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

Amendments to existing lawsLegislation Updates

The Companies (Amendment) Bill, 2020 received Presidential Assent on 28-09-2020.

The Companies (Amendment) Act, 2020

Purpose:

Based on the recommendations of the Company Law Committee and an internal review by the Government, it is proposed to amend various provisions of the Act to decriminalise minor procedural or technical lapses under the provisions of the said Act, into civil wrong; and considering the overall pendency of the courts, a principle-based approach was adopted to further remove criminality in case of defaults, which can be determined objectively and which otherwise lack any element of fraud or do not involve larger public interest. In addition, the Government also proposes to provide greater ease of living to corporates through certain other amendments to the Act.

Key Features:

(a) to decriminalise certain offences under the Act in case of defaults which can be determined objectively and which otherwise lack any element of fraud or do not involve larger public interest;

(b) to empower the Central Government to exclude, in consultation with the Securities and Exchange Board, a certain class of companies from the definition of “listed company”, mainly for listing of debt securities;

(c) to clarify the jurisdiction of the trial court on the basis of place of commission of offence under Section 452 of the Act for wrongful withholding of property of a company by its officers or employees, as the case may be;

(d) to incorporate a new Chapter XXIA in the Act relating to Producer Companies, which was earlier part of the Companies Act, 1956;

(e) to set up Benches of the National Company Law Appellate Tribunal;

(f) to make provisions for allowing payment of adequate remuneration to non-executive directors in case of inadequacy of profits, by aligning the same with the provisions for remuneration to executive directors in such cases;

(g) to relax provisions relating to charging of higher additional fees for default on two or more occasions in submitting, filing, registering or recording any document, fact or information as provided in Section 403;

(h) to extend the applicability of Section 446B, relating to lesser penalties for small companies and one-person companies, to all provisions of the Act which attract monetary penalties and also extend the same benefit to Producer Companies and start-ups;

(i) to exempt any class of persons from complying with the requirements of Section 89 relating to declaration of beneficial interest in shares and exempt any class of foreign companies or companies incorporated outside India from the provisions of Chapter XXII relating to companies incorporated outside India;

(j) to reduce timelines for applying for rights issues so as to speed up such issues under Section 62;

(k) to extend exemptions to certain classes of non-banking financial companies and housing finance companies from filing certain resolutions under Section 117;

(l) to provide that the companies which have Corporate Social Responsibility spending obligation up to 50 lakh rupees shall not be required to constitute the Corporate Social Responsibility Committee and to allow eligible companies under Section 135 to set off any amount spent in excess of their Corporate Social Responsibility spending obligation in a particular financial year towards such obligation in subsequent financial years;

(m) to provide for a window within which penalties shall not be levied for delay in filing annual returns and financial statements in certain cases;

(n) to provide for specified classes of unlisted companies to prepare and file their periodical financial results;

(o) to allow direct listing of securities by Indian companies in permissible foreign jurisdictions as per rules to be prescribed.

Read the detailed Act here: ACT


Ministry of Law and Justice

Op EdsOP. ED.

Introduction

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

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

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

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

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

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

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

Valuation Standards

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

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

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

Sale of Assets under the Code

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

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

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

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

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

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

Asset Sale Report: A Mere Formality

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

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

(a) the realised value;

(b) cost of realisation, if any;

(c) the manner and mode of sale;

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

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

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

Suggested Reforms

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

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

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

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

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

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

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

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


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

[1]  2018 SCC Online NCLAT 521

[2]  Ibid

[3]  1920 SCC OnLine Mad 166

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

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


Image credits: economictimes.com

Corp Comm LegalExperts Corner

In today’s corporate world mired in corporate frauds and misdeeds, independent professionals are feeling increasingly uncomfortable and unenthusiastic to act as independent directors and non-executive directors in India. This discomfort stems out of fear of penal proceedings for the defaults committed by the company without their knowledge/involvement in the default.

Not stopping at that, this sense of fear has also developed into a recent phenomenon of resignations spree by independent directors/non-executive directors—this could lead to shortage of qualified/skilled professionals in the independent directors/non-executive directors’ ecosystem.

Paying heed to the concerns expressed by professionals and corporates alike and to ease the fear from the minds of independent/non-executive directors, the Ministry of Corporate Affairs (MCA) has issued a recent directive.

This directive has been rolled out via Circular dated 2-3-2020 dealing with prosecution of independent directors, non-promoters, non-KMP and non-executive directors. It stipulates that no civil/criminal proceedings should be initiated against the independent/non-executive directors without adequate evidence in relation to the involvement of such independent/non-executive directors in any default committed by a company.

The Companies Act, 2013 expressly provides under different provisions that any legal proceedings will be instigated against the officer in default for the company contravention of law. In general, day-to-day affairs of any company are carried out, monitored and processed by the Whole-Time Director (WTD)/Key Managerial Person (KMP) (who are authorised for it by the company’s byelaws and/or with express authority through specific board/shareholders resolutions or power of attorney).

Therefore, typically, a WTD/KMP would be liable for company violation of law as such person regulates the day-to-day affairs of the company. Accordingly, in majority of the corporate defaults, the liability for such default would be imposed on the WTD/KMP due to his direct involvement in the company business management.

In the absence of WTD/KMP, the liability for default of a company would be imposed on a director who (pursuant to e-form GNL-3 filed with the Registrar of Companies) agrees in writing to undertake such liability.

In certain cases, the law will inflict the liability on a specific managerial person/officer in charge of a specific assignment/function—accordingly, penal action should be initiated against such managerial person/officer only.

However, in practice, we see that many a times, even independent directors are caught in the crossfire between the regulatory/enforcement authorities and the company’s management. This causes unnecessary burden and stress on the independent directors. They have to defend themselves from allegations of misdeeds, lapses and frauds they may not even be aware of—deviating their attention from their own business/profession and resulting in a loss of repute, time, energy and money for them.

It is much better that in order to ascertain the respective contribution of any independent director and non-executive director/KMP/promoter in any default committed by the company—regulatory authorities evaluate records pertaining to such independent director and non-executive director/KMP/promoter available on the MCA portal.

If regulatory authorities have any queries in relation to initiation of penal proceedings against independent director and non-executive director/KMP/promoter for the defaults of the company, such authorities may look up to MCA to seek guidance in this regard. In such cases any course of action will be initiated by the regulatory authorities following the receipt of nod from the MCA.

The crux of Section 149 of the Companies Act, 2013 is that independent/non-executive director (other than promoter/KMP) will incur liability for the defaults of the company provided such default has occurred with such independent/non-executive director knowledge/consent/involvement in such default.

It is evident from the aforesaid provision no legal action can be initiated against independent/non-executive director unless it is established that they are involved/consented for the default committed by the company.

Nature of the default is another crucial variant in influencing the prospects of default proceedings against any person/company.

Under the law, primarily it is the responsibility of the WTD/KMP to comply with certain statutory/regulatory requirements in relation to company business.

In exceptional cases only, independent director/non-KMP/non-executive director should be held accountable to monitor the compliance aspects of certain specific subject-matters as stipulated under the law.

Prior to initiating any legal action against any independent director/non-KMP/non-executive director— the regulatory authorities must verify the documents connected with the default to ascertain the involvement of independent director/non-KMP/non-executive director in the default.

During the verification, if it is established to the satisfaction of the regulatory authorities that such independent director/non-KMP/non-executive director has been actually and actively involved in the default, then only the regulatory authorities should take proper course of legal action against such independent director/non-KMP/non-executive director.

Otherwise, shooting random notices to independent director/non-KMP/non-executive director without substantiating the connection of independent director/non-KMP/non-executive director with the default would cause damage in two folds:

(a) Force the existing professionals to quit from their designations; and

(b) slay the enthusiasm of skilled/qualified professionals to take up position of independent director/non-KMP/non-executive director.

MCA has directed the regulatory authorities to adopt the procedures established under the law to the point in relation to the existing cases against the independent directors, non-promoter/KMP/executive directors.

If regulatory authorities fail to establish a connection amid the independent directors/non-promoter/non-KMP/non-executive directors with the default committed by the company as stipulated under the law, then such existing cases may be forwarded for further course of action to the MCA.

Besides independent directors’ fraternity, the job of non-promoter/KMP/executive director would subsist in the following scenarios:

(a) Nomination of the directors in the public sector undertakings by the Government;

(b) nomination of the directors by public sector financial institutions or banks with a equity stake in a company; and

(c) appointment of directors by the regulatory authorities pursuant to the legal requirements.

MCAs new directives are well timed as the “quit corporate” movement is getting impetus among independent professionals who are queueing up to resign from directorships. The monetary and reputational risk involved with an independent directorship outweighs the perks of the office many a times in today’s corporate environment in India.

The new directives may provide a breathing space to independent directors, non-promoter/KMP/executive directors and may salvage them from unwanted exposure to legal/penal proceedings.

At the same time it will provide clear-cut guidance to the regulatory authorities in handling the cases related to independent directors, non-promoter/KMP/executive directors and will make the regulatory authorities more accountable/responsible for their acts.


* Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at bhumesh.verma@corpcommlegal.in.

**Paruchuri Baswanth Mohan, Research Associate, Corp Comm Legal.

Experts CornerGaurav Pingle and Associates

Introduction

Generally, by business parlance, the directors are either appointed or addressed as “executive directors” or “non-executive director”. Generally, “executive directors” are in employment of the company, whereas non-executive directors are domain experts or practising professionals and are appointed by companies for their expertise, specialised knowledge. Under the Companies Act, 1956, the expression “executive director” was not defined. However, under the Companies Act, 2013 (the Act), “executive director” means a whole-time director under the Act i.e. director in whole-time employment of the company. Generally, companies appoint functional heads as “directors”, such directors are whole-time directors or executive directors i.e. Director (Sales), Director (Production), Director (R&D), Director (Marketing), etc. Generally, such directors do not have substantial powers of the management of the company. This article provides an analysis of relevant provisions of the Act and Rules made thereunder along with detailed checklist w.r.t. to appointment of Executive Director or whole-time Director in a company.

1. Director Identification Number (DIN).— Every individual intending to be appointed as Director of a company shall make an application for allotment of director identification number to the Central Government (under Section 153 of the Act).

2. Modes of Appointment of Executive Director or Whole-Time Director.—The Managing Director is appointed virtue of articles of association of the company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors. However, in the case of executive director or whole-time director, there is no provision for a specific mode of appointment. The articles of association of company may also provide for appointment in a particular manner. In any case, the Board of Directors of the company can appoint Executive Director or whole-time Director.

3. Approval of Board of Directors.— W.r.t. the appointment of Executive Director or whole-time Director by Board of Directors, the notice convening the meeting of Board of Directors shall include the terms and conditions of such appointment, remuneration payable and such other matters including interest, of a director or directors in such appointments, if any.

4. Appointment Letter or Agreement.— The Act has not defined the specific role or powers that can be given to executive director or whole-time director of the company. The terms of appointment shall specifically state the powers, functions, roles, responsibility and duties of the appointee. At the same time, it is important that substantial powers of the management of the company are not entrusted to the executive director or whole-time director. Such powers can only be entrusted to the managing director or manager.

5. Appointment of Executive Director and Whole-Time Director.— Under the Act or the Rules, there is no restriction for a private company or public company for appointment of Executive Director or whole-time Director and whole-time Director at the same time.

6. Tenure.— A private company or public company shall appoint or reappoint any person as its Executive Director or whole-time Director for a maximum term of 5 years. However, the reappointment shall not be made earlier than 1 year before the expiry of his term. According to the provisions of the articles of association of the company, such reappointment can be subject to the approval of the Board of Directors and/or shareholders of the company.

7. Age Criteria.— In case of private company or public company, a company shall not appoint or continue the employment of any person as Executive Director or whole-time Director who is below the age of 21 years or has attained the age of 70 years. However, the appointment of a person who has attained the age of 70 years may be made by passing a special resolution. In such case, the explanatory statement annexed to the notice of general meeting shall indicate the justification for appointing such person.

8. Other Criterias & Qualifications (As Prescribed in Section 196 of the Act).— In case of private company or public company, the appointee shall not be an undischarged insolvent or has not at any time been adjudged as an insolvent. The appointee has not at any time suspended payment to his creditors or makes, or has at any time made, a composition with them. The appointee has not at any time been convicted by a court of an offence and sentenced for a period of more than 6 months. In order to ensure compliance of the said provisions, the company shall obtain a declaration from such appointee.

9. Other Disqualifications Under Section 164 of the Act.—The appointee shall not be disqualified to be a director under Section 164 of the Act (i.e. the appointee shall be of sound mind, solvent, not convicted for a particular offence, etc.). In order to ensure compliance of the said provisions, the company shall obtain a declaration from such appointee. With reference to certain provisions, the appointee shall inform to the company about his disqualification under sub-section (2) of Section 164, if any, in Form DIR-8 before he is appointed or reappointed.

10. Consent.— In case of private company or public company, the proposed appointee shall give his consent to hold the office as executive director or whole-time director of the company.

11. Compliance of Criteria Specified in Part I to Schedule V of the Act.— In case of public companies only, the provisions of Part I to the Schedule V of the Act are applicable. Accordingly, a person shall be eligible for appointment as executive director or whole-time director, if he satisfies the following conditions: (i) he has not been sentenced to imprisonment for any period, or to a fine exceeding Rs 1000, for the conviction of an offence under 19 prescribed statutes; (ii) he had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974; (iii) he has completed the age of 21 years and has not attained the age of 70 years; and (iv) he is resident of India. In order to ensure compliance of the said provisions, the company shall obtain a declaration from the executive director or whole-time director.

12. Shareholders’ Approval.— In case of public companies, the terms and conditions of such appointment and remuneration payable to the Executive Director or whole-time Director shall be first approved by Board of Directors and then by the shareholders at the next general meeting of the company. The notice convening the general meeting for considering such appointment shall include the terms and conditions of such appointment, remuneration payable and such other matters including interest, of a director or directors in such appointments, if any. Subject to the provisions of the Act, where an appointment of a Executive Director or whole-time Director is not approved by the company at a general meeting, any act done by him before such approval shall not be deemed to be invalid.

13. Central Government’s Approval, in Certain Cases.— The approval of the Central Government shall be obtained if there is a variance in the terms of appointment (i.e. criteria specified in Part I to Schedule V of the Act) of Executive Director or whole-time Director.

14. Appointment of Key Managerial Personnel (KMP).— Every company belonging to such class or classes of companies shall have the following whole-time KMPs i.e. managing director or CEO or managing and in their absence, a whole-time director, CS and CFO. Such class or classes of companies includes listed company and every other public company having a paid-up share capital of Rs 10 crore or more. This provision shall be also considered, if applicable, at the time of appointment of Executive Director or whole-time Director.

15. Number of Directorships.— A person shall not hold office as a director in not more than 20 companies, including alternate directorship (under Section 165 of the Act). The appointee and the company in which he is appointed as Executive Director or whole-time Director shall confirm the same.

16. Filing of E-Form & Returns.— (i) The company shall file e-Form DIR-12 for the appointment of Executive Director or whole-time Director; and (ii) in case of public companies, it shall file e-Form MR-1 within 60 days of such appointment of Executive Director or whole-time Director.

17. Entry in the Register of Directors & KMP and their Shareholding.— The company shall make necessary entry of the requisite particulars in the register of directors and key managerial personnel and their shareholding (under Section 170 of the Act).

18. Disclosure of Concern or Interest.— The appointed Director shall disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in Form MBP-1 (under Section 184 of the Act). Such disclosure shall be made at the first Board meeting in which he participates as a director and thereafter at the first Board meeting in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change. Such disclosure made by the executive director or whole-time director shall be noted in the minutes of the Board meeting.


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

Cyril Amarchand MangaldasExperts Corner

I. Introduction

1.The Lok Sabha, on March 17, 2020[1], introduced the Companies (Amendment) Bill, 2020 (the Bill) to decriminalise various provisions of the Companies Act, 2013 (the 2013 Act). In the first part of this two-part series, we will provide an analysis of the doctrine of corporate criminal liability and its evolution in India. In the second part, we will deal with details of the Bill and its significance in commencing a new chapter in the development of corporate criminal liability in India.

II.Evolution of corporate criminal liability particularly in the United States of America and the United Kingdom

2.The concept of corporate criminal liability developed in the Anglo-American tradition of common law through a process of accretion that lacked any conscious effort or a direction. Initially, the corporations were considered incapable of committing crimes, but with globalisation and liberalisation came a shift in the societal stance wherein corporations were seen as being involved in committing (almost all) white collar crimes[2].

3. In the early 1700s, the development of corporate criminal liability faced four main obstacles[3]:

a. Attributing acts to a juristic person[4];

b.Belief that companies could not possess the moral culpability necessary to commit intentional crimes[5];

c. Ultra vires doctrine, under which courts would not hold corporations accountable for acts, such as crimes, that were not provided for in their charters[6]; and

d.Understanding of the extant criminal procedure, wherein procedure without the accused physically coming before the court was unknown[7].

4. Criminal liability stands on the basic rule of ‘actus non facit reum nisi mens sit rea’ i.e. an act is wrongful only when it is done with a wrongful state of mind. However, a corporation neither has a mind which can possess knowledge or intention, nor does it have hands to carry out its intentions. To address this issue, it is essential to understand that the original application of both civil and criminal liability to corporate entities were derived primarily from the ancient common law tort doctrine which says masters had “vicarious” liability for the wrongful actions of their servants[8]. As a result, the courts were soon willing to hold corporations criminally liable for almost all wrongs except rape, murder, bigamy, and other crimes of malicious intent[9].

5. The common criminal law also took the position that, in general, there could be no vicarious criminal responsibility i.e. a person could not be deemed to be guilty of a criminal offence committed by another[10]. Over a period of time, application of this rule became subject to exception on the basis of specific provisions in the statutes extending liability to others.

6. In the United Kingdom, the House of Lords while hearing the case of Tesco Supermarkets Ltd v. Nattrass[11] held that an employee was not a part of the ‘directing mind’ of the corporation and, therefore, his conduct was not attributable to the act of corporation. However, in  Meridian Global Funds Management Asia Ltd v. Securities Commission[12] the Privy Council ruled that a company can be held liable for the crimes of its senior personnel, committed without the knowledge of the company. The identification theory imposes vicarious liability of an organisation for the acts committed by agents of the organisation and was identified in the above two judgments.

7. Both the American standards i.e. vicarious liability and Respondent Superior for holding organisations criminally liable employ the ‘identification’ approach pioneered in England. Respondent Superior is the broader of the two standards. Derived from agency principles in tort law, it provides that a corporation may be held criminally liable for the acts of any of its agents [who] (1) commits a crime, (2) within the scope of employment, (3) with the intent to benefit the corporation[13]. This standard is quite broad, permitting organisational liability for the act of any agent, even the lowest level employee[14].

III. Development of corporate criminal liability in India

A. Judicial Interpretation

8. The special vicarious liability doctrine adopted in India emanates from the common law principle which enables the courts to hold the directing minds responsible for the actions and affairs of the company[15]. In  Sunil Bharti Mittal v. Central Bureau of Investigation[16], the Supreme Court, while adopting the position from Tesco Supermarkets Limited, held that a company cannot be criminally liable for the actions of its employees. Therefore, there is no special vicarious liability in criminal law without a specific statutory exception. However, this position was overturned in  Standard Chartered Bank v. Directorate of Enforcement[17], where the Supreme Court at the outset rejected the idea that the company is immune from criminal prosecution where custodial sentence is mandatory and observed that the company is liable to be prosecuted and punished for criminal offences.

9. Thereafter, in the landmark case of Iridium India Telecom Limited v. Motorola Inc.[18], the Supreme Court observed that corporate houses can no longer claim immunity from criminal prosecution on the ground that they are not capable of possessing mens rea. Therefore, the actions of the directors of the accused company were directly linked to the actions of the company itself, thereby holding the corporation criminally liable both under common law and statutory law. It is an admitted position in India that despite being a juristic person, a company is liable for its actions and inactions that result in commission of an offence punishable under law. 

B. Corporate criminal liability under the Companies Act

10. In India, the corporate criminal liability is imposed on the corporations through various legislations such as the Income Tax Act, 1961, the Securities and Exchange Board of India Act, 1992, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, the Negotiable Instruments Act, 1881 and the Prevention of Corruption Act, 2013 to hold the company and the key managerial personnel (KMP) responsible for the illegal acts of the corporations. Considering that the Companies Act, 1956 (the 1956 Act) and the 2013 Act are legislations solely for the governance of the corporations, the study of the corporate criminal liability as provided for in these legislations become relevant.

11. Corporate criminal liability under the 1956 Act was based on the principle of strict vicarious liability, as discussed in the section above. However, the threshold of corporate criminal liability was increased under the 2013 Act by introducing stricter provisions to hold officers and directors vicariously liable on account of their designation, scope of employment and responsibility irrespective of any requirement to prove their involvement in commissioning of the crime.

12. The 2013 Act streamlines the manner in which corporate criminal liability is to be imposed on corporations. It specifies that the KMP would be considered as defaulting “officers”. The officers under the Companies Act, 2013 have been categorised as following:

(i) KMP including managing director, whole time directors, chief executive directors, chief financial officers and company secretaries;

(ii) personnel reporting to the KMP that are responsible for maintaining, filing or distribution accounts and records and participating in actively taking certain actions or inactions;

(iii) personnel responsible for ‘maintaining accounts and records’;

(iv) directors possessing the knowledge of any default committed by the other officers on behalf of the company through participation in board meetings or being in receipt of any board proceedings; and

(v) personnel not involved in the day-to-day affairs of the company but involved in the transfer of shares such as share transfer agents, registrars and the merchant bankers to the issue or transfer of shares.

13.The existing standards under the 2013 Act are inconsistent with the principles of criminal law as it holds the officers and personnel criminally liable merely on account of their designation and there specific actions or inactions that indicate that they possessed knowledge of the crime while they may not be actively involved in the commission of the crime. It is relevant to note the imposition of stricter punishments for offences committed by corporations was introduced in the 2013 Act with the objective of ensuring ‘deterrence’ on the companies. However, the imposition of stricter liability has made the corporations very vulnerable, thus greatly hampering the ease of doing business.

IV. Conclusion

14. While corporations have been a blessing to the economy, it is crucial that for progress and development of the society, the laws governing such corporations strike at the root cause of the crimes committed. While doing so, the legislations should also incentivise corporations to carry out their business with ease, and by freeing the directing mindsof the fear of being criminally liable merely on account of their designation. It is imperative for the legislation, while combating crimes, to strike a balance between functioning of the society and the overall benefit of the economy.

15. Therefore, there is a pressing need to dilute the corporate criminal liability, imposed specifically under the 2013 Act. The unrealistic standards prescribed under the said legislation needs to be watered down to a certain extent for the purpose of enhancing the ease of doing business. With this objective, the legislators introduced the Bill to decriminalise various provisions of the 2013 Act.


* Partner, Cyril Amarchand Mangaldas

** Partner, Cyril Amarchand Mangaldas

*** Senior Associate, Cyril Amarchand Mangaldas

†Associate, Cyril Amarchand Mangaldas

‡Associate, Cyril Amarchand Mangaldas

[1] Companies (Amendment) Bill, 2020 [Bill No. 88 of 2020]

[2] Thomas J. Bernard, The Historical Development of Corporate Criminal Liability, 22 Criminology 3 (1984).

[3] John C. Coffee, Jr., Corporate Criminal Responsibility, in 1 Encyclopaedia of Crime and Justice 253, 253 (Sanford H. Kadish ed., 1983)

[4] Coffee, supra note 3, at 253

[5] Ibid

[6] L.H. Leigh, The Criminal Liability of Corporations in English Law 1-12 (1969) (discussing the development of English corporate criminal liability).

[7] Ibid

[8] Ibid

[9] Richard S. Gruner, Corporate Crime and Sentencing § 1.9.2, at 52-55 (1994)

[10] Matthew Goode, Corporate Criminal Liability, Australian Govt. Publications, available at http://www.aic.gov.au/medialibrary/publications/proceedings/26/goode.pdf

[11] [1972] AC 153  

[12] [1995] 2 AC 500

[13] United States v. A&P Trucking Co., 358 U.S. 121, 124-27 (1958)

[14] Corporate Criminal Responsibility-American Standards of Corporate Criminal Liability; available at

https://law.jrank.org/pages/744/Corporate-Criminal-Responsibility-American-standards-corporate-criminal-liability.html

[15] Tesco Supermarkets Ltd v. Nattrass, [1972] AC 153  

[16] (2015) 4 SCC 609 

[17] Standard Chartered Bank v. Directorate of Enforcement, (2005) 4 SCC 530

[18] (2011) 1 SCC 74  

COVID 19Legislation UpdatesNotifications

Clarification with regard to creation of deposit repayment reserve of 20% under Section 73 (2) (C) of the Companies Act, 2013 and to invest or deposit 15% of amount of debentures under Rule 18 of Companies (Share capital and Debentures) Rules 2014 – COVID-19 — Extension of time-regarding

ln continuation to General Circular No. 11/2020 dated 24th March 2020 and keeping in view the requests received from various stakeholders seeking extension of time for compliance of the subject requirements on account of COVID-19, it has been decided to further extend the time in respect of matters referred to in paras V , Vl of the aforesaid circular, from 30th June 2020 to 30th September 2020.

CIRCULAR


Ministry of Corporate Affairs

[Circular dt. 19-06-2020]

Op EdsOP. ED.

The  National Company Law Appellate Tribunal (NCLAT) in the matter of Punjab National Bank v. Kiran Shah, Liquidator of ORG Informatics Ltd.[1] observed that an application for removal of Liquidator cannot be moved in the absence of any provision under the law. In this case, the Committee of Creditors (CoC) instructed the resolution professional to move an application under Sections 33 & 34 of the Insolvency and Bankruptcy Code, 2016 (IBC). The application was accepted by the Adjudicating Authority (AA) on 20.11.2019. The Lead Financial Creditor (FC) appealed to NCLAT against the appointment of the Liquidator. NCLAT decided not to interfere with the order of AA on two grounds: (1) CoC has no role to play and are simply claimants whose matters are determined by the Liquidator, and (2) Such a creditor cannot move an application for removal of the Liquidator in the absence of any provision under the law.[2]

The decision of NCLAT has raised several eyebrows among the academicians and practitioners. The decision highlights the existence of a void in the current insolvency and bankruptcy law, wherein, there is no answer to the following questions:

  1. How can a Liquidator be removed?
  2. Who can seek the removal of a Liquidator?
  3. Who will decide on the matter of the removal of a Liquidator?
  4. Who will appoint the new Liquidator?

Understanding the transition of provisions governing Liquidators from Companies Act, 1956 to IBC, 2016

In the Companies Act, 1956, the appointment of a Liquidator was to be made by the High Court[3] prior to the Companies (Second Amendment) Act, 2002[4]. After the amendment, the same provision read to substitute High Courts with Tribunals[5]. The Official Liquidator was to be appointed from the pool of Liquidators made available by Section 448(1) of the 1956 Act. However, the provision[6] comes with a proviso stating that the Tribunal was to give due regard to the views of the secured creditors and workmen before the appointment of the Official Liquidator. The Liquidator was to perform such duties as the Tribunal may specify[7] and he could be removed by the Tribunal on sufficient cause being shown[8]. There was a sharing of powers between the Tribunal and the Central Government regarding their jurisdiction over a Liquidator[9].

In Chapter XX of the Companies Act, 2013, the Tribunal was to appoint an Official Liquidator or a Liquidator while passing an order for winding up[10]. The Liquidator was to be appointed from the pool of Liquidators made available by Section 275(2) of the Companies Act, 2013. The Companies Act, 2013, unlike its precursor, provided for a detailed list of grounds on which a Liquidator can be removed. These included misconduct, fraud, professional incompetence, failure to exercise due care and diligence etc.[11] Once again, there was a sharing of powers between the Tribunal and the Central over a Liquidator[12].

The Insolvency and Bankruptcy Code, 2016, by virtue of Schedule XI, has brought in a few amendments to the Companies Act, 2013.  What is important to note here is that the supervision over the appointment of a Liquidator, in the Insolvency and Bankruptcy Code, remains with the Adjudicating Authority or NCLT[13] whereas the setup of disciplinary supervision over a Liquidator now vests with the Insolvency and Bankruptcy Board of India (IBBI)[14].

1. Removal of the Liquidator:

a. The inherent powers of  NCLT – Rule 11 of the NCLT Rules, 2016 [15]

i. Rule 11 of the NCLT Rules is carefully worded:

11. Inherent Powers. – Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.

It is important to note that these rules are not specific to a particular act or do not derive their powers solely to be made applicable to a particular act. These are general rules that govern the Tribunal, while dealing with cases brought before it – by any and all acts that have appointed the Tribunal to adjudicate on certain disputes. Therefore, it would be improper to say that the Tribunal cannot use its inherent powers. Considering how the Bankruptcy Law Reforms Committee (BLRC) wished to use the existing infrastructure in place[16], it is clear that the Tribunal was to be utilised to meet the ends of justice in adjudicating Insolvency matters of corporate persons.

ii. Two important terms in the Preamble of the Insolvency and Bankruptcy Code, 2016 are time bound manner for maximisation of value of assets and balance the interests of all the stakeholders[17]. Removal and replacement of a Liquidator is an act that NCLT must undertake for the purpose of value maximisation of assets and to balance the interests of all the stakeholders.

iii. The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 cannot be drawn into picture here since, in Rule 2 of the said Rules, it is clearly mentioned that these Rules would be applicable to matters relating to Corporate Insolvency Resolution Process. The same rules define Corporate Insolvency Resolution Process to mean the resolution process for corporate persons under Chapter II of Part II of the Code. However, liquidation squarely falls in Chapter III of Part II of the Code. Therefore, arguments limiting use of NCLT’s inherent powers cannot be taken.

iv. It is also noteworthy to mention that in  Allahabad Bank v. Supreme Tex Mart Ltd.[18], the Chandigarh Bench of NCLT faced a similar pressing situation. The Liquidator of the corporate debtor was facing cardiac problems and was advised to rest for 3-6 months. Therefore, NCLT was presented with an application for the replacement of the Liquidator and although there was no provision in the Code that permitted the replacement of the Liquidator, NCLT, in para 5 noted as follows and replaced the Liquidator:

“…. As rightly submitted by the learned counsel for the applicant, this authority can invoke its inherent power in the interest of justice and in the circumstances of the application.”

b. Section 16 of the General Clauses Act, 1897

Section 16 of the General Clauses Act, 1897[19] reads as follows:

Power to appoint to include power to suspend or dismiss. Where, by any [Central Act] or Regulation, a power to make any appointment is conferred, then, unless a different intention appears, the authority having [for the time being] power to make the appointment shall also have power to suspend or dismiss any person appointed [whether by itself or any other authority] in exercise of that power.

This is an important provision in understanding how NCLT has the inherent power to remove a Liquidator who has been appointed.

According to Woodroffe’s Book on Receivers[20], it is said:

The power to terminate flows naturally and as a necessary sequence from the power to create. The power of the Courts to remove or discharge a Receiver whom it has appointed may be exercised at any stage of the litigation. It is a necessary adjunct of the power of appointment and is exercised as an incident to, or consequence of, that power; the authority to call such officer into being necessarily implying the authority to terminate his functions when their exercise is no longer necessary, or to remove the incumbent for an abuse of those functions or for other cause shown” or “because of the necessity of the appointment having ceased to exist.”

It was also noted by the Federal Court that:

It seems because of this statutory rule based on the principles mentioned above that in Order XL Rule 1 of the Code of Civil Procedure no express mention was made of the power of the court in respect of the removal or suspension of a receiver. The General Clauses Act has been enacted so as to avoid superfluity of language in statutes wherever it is possible to do so. The legislature instead of saying in Order XL Rule 1, that the court will have power to appoint, suspend or remove a receiver, simply enacted that wherever convenient the court may appoint a receiver and it was implied within that language that it may also remove or suspend him. If Order XL Rule 1 of the Code of Civil Procedure is read along with the provisions above mentioned, then it follows by necessary implication that the order of removal falls within the ambit of that rule…[21]

To further drive home the point that such an exercise of power to remove a receiver, is exercised by the inherent powers of a court, it was noted that:

It is a necessary adjunct of the power of appointment and is exercised as an incident to, or consequence of, that power; the authority to call such officer into being necessarily implying the authority to terminate his functions when their exercise is no longer necessary, or to remove the incumbent for an abuse of those functions or for other cause shown” or “because of the necessity of the appointment having ceased to exist.” I take it, therefore, that the present petition is put in for the exercise of the inherent powers of the Court, though it does not come under any particular section or rule in the Code.[22]

(emphasis supplied)

The same reasoning was also used in  Chacko v. Jaya Varma[23].

The inherent powers of the court under the Code of Civil Procedure (CPC) are found in various sections[24]. The relevant section similar to the current issue is Section 151 CPC which reads as follows, “Nothing in this Code shall be deemed to limit or otherwise affect the inherent powers of the Court to make such orders as may be necessary for the ends of the justice or to prevent abuse of the process of the court.” Rule 11 of the NCLT Rules and Section 151 CPC are similarly worded. Therefore, even in the absence of a specific provision, NCLT can exercise its inherent powers along with Section 16 of the General Clauses Act to remove a Liquidator.

2. Stakeholders may approach  NCLT:

The BLRC Report mentions that it should be available for the stakeholders to be able to remove a Resolution Professional for causes shown. The relevant provision reads as follows:

“The Code makes provision for the removal of the RP[25] during the resolution process. This can be done either during an insolvency or a bankruptcy resolution process. An application can be made to the Adjudicator by the creditors committee for the removal of the RP at any time during the IRP[26], or by the board during the liquidation process. In either case, this must be supported with a majority vote. Any other application for the removal of the RP can be made to the Adjudicator with cause shown.”[27]

The Code mentions that a Liquidator has the power to consult any of the stakeholders entitled to a distribution of proceeds under Section 53[28]. This makes it clear that the Code realises that those mentioned in Section 53 are stakeholders and this by very mention gives them a right to approach NCLT in case the Liquidator is acting in a manner that is going to harm their interests.

The BLRC Report had also envisioned the removal of a Liquidator. In the drafting instructions for the code, Box 5.26, point 2 says that “The Adjudicator will admit an application for the removal of either the RP or a Liquidator during the resolution process, from any other party with cause shown”. This could possibly mean that if the Liquidator’s acts cause grievance to “any party” of a Liquidation process, then such a party could approach the Adjudicator/NCLT.

3. NCLT is the right forum to decide on this matter:

Section 60(5)(c) of the Insolvency and Bankruptcy Code empowers NCLT to decide on matters of insolvency resolution or liquidation. The provision reads as follows: “any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code”. Therefore, the ideal approach for the removal and replacement of the Liquidator would be to move the National Company Law Tribunal under Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 read with Rule 11 of the NCLT Rules, 2016.

4. Appointment of the new Liquidator:

From the perusal of the BLRC Report, it is clear that the procedure that was intended by the Committee to replace a Liquidator was that once the communication for the replacement is made by the Adjudicating Authority to IBBI, the replacement was to be given effect to by IBBI suggesting a new Professional within 48 hours of this communication. Box 5.26 of the BLRC Report, which has drafting instructions for the Code, in Point 3 says that “The Code does not permit the removal to be accompanied by a new recommended replacement candidate.

Conclusion

Therefore, in the absence of any such provision that gives effect to the removal of a Liquidator, all such applications that show the incompetence of a Liquidator or that show that the Liquidator is not being diligent in discharging his duties, can be made to NCLT under Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 read with Rule 11 of the National Company Law Tribunal Rules, 2016. If this process is not allowed and if incompetent Liquidators are allowed to conduct liquidation proceedings, it would prove detrimental to the interests of all the stakeholders in Section 53 of the Code. 

To put an end to all and any possible interpretation for the issues raised above, it is imperative that an amendment be introduced to the Insolvency and Bankruptcy Code, 2016 that mentions the circumstances in which a Liquidator may be removed/replaced, the manner and procedure for such replacement and the locus of parties who may approach the Adjudicating Authority for the same[29]. This would be in the interest of all the stakeholders and in the spirit of the Code.

Misconduct, fraud, misfeasance, professional incompetence or failure to exercise due care and diligence in performance of powers and functions by the Liquidator, when the Liquidator expresses his inability to act as a Liquidator, when there arises a conflict of interest or lack of independence during the term of his appointment that justify his removal, or when there is a death or resignation of the liquidator – could be the grounds on which a Liquidator can be removed/replaced.

It is also important to note that during the Insolvency Resolution Period, the Resolution Professional is in the supervision of the Committee of Creditors and direct supervision of the Adjudicating Authority. Once liquidation commences, the Committee of Creditors ceases to exist, which is all the more reason why the Adjudicating Authority should use its powers to ensure that the Liquidator is discharging his duties and if it is found out that he isn’t, the Adjudicating Authority should act quickly to ensure that there is no delay in the process of Liquidation and replace him[30]. This is the need of the hour and if this is not done, there would be no balance in the interests of the stakeholders, which would be against the very spirit of the Code.


*Graduate from Symbiosis Law School, Hyderabad and has a background in the field of Insolvency and Bankruptcy. Author can be reached at kssyasaswi@gmail.com

[1] 2020 SCC OnLine NCLAT 155

[2]. Id.

[3] Section 448(1) of the Companies Act, 1956

[4] Companies (Second Amendment) Act, 2002, w.e.f. 1.4.2003, to establish  National Company Law Tribunals. 

For more, read Press No. 2/2003 dated 4th April, 2003, Department of Company Affairs, available at https://www.mca.gov.in/Ministry/pdf/press_release/Press_022003.html. (Till the constitution of Tribunals was completed, the jurisdiction of the Company Law Boards was to continue)

[5] This is when it was thought that a Company Tribunal would be established and until then, the powers were to be vested with the Company Law Board. Therefore, the amended provision used “Tribunal” instead of “Court”.

[6] Section 448(1) of the Companies Act, 1956

[7] Section 448(6) of the Companies Act, 1956

[8] Section 448(6)(b) of the Companies Act, 1956

[9]The Tribunal was to adjudicate on disputes and could order the removal of a Liquidator whereas the Central Government looked into the conduct of the Liquidator and could take disciplinary action against him/her (Section 463 of the Companies Act, 1956).

[10] Section 275 of Companies Act, 2013

[11] Section 276 of the Companies Act, 2013. Section 276(3) also brought in the liability of a Liquidator for the losses caused to a company under Liquidation because of his acts.

[12] Tribunal could remove a Liquidator from a proceeding on the grounds mentioned in Section 276 of the Companies Act, 2013 and the Central Government could remove a Liquidator from its panel under Section 275(4) of the Companies Act, 2013. The former is an adjudication process whereas the latter is a disciplinary measure.

[13] For instance, Section 34(1) of the Insolvency and Bankruptcy Code, 2016 reads, “Where the Adjudicating Authority passes an order for liquidator of the Corporate Debtor under Section 33…unless replaced by the Adjudicating Authority…”and Section 35 of the Insolvency and Bankruptcy Code, 2016 reads, “Subject to the directions of the Adjudicating Authority, the Liquidator shall….It is also common practice that the NCLT, while passing an order for liquidation, in the last few pages of the written order, gives a few directions to the Liquidator which are nothing more than the provisions of Section 35 of the Insolvency and Bankruptcy Code, 2016.

[14] The Insolvency and Bankruptcy Board of India (IBBI) is to take disciplinary action against the Liquidator under Section 47(2)(b) of the Insolvency and Bankruptcy Code, 2016. It also exercises disciplinary powers under Section 220 of the IBC.

[15] National Company Law Tribunal Rules, 2016

[16] 4.2.1., Tribunals, Bankruptcy Law Reforms Committee Report, Pg. 44

[17] Preamble, Insolvency and Bankruptcy Code, 2016.

[18] CA No. 941/2019 in CP (IB) No. 67/Chd/Pb/2017, Decided On: 01.11.2019, MANU/NC/9236/2019

[19] General Clauses Act, 1897

[20] Page 269, Section 30

[21] Kutoor Vengayil Rayarappan Nayanar v. Kutoor Vengayil Valia Madhavi Amma , 1949 SCC OnLine FC 34  

[22] M.K. Subramania Iyer v. Muthulakshmiammal, LQ 1912 HC 1629

[23] Chacko v. Jaya Varma, 1999 SCC OnLine Ker 373 

[24] Sections 148 and 149 – deal with grant or enlargement of time, Section 150 – deals with transfer of business, Sections 152, 153 and 153-A –  deal with amendments in judgments, decrees or order or in separate proceedings.

[25] Resolution Professional

[26] Insolvency Resolution Period

[27] 5.5.10, Bankruptcy Law Reforms Committee Report, 2015, Pages 109 & 110

[28] Section 35(2) of the Insolvency and Bankruptcy Code, 2016

[29] Since previous Acts have given locus to parties. See Section 183(5) of Companies Act, 1913; Section 460(6) of Companies Act, 1956 and Section 292(4) of Companies Act, 2013.

[30] 5.5.10, Bankruptcy Law Reforms Committee Report, 2015, Pg. 109 & 110, “The Adjudicator must apply to the Regulator for a replacement RP as soon as the application is made. The Regulator must recommend a replacement RP within not more than 48 hours. In case the application is to remove an RP during the IRP, the removal of the RP does not allow for an extension in the window of time permitted for the IRP: there final date of closure for the IRP remains the same as in the order registering the IRP.”

COVID 19Legislation UpdatesNotifications

In order to support and enable Companies and Limited Liability Partnerships (LLPs) in India to focus on taking necessary measures to address the COVID-19 threat, including the economic disruptions caused by it, the following measures have been implemented by the Ministry of Corporate Affairs to reduce their compliance burden and other risks: –

  1. No additional fees shall be charged for late filing during a moratorium period from 01st April to 30th September 2020, in respect of any document, return, statement etc., required to be filed in the MCA-21 Registry, irrespective of its due date, which will not only reduce the compliance burden, including financial burden of companies/ LLPs at large, but also enable long-standing noncompliant companies/ LLPs to make a’fresh start’. The Circulars specifying detailed requirements in this regard are being issued separately.
  2. The mandatory requirement of holding meetings of the Board of the companies within the intervals provided in section 173 of the Companies Act, 2013 (CA13) (120 days) stands extended by a period of 60 days till next two quarters i.e., till 30th September. Accordingly, as a one time relaxation the gap between two consecutive meetings of the Board may extend to 180 days till the next two quarters, instead of 120 days as required in the CA-13.
  3. The Companies (Auditor’s Report) Order,2020 shall be made applicable from the financial year 2O2O-2O21 instead of being applicable from the financial year 2019-2020 notified earlier. This will significantly ease the burden on companies & their auditors for the financial year 2019-20. A separate notification has been issued for this purpose.
  4. As per Para Vll (1) of Schedule lV to the CA-13, lndependent Directors (lDs) are required to hold at least one meeting without the attendance of Non-independent directors and members of management. For the financial year 2019-20, if the lDs of a company have not been able to hold such a meeting, the same shall not be viewed as a violation. The lDs, however, may share their views amongst themselves through telephone or e-mail or any other mode of communication, if they deem it to be necessary.
  5. Requirement under section 73(2)(c) of CA-13 to create the deposit repayment reserve of 20% of deposits maturing during the financial year 2020-21 before 30th April 2020 shall be allowed to be complied with till 30th June 2020.
  6. Requirement under rule 18 of the Companies (Share Capital & Debentures) Rules, 2014 to invest or deposit at least 15% of amount of debentures maturing in specified methods of investments or deposits before 30th April 2020, may be complied with till 30th June 2020.
  7. Newly incorporated companies are required to file a declaration for Commencement of Business within ‘180 days of incorporation under section 10A of the CA-13. An additional period of 180 more days is allowed for this compliance.
  8. Non-compliance of minimum residency in India for a period of at least 182 days by at least one director of every company, under Section 149 of the CA-1 3 shall not be treated as a non-compliance for the financial year 2019-20.
Experts CornerGaurav Pingle and Associates

Introduction

Under the Companies Act, 2013 (“Act”), there are limited ways in which dedicated employees of the company can be rewarded or remunerated by issue of shares. One of the ways of rewarding or remunerating such employees is issue of sweat equity shares by the company. Section 2(88) of the Act defines “sweat equity shares” as equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called. In the definition of sweat equity, there is a reference to the expression “value additions”. It means actual or anticipated economic benefits derived or to be derived by the company from an expert or a professional for providing know-how or making available rights in the nature of intellectual property rights, by such employee.

It is interesting to note that the rights, limitations, restrictions applicable to equity shares shall be applicable to the sweat equity shares. The holders of sweat equity shares shall rank pari passu with other equity shareholders.

This article is a checklist for private companies and unlisted public companies for the issue of sweat equity shares under the Act and the Rules made thereunder. The listed companies shall comply with the SEBI (Securities and Exchange Board of India) Regulations in addition to the provisions of the Act.

  1. Meaning “Employee” and “Director” for Issue of Sweat Equity Shares.—According to the provisions of the Companies (Share, Capital and Debentures) Rules, 2014, a company can issue sweat equity shares to its directors or employees, which means:

(i)    Permanent employee of the company who has been working in India or outside India; or

(ii)   director of the company, whether a whole-time director or not; or

(iii)   employee or a director of the subsidiary company, in India or outside India; and

(iv)   employee or a director of the holding company;

Therefore, the company shall ensure that the sweat equity shares are offered and allotted to an employee (as defined above) or directors and such employee provides know-how or makes available rights in the nature of intellectual property rights or value additions.

  1. Valuation.—The sweat equity shares to be issued shall be valued at a price determined by a registered valuer as the fair price giving justification for such valuation. The valuation of intellectual property rights or of know how or value additions for which sweat equity shares are to be issued, shall be carried out by a registered valuer.
  2. Limit on Issue of Sweat Equity Shares.—The company shall not issue sweat equity shares for more than 15% of the existing paid-up equity share capital in a year or shares of the issue value of Rs. 5 crores, whichever is higher. However, the issuance of sweat equity shares in the company shall not exceed 25% of the paid-up equity capital of the company at any time. However, a startup company[1] may issue sweat equity shares not exceeding 50% of it’s paid up capital upto 5 years from the date of its incorporation.
  3. Lock-in for Sweat Equity Shares.—The sweat equity shares issued to directors or employees shall be locked-in i.e. non transferable for a period of 3 years from the date of allotment.
  4. Approval of the Board of Directors.—According to the amendment introduced by the Companies (Amendment) Act, 2017, the company can issue sweat equity shares even when it has not commenced its business. A company can issue sweat equity shares to its employees or directors after obtaining the approval shareholders by passing a special resolution. Therefore, in such cases, the Board of Directors shall accord it’s in principle approval for such issue. The points that shall be discussed in the board meeting and which shall also be part of the minutes of the meetings are justification for such issue, number of shares proposed to be offered and allotted, details of the employees or directors to whom such shares will be issued, principal terms and conditions on which sweat equity shares are to be issued, issue price, basis of valuation, consideration including consideration other than cash, if any to be received for the sweat equity, provisions relating to managerial remuneration, etc. The Board of Directors may also note the pre-issue and post-issue shareholding pattern of the company.
  5. Approval of the Shareholders.—After obtaining the approval of the directors, the company shall obtain shareholders’ approval by passing a special resolution. A copy of gist along with critical elements of the valuation report shall be sent to the shareholders along with the notice of the general meeting. The explanatory statement to be annexed to the notice of general meeting shall contain the particular prescribed under the Companies (Share Capital and Debentures) Rules, 2014. The company shall file e-Form MGT-14 with the Registrar of Companies along with the fee as specified in the Companies (Registration Offices and Fees) Rules, 2014.

The special resolution authorising the issue of sweat equity shares shall be valid for making the allotment within a period of not more than 12 months from the date of passing of the special resolution.

  1. Allotment of Sweat Equity Shares.—After the approval of the shareholders, the company shall make a private offer to the specific employees. After receipt of share application money, the Board of Directors shall allot the sweat equity shares to the employees. The board shall also authorise directors for ensuring post-allotment compliances.
  2. Post-Allotment Compliances.—After allotment of sweat equity shares, the company shall, within 30 days thereafter, file with the Registrar a return of allotment in e-Form PAS-3, along with the fee as specified in the Companies (Registration Offices and Fees) Rules, 2014. The company shall issue share certificates within 2 months from the date of allotment. The fact that the share certificates are under lock-in and the period of expiry of lock-in shall be stamped in bold or mentioned in any other prominent manner on the share certificate.

After allotment of sweat equity shares, the company secretary of the company or any other authorised person by the Board of Directors shall make necessary entries in the register of members within 7 days from the date of allotment.

  1. Maintenance of Register of Sweat Equity Shares.—The company shall also maintain Register of Sweat Equity Shares in a prescribed form (Form No. SH-3) and shall forthwith enter therein the particulars of sweat equity shares issued. The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place as the Board of Directors may decide. The entries in the register shall be authenticated by the company secretary of the company or by any other person authorised by the Board of Directors for the purpose.

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

[1] As defined in DIPP Notification No. GSR 180(E) dated 17-2-2016.

Case BriefsHigh Courts

Uttaranchal High Court: Sharad Kumar Sharma, J. contemplated the writ petition where the petitioner raised questions related to the order of the Labor Court passed in 2014.

The brief facts as involved in the instant writ petition were that the petitioner in the capacity of being an employer as a registered company under the Companies Act, had got different units and plants situated at various places, which required the services of certain workman in order to discharge the industrial work, which the unit had to undertake and in order to get the work performed in an efficient manner they required the services of Tool Room Trainee. Hence, the respondent was engaged as a Trainee with the said company and appointment made of the respondent for Trainee was governed by the terms and conditions of letter of appointment as it was provided in the letter of appointment itself issued. A certain stipend was fixed for the respondent. Subsequently the services of the respondent were put to an end on the grounds that the work and services were not satisfactory. The issue that arose afterwards was resolved between the parties.

Hence, the respondent filed an industrial dispute against the petitioner; consequently a proceeding was drawn before the Conciliation Officer and on the culmination of the said proceedings before the Conciliation Officer under Section 2-A of the U.P. Industrial Disputes Act, reference was sought to be made with regards to an adjudication of the controversy as raised by the workman. Consequently, a reference was made to the effect that as to whether and the act of the employer of dispensing the services of the petitioner as a tool room trainee was just and valid and to what benefit the trainee would be entitled to receive.

Labour Court ultimately by the impugned award had held that the act of the employer of dispensing the services of the respondent by an order was illegal and the workman was directed to be reinstated into the services.

Counsel for the petitioner Sudhir Kumar, submitted that in the said letter of appointment a clause was mentioned where the employer had reserved the rights to terminate the services of the trainee as any desired time without assigning any reason and even with put any prior intimation. He argued that while holding the termination as to be illegal the Labor Court had not treated that it was a reference which was made for defining the status of the workmen, as that of the respondent being of a regular employee.

Labor Court to the particular issue related to the status of the workman held that, it cannot in any manner be interpreted as if the petitioner was providing a regular status to the respondent as the effect of the award would be that as soon as the order was dispensed, the service of respondent was held to be bad in the eyes of the law, it will only give the respondent the same status of that being of a Tool Room Trainee from where he was removed, the post which he had acquired prior to his removal and thus he would be acquiring back the status of that of a Tool Room Trainee only, and the said award cannot be read as if it was giving him the status as that of a regular employee.

The Court observed that the clause of the terms of appointment would not come into play at the stage where the respondent was given a reason for his termination. More particularly, when had it been a simplicitor dispensation of service without attaching any stigma, then the employer could had exercised its power to dispense the services, but as soon as the employer attached a stigma and made any observation affecting the credibility with regards to the manner in which the work was performed by the trainee, it amounted to be a stigmatic order and in that eventuality, the adherence to the principles contemplated under the Industrial Disputes Act or under the principles of natural justice was required to adhere to prior to terminating the services of the workmen.

Hence, it may not be treated to have an effect of providing the status of a regular employee to that of the respondent was absolutely a misconception which was  drawn, because logically even otherwise also, if the order of termination was set aside, it goes without saying that the effect of setting aside of the termination order would only be revival of the status of the workmen, which was existing or he was enjoying in relation to the trainee which was prevailing at the time when the services were dispensed.[L.G. Balakrishnan & Bros Ltd. v. Virendra Singh, 2019 SCC OnLine Utt 646, decided on 02-07-2019]

Experts CornerGaurav Pingle and Associates

Introduction to “shares” and “share certificate”

According to the provisions of the Companies Act, 2013 (“the Act”), “share” means a share in the share capital of a company and includes stock. [Section 2(84) of the Act]. A share is a part or portion of a larger amount which is divided among or contributed by number of people. It is one of the equal fractional parts into which the share capital of the company is divided.

The shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of association of the company (Section 44 of the Act). According to the definition of the “private company”, the articles of association shall contain a provision that restricts the right to transfer its shares.

Share certificate is a document issued by company evidencing that the person named in the certificate is owner of number of shares of company as specified in the share certificate. Share certificate is not a negotiable instrument or warranty of title by the company. According to the provisions of the Act, share certificate issued a company shall specify the shares held by any person and the share certificate shall be prima facie evidence of the title of the person to such shares [Section 46(1) of the Act]. Where a share is held in depository form, the record of the depository is the prima facie evidence of the interest of the beneficial owner.

This article is an analysis of various provisions of the Act and provides a compliance checklist for issuing share certificates to the shareholder of the company.

  1. Authority to Issue Share Certificate —Where a company issues any share capital, the share certificate of any share(s) held in the company shall be issued in pursuance of a resolution passed by Board of Directors [Rule 5(1) of the Companies (Share Capital and Debentures) Rules, 2014];
  2. Distinctive Number for each Share —Every share in a company having a share capital shall be distinguished by its distinctive number (Section 45 of the Act). However, the said provisions are not applicable where the shares are held in dematerialised form;
  3. Details on the Share Certificate —The share certificate shall have following details: (i) name of company, (ii) name of shareholder, (iii) registered office address of the company, (iv) corporate identification number, (v) website of company, if any, (vi) e-mail id of company, if any, (vii) registered folio number, (viii) share certificate number, (ix) distinctive numbers of the shares, (x) paid-up amount per share, (xi) date of issue. Every certificate of share(s) shall be in Form No. SH.1 or as near thereto as possible
    [Rule 5(2) of the Companies (Share Capital and Debentures) Rules, 2014];
  4. Stamp Duty on Share Certificate—The share certificate shall bear requisite stamp duty as per Stamp Act of the State/Union Territory. The amount of stamp duty payable on share certificate shall be determined with reference to the rate indicated in the relevant article specified in the Schedule to the Stamp Act.
  5. Signatures on Share Certificate (for companies other than One Person Company) —The share certificate, issued under the common seal, if any, shall be signed by two Directors or by a Director and the Company Secretary, wherever the company has appointed a Company Secretary. In case the company has a common seal it shall be affixed in the presence of persons required to sign the certificate. [Section 46(1) of the Act read with Rule 5(3) of the Companies (Share Capital and Debentures) Rules, 2014];
  6. Signatures on Share Certificate (in case of One Person Company) —For OPCs, it shall be sufficient if the share certificate is signed by a director and the company secretary or any other person authorised by the Board for the purpose [Rule 5(3) of the Companies (Share Capital and Debentures) Rules, 2014];
  7. Director’s Facsimile Signature on Share Certificate—A director shall be deemed to have signed the share certificate if his signature is printed thereon as facsimile signature by means of any machine, equipment or other mechanical means such as engraving in metal or lithography or digitally signed, but not by means of rubber stamp. However, the Director shall be personally responsible for permitting the affixation of his signature and the safe custody of any machine, equipment or other material used for the purpose;
  8. Corresponding reference in Register of Members—The particulars of every share certificate (as discussed above) shall be entered in the Register of Members;
  9. Maintenance of Share Certificate Forms and related Books and Documents —(i) All blank forms to be used for issue of share certificates shall be printed and the printing shall be done only on the authority of a resolution of the Board of Directors, (ii) blank form shall be consecutively machine numbered and the forms and the blocks, engravings, facsimiles and hues relating to the printing of such forms, (iii) blank forms shall be kept in the custody of the Company Secretary (or such other person as the Board may authorise for the purpose). The said person shall be responsible for rendering an account of these forms to the Board of Directors, (iv) committee of the Board of Directors or appointed Company Secretary or duly authorised Director shall be responsible for the maintenance, preservation and safe custody of all books and documents relating to the issue of share certificates, including the blank forms of share certificates;
  10. Preservation of Books and Documents relating to Issue of Share Certificates —The books and documents relating to the issue of share certificates (including blank forms of share certificates) shall be preserved in good order for not less than 30 years. However, in certain disputed cases, said documents shall be preserved permanently. All certificates surrendered to a company shall immediately be defaced by stamping or printing the word “cancelled” in bold letters and may be destroyed after the expiry of 3 years from the date on which they are surrendered. Share certificate shall be destroyed under the authority of a resolution of the Board of Directors and in the presence of a person duly appointed by Board of Directors [Rule 7(2) of the Companies (Share Capital and Debentures) Rules, 2014];
  11. Duplicate Share Certificate —A duplicate certificate of shares may be issued, if: (i) such share certificate is proved to have been lost or destroyed; or (ii) such share certificate has been defaced, mutilated or torn and is surrendered to the company. The company shall comply with the following conditions w.r.t. ( in writing ) the issue of renewed or duplicate share certificate [Rule 6 of the Companies (Share Capital and Debentures) Rules, 2014]:

(i)  In case of sub-division, consolidation, replacement (if share certificates are defaced, mutilated, torn or old, decrepit, worn out), the duplicate share certificate shall be issued after the original share certificate is surrendered to the company.

(ii)  Company may charge certain fees for issue of such share certificate;

(iii) Company shall make necessary reference (e.g. “duplicate”, “subdivided”, “replaced”, “consolidated”, etc.) on the face of the fresh share certificate and in the Register of Members;

(iv) Prior consent of the Board of Directors and payment of minimum fees (as decided from time to time) is required for issue of duplicate share certificate in lieu of certificates that are lost or destroyed. The Board of Directors shall direct the shareholder to furnish supporting evidence(s), indemnity and the payment of out-of-pocket expenses incurred by the company in investigating the evidence produced;

  1. Maintenance of Register of Renewed and Duplicate Share Certificates —(i) The company shall maintain Register of renewed and duplicate share certificates (with suitable cross-references to the Register of Members) at its registered office or at such other place where Register of Members is kept. (ii) Register of renewed and duplicate share certificates shall be preserved permanently and shall be kept in the custody of the Company Secretary of the company or any other person authorised by the Board for the purpose. For such authority, the Board shall pass necessary resolution. (iii) All entries made in the said Register of renewed and duplicate share certificates shall be authenticated by the Company Secretary or an authorised person. For such authority, the Board shall pass a resolution;
  2. Timelines for Issue of Share Certificate —Unless prohibited by any provision of law or any order of Court, Tribunal or other authority, every company shall deliver the certificates of all securities within following timelines:

(i)  To subscribers of memorandum of association—within 2 months from the date of incorporation,

(ii)  To allotees (shares)—within 2 months from the date of allotment,

(iii) To transferee—within 1 month from the date of receipt of instrument of transfer or intimation of transmission,

(iv) To allotees (debentures)—within 6 months from the date of allotment.

If the securities are dealt with in a depository, the company shall intimate the details of allotment of securities to depository immediately on its allotment [Section 56(4) of the Act].

14. Timelines for Issue of Duplicate Share Certificate —In case unlisted companies, the duplicate share certificates shall be issued within 3 months from the date of submission of complete documents with the company. In case of listed companies, the duplicate certificate shall be issued within 45 days from date of submission of complete documents with the company. [Rule 6(2)(c) of the Companies (Share Capital and Debentures) Rules, 2014]


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

Experts CornerGaurav Pingle and Associates

Generally, social entrepreneurs and professionals have a very basic concern w.r.t. the type of entity for engaging in activities relating to charity i.e. whether such activity should be in the form of a trust or society or a company with charitable objects. The decision is taken based on the nature of activities, persons involved in decision-making process, accounting aspects, taxation aspects, etc. This article focuses on incorporation of company with charitable objects.

According to the provisions of Section 8 of the Companies Act, 2013 (the Act), following are the 3 conditions or restrictions on its activities of such company:

(i) the company’s objective shall include activities for promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;

(ii) the company intends to apply its profits, if any, or other income in promoting its objects (as stated above); and

(iii) the company intends to prohibit the payment of any dividend to its members.

The Central Government issues a licence on such terms and conditions as it deems fit. Based on the licence, the company can be incorporated under Section 8 of the Act without addition to its name of the word “limited” or “private limited” as the case may be. This article provides a detailed compliance checklist for incorporation of companies with charitable objects (i.e. companies incorporated under Section 8 of the Act). The applicable provisions are Rules 8, 12 and 19 of the Companies (Incorporation) Rules, 2014 read with Section 8 of the Act. The entrepreneurs and professionals shall ensure compliance of the following provisions:

  1. Minimum number of directors.—If the company (under Section 8 of the Act) to be incorporated is a private company then minimum directors should be 2 and in case of public company, the minimum directors should be 3.
  2. Minimum number of members.—If the company (under Section 8 of the Act) to be incorporated is a private company then minimum members should be 2 and in case of public company, the minimum members should be 7. A partnership firm may be a member of company incorporated under Section 8 of the Act.
  3. Application for name.—The name of proposed company shall be considered undesirable, if: (i) it attracts the provisions of Section 3 of Emblems and Names (Prevention of Improper Use) Act, 1950; (ii) it includes the name of a trade mark registered or trade mark which is subject of an application for registration under Trade Marks Act, 1999 (unless the consent of owner or applicant for registration, of trade mark, as the case may be, has been obtained and produced by the promoters); (iii) it includes any word or words which are offensive to any section of the people; and (iv) it is identical with or too nearly resembles the name of LLP or company. Other provisions of Rule 8 of the Companies (Incorporation) Rules, 2014 shall also be complied with.

Under Rule 9 of the Companies (Incorporation) Rules, 2014, an application for reservation of name shall be made through RUN (Reserve Unique Name) web service (available at www.mca.gov.in). The name may either be approved or rejected, as the case may be, by the Registrar, Central Registration Centre after allowing resubmission of such application within 15 days for rectification of the defects, if any.

For the companies under Section 8 of the Act, the name shall include the words like foundation, forum, association, federation, chambers, confederation, council, electoral trust and the like, etc. [Rule 8(7) of the Companies (Incorporation) Rules, 2014].

The name including phrase “electoral trust” may be allowed for registration of companies to be formed under Section 8 of the Act, in accordance with the Electoral Trusts Scheme, 2013 notified by Central Board of Direct Taxes [Explanation to Rule 8(2)(b)(vi) of the  Companies (Incorporation) Rules, 2014].

  1. Validity of name approved.—Once approved, the name is valid for 20 days from the date of approval [Section 4(5)(i) of the Act].
  2. Application for licence under Section 8 of the Companies Act.—After the name is approved, the promoters of the company shall apply for licence under Section 8 of the Act. The licence provides certain terms and conditions to be followed during the lifetime of the company. Such application shall be made to the Registrar of Companies (in whose jurisdiction the registered office of the proposed company is to be situated). Such application shall be made in e-Form INC-12 [Rule 19 of the Companies (Incorporation) Rules, 2014]. Following documents that are to be submitted with the said e-form:

Draft memorandum and articles of association (format provided in Form INC-13):

(i)  declaration by practising profession that draft memorandum and articles of    association have been drawn up in conformity with the provisions of Section 8 of the Act and Rules made thereunder (in Form INC-14);

(ii) estimate of the future annual income and expenditure of the company for next 3 years, specifying the sources of the income and the objects of the expenditure;

(iii) grounds on which the application is made;

(iv) brief description of proposed activity;

(v) statement of assets and liabilities;

(vi) declaration by each of the persons making the application in Form INC-15 i.e. a declaration that draft memorandum and articles of association have been drawn up in conformity with the provisions of Section 8 of the Act and Rules made thereunder;

(vii) list of promoters (name, address, DIN or Income Tax PAN);

(viii) list of proposed directors (name, address, DIN or Income Tax PAN); and

(ix)   list of key managerial personnel (name, address, DIN or Income Tax PAN).

  1. Obtaining licence under Section 8 of the Companies Act.—The licence is granted by Central Government (powers delegated to the Registrar of Companies).
  2. Application for incorporation of company.— After obtaining licence under Section 8 of the Act, the promoters shall file an application for incorporation of the company in Form INC-32 (SPICe) along with following documents:

(i) memorandum and articles of association of the proposed company (incorporating the changes suggested by the Registrar of Companies at the time of issue of licence —as discussed above);

(ii) consent to act as a director (in Form DIR-2);

(iii) declaration by first director and subscribers of the proposed company (in Form INC-9);

(iv) declaration by practising professional (in Form INC-8);

(v) proof of registered office address [as provided in Rule 25 of the Companies (Incorporation) Rules, 2014];

(vi) indentify proof and residential proof of every subscribers of the proposed company;

(vii) pursuant to the recent amendment [i.e. Companies (Incorporation) Third Amendment Rules, 2019 dated 29-3-2019], the application for company incorporation shall be accompanied by e-Form Agile (INC-35) containing an application for registration of Goods and Services Tax Identification Number (Gstin), Employees’ State Insurance Corporation (ESIC) and Employees’ Provident Fund Organisation (EPFO).

  1. Certificate of Incorporation.— After review of e-form, information/proofs and documents, the Registrar, Central Registration Centre issues certificate of incorporation. Along with the certificate of incorporation, the Government also issues permanent account number (PAN) and tax deduction and collection account number (TAN) under the Income Tax Act.
  2. Opening of bank account and deposit of share subscription money.—The Board of Directors in their first meeting (or by circular resolution) shall decide to open the bank account of the company. The subscribers shall deposit the share subscription money in the company’s bank account (for the number of shares, we shall refer the subscription clause of the memorandum of association).
  3. Application for certificate of commencement of business.—A company (not being company limited by guarantee or unlimited company) shall not commence any business or exercise any borrowing powers unless a declaration is filed by director of the company within a period of 180 days of the date of incorporation of the company in e-Form INC 20-A with the Registrar of Companies. It is necessary to state that every subscriber to the memorandum of association has paid the value of the shares agreed to be taken by him on the date of making of such declaration. Section 10-A of the Act [as introduced by the Companies (Amendment) Ordinance, 2019]. Bank statement of the company shall be attached to the requisite e-form. The Registrar of Companies then issues certificate of commencement of business.

Generally, a company with charitable object (Section 8 company) is incorporated within 25 to 30 days. It is a time-bound process for incorporation of such company. After the name of such company is approved, there are 2 activities —application for licence under Section 8 and application for incorporation of the company. The company incorporation process also involves signing and execution of several documents at different stages.


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

Hot Off The PressNews

Supreme Court: The bench of Ranjan Gogoi, CJ and Sanjiv Khanna, J has issued notice to the Centre in a writ petition challenging the Constitutional validity of Section 327 (7) of the Companies Act, 2013 qua Section 53 of the Insolvency and Bankruptcy code, to the extent that Section 327 (7) renders the meaning of the Explanation (II) to Section 53 of the Code meaningless.

The petition was filed by a group of workmen comprising the Moser Baer Karamchari Union. Swarnendu Chatterjee and Shriya Maini, the advocates appearing for the Union argued before the Court that since Section 327(7) bars the application of Section 326 and Section 327 Companies Act, 2013 to the proceedings under the Code, it denies the workmen their legitimate dues for the services rendered in the company for a long period of time, which runs contrary to the concept to Right to Livelihood enshrined under Article 21 of the Constitution of India.

The Union also submitted that the Legislation undertaken for the benefit of the labour or workmen cannot be so construed so as to prejudiced the right and welfare of the labour. It would be an illegitimate method of interpretation of a statute or any provision whose dominant purpose is to protect the workmen. The petition read,

“The present provision; Section 327 (7) of the Companies Act, 2013 creates an artificial embargo by ousting the application of Section 326 of Companies Act, 2013 to the proceedings under IBC, 2016 which results in exclusion of “Workmen Dues” which results in violation of Right to Livelihood as the statutory dues which are rights of every employee/workmen gets denied.”

It was argued that “by not defining “Workmen Dues” in the Code itself and also by debarring the application of companies Act by the impugned Section, a void has been created, with respect to the definition of workmen dues under the Insolvency and Bankruptcy Code, 2016.  On the other hand, by excluding the applicability of Companies Act, especially Sections 326 and 327 from the proceedings under the Code, it has created an ambiguity as it fails to define as to what will constitute “Workmen’s Dues” under the Code, being in stark violation of Article 21 of the Constitution.”

The petition stated,

“when Legislature in its wisdom has categorically mentioned that the definition of workmen dues will be taken/borrowed/shall have the same meaning as defined in Section 326 of the Companies Act, 2013, Section 327(7) frustrates the object and purpose of the explanation (II) which results in conflict between two central statutes and ultimately results in denial of statutory dues of the workmen such as gratuity, pension, provided fund and all other wages and salaries which have been guaranteed under Section 326 of the Companies Act, 2013, in effect rendering the Companies Act and its applicability to the Code to a level of a mere rubber stamp. Such denial in effect actually frustrates the social welfare aspect of the beneficial provision which results in denial of hard earned money and welfare rights of the workmen guaranteed under Article 21 of the Constitution.”

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal, Mumbai: The Coram of Tarun Agarwala, J., (Presiding Officer), Dr C.K.G. Nair, (Member), M.T. Joshi, J., (Judicial Member) dismissed the appeals which were filed against the order which imposed a penalty on the appellants for not following Regulation 7(2) (a) of the Securities and Exchange Board of India (Prohibition of Insider Trading (PIT) Regulations, 2015

The appellant was a promoter of a company incorporated under the Companies Act, 1956. As per Regulation 7(2)(a) of the PIT Regulations, 2015 every promoter, was required to disclose to the company the number of such shares acquired or disposed of within two trading days of such transaction if the value of the shares traded, whether in one transaction or a series of transactions over any calendar quarter, aggregated to a traded value in excess of 10 lakh rupees. The said Regulation was not followed by the appellant and accordingly a show cause notice was issued to him for having failed to make the relevant disclosure under the provisions of Regulation 7(2)(a) of the PIT Regulations. The Adjudicating Officer passed an order holding him guilty of violating the provision of Regulation 7(2)(a) of the PIT Regulations and accordingly imposed a penalty of Rs 5,00,000 under Section 15A(b) of SEBI Act. The said appellants being aggrieved by the imposition of penalty filed the appeal.

The Court found that no disproportionate gain or unfair advantage was made by the appellants while undertaking the transactions in the shares of the Company nor any loss was caused to the investors as a result of non-disclosure. Thus the violation was only technical in nature. The Court thus reduced the penalty by declaring it disproportionate and excessive. Further, it was held that imposition of higher penalty amounted to discrimination especially when it was the first offence made by them. The appellants had violated Regulation 7(2)(a) of the PIT Regulations and consequently, the minimum penalty was justifiable. These three appeals failed and were dismissed. [Nitin Agrawal v. SEBI, 2019 SCC OnLine SAT 18, decided on 25-03-2019]

Case BriefsSupreme Court

Supreme Court: The bench of Abhay Manohar Sapre and UU Lalit, JJ has held that Section 212 of the Companies Act, 2013 does not prescribe any period within which a report has to be submitted by Serious Fraud Investigation Office (SFIO) to the Central Government.

Lalit, J, writing for himself and Sapre, J listed down the ‘basic features’ that were considered while coming to this conclusion:

  1. Absolute transfer of investigation in terms of Section 212(2) of 2013 Act in favour of SFIO and upon such transfer all documents and records are required to be transferred to SFIO by every other Investigating Agency.
  2. For completion of investigation, sub-Section (12) of Section 212 does not contemplate any period.
  3. Under sub-Section (11) of Section 212 there could be interim reports as and when directed.

He said that in the face of these three salient features it cannot be said that the prescription of period within which a report is to be submitted by SFIO under sub-Section (3) of Section 212 is for completion of period of investigation and on the expiry of that period the mandate in favour of SFIO must come to an end. If it was to come to an end, the legislation would have contemplated it.

“In the absence of any clear stipulation, in our view, an interpretation that with the expiry of the period, the mandate in favour of SFIO must come to an end, will cause great violence to the scheme of legislation. If such interpretation is accepted, with the transfer of investigation in terms of sub Section (2) of Section 212 the original Investigating Agencies would be denuded of power to investigate and with the expiry of mandate SFIO would also be powerless which would lead to an incongruous situation that serious frauds would remain beyond investigation. That could never have been the idea.”

The Court hence concluded that the only construction which was, possible therefore, was that the prescription of period within which a report has to be submitted to the Central Government under sub-Section (3) of Section 212 is purely directory. It added:

“Even after the expiry of such stipulated period, the mandate in favour of the SFIO and the assignment of investigation under sub-Section (1) would not come to an end. The only logical end as contemplated is after completion of investigation when a final report or “investigation report” is submitted in terms of sub-Section (12) of Section 212.”

Sapre, J in his concurrent opinion said:

“If the submission of the learned counsel for the respondents (writ petitioners) that the compliance of sub-section (3) of Section 212 of the Act in relation to the submission of the report be held mandatory is accepted (which I am afraid, I cannot accept) in our view, the very purpose of enacting Section 212 of the Act would get defeated and will become nugatory.”

[Serious Fraud Investigation Office v. Rahul Modi, 2019 SCC OnLine SC 423, decided on 27.03.2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial) dismissed an appeal filed by the Corporate Debtor against the initiation of Insolvency Resolution Process.

The Financial Creditor had granted a loan of Rs 1.02 crores to the Corporate Debtor which they were unable to repay. The Financial Creditor took recourse to arbitration and an award was passed favouring the Financial Creditor. The Corporate Debtor failed to comply with the award. Consequently, the Financial Creditor triggered the Insolvency Resolution Process. The appellant – a shareholder of Corporate Debtor – assailed the initiation of the process on the ground that there was an internal dispute among the directors which was pending adjudication under Section 241 and 242 of the Companies Act, 2013 before National Company Law Tribunal, New Delhi.

The Appellate Tribunal perused the entire scheme of the Insolvency and Bankruptcy Code regarding the Insolvency Resolution Process. It was observed that internal dispute among directors of the Corporate Debtors does not construe a valid defence to triggering of the process. Furthermore, it could not be defeated by taking resort to pendency of matter before the NCLT under Companies Act. The Code is a special law having an overriding effect on any other law as mandated by Section 238. The factum of default and non-compliance with arbitral award was not disputed by the Corporate Debtor; and thus, the Financial Creditor was well within its right to initiate the process. The appeal was held to be frivilous and costs amounting to Rs 1 lakh were imposed. The appeal was, thus, dismissed. [Jagmohan Bajaj v. Shivam Fragrances (P) Ltd.,2018 SCC OnLine NCLAT 413, dated 14-08-2018]

Case BriefsHigh Courts

Delhi High Court: A Single Judge Bench comprising of Jayant Nath, J., admitted a petition filed for winding up of respondent company. The petition was filed under Section 433(e) and 434(a) of the Companies Act, 1956.

The petitioner company had business dealings with the respondent company. The respondent was indebted to pay outstanding dues to the petitioner which amounted to Rs 13,58,000. Proceedings under Section 138 of the Negotiable Instruments Act were also pending before the competent court. The respondent took a plea that the claim was time-barred.

The High Court, reading the provision of Section 19 of the Limitation Act into the facts of the present case, rejected the plea of the respondent. The said section provides that if there is a part payment on account of a debt before the expiry of the prescribed period of limitation, a fresh period is to be computed. In the present case, admittedly, there was a part payment by the respondent. Thus, the claim of the petitioner was well within time. The Court noted the fact that there was clearly an outstanding liability, and the respondent failed to raise any bona fide defence for non-payment of the said dues. In such circumstances, the High Court appointed the Official Liquidator attached to the Court as Provisional Liquidator for the respondent company. The petition filed by the petitioner under the Companies Act, 1956 was thus admitted. [Tigers Worldwide (P) Ltd. v. MAL Cargo (P) Ltd.,2018 SCC OnLine Del 10106, dated 17-07-2018]

Hot Off The PressNews

The Ministry of Corporate Affairs (MCA) has constituted a 10 Member Committee, headed by the Secretary of Ministry of Corporate Affairs, for review of the penal provisions in the Companies Act, 2013 may be setup to examine ‘de-criminalisation’ of certain offences. The MCA seeks to review offences under the Companies Act, 2013 as some of the offences may be required to be decriminalised and handled in an in-house mechanism, where a penalty could be levied in instances of default. This would also allow the trial courts to pay more attention on offences of serious nature. Consequently, it has been decided that the existing compoundable offences in the Companies Act, 2013 viz. offences punishable with fine only or punishable with fine or imprisonment or both may be examined and a decision may be taken as to whether any of such offences may be considered as ‘civil wrongs’ or ‘defaults’ where a penalty by an adjudicating officer may be imposed in the first place and only consequent to further non-compliance of the order of such authority will it be categorised as an offence triable by a special court.

It is also required to be seen as to whether any non-compoundable offences viz. offence punishable with imprisonment only, or punishable with imprisonment and also with fineunder the Companies Act, 2013 may be made compoundable. The Committee shall submit its report within thirty days to the Central Government for consideration of its recommendations.

The terms of reference of the Committee are as follows:

  1. To examine the nature of all ‘acts’ categorised as compoundable offences viz. offences punishable with fine only or punishable with fine or imprisonment or both under the CA-13 and recommend if any of such ‘acts’ may be re-categorised as ‘acts’ which attract civil liabilities wherein the company and its ‘officers in default’ are liable for penalty;
  2. To review the provisions relating to non-compoundable offences and recommend whether any such provisions need to be re-categorised as compoundable offence;
  3. To examine the existing mechanism of levy of penalty under the CA-13 and suggest any improvements thereon;
  4. To lay down the broad contours of an in-house adjudicatory mechanism where penalty may be levied in a MCA21 system driven manner so that discretion is minimised;
  5. To take necessary steps in formulation of draft changes in the law;
  6. Any other matter which may be relevant in this regard.

The Committee’s constitution, under the Chairmanship of Secretary, is the following:

(1) Secretary,  Ministry of Corporate Affairs Chairperson
(2) Shri T.K. Vishwanathan, Former Secretary General Lok Sabha and Chairman, BLRC Member
(3) Shri Uday Kotak, MD, Kotak Mahindra Bank Member
(4) Shri Shardul S Shroff, Executive  Chairman, Shardul Amarchand Mangaldas & Co. Member
(5) Shri Ajay Bahl, Founder Managing Partner, AZB & Partners Member
(6) Shri Amarjit Chopra, Senior Partner, GSA Associate Member
(7) Shri Arghya Sengupta, Vidhi Centre for Legal Policy Member
(8) Shri Sidharth Birla, Former President, FICCI Member
(9) Ms. Preeti Malhotra, Partner and Executive Director of Smart Group Member
(10) Joint Secretary (Policy), Ministry of Corporate Affairs Member-Secretary

Ministry of Corporate Affairs

Case BriefsHigh Courts

Delhi High Court: A Division Bench comprising of Gita Mittal, Actg, CJ and C. Hari Shankar, J., adjudicated upon and listed matters relating to the Companies Act, 2013 for further hearing on 24.07.2018.

The writ petitions adjudicated upon jointly were filed against notices dated 06.09.2017 and 12.09.2017 issued under Section 164(2)(a) of the Companies Act, 2013 disqualifying the petitioners from being directors in companies wheresoever they may be directors. The disqualification took place because of default in submitting returns which were statutorily required to be filed with the Registrar of Companies (hereinafter ROC) with regard to the affairs of the company in question, for a continuous period of three financial years. Additionally, some of the writ petitions also alleged misuse of powers under Section 248(1) of the Companies Act, 2013, claiming that the Registrar of Companies additionally struck off the name of the said companies from the register of companies. The writ petitioners claim that the disqualification of directors as well as the striking off the names of the companies was in gross violation of the principles of natural justice.

The Court, noted that the issues raised in the writ petitions before it required adjudication and were of grave importance as they raised questions about the working of, spirit, intention and object of Sections 164 and 248 of the Companies Act, 2013. Further, interim stay was granted in the cases of all writ petitioners. The Court also allowed the petitioners to avail cancellation of disqualification under the Condonation of Delay Scheme, 2018. [Atul Khosla v. Union of India, WP (C) 9439 of 2017, order dated 22.03.2018]