, (2016) 5 SCC 1, it was held that the Court should not, except when it is demonstrated beyond all reasonable doubt that its previous ruling given after due deliberation and a full hearing was erroneous, revisit earlier decision so that the law remains certain.

In CCE v. Matador Foam, (2005) 2 SCC 59, the following was observed:

“….. These being judgments of coordinate benches were binding on the Tribunal. Judicial discipline required that the Tribunal follow those judgments. If the Tribunal felt that those judgments were not correct, it should have referred the case to a larger bench.”

Hence, in light of the above, Tribunal held that:

Following of the judicial precedent of a Bench of equal strength and of a Larger Bench as in the instant case, is a matter of judicial discipline.

While parting with the decision, Bench recorded that

It is not open to the Referral Bench to appreciate the judgment rendered by the earlier Bench as if sitting in appeal to hold that the view is erroneous. Escaping of attention of the earlier Bench as regards a binding judicial precedent or a patent error is of relevance but not an evaluation of earlier judgment as if sitting in appeal.

Referral Bench overlooked all legal considerations. Company Appeal (AT) (Insolvency) No. 385 of 2020 be listed for regular hearing on 11-01-2021.[Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd., Reference made by Three Member Bench in Company Appeal (AT) (Insolvency) No. 385 of 2020, decided on 22-12-2020]

Hot Off The PressNews

Cooling Period

To inculcate discipline and encourage the submission of applications by serious players as also for effective utilisation of regulatory resources, it has been decided to introduce the concept of Cooling Period in the following situations –

  1. Authorised Payment System Operators (PSOs) whose Certificate of Authorisation (CoA) is revoked or not-renewed for any reason; or
  2. CoA is voluntarily surrendered for any reason; or
  3. Application for authorisation of a payment system has been rejected by RBI.
  4. New entities that are set-up by promoters involved in any of the above categories; definition of promoters for the purpose, shall be as defined in the Companies Act, 2013.

The Cooling Period shall be for one year from the date of revocation / non-renewal / acceptance of voluntary surrender/rejection of the application, as the case may be. In respect of entities whose application for authorisation is returned for any reason by RBI, condition of Cooling Period shall be invoked after giving the entity an additional opportunity to submit the application.

During the Cooling Period, entities shall be prohibited from submission of applications for operating any payment system under the PSS Act.

Reserve Bank of India

[Notification dt. 04-12-2020]

Op EdsOP. ED.


In furtherance of the objective of the government to expedite greater ease of living and doing business for those companies that uphold the law, it set up the Company Law Committee (CLC) in September 2019 to look into the decriminalisation of various offences under the Companies Act, 2013 (“2013 Act”) with respect to the gravity of each offence. Taking into account the recommendations of the CLC, the government has sought to amend various provisions through the Companies (Amendment) Act, 2020[1] (“Act”) in an endeavour to revamp the existing laws.

With this background, this article seeks to deliberate upon the key changes provided for in the Act and its far-reaching consequences. Further, it analyses whether the Act is a step in the right direction.

Decriminalisation of Offences

One of the most significant changes brought about by the Act is the decriminalisation of offences under the Companies Act, 2013. Stated as one of the primary objects of the Companies (Amendment) Bill, 2020 which manifested into this Act, this was implemented keeping in mind the CLC report[2] which was submitted in November, 2019. The offences are decriminalised based on the gravity of each offence, and on the premise that these offences neither affect public interest in a detrimental manner nor contain any element of fraud in its commission.

Keeping in mind the overall pendency of cases in courts and in an attempt to alleviate the burden of such courts, the Act seeks to enforce and adopt a principle-based approach in removing the imposition of penal consequences in case of minute and technical defaults. Further, the levying of such monetary penalties can now be adjudicated by In-house Adjudication Mechanisms (IAM) as provided under section 454 of the Companies Act, 2013, without having to approach criminal courts.

The changes have been brought about either by merely striking down parts of provisions which entail penal consequences to leave behind only the civil and monetary punishments whether with or without modifications, (as seen in section 86(1), section 89 (5), section 90 (1) etc.) or by entirely omitting offences involving the contempt of the Tribunals’ orders (under section 48(5), section 59(5), section 66(11) etc). Further, while certain offences specifically relating to Corporate Social Responsibility[3], and related party transactions[4] have been decriminalised, the monetary fine and penalties have been increased keeping in mind the gravity and nature of these offences.

Decriminalisation of offences is a quintessential move to uplift the confidence of members in running the company without the fear of being constantly taken to court for trivial offences. While there is a risk of attributing less due diligence due to the absence of criminal liability, this move is imperative for the protection of companies. The said changes are necessary in striking the right balance between the protection of the individual interests of the companies and the public interest at large.

Alternate Framework for certain offences

The CLC had suggested the introduction of an alternate framework for certain offences. This can be observed in the framework suggested for the violation of Section 16(1) of the 2013 Act. The said section requires a company to rectify its name if such a name is identical or similar to that of an existing company. While the violation of this provision would normally result in the imposition of a fine, the amendment seeks to provide such companies with an auto-generated name that needs to be compulsorily used by the company until it changes its name after following the due process provided for under the Act.

Further, a contravention of Section 284 of the 2013 Act, which deals with the failure of employees, promoters and directors to co-operate with the company liquidator (CL), attracts an imposition of a fine as prescribed under the Act. However, the Act has removed such a fine and has empowered the company liquidator to apply to the National Company Law Tribunal (NCLT) in order to obtain directions from it. Further, non-compliance with NCLT’s directions is to be dealt using NCLT’s power to punish for contempt.[5]

Moreover, the CL is required to forward a copy of the tribunal order to the Registrar of Companies (ROC) regarding the dissolution of company within 30 days.[6] Non-adherence would result in the imposition of fine that has been removed by the Act. Also, the Act has laid down a process wherein the NCLT would not only forward a copy of its order to the ROC but also instruct the Company Liquidator to forward a copy to the ROC. Further, the CL is required to update the register about the dissolution of the company. Similar alternate frameworks have been provided for the violation of Section 342, Section 348 and Section 356 of the 2013 Act as well. This will allow companies to achieve the objectives of the provisions in a much efficient manner.

Relaxations towards corporate social responsibilities of companies

As per section 135 of the 2013 Act, Corporate Social Responsibility (CSR) committees were required to be constituted mandatorily on fulfilment of certain thresholds concerning profits, net worth and turnover. However, the Act has exempted companies which undertake CSR expenditure of upto 50 Lakhs, from the requirement of constituting a CSR Committee. In such companies, the functions of the CSR committee will be carried on by the Board of Directors. Further, an additional benefit is provided for under the Act to companies which spend in excess of their CSR obligation, to set-off such amount towards CSR obligations in the subsequent years.

Further, non-compliance with section 135(5) and section 135(6) entailed a fine as well as penal punishment under section 135(7) of the 2013 Act. However, under the Act, this has been decriminalised with only fines to be paid as specified, both by the company as well as the officer of the company in default. Although the Companies Amendment Act, 2019 sought to enact a provision to impose a penal punishment for not complying with the requirement of spending 2% of average net profits of the preceding three financial years towards CSR obligations, the said penal punishment has been dropped under the Act.

Introduction of producer companies

The Act has provided for the introduction of producer companies under Chapter XXIA. Producer companies are those that are engaged in business activities such as production, handling, procurement, marketing, selling, import/export or other such activities as provided for under Section 581B of the Companies Act, 1956[7] (1956 Act). Producer companies had to adhere to the requirements laid down under the 1956 Act until a special legislation was passed for the governance of such companies. However, the CLC propounded that modifications be made to the 2013 Act for producer companies instead of enacting a new law for the same. In line with CLC’s proposal, the Act has provisions that are similar to the 1956 Act for the governance of such companies. At the outset, these provisions relate to incorporation, registration, formation, voting rights of members, general meetings, share capital, and mergers and amalgamations of producer companies. It is important to realize that the introduction of this chapter will be beneficial for agriculture, handlooms, handicrafts and other related industries.

Classification of listed companies

The Act provides for the amendment of Section 23 of the 2013 Act in order to enable the Central Government to exempt certain classes of companies from the ambit of listed companies. The CLC opined that the extant framework acts as a deterrent for private companies to list their debt securities as they are sceptical about the strict regulations imposed on listed companies as opposed to unlisted private companies. Thus, the said exemption has been given with the intention of incentivizing the private companies to list their debt securities on stock exchanges without having to bear the brunt of stringent regulations imposed on listed companies.

Further, the Act seeks to permit overseas listing of Indian companies on the bourses of permissible jurisdictions as prescribed under the rules which will be framed in this regard. This move will not only foster the economic growth of companies but will also enable India Inc. to raise foreign capital at a lower cost.

Reduction of timeline for rights issue

Section 62 of the 2013 Act had mandated that the offer for further issue of shares given to existing shareholders during rights issue can be exercised by such shareholders for a time period that is not lesser than 15 days but does not exceed 30 days from the date when the offer is made. However, the Act has sought to speed up the process by the reducing the earlier timelines provided for exercising such rights under the 2013 Act.

Constitution of NCLAT benches

The Act has inserted section 418A with the objective of setting up more benches of National Company Law Appellate Tribunal (NCLAT) that will ordinarily sit in New Delhi. The said benches of NCLAT will be constituted by atleast one Judicial Member and one Technical Member. Considering the quantum of cases that NCLAT has to deal with, this is a welcome move which will not only reduce the burden of NCLAT but also will ensure speedy disposal of matters addressed to the NCLAT.

Remuneration to Non-Executive Directors

Under the 2013 Act, it was mandated that the directors shall be paid remuneration even during instances where a company earns no profits or profits are insufficient, subject to the provisions in Schedule V. While there was a mechanism for computation of remuneration only for managerial personnel under Section 197, the same did not extend to Non-Executive Directors (NED) or Independent Directors (ID).

Based on the recommendation of the CLC, Section 197 now includes NED’s as well as ID’s under its ambit. This ensures that remuneration is paid to such directors, notwithstanding the amount paid as sitting fees to such directors. As pointed out by the CLC, such directors must be compensated for their skill, professionalism and time spent in furthering the development of the company. Reducing the inconsistency between executive and non-executive directors will not only increase their effectiveness but will also help companies in retaining motivated and skilled directors who can improve its efficiency.

Concluding Remarks

At the outset, the relaxations provided for under the Act can not only help the companies in the reduction of compliance costs but will also help them focus on their business activities. Further, due to the pandemic situation, the need to support and facilitate the functioning and ease of doing business for corporates in such times of economic downfall has become pertinent. Thus, the authors contend that the amendments in the Act will not only ensure that the corporates can continue to run their businesses smoothly in such testing times but will also reduce the burden of courts due to the proposed rationalization of the penalties. Hence, the Act can be considered to be a step in the right direction by the Ministry of Corporate Affairs.

†Ms Ananya Raghavendra and ††Mr Eshvar Girish. 5th-year BBA LLB students of Christ University.



[3] Section 135(7) of the Companies Act, 2013

[4] Section 188(5(i)) of the Companies Act, 2013

[5] Section 425 of Companies Act, 2013.

[6] Section 302 of Companies Act, 2013.


Case BriefsHigh Courts

Orissa High Court: A Division Bench of Mohammed Rafiq and B. R. Sarangi, JJ.,  dismissed the petition and vacated the interim order.

 The facts of the case are such that the petitioner is a private limited company, registered under Companies Act was awarded the work “Construction of HL bridge over river Suktel on Tamian to Mundalsar road in the district of Bolangir under Biju Setu Yojana” vide agreement dated 26-02-2014 and the completion date was fixed to 25-02-2016 but it was completed before scheduled dated and handed over on 07-09-2015. Once the work completed and it was open for public transportation few horizontal cracks were to be seen and while the petitioner company was called for restoration work, the nationwide lockdown was announced and due to it being left unattended in the middle of the work, ‘span’ collapsed killing and injuring two persons respectively. Consequently, the petitioner was blacklisted and charged under various sections of the Penal Code, 1860 which stands challenged and pending adjudication. However, now Lokayukta has registered suo motu case against the petitioners and observed that a recently constructed bridge was collapsed resulting in death of two labourers and demanded a fair enquiry to be submitted exercising its power under Section 20(6) of the Odisha Lokayukta Act, 2014, and directed to file status report of the same within a period of three months from the date of passing of the order. Hence the instant application was filed challenging the order of Lokayukta.

Counsel for the petitioner submitted that as there are petitions pending adjudication before Court and the petitioner is also facing criminal charges, Lokayukta also causing an enquiry is prejudicial to the interest of the petitioner and the order passed is without complying the principles of natural justice and, thereby, the said order cannot sustain in the eye of law.

Counsel for the respondent the Lokayukta has only directed for investigation by the Vigilance authority, which is within the complete domain of the Lokayukta under Section 20(6) of the Odisha Lokayukta Act, 2014. If the Lokayukta has been empowered under the statute to issue such direction for investigation, the same should not be interfered with by this Court by passing an interim order and seeks that such interim order should be vacated and allow the Lokayukta to proceed with the matter in accordance with the law.

The Court observed that even though the order of blacklisting the contractor has been challenged before this Court and the matter is pending adjudication, and the contractor himself is facing criminal case lodged against it for such negligence in the work, but that ipso facto cannot disentitle the Lokayukta to cause an enquiry under the provisions of the Odisha Lokayukta Act, 2014 for alleged corruption in the matter of execution of the work itself.

The Court held that if the direction has been given to find out the lapses caused on the part of the government servant and such direction has been issued under Section 20(6) of the Odisha Lokayukta Act, 2014, this Court does not find any illegality or irregularity by issuing such direction by the Lokayukta.

In view of the above, petition is not entertained and accordingly dismissed.[Ram Kumar Agrawal Engineers (P) Ltd. v. Odisha Lokayukta,  2020 SCC OnLine Ori 774, decided on 16-10-2020]

Arunima Bose, Editorial Assistant has put this story together

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): Anant Barua (Whole-time member) passed the order in exercise of his powers under Sections 11 and 11B read with Section 19 of the Securities and Exchange Board of India Act, 1992.

The facts in the instant case are such that the company PDS Agro Industries Ltd. i.e. PAIL was incorporated on 20-04-2010 and noticee 3 (subject of this order) was signatory to the Memorandum of Association of the company having subscribed to 4000 shares and was thus a promoter of PAIL. Noticee 3 was also the non-executive director in the Company from April 20, 2010, to July 30, 2010. PAIL had raised Rs 50,29,300 during the financial years 2010-11 and Rs 2,53,200 during the financial year 2011-12, from the public through issue of RPS, in violation of the provisions of the Companies Act, 1956. Hence SEBI passed an ex parte interim order dated 26-04-2018 against the company PDS Agro Industries Ltd. and its directors for a violation under Sections 56, 60(1) and 73(1) of Companies Act, 1956 thereby

  1. Restraining / prohibiting the access to the securities market or buy, sell or otherwise deal in the securities market, either directly or indirectly, or associate themselves with any listed company or company intending to raise money from the public;
  2. Prohibiting /retraining to dispose of, alienate or encumber any of its /their assets nor divert any funds raised from public through the offer and allotment of Redeemable Preference Shares;
  3. Cooperating with SEBI and shall furnish all information/documents in connection with the offer and allotment of Redeemable Preference Shares sought vide letters dated February 13, 2017.

The interim order also called for show cause by PAIL and its directors, promoters by filing a reply within 21 days to show cause or seek opportunity of hearing related to reasons why suitable directions/ prohibitions under Sections 11, 11(4), and 11B of the SEBI Act, 1992 should not be issued/ imposed along with certain prohibitory directions failing which the interim order will deemed to be considered as final and absolute.

Noticee 3 i.e. Sumana Ghosh Roy being the only one who served a reply dated 20-06-2018 and accepted the opportunity of hearing. Counsel submitted that Noticee 3 does not in any manner is involved in the running of the respondent-company and they have nothing to do so as far the present case is concerned.

The Court relying on the judgment titled Pritha Bag v. SEBI (Appeal no. 291 of 2017) observed that the liability for refund under Section 73(2) of the Companies Act, 1956, lies on the company along with the director who is ‘officer in default’ as per Section 5 of the Companies Act, 1956.

In view of the observations above, the Court held that Noticee 3 was appointed as a non-executive director in PAIL on April 20, 2010 and remained so till July 30, 2010 whereas during the same period Mr. Prabir Roy (Noticee 4 to the interim order) was the Managing Director of PAIL. Hence Noticee 3 was not the ‘officer in default’ in terms of Section 5 of the Companies Act, 1956. The Court further held that Noticee 3 to not be liable for refund in terms of Section 73(2) of the Companies Act, 1956. However, the violations under Sections 56 and 60 of the Companies Act, 1956, has prejudicially affected the interest of investors and the securities market which has not been denied/ raised contention by Noticee 3. Therefore, Noticee 3 may not be liable for refund but was found liable for directions under SEBI Act, 1992.

The Court while disposing off the petition held that Noticee 3 be refrained/prohibited from accessing the securities market by issue of prospectus/ offer document/ advertisement or otherwise in any manner whatsoever, and shall be refrained/prohibited from buying, selling or otherwise dealing in securities in any manner whatsoever, directly or indirectly, for a period of 3 years.[PDS Agro Industries Ltd., In Re.,  WTM/AB/ERO/ERO/9380/2020-21, decided on 07-10-2020]

Arunima Bose, Editorial Assistant has put this story together