Case BriefsSupreme Court

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

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

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

Findings of the Courts Below

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

Issues Before the Court

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

Observations and Analysis by the Court

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

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

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

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

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

Kamini Sharma, Editorial Assistant has put this story together 

*Judgment by: Justice B.R. Gavai

Know Thy Judge| Justice B.R. Gavai

Appearance before the Court by:

For the Appellant: Adv. Karan Nehra

For the Respondent: Adv. Tarun Gupta

Case BriefsSupreme Court

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

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

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

The Court, hence, held that,

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

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

*Judgment by: Justice RF Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by

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

For respondent: Advocate Abhijeet Sinha

Case BriefsSupreme Court

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

The Court said,

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

The dispute

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

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

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

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

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

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

NCLT on Mistry’s removal

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

NCLAT on Mistry’s removal

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

Supreme Court on NCLT and NCLAT’s approach

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

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

Supreme Court on NCLAT’s decision to reinstate Mistry

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

The following words at the end of sub¬section (1) of 242 “the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit” cannot be interpreted a conferring on the Tribunal any implied power of directing reinstatement of a director or other officer of the company who has been removed from such office.

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

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

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

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

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

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

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

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

Experts CornerSaakshya Law

A. Introduction – Historical background and context

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

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

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

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

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

Lord Macnaghten summed up the position succinctly:

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

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

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

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

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

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

B. Buy-back of its own shares

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

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

C. Financial assistance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

D. Other purchases of its shares; indirect purchases

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

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

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

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

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

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

E. Conclusion

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

By Siddharth Raja, Partner at Saakshya Law 

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

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

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

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

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

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

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

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

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

[9] Id., at p. 332.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Op EdsOP. ED.

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

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

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

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

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

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

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

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

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

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

Explanation.—For the purposes of this section—

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

On a mere glance, two things immediately stand out:

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

Let us unpack each of the above briefly:

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

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

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

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

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

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

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

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

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

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

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


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

† Former Judge and Independent Counsel, e-mail

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

2 (2015) 5 SCC 1.

3 AIR 1961 SC 293.

Business NewsHot Off The PressNewsTaxation

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

6 Pillars:

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


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

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

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

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

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

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

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

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

Arunima Bose, Editorial Assistant has put this story together.

Case BriefsSupreme Court

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

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

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

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

Contempt Petition | Father v. Sons

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

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

Family Settlement

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

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

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


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

Contempt Proceedings against the Respondents

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

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

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

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

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


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

Company Law Board

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

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

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


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

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

Civil Contempt

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

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

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

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

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

Main Contention

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


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

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

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

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

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

Requisite in a contempt proceeding

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

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

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

Situation in the present case

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

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

Further, the Bench expressed in light of jurisdiction that,

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

 Violation of Interim Orders

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

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

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

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

Case BriefsTribunals/Commissions/Regulatory Bodies

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

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


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

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

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

Facts and Contentions

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

Analysis, Law and Decision

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

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


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

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

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

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

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

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

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

Judicial Indiscipline

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

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

Cases referred by the Tribunal for the above-stated:

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

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

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

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

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

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

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

While parting with the decision, Bench recorded that

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

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

Hot Off The PressNews

Cooling Period

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

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

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

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

Reserve Bank of India

[Notification dt. 04-12-2020]

Op EdsOP. ED.


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

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

Decriminalisation of Offences

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

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

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

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

Alternate Framework for certain offences

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

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

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

Relaxations towards corporate social responsibilities of companies

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

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

Introduction of producer companies

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

Classification of listed companies

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

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

Reduction of timeline for rights issue

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

Constitution of NCLAT benches

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

Remuneration to Non-Executive Directors

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

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

Concluding Remarks

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

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



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

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

[5] Section 425 of Companies Act, 2013.

[6] Section 302 of Companies Act, 2013.


Case BriefsHigh Courts

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

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

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

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

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

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

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

Arunima Bose, Editorial Assistant has put this story together

Case BriefsTribunals/Commissions/Regulatory Bodies

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

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

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

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

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

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

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

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

Arunima Bose, Editorial Assistant has put this story together

Legislation UpdatesStatutes/Bills/Ordinances

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

The Companies (Amendment) Act, 2020


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.


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:

[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.

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Op EdsOP. ED.

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

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

OP. ED.Practical Lawyer Archives


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

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

[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

[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.


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.


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

[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 (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.”