OP. ED.Practical Lawyer Archives

The objects clause of the memorandum of association defines the contours of the company’s business activities. It gives powers to undertake the business activities which as indicated, whereas those activities not part of the objects, cannot be undertaken by the Company, even if all the shareholders give consent to undertake such activity.

In Bhutoria Brothers (P) Ltd., In re[1], it was noted,

“11. Stating the objects of the Company in the memorandum is not a mere legal technicality, but is a necessity of great practical import. It is essential that the public who are called upon to subscribe to the capital of the company by purchase of its share should know clearly what are the objects for which they are paying and which they want to encourage. To give this necessary information, the statement of objects should be clear. It must not be too vague and too general and too wide for in that case it will defeat its very purpose and object. That is why it is not regarded permissible in law to have one solitary clause in the memorandum of association saying, “The Company will carry on all kinds of business” without stating what the kinds of business are.”

Subject to the compliance of Companies Act, a company can change or alter its object clause. Such change in object clause of the company would be increase the scope of business activity of the company/expand business operations, include an object clause of the company (which is not there), statutory purpose (for certain Insurance Regulatory and Development Authority (IRDA)/SEBI registered intermediaries, etc.). Such alteration would also include deletion of obsolete and redundant objects included in the memorandum of association of the company. This article relates to the compliance checklist for altering the object clause of the memorandum of association of the company.

1. Applicable provisions.— Sections 4, 10 and 13 of the Companies Act, 2013 (Act) and relevant provisions of the Companies (Incorporation) Rules, 2014 relates to object clause or changes in object clauses of the memorandum of association of the company.

  1. Contents of the “object clause”.—Under Section 4 of the Act, the object clause shall contain the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof. Here, the relevant provisions are Schedule I to Act which Tables A, B, C, D and E.
  2. Approval of the Board of Directors.—The directors of the company shall primarily approve the proposal for altering object clause of the company. Such approval shall be subject to the approval of the shareholders and Central Government (in case of Section 8 companies). The necessary authorities shall also be specified in the resolution. The directors shall then call for shareholders meeting and authorise the director(s) or company secretary to issue notice to the shareholders. The resolution passed shall be accordingly drafted. The notice shall be issued in accordance with the Act, Rules made there under and the provisions of the articles of association of the company. The company shall ensure compliance of Sections 101 and 102 of the Act (according to the applicability and provisions in articles of association of the company). In case of public companies or private companies that are subsidiary of public companies, if the amendment to the object clause amounts to diversification of business activity, then in such cases, such companies shall file e-Form MGT-14[2] with the Registrar of Companies.
  3. Approval of shareholders.—The resolution for amending the memorandum of association for the objects of the company shall be placed before the shareholders of the company. Such approval can be obtained in general meeting or electronic voting or both, as the case may be. The approval of shareholders by passing a resolution by postal ballot may be obtained for alteration of the object clause in the memorandum of association and in the case of the company in existence immediately before the commencement of the Act (i.e. 1-4-2014), alteration of the main objects of the memorandum of association[3].
  4. Explanatory statement.—A statement setting out the following material facts concerning each item of special business (i.e. amendment to memorandum of association) to be transacted at a general meeting, shall be annexed to the notice calling such meeting, namely: (i) Nature of concern or interest, financial or otherwise, if any, in respect of each items of every director and the manager, every other key managerial personnel; and relatives of the said persons; and (ii) Any other information and facts that may enable members to understand the meaning, scope and implications of the items of business and to take decision thereon. Where any item of business refers to any document (i.e. memorandum of association, in this case), which is to be considered at the meeting, the time and place where such document can be inspected shall be specified in the explanatory statement.
  5. Section 8 companies.—A company registered under Section 8 of the Act shall not alter the provisions of its memorandum of association or articles of association (for any clauses) of the company, except with the previous approval of the Central Government (the powers have been delegated to the Registrar of Companies). An application for such alteration for Section 8 company may be filed by e-Form GNL – 1. Such application to the Central Government (i.e. ROC) can be made by obtaining the approval of Board of Directors. After the approval of Central Government (i.e. ROC), the amendment to the memorandum of association shall be placed before shareholders for their approval. The company shall then file e-Form MGT-14 with the Registrar of Companies[4];
  6. Change of name (for listed entities).—According to Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, a listed entity shall be allowed to change its name subject to compliance with the following conditions: (i) time period of at least 1-year has elapsed from the last name change; (ii) at least 50% of the total revenue in the preceding 1-year period has been accounted for by the new activity suggested by the new name; or (iii) the amount invested in the new activity/project is atleast 50% of the assets of the listed entity. SEBI has clarified that if any listed entity has changed its activities which are not reflected in its name, it shall change its name in line with its activities within a period of 6 months from the change of activities in compliance of provisions as applicable to change of name prescribed under the Act[5].
  7. Registration of alteration.—The Registrar of Companies shall register any alteration of the memorandum with respect to the objects of the company and certify the registration within a period of 30 days from the date of filing of the special resolution. The Registrar of Companies issues a certificate for registering the alteration of the object clause of the company.
  8. Validity of registration.—The alteration made under Section 13 of the Act shall not have any effect until it has been registered in accordance with the provisions of the Act.
  9. Compliances (post-alteration of object clause.—Each and every copy of the memorandum of association shall have the revised/new object clause of the company.

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

[1] 1957 SCC OnLine Cal 229 : AIR 1957 Cal 593.

[2] S. 179(3)(h) read with S. 117(3)(g) of the Act.

[3] R. 22 of the Companies (Management and Administration) Rules, 2014.

[4] Under S. 117 of the Act.

[5] Regulation 45 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Case BriefsHigh Courts

Allahabad High Court: Ravi Nath Tilhari, J., addressed a matter wherein a person being the director of the company signed a cheque on behalf of the company and since the said cheque got dishonoured, he was made liable, without the company being made liable under the offence of Section 138 of Negotiable Instruments Act, 1881.

The instant petition was filed under Section 482 of the Code of Criminal Procedure, 1973 for quashing of summoning order passed by Additional Chief Judicial Magistrate under Section 138 of the Negotiable Instruments Act.

Facts as stated by the applicant

Applicant has been stated to be the Director of a Company and complainant/OP 2, an employee in the railways, by giving assurance of contract of road construction from his superior officers in favour of applicant’s company obtained post-dated cheque of 5 lakh rupees in terms of security money.

Complainant had assured the applicant that once he starts earning profits from the said contract work he would return the post-dated cheques.

However, applicant without any prior notice to the company, complainant presented the cheque in the bank which was dishonoured due to non-availability of funds. One of the legal notice, though was not received by the applicant, but the second notice was served.

Points that arose for consideration:

High Court formulated the following points of consideration:

  • Whether criminal prosecution against the person in charge of, and responsible for conduct of the business of the company under Section 138 NI Act, can be maintained, in the absence of any prosecution of the Company for such offence and without making the company an accused, in view of Section 141 of the NI Act?
  • Whether the cheque in question was issued by the applicant in his personal capacity or in the capacity of director of the company?
  • Whether the orders under challenge and the criminal proceedings against the applicant deserve to be quashed in the exercise of jurisdiction under Section 482 CrPC?

Analysis of the above points:

In order to consider the first point, Court referred to Sections 138 and 141 of the Negotiable Instruments Act, 1881.

On perusal of the said provisions, the essential ingredients of offence under Section 138 NI Act as laid down by the Bench were:

  • The person drew a cheque on an account maintained by him with the banker
  • When such a cheque is presented to the bank is returned by the bank unpaid
  • such cheque was presented to the bank within a period of six months from the date it was drawn or within the period of its validity, whichever is earlier;
  • the payee demanded in writing from the drawer of the cheque the payment of the amount of money due under the cheque to the payee
  • Such a notice of payment is made within a period of 30 days from the date of the receipt of the information by the payee from the bank regarding return of the cheque, as unpaid and
  • Inspite of the demand notice the drawer of the cheque failed to make the payment within a period of 15 days from the date of receipt of the demand notice

For the offence to be constituted under Section 138 NI Act, all the above ingredients need to co-exist.

Supreme Court decision in Aneeta Hada v. Godfather Travels and Tours (P) Ltd., (2012) 5 SCC 661, held that Section 141 of NI Act is concerned with the offences by the company. It makes the other persons, vicariously liable for commission of an offence on the part of the company.

The vicarious liability gets attracted when the condition precedent laid down in Section 141 NI Act stands satisfied. There can be no vicarious liability unless there is a prosecution against the company. For maintaining a prosecution under Section 141 NI Act, arraying of the company as an accused is imperative.

 In Supreme Court’s decision of Standard Chartered Bank v. State of Maharashtra, (2016) 6 SCC 62, it was held that there cannot be any vicarious liability unless there was a prosecution against the Company.

In Harihara Krishnan v. J Thomas, (2018) 13 SCC 663, Supreme Court held that Section 141 stipulates the liability for the offence punishable under Section 138 NI Act when the person committing such an offence happens to be a company.

In Aneeta Hada v. Godfather Travels and Tours (P) Ltd., (2012) 5 SCC 661, it was settled that for maintaining a prosecution against the person in charge of and responsible for conduct of the business of the company under Section 138 NI Act, arraigning of the Company as an accused is imperative in view of Section 141 of the Act, as such a person can only be held vicariously liable.

With regard to point 1, hence Court held that such a person, cannot be prosecuted unless there was prosecution of the company.

Second Point

 Whether the cheque in question was issued by the applicant in his personal capacity or in the capacity of the Director of the Company?

The above-stated question can be determined from perusal of the cheque itself. It is one of the essential ingredients to constitute an offence under Section 138 NI Act, that the person drew a cheque on an account maintained with the Banker and the existence of this ingredient is to be proved from the document itself, i.e. the cheque, and for its proof no other evidence is required. Hence, Court could determine if the cheque was issued as authorized signatory or in personal capacity by the applicant by exercising its jurisdiction under Section 482 CrPC.

On perusal of the copy f the cheque it was found that the said was signed by Sanjay Singh, the applicant for Udit Infraheights Private Limited, as its authorized signatory.

Hence the cheque was not issued in the applicant’s personal capacity.

In the absence of the company, as accused, any offence was not made out, even prima facie, against the applicant for his summoning under Section 138 read with Section 141 of the NI Act.

While referring to the Supreme Court decision in Ashoke Bafna v. Upper India Steel Manufacturing and Engineering Company Ltd., (2018) 14 SCC 202, it was held that before summoning an accused under Section 138 NI Act, the Magistrate is expected to examine the nature of the allegations made in the complaint and the evidence, both oral and documentary, in support thereof, and then to proceed further with the proper application of mind to the legal principle of the issue.

Last Point

 With regard to the last point of consideration, Bench referred to the decision of Supreme Court in Rishipal Singh v. State of U.P., (2014) 7 SCC 215, Supreme Court, while considering the scope of Section 482 CrPC held that when a prosecution at the initial stage is asked to be quashed, the test to be applied is as to whether the uncontroverted allegations as made in the complaint prima facie establish the case.

In Pooja Ravinder Devidasani v. State of Maharshtra, (2015) 88 ACC 613, Supreme Court held that the Superior Court should maintain purity in the administration of justice and should not allow the abuse of process of the Court.

Therefore, Court opined that the complaint was not filed against the company, as the company was not made a party accused and no vicarious liability could be imposed upon the accused applicant.

Since, the cheque was not signed by the applicant in his personal capacity, the complaint could not have proceeded against him and no offence could be made out against the applicant.

Petition was allowed and the orders challenged were quashed. [Sanjay Singh v. State of U.P., 2021 SCC OnLine All 120, decided on 10-02-2021]

OP. ED.Practical Lawyer Archives

The articles of association (articles) of the company are often termed as the “bye-laws”. The articles contain regulations for the overall internal management of the company. It contains basic rules for calling and conducting Board meetings, voting at Board meeting, transfer and transmission of securities, voting rights of shares, calling and conducting of general meetings, etc. The article may have a detailed provision for appointment, role and responsibilities of Managing Director, whole-time Director, Executive Directors, etc. Certain provisions of the Companies Act, 2013 (Companies Act) are not applicable to private companies, Section 8 companies if there are certain provisions in its articles. The articles regulate the day-to-day functioning of the company. A shareholder of the company is expected to be familiar with the contents.  A company is expected to act within the contours of its article of association. In Naresh Chandra Sanyal v. Calcutta Stock Exchange Assn. Ltd.[1]1, it has been held,

“14. Subject to the provisions of the Companies Act, the company and the members are bound by the provisions contained in the articles of association. The articles regulate the internal management of the company and define the powers of its officers. They also establish a contract between the company and the members and between the members inter se. The contract governs the ordinary rights and obligations incidental to membership in the company.”

The “articles of association” have been defined under Section 2(5) of the Companies Act as “it means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act”. “Previous company law” has also been defined in Section 2(67) of the Companies Act. According to Section 5 of the Act, the articles of a company shall contain the regulations for management of the company.

This article relates to procedure and checklist for amending the articles of companies of private companies and unlisted public companies. For listed companies, it shall be necessary to comply with the provisions of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as well.

1.Contents of AOA.—The articles shall also contain such matters, as may be prescribed i.e. in accordance with Rule 11 of the Companies (Incorporation) Rules, 2014. The model articles as prescribed in Tables F, G, H, I and J of Schedule I to the Companies Act may be adopted by a company as may be applicable to the case of the company, either in totality or otherwise.

(i) Table F relates to AOA of company limited by shares.

(ii) Table G relates to AOA of company limited by guarantee and having a share capital.

(iii) Table H relates to AOA of company limited by guarantee and not having a share capital.

(iv) Table I relates to AOA of unlimited company and having a share capital.

(v) Table J relates to AOA of unlimited company and not having a share capital.

Nothing prevents a company from including such additional matters in its articles as may be considered necessary for its management. Such inclusion of additional matters can be done at the time of incorporation of the company or by amending the articles of the company.

2. Entrenchment Related Provisions in AOA of Company.—The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with.

3. Manner of Inclusion of Entrenchment Related Provisions in AOA of Company.—The inclusion can be made at the time of incorporation of the company or subsequently by amending the articles of the company. Such provisions for entrenchment shall only be made either on formation of a company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company.

4. Notice to Registrar of Companies.—Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed i.e. e-Form INC-7 or e-Form INC-32 Simplified Proforma for Incorporating Company Electronically (SPICe) of the Companies (Incorporation) Rules, 2014 and e-Form MGT-14 of the Companies (Management and Administration) Rules, 2014 in case of subsequent amendment.

4. Occasions for Amending AOA of the Company.—The articles of the company may be amended for ensuring proper compliance of the Companies Act, 2013, availing certain exemptions under the Ministry of Corporate Affairs (MCA) notifications for private company, Section 8 companies, etc., or specifying roles and responsibilities of the directors and key managerial personnel (KMP), or inclusion of certain points of shareholders agreement or investment agreement in the articles of the company, etc. In recent years, companies have adopted an entire new set of articles under the Companies Act, 2013 for the articles of Companies Act, 1956. The amendment of articles would also be required for conversion of a company from private to public or vice versa.

5. Conversion of Companies.— According to Section 14 of the Act, subject to the provisions of the Act and the conditions contained in its memorandum of association, if any, a company may, by a special resolution, alter its articles by including alterations having the effect of conversion of: (i) private company into a public company; or (ii) public company into a private company. However, where a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under Companies Act, the company shall, as from the date of such alteration, cease to be a private company. Any alteration having the effect of conversion of a public company into a private company shall not be valid unless it is approved by an order of the Central Government (powers delegated to Regional Director) on an application made in such form and manner as may be prescribed (i.e. e-Form RD-1). The company shall ensure compliance of Rule 41 of the Companies (Incorporation) Rules, 2014.

6. Section 8 Companies.—A company registered under Section 8 of the Act shall not alter the provisions of its memorandum of association or articles of association of the company, except with the previous approval of the Central Government (powers have been delegated to the Registrar of Companies). Such application for altering the articles of association of Section 8 company may be filed by e-Form GNL-1. Such application to the Central Government [i.e. Registrar of Companies (ROC)] can be made by obtaining the approval of Board of Directors. After the approval of Central Government (i.e. ROC), the amendment to the articles of association shall be placed before shareholders for their approval. The company shall then file e-Form MGT-14 with the Registrar of Companies under Section 117 of the Act.

7. Approval of the Board of Directors.—The directors of the company shall primarily approve the proposal for altering the articles of the company. Such approval shall be subject to the approval of the shareholders and Central Government (in some cases, discussed above). The resolution passed in the meeting of Board of Directors shall be accordingly drafted. The necessary authorities shall also be specified in the resolution.

8. Approval of Shareholders.— The resolution for amending the articles of the company shall be placed before the shareholders of the company. Such approval can be obtained in general meeting or electronic voting or both, as the case may be. The approval of shareholders by passing a resolution by postal ballot may be obtained for alteration of articles of association in relation to insertion or removal of provisions which, under sub-section (68) of Section 2 of the Act, are required to be included in the articles of a company in order to constitute it a private company [Rule 22 of the Companies (Management and Administration) Rules, 2014].

9. Explanatory Statement.—A statement setting out the following material facts concerning each item of special business (i.e. amendment to articles of association) to be transacted at a general meeting, shall be annexed to the notice calling such meeting, namely: (i) nature of concern or interest, financial or otherwise, if any, in respect of each items of every director and the manager, every other key managerial personnel; and relatives of the said persons; and (ii) any other information and facts that may enable members to understand the meaning, scope and implications of the items of business and to take decision thereon. Where any item of business refers to any document (i.e. articles of association, in this case), which is to be considered at the meeting, the time and place where such document can be inspected shall be specified in the explanatory statement.

10. Registration of Alteration.— Every alteration of the articles under Section 14 of the Act and a copy of the order of the Central Government approving the alteration (i.e. in case of conversion of public company into private company) shall be filed with the Registrar of Companies, together with a printed copy of the altered articles of association, within a period of 15 days, who shall register the same. The company shall then file e-Form MGT-14 with the Registrar of Companies under Section 117 of the Act.

11. Validity of Registration.— Any alteration of the articles of association registered shall, subject to the provisions of the Companies Act, be valid as if it were originally in the articles.


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

[1]  (1971) 1 SCC 50, 56 : (1971) 41 Comp Cas 51.

Case BriefsHigh Courts

Delhi High Court: Subramonium Prasad, J., while addressing the present revision petition expressed that:

“A court in revision considers the material only to satisfy itself about the legality and propriety of the findings, sentence and order and refrains from substituting its own conclusion on an elaborate consideration of the evidence.”

The instant revision petition was filed under Section 397/401 CrPC against the Order passed by Additional Sessions Judge. Further, the petitioner has also challenged the Order passed by Metropolitan Magistrate in an application for claiming interim maintenance under Section 23 of the Domestic Violence Act.

Facts leading to the present revision petition:

After marriage, Respondent/wife was inducted as a whole-time Director in the company run by the petitioner/husband. Later, the respondent-wife started living separately claiming that she was deserted by the petitioner after which she filed an application under Section 23 of the protection of Women from Domestic Violence Act, 2005 for seeking interim maintenance.

Since the respondent was continuing as the Director in the said company of the husband she wasn’t able to take up any other job and was not even getting any salary from the husband’s company which all lead to her not being able to maintain herself.

Initially, she was granted interim maintenance of Rs 1,00,000 but it was rejected by the lower court.

Respondent also approached the Company Law Board for a direction that she should be paid salary during the period she served as the Director of the Company to which the Company Law directed the above-stated company to pay the salary to the respondent.

When the petitioner moved an application under Section 25 of the Domestic Violence Act for the modification in the maintenance order since now the respondent was getting a salary from the Company, the said request was rejected.

Analysis and Decision

Bench opined that the scope of interference in a revision petition is extremely narrow.

Section 397 CrPC gives the High Courts or the Sessions Courts jurisdiction to consider the correctness, legality or propriety of any finding inter se an order and as to the regularity of the proceedings of any inferior court. It is also well settled that while considering the legality, propriety or correctness of a finding or a conclusion, normally the revising court does not dwell at length upon the facts and evidence of the case.

 Court noted that the findings of the Metropolitan Magistrate as upheld by the Sessions Court was that the petitioner was not providing adequate maintenance to the respondent and since the said maintenance was not being paid, petitioner was directed to pay a sum of Rs 1,00,000 towards maintenance.

Further, the Company which was being run by the petitioner did not release her salary. The respondent had to move the Court and fight for getting her legitimate salary.

To the above, Bench stated that even though the company is distinct from the petitioner but the company is being run by the petitioner and it can be assumed that the salary was not being paid to the respondent only at the instance of the petitioner.

While concluding, the Court held that it is open for the petitioner to raise all the contentions in the matrimonial proceedings pending between the husband and wife while deciding the issue of grant of alimony under Section 25 of the Hindu Marriage Act. [Taron Mohan v. State, 2021 SCC OnLine Del 312, decided on 25-01-2021]


Advocates for the parties:

Petitioner: Vishesh Wadhwa, Advocate

Respondents: Hirein Sharma, APP for the State

Joel, Advocate for the respondent 2.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Consumer Disputes Redressal Commission (NCDRC): Dinesh Singh (Presiding Member), expressed that whether, for a particular purpose, a company is a ‘consumer’, has principally to be determined by examining the facts and specificities of the case.

In the instant matter, the complainant had filed the complaint under Section 58(1) (a) read with Section 59 of the Consumer Protection Act, 2019.

11 units, comprising the entire Mezzanine Floor of Summit Business Bay Andheri, were purchased by the Complainant Co. from the Builder Co. for a total consideration of Rs 17,95,30,000.

Preliminary Issue:

Whether the Complainant Co. is a ‘consumer’ under the Act?

A Company is included in the definition of ‘person’ contained in Section 2(31)of the Consumer Protection Act, 2019, it is not per se precluded from being ‘consumer’, provided, if, for a particular purpose, it meets the requirements of ‘consumer’ as defined in Section 2(7) of the Act 2019.

Further, it was added that:

[a] ‘housing construction’ under the definition of ‘service’ in Section 2(42) cannot be construed  to include construction of a commercial complex for commercial activity; and

[b] commercial space in a commercial complex for an office of a company engaged in a business to generate profit is for ‘commercial purpose’.

Bench stated that a plain reading of Section (7)(ii) and Section 2(42) of the Act 2019 makes it clear that the Complainant Co., which has purchased commercial space for its office in a commercial complex, is not a ‘consumer’ under the Act 2019.

“…if, for a particular purpose, a company does not meet the ingredients of ‘consumer’ under the Act 2019, it will not be left remediless, it can avail of remedies available under other existing laws.”

Commission referred to the Supreme Court decision in Lilavati Kirtilal Mehta Medical Trust v. Unique Shanti Developers, (2020) 2 SCC 265, wherein it was decided that If, for a particular purpose, a company wants to enter the consumer protection fora, whether or not it is a ‘consumer’ has to be (reasonably and logically) adjudged in the given facts and specificities of each case (“a straight-jacket formula cannot be adopted in every case”; “The question of whether a transaction is for a commercial purpose would depend upon the facts and circumstances of each case”).

Further while addressing the question relating to the purchase of commercial space in a commercial complex, in its own name, as its, the company’s property, its immovable capital assets, Bench stated that:

“a company creating immovable capital assets in the form of lands and buildings, in its own name, for its office, is differently placed from a company buying a car, in its own name, ‘solely or principally’ for the personal use of its Directors or employees.”

While analysing, another significant aspect that was added by the Bench was that, a company purchasing commercial space for its office in a commercial complex, is materially different from a company indemnifying its raw materials, goods in process, finished goods, plant and machinery, lands and buildings, etc., by taking insurance. In such case, the purpose is indemnification against perils, nothing per se to do ‘closely and directly’ with its profit-generating activity, the ‘dominant purpose’ is not linked with its commercial activity, as such the company straightaway falls within the meaning of ‘consumer’ in accordance with Section 2(7), without necessitating a detailed exposition.

Hence, Complainant’s case that it is a ‘consumer’ failed on its facts and on the law. Commission also observed that allowing anyone into consumer protection for has adverse ramifications:

[a] evasion of court fee in civil courts; and

[b] eroding into the time and resources of consumer protection fora, which could otherwise be better devoted to the ordinary general consumers, who straightaway fall, ex facie, in the definition of ‘consumer’ (without having to write a treatise to enable their anyhow entry into the fora).

In light of the above discussion, it was found that the complaint was not maintainable before the Commission. [Freight System (India) (P) Ltd. v. Omkar Realtors and Developers (P) Ltd., 2021 SCC OnLine NCDRC 19, decided on 25-01-2021]


Advocates for the parties:

For the Complainant: Vivek Kohli, Senior Advocate with Bharti Chawla, Advocate.

Case BriefsHigh Courts

Karnataka High Court: B. M Shyam Prasad J dismissed the appeal being devoid of merits.

The facts of the case are such that the first respondent – the Karnataka State Financial Corporation filed a petition under Section 31 (1)(aa) and 32 of the State Financial Corporations Act, 1951 before VI Additional City Civil Judge, Bengaluru City, against the appellant and the second and third respondents invoking Bank Guarantee executed by them. Hence the petition was filed under Section 31 (1) (aa) and 32 of the State Financial Corporation Act, 1951 which was allowed, assailing this order another petition under Order IX Rule 13 of the Code of Civil Procedure, 1908 was filed which was dismissed ex parte as inspite of giving repeated reminders no one appeared before the Court. Aggrieved by the dismissal of the petition instant appeal was filed before XXXVII Additional City Civil and Sessions Judge, Bengaluru City.

Counsel for the appellants submitted that the first respondent had shown his address at Wilson Garden, Bengaluru for service of notice but he had sold the property way back in 1992 and shifted his residence and been a resident of this new place ever since. He further submitted that this is the reason why the appellant did not know about the petition and came to know only in the month of September 2008 when he visited Sub Registrars Office for verification of documents.

The Court observed that the question of the appellant being served at the address other than the address mentioned in the petition viz., address of the principal borrower and there was a complete cessation of all association with the principal borrower. It was further observed that when it is admitted that he was one of the directors of the principal borrower and he continued to be a director of the principal borrower as of the relevant date, the service of notice at the first instance at the principal borrower’s address could be reasonably inferred as due service of notice. Also, it would not be reasonable to infer that the appellant has no knowledge of the petition merely because the appellant contends that he shifted his residential address.

The court thus held that based on documents placed on record it is amply clear that there is no information available that the appellant informed the first respondent about his shifting of residence and his new address. Thus, there stands no reason for interference.

In view of the above, appeal was dismissed.[N. Nagaraja Reddy v. Karnataka State Financial Corporation, Miscellaneous First Appeal No. 1413 of 2013 (CPC), decided on 03-01-2021]


Arunima Bose, Editorial Assistant has put this story together

Op EdsOP. ED.

The doctrine of the ‘corporate veil’ is the legal assumption that the acts of a corporation are not the actions of its shareholders, so that the shareholders are exempt from liability for the corporation’s actions. However, Courts sometimes apply common law principles to ‘pierce the corporate veil’ and hold promoters/shareholders personally responsible for the corporation’s wrongful acts. This article examines whether these common law principles extend themselves to the arbitration of disputes.

INTRODUCTION

Company laws of all economically advanced countries make available corporate vehicles through which businesses can be carried on with the benefit of limited liability. For most shareholders this means that once they have paid for their shares the worst fate that can befall them in the event the company becomes insolvent is that they will lose the value of their investment. Their other assets remain unaffected. In the event of the success of the company, its shareholders are entitled to receive all residual benefits in the form of dividend and/or share price appreciation. The irony from the perspective of its trade and financial creditors is apparent, companies require credit to work, yet creditors do not partake in the potentially unlimited returns of the company in the event of its success. They are at all times limited to the fixed returns agreed between themselves and the company .

Otto Kahn-Freund in his seminal piece, Some Reflections on Company Law Reform analysed modern company law issues such as the abuse of the corporate entity and allocation of shares in return for overvalued assets from the perspective of a creditor. Kahn-Freund noted with amusement how the position of law recognised a ‘metaphysical’ distinction between one man in his individual capacity as a shareholder and his capacity as a company when it came to recovering the dues of trade creditors. Describing the judgment in Solomon v. Solomon as catastrophic, Kahn-Freund had suggested two remedies (a) requiring higher capital inputs by shareholders at the time of forming private companies to protect the interest of its creditors; and (b) fixing liability upon shareholders based on their controlling interest in the company. Neither of these suggestions were ever implemented in the United Kingdom as they were perceived as a barrier to the organic growth of small companies.

In India, we are seeing a push towards encouraging free enterprise through the STARTUP INDIA initiative and the MAKE IN INDIA initiative. Companies can now be set up in just one day. The environment is apt to revisit Kahn-Freund’s concerns and examine the doctrine of piercing the corporate veil. Given the vastness of the subject the authors are limiting their inquiry only to an analysis of the doctrine of piercing the corporate veil in relation to the arbitration of disputes.

THE STATUTORY FRAMEWORK IN INDIA

The authors Gower and Davies state that the doctrine of lifting the veil plays but a small role in British Company Law. They assert that instances in which ‘the veil has been lifted’ usually turn on the provisions of a particular statute or on the contracts executed between the parties .

Does the legislative environment in India lend itself to piercing of the corporate veil in aide of arbitration? Chapter I of Part I of the Arbitration and Conciliation Act, 1996 (“the 1996 Act”) contains the general provisions of the 1996 Act. Section 2(1) defines various terms appearing in the 1996 Act with the qualification “unless the context otherwise requires”. Section 2(1)(h) defines the term party to mean ‘a party to an arbitration agreement ’.

In the year 2014, the 246th Law Commission submitted its Report on ‘Amendments to the Arbitration and Conciliation Act, 1996’. While the Law Commission suggested changes to Section 7 of the 1996 Act, none of the Law Commission’s recommendations were directed to the language of sub-section (1) and sub-section (4)(a) of Section 7 and in particular to the referential terms: ‘parties’ and ‘document signed by the parties’ therein. Ultimately, the only amendment included in the statute book was an amendment to sub-section 4(b) of Section 7 whereby the words ‘including communication through electronic means’ was inserted.

The Commission recommended the need to amend Section 2(h) and Section 8(1) to bring them in line with the wording of Section 45 and Section 54 of the 1996 Act . The recommendations were suggested with the view to extend the ratio of the judgment of the Supreme Court of India in Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc to arbitrations conducted under Part I of the 1996 Act.

Following the recommendations of the Law Commission, Section 8(1) of Chapter II of Part I of the 1996 Act dealing with the Power of a Judicial Authority to refer parties to arbitration where there is an arbitration agreement was amended to bring it in line with Section 45 of Chapter I of Part II of the 1996 Act. Post amendment Section 8(1) reads:

(1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.

However, in spite of the recommendations of the Law Commission there was no amendment made to Section 2(1)(h) of the 1996 Act i.e. the provision which defines the term a party to an arbitration agreement. Without the amendment to Section 2(1)(h) the amendment to Section 8(1) is indeed an anomaly.

At first glance the use of the phrase ‘any person claiming through or under him’ with reference to a ‘party to the arbitration agreement’ is suggestive of a legislative policy allowing for ‘non-signatories’ to an arbitration agreement to seek the reference of a matter filed before a judicial authority to arbitration. But the manner in which the provision is drafted presents limited practical application. The term ‘any person claiming through or under him’ is suggestive of two circumstances: (a) the person (making the application for reference) has acquired the interest of a party to a matter, and/or (b) the person is an heir or a subsidiary/holding/associate company of a party to a matter. In both instances, one fails to understand how the provision has benefited by the addition. The acquisition of a company does not affect the right of the transferee company to seek reference of a matter to arbitration . An heir was by virtue of Section 40 of the 1996 Act entitled to commence and/or continue and/or enforce and/or was bound by an award passed in an arbitration. Where such acquisition of a company being a party to a matter before a judicial authority is sanctioned by the Tribunal, the provisions of Section 232 of the Companies Act, 2013 ensure that the rights, liabilities of the transferor company become those of the transferee company. The relevant provisions of the Companies Act, 2013 also contain the stipulation that proceedings initiated by the transferor company may be continued by the transferee company .

One could also argue that the amendment to Section 8(1) far from furthering the intentions of the judgment in Chloro Controls actually is a step in the wrong direction. The following illustration would demonstrate this point: Company A1 is the holding company of Company A2. Company B enters into an agreement with Company A2, which contains an agreement to arbitrate disputes. Disputes arise and Company B initiates a matter before a judicial authority against Company A1 realising as is commonly the case that A2 has no assets of its own and seeking the lifting of the corporate veil of Company A2 on the ground that Companies A1 & A2 are a single economic unit, or Company A2 is a façade or sham, or that Company A2 is an agency for the business of Company A1. The provision as drafted would allow Company A2 to interrupt such proceedings before a judicial authority and seek to enforce the agreement to arbitrate disputes between Company B and Company A2.

Another oddity observed is that the provision specifies a special period of limitation within which the application would have to be made by a person claiming under or through a party to a matter. Section 8(1) requires the application by a person seeking a reference of the matter to arbitration to be made before the submission of a party’s first statement on the substance of the dispute. In Jadavji Narsidas Sha & Co. v. Hirachand Chaturbhai a Division Bench of the Bombay High Court regarded the filing of an affidavit-in-reply setting out a party’s defence in a summary suit as being the submission of its first statement on the substance of the dispute. But there appears no logical reason for the imposition of this time limit for an application when made by a person claiming through or under a party in a matter before a judicial authority as such person is under no obligation under the Code of Civil Procedure, 1908 to ‘submit a first statement on the substance of the dispute’ not being a party to the proceeding.

That said, the amendments aforementioned have received wide spread acknowledgement for encouraging one to look beyond the identity of the ‘party’ or ‘signatory’ to the arbitration agreement and consider an application for reference to arbitration by ‘non-signatories’ or including ‘non-signatories’ to an arbitration agreement.

In the next part of this article the authors shall evaluate the approach adopted by Courts with the view of assessing whether a norm for lifting the veil can be identified with reference to the arbitration of disputes.

THE VEIL AND COMMON LAW

A leading case on the doctrine of piercing the corporate veil in the United Kingdom was the case of Adams v. Cape Industries Plc. . This case raised almost every known reason for piercing the corporate veil known to modern company law including that the corporate structure was a sham or façade that the companies were a group of companies forming a single economic unit and even the principle of the interest of justice in order to make the parent company liable for the obligations of a subsidiary towards involuntary tort victims. The question ultimately boiled down to whether the holding company was bound by judgments passed in the United States of America against its subsidiary and a company it was associated with. The Court rejected the argument that Cape the holding company was doing business or was present in the United States through its wholly owned subsidiaries or through a company (CPC) with which it was observed to have close business links.

A leading authority on the doctrine of piercing the corporate veil in India is the judgment of the Supreme Court of India in Life Insurance Corporation of India v. Escorts Ltd. . In this case the Supreme Court was called upon to consider whether a portfolio investment scheme framed under Section 73(3) of the Foreign Exchange Regulation Act, 1973 for the purpose of encouraging investment in Indian companies by non-resident Indians read with the other provisions of the Act permitted authorities to look beyond the corporate identity of the investor and identify the ‘real’ owners of the portfolio. The examination by the authorities was undertaken in order to ascertain whether there had been a transgression of the maximum of 1% investment by an individual non-resident Indian. The allegation of the Revenue was that a single individual Mr Swraj Paul had made investments in the scheme far in excess of the 1% limit through his family trust and through thirteen companies forming the Caparo group of companies which it was alleged were controlled by him. The Court ruled that the statutory framework read with the scheme of the portfolio concerned only permitted a limited lifting of the corporate veil for the purpose of inquiring into identifying the nationality of the shareholders but did not permit or allow any further scrutiny to determine the individual identity of each shareholder.

In the context of arbitration, the inquiry into this issue eventually leads one to the case of Indowind Energy Ltd. v. Wescare (India) Ltd. where the Supreme Court of India was called upon to consider an agreement for sale dated 24th February, 2006 between Wescare and Subuti. The agreement defined Wescare and its subsidiary RCI Power India as the sellers and defined Subuti and its nominee as the buyers and promoters of Indowind. The agreement contemplated the transfer of business assets by the seller to the buyer in return for part payment in cash and part payment via the issuance of shares. Disputes arose between the parties and Wescare filed 3 separate applications under Section 9 of the 1996 Act seeking various reliefs against Subuti and Indowind. All of these applications came to be rejected with a prima facie observation that Indowind had not signed the agreement for sale. Wescare thereafter filed an application under Section 11 of the 1996 Act seeking the appointment of an arbitrator to determine the disputes between the parties. Subuti resisted the application on the ground that ‘the agreement did not contemplate any transaction between itself and Wescare’ and hence the application did not indicate any cause of action against it. Indowind asserted that it was not a party to the agreement for sale. The learned Chief Justice of the Madras High Court allowed the application and observed that by lifting the corporate veil one would see that Subuti and Indowind were ne and the same person. Interestingly, only Indowind challenged the judgment of the Chief Justice. The Supreme Court of India upheld Indowind’s challenge and held that there was no arbitration agreement between Indowind and Wescare that met the requirements of Section 7 of the 1996 Act. The Court observed that the fact that Subuti and Indowind had common directors/shareholders made no difference for the purpose of seeking a reference to arbitration and actually observed negligence on the part of Wescare in not insisting that Indowind also sign the agreement.

The contractual terms between Subuti and Wescare are discussed in great detail in the judgment of the High Court of Judicature at Madras. The Madras High Court had observed that under the agreement for sale Indowind was described as the nominee of Subuti and agreed to ‘give’ consideration by issuing share capital to Wescare . Under Clauses 4.4 to 4.6 of the agreement for sale Indowind agreed to pay Wescare for the purchase of certain machinery. Thereafter, pursuant to the agreement for sale, Indowind passed two crucial resolutions to give effect to the terms of the agreement. An Extraordinary General Body Resolution was passed by the shareholders of Indowind on 15.04.2006 whereby the allotment of shares to Wescare was approved. The Board of Directors of Indowind passed a resolution approving the part purchase of machinery under the agreement for sale on 17.04.2006. The authors would submit that the analysis of the Madras High Court of the contractual terms are well informed and correctly exposit the true intention of the parties from the agreement between the parties, namely, that Indowind would be covered by the agreement for sale. The authors would submit that in addition to the analysis of the contractual terms between the parties if one were to apply the statutory scheme contained in the Specific Relief Act, 1963 and in particular the provisions of Section 15(h) and Section 19(e) of the Specific Relief Act, 1963 dealing with circumstances when a company can seek specific performance of an agreement entered into by its promoters one would necessarily conclude that Indowind was bound by the agreement for sale. The conduct of Indowind in passing the aforementioned resolutions clearly indicates that it had accepted the contract and had communicated such acceptance to the other party to the contract . It is submitted that if Indowind could seek the specific performance of the agreement for sale it would most certainly have to be willing to abide by it and hence it’s terms could also be enforced against it . The authors would therefore respectfully submit that both the terms of the contract between the parties as well as the statutory framework supported a conclusion that disputes between the parties were arbitrable.

In Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. the Supreme Court was called upon to consider whether the arbitration agreements contained in some of the agreements between the parties governed all the joint venture agreements. The Court analysed the corporate structure of the several parties to the dispute before it and came to the conclusion that the disputes essentially arose between two groups, namely: (a) the Chloro Control or Kocha Group, and (b) the Severn Trent Group.

These groups had entered into seven separate agreements with the intention of carrying on business by joint venture in the form of the appellant and Severn Trent De Nora LLC. In its analysis the Supreme Court determined that the shareholders agreement dated 16.11.1995 was the principle agreement between the parties. Under this agreement the Severn Trent Group appointed the appellant as its distributor in India for the products manufactured by it . In furtherance of this principle agreement the parties entered into an International Distributors Agreement, a Managing Director’s Agreement, an Export Sales Agreement, a trademark licence and technical know-how agreement and a Supplemental Agreement.

Disputes between the parties commenced following the allegation by the Severn Trent Group that the Chloro Control Group had failed to remedy certain issues and grievances raised by them whereupon they took the decision to terminate the joint venture. The appellant then filed a derivative suit before the High Court of Judicature at Bombay whereupon the Severn Trent Group made an application under Sections 8 and 5 of the 1996 Act seeking a reference of the dispute to arbitration. The Supreme Court concluded that in the present case the fact that one or some of the parties were not signatories to all the agreement would not be of much significance since all the agreements flow from one principle agreement. The Court opined that all the sub-agreements were executed in order to attain the object of the principle agreement. The intention of the parties being to attain one common goal it was necessary to construe that the disputes under one or more or all the agreements must be sent to a common arbitration . It would thus appear that the Court concluded from the terms of the agreements between the parties that there was an intention to refer all disputes between all the parties to arbitration. From the reported version of the judgment available with the authors it would appear that the decision in Indowind was not placed before the Supreme Court for its consideration.

In Rakesh Kathotia v. Milton Global , a Division Bench of the High Court of Judicature at Bombay was hearing an appeal from the dismissal of an application under Section 9 of the 1996 Act. The learned Single Judge had rejected the application on the ground that there was no identity between the parties to the arbitration agreement and the application. It was the contention of the appellant that a Joint Venture Agreement (JVA) dated 14.07.2001 entered into between two groups, namely, the Vaghani Group and the Subhkam Group required the transfer of the entire manufacturing and distribution business of the Vaghani Group to be transferred to a Joint Venture Company (JVC) incorporated between the groups. The appellant argued that the Vaghani Group had formed an entity Respondent 2 and were carrying on business in competition with the JVC. From the contractual documents before it the Court held that Respondent 2 would be covered by the terms of the JVA between the parties and hence the application under Section 9 could not have been dismissed on the ground that Respondent 2 was not a party to the arbitration agreement.

The judgment in Chloro Controls was followed by the Supreme Court of India in Purple Medical Solutions (P) Ltd. v. MIV Therapeutics Inc. The judgment is significant as the ratio in Chloro Controls was sought to be applied to an application filed under Section 11 of the 1996 Act. Differences between the parties had their genesis in a Share Purchase Agreement (SPA) entered into on 11.07.2011 and a License Royalty Agreement entered on the same date. Under the SPA, the first respondent was required to transfer 99.96% of its share capital to the petitioner. The transfer of shares was restrained by an order and Injunction passed by the District Court of Massachusetts in a claim filed by a third party. The petitioner came to learn of this order on 12.07.2011 just one day after the execution of the SPA. The petitioner was assured by the respondents that the dispute before the Court of Massachusetts would be settled and was thereby induced to make payment towards the purchase price of the shares. The respondents however did not discharge the claim before the District Court of Massachusetts and on 23.07.2013, coercive proceedings were commenced against the petitioner and Respondent 1 a company in which it had by now acquired a substantial stake. The Supreme Court applying the ratio of the judgment in Chloro Control held that the consent of Respondent 2 to arbitrate disputes under the agreements between the parties could be inferred from the nature of the transaction between the parties .

The judgment in Chloro Control was sought to be applied in a challenge to an arbitral award in a petition under Section 34 of the 1996 Act in ONGC v. Jindal Drilling and Industries Ltd. before the High Court of Judicature at Bombay. The arbitral tribunal had dismissed a claim filed before it on the grounds of lack of jurisdiction. It was the case of the petitioner that it had awarded a contract to a company by the name DEPL basis the representation that this entity was a sister concern of the respondent. The Court found no contractual or circumstantial evidence in support of these allegations and hence agreed with the Tribunal’s findings that there was no material produced in support of the aforesaid allegations. It was in such circumstances that the Court refused to apply the ratio of the judgment in Chloro Control .

GMR Energy Limited v. Doosan Power Systems India (P) Ltd. was an interesting case for it was a suit filed before the Delhi High Court seeking an injunction restraining the defendants from initiating or continuing an arbitration before the Singapore International Arbitration Centre (SIAC). The suit sought an injunction on the ground that the plaintiff was not a party to the arbitration agreements. The defendants filed an application seeking reference of the suit to arbitration under Section 45 of the 1996 Act. The defendants contended that the plaintiff had by virtue of two MOU’s guaranteed the liability of GCEL. These contentions were accepted by the Court and also noted that the GMR group of companies operated as a single group concern and the plaintiff had in fact made part-payment of the obligations of GCEL.

In Cheran Properties Ltd. v. Kasturi and Sons Ltd. , the Supreme Court of India was hearing appeals from a judgment of the National Company Law Appellate Tribunal. The third respondent, KSL, SPIL and Hindcorp entered into a share purchase agreement on 19.07.2004. Under this agreement SPIL would allot 240 lakh equity shares to KSL at a price fixed under the agreement in order to discharge the book debts of SPIL. KSL was to sell 243 lakh equity shares to KCP. The object being to take over the business, shares and liabilities of SPIL. Since the transaction was not completed by KCP disputes broke out between the parties, which were referred to arbitration. An award was passed against KCP. KCP challenged the award unsuccessfully losing at every stage right up to the Supreme Court. The award having attained finality, KSL initiated proceedings under Section 111 of the Companies Act, 1956 seeking a rectification of the register. The NCLT allowed the application and KCP’s appeal against this order was dismissed. In passing its order, the NCLT had concluded that the appellant was a nominee of KCP. These conclusions were based on an evaluation of the proceedings during the course of the arbitration and the provisions of the share purchase agreement, which allowed KCP to nominate any person for the purpose of acquiring the shares of SPIL provided they agreed to abide by the terms of the agreement between the parties. It was the appellant’s principal contention that the award could not be enforced against it, as it was not a party to the arbitration. The Court however, opined that in modern business transactions where parties enter into multiple layers of transactions through groups of companies. The Court held that the intention of the parties ought to be gathered from the transactional documents and the intention of the parties ought to be given effect including if necessary, by binding non-signatory parties by the outcome of the arbitration proceedings. Accordingly, the Court derived a contractual intent to bind the appellant and upheld the decision of the NCLT and the NCLAT and dismissed the appeal.

Before parting with this decision, it would be necessary to bring the attention of the reader to a distinction sought to be created by the Court between seeking to apply ‘the group of companies principle’ in a Section 11 situation as in Indowind and in a post arbitration case as in the case at hand. The Court concluded that the statutory framework, namely, Section 35 of the 1996 Act allowed it to execute an Award against persons claiming under or through a party to an arbitration but the scheme of the 1996 Act did not authorise such considerations in the context of an application under Section 11 of the 1996 Act . The authors respectfully differ with these observations of the Supreme Court . In proceedings under Section 8 as well as in proceedings under Section 11 of the 1996 Act, the judicial authority or court is required to give a finding on the existence of an arbitration agreement’ . There was additionally no distinction between the language of Section 8 and Section 35 at the time of the judgment since Section 8 of the 1996 Act had already been amended by Act 3 of 2016. The authors would state that once an intent can be seen or derived from the transaction between the parties or observed in their conduct there is nothing in the language of the 1996 Act that prevents a judicial authority or court from giving effect to that intention and appointing an arbitrator in a dispute covering signatory parties as well as non-signatory parties. It is also pertinent to note that the decision of the Supreme Court in this case did not benefit from having the opportunity to consider the judgment of the Supreme Court in Purple Medical Solutions which itself did not have the opportunity of considering Indowind .

In Ameet Lalchand Shah v. Rishabh Enterprises , the Supreme Court of India was called upon to consider the validity of an order dismissing an application under Section 8 of the 1996 Act. Rishabh had entered into two contracts with Juwi India, namely, an equipment and material supply contract and an engineering, installation and commissioning contract, both of which contained an arbitration agreement. Rishabh then entered into a sale and purchase agreement with Astonfield for purchasing CIS Photovoltaic products and an equipment lease agreement whereby Dante Energy agreed to lease the solar power plant of Rishabh at Jhansi. These two agreements did not contain arbitration agreements. Owing to disputes between the parties, Dante Energy invoked arbitration and nominated an arbitrator. In response Rishabh filed a suit before the High Court of Judicature at Delhi alleging fraud and seeking a declaration that the aforementioned agreements were void. The Supreme Court considered the terms of the various agreements as well as the pleadings in the plaint filed by Rishabh and concluded that clearly the four agreements were inter-connected. The Court opined that while there were several agreements covering several different parties these were all executed for the same commercial object of commissioning a solar power project in Jhansi. The Court therefore referred disputes under all four agreements to an arbitrator to be appointed by the parties.

The Courts have also had an opportunity of considering intervention by third parties in arbitration proceedings as was the case in Nirmala Jain v. Jasbir Singh as well as impleadment of third parties to arbitration agreements as was the case in Starlog Enterprises Ltd. v. Board of Trustees of Kandla Port . In Nirmala Jain a Division Bench of the Delhi High Court was deciding an appeal where the principle ground for challenge to an order under Section 9 of the 1996 Act was that it allowed a third party to the arbitration proceedings to intervene in the arbitral proceedings. Dismissing the appeal, the Court held that there was no absolute proposition of law that third parties/non-signatories could not be made parties to an arbitration. The Court observed that given the commonality of the subject-matter and the composite nature of the transaction between the parties there was nothing wrong with the order under challenge. In Starlog an arbitral tribunal passed an order in July 2019 impleading a third party in an arbitration that had commenced in the year 2014. The impleaded party sought to challenge the order of the Tribunal by filing a writ petition before the High Court of Judicature of Gujarat at Ahmedabad. This proceeding was dismissed as not maintainable and the Gujarat High Court left the parties to raise all the contentions on merits before an appropriate forum at the appropriate time.

In MTNL v. Canara Bank , MTNL sought to oppose the inclusion of CANFINA as Respondent 2 in arbitral proceedings contending that there was no arbitration agreement between MTNL and CANFINA. The Supreme Court referred to several documents to ascertain the intention of the parties including: the contractual documents between MTNL and Canara Bank, Minutes of Meetings between Cabinet Secretaries with respect to the arbitration of disputes and to earlier proceedings between the parties. The Court observed that arbitration agreements are to be construed according to the general principles of construction of statutes, statutory instruments, and other contractual documents. The intention of the parties must be inferred from the terms of the contract, conduct of the parties, and correspondence exchanged, to ascertain the existence of a binding contract between the parties. If the documents on record show that the parties were ad idem, and had actually reached an agreement upon all material terms, then it would be construed to be a binding contract . The meaning of a contract must be gathered by adopting a common sense approach and must not be allowed to be thwarted by a pedantic and legalistic approach. A commercial document has to be interpreted in such a manner so as to give effect to the agreement, rather than to invalidate it. An arbitration agreement is a commercial document inter parties, and must be interpreted so as to give effect to the intention of the parties, rather than to invalidate it on technicalities. The Supreme Court stated that a non-signatory can be bound by an arbitration agreement on the basis of the ‘group of companies’ doctrine, where the conduct of the parties evidences a clear intention of the parties to bind both the signatory as well as the non-signatory parties. The Courts and Tribunals have invoked this doctrine to join a non-signatory member of the group, if they are satisfied that the non-signatory company/ party was by reference to the common intention of the parties, a necessary party to the contract. The Court held that a non-signatory entity of a group of companies could be bound by an arbitration agreement if it was found that it had been engaged in the negotiation or performance of the transaction or made statements indicating its intention to be bound by the contract. Non-signatory parties could also be bound if they were found to be bound and/or benefitted from the relevant contract. The Court also observed the need to have a common arbitration where a ‘composite transaction’ required several different agreements to be performed in order to attain a common objective. Ultimately, the Court concluded that from the material before it no gainful arbitral proceedings could be conducted in the absence of CANFINA and thus referred the parties to the arbitration.

CONCLUSION

Like a consummated romance arbitration rests on consent. The analysis above clearly articulates consent as the cornerstone of arbitration. However, consent need not always be express and it may be implied from the transactional documents and the conduct of the parties as well as by the conduct of non-parties/non-signatories. The authors, therefore, propose that terminology such as ‘group of companies’, ‘vessel of fraud’, ‘sham or bogus’ etc commonly used in proceedings where parties seek to question or challenge the separate corporate identity of a company whilst applicable to civil proceedings where such questions arise, do not have a natural home in the sphere of arbitration. In the sphere of arbitration, the enquiry must exclusively concentrate on whether or not consent to arbitrate can be observed whether expressly or by necessary implication from the nature of the transaction, the contract, the correspondence and conduct of the parties.


*Advocate, Bombay High Court (mikhailbehl@gmail.com)

**Advocate, Bombay High Court and former Visiting Professor at Government Law College, Mumbai (anupamsurve@gmail.com).

[1] Definition of ‘corporate veil’: Black’s Law Dictionary (11th Edn.).

[2] Definition of ‘piercing the corporate veil’: Black’s Law Dictionary (11th Edn.).

[3] Gower and Davies: Principles of Modern Company Law (8th Edn.) (Ch. 8, pp. 193–209).

[4] (1944) 7 Modern Law Review 54.

[5] 1896 AC 22.

[6] UK Company Law Review: Strategic Framework, Ch. 5.2.

[7] Gower and Davies: Principles of Modern Company Law (8th Edn. ) (Ch. 8 at p. 195).

[8] https://www.startupindia.gov.in (viewed on 26.08.2020).

[9] https://www.makeinindia.com/policy/new-initiatives (viewed on 26.08.2020).

[10] Gower and Davies: Principles of Modern Company Law (8th Edn.) (Ch. 8 at pp 208-209).

[11] Arbitration and Conciliation Act, 1996

[12] What constitutes an arbitration agreement being defined in Section 7 of the 1996 Act.

[13] Report No. 246 of the Law Commission of India: Amendments to the Arbitration and Conciliation Act, 1996 [at p. 42].

[14] Act 3 of 2016.

[15] Pertaining to New York Convention Awards.

[16] Pertaining to Geneva Convention Awards.

[17] See paras 61 to 64 of the 246th Report of the Law Commission on Amendments to the Arbitration and Conciliation Act, 1996 (August,2014).

[18] (2013) 1 SCC 641.

[19] Order 22 Rule 10 of the Code of Civil Procedure, 1908.

[20] See also Order 22 Rule 1 of the Code of Civil Procedure, 1908.

[21] Section 232 (4) of the Companies Act, 2013.

[22] Section 232(3)(c) of the Companies Act, 2013.

[23] (2013) 1 SCC 641.

[24] 1953 SCC OnLine Bom 65.

[25] Malhotra: Commentary on the Law of Arbitration (Fourth EdN.) (pp. 152-154).

[26] [1990] Ch 433: [1990] 2 WLR 657 (HL).

[27] (1986) 1 SCC 264.

[28] (2010) 5 SCC 306.

[29] Wescare (I) Ltd. v. Subuthi Finance Ltd., 2008 SCC OnLine Mad 539 at para 12.

[30] Clause 4.2 of the Agreement for Sale dated 24.02.2006.

[31] Wescare was seeking enforcement of its agreement with Subuti.

[32]See proviso to Section 15(h) of the Specific Relief Act, 1963.

[33] See Section 16(b) and (c) of the Specific Relief Act, 1963.

[34] See Section 19(e) of the Specific Relief Act, 1963.

[35] (2013) 1 SCC 641.

[36] Clause 7 of the Shareholders Agreement.

[37] (2013) 1 SCC 641 at paras 73 to 76.

[38] (2010) 5 SCC 306.

[39] 2014 SCC Online Bom 1119.

[40] (2013) 1 SCC 641.

[41] (2015) 15 SCC 622.

[42] (2013) 1 SCC 641.

[43] The judgment however does not consider Indowind, (2010) 5 SCC 306.

[44] (2013) 1 SCC 641.

[45] 2015 SCC Online Bom 1707.

[46] (2013) 1 SCC 641.

[47] 2017 SCC Online Del 11625.

[48] (2018) 16 SCC 413.

[49] (2010) 5 SCC 306

[50] (2018) 16 SCC 413  para 29.

[51] It is necessary to note that these observations were made prior to the enactment of Act 33 of 2019 whereby Section 11(6-A) of the 1996 Act came to be deleted from the statute book.

[52] Malhotra: Commentary on the Law of Arbitration (Fourth Edn, at. page 317).

[53] Malhotra: Commentary on the Law of Arbitration (Fourth Edn., at page 449).

[54] See Sections 4 & 6 of Act 3 of 2016. The authors would state that irrespective of the deleting of Section 11(6-A) by virtue of Act 33 of 2019 since the High Court or the Supreme Court is required to evaluate the mechanism contained in the arbitration agreement the Courts would have to come to a prima facie finding that there was an arbitration agreement in existence.

[55] Garware Wall Ropes Ltd.  v. Coastal Marine Construction and Engineering Ltd., (2019) 9 SCC 209.

[56] (2015) 15 SCC 622.

[57] (2010) 5 SCC 306.

[58] 2018 SCC Online SC 487.

[59] (2019) SCC Online Del 11342.

[60] R/Special Civil Application No. 14146 of 2019 decided by the  High Court of Judicature of Gujarat at Ahmedabad on 18.05.2020.

[61] (2019) SCC Online Del 11342.

[62] R/Special Civil Application No. 14146 of 2019 decided by High Court of Judicature of Gujarat at Ahmedabad on 18.05.2020.

[63] 2019 SCC Online SC 995.

[64] Ibid at para 9.4.

[65] The Court subsequently on the constitution of the Administrative Mechanism for the Resolution of CPSE’s Disputes (AMRCD) referred the three government bodies to the AMRCD with the understanding that if disputes were not settled by 15.01.2020 there would be an arbitration of these disputes. See (2019) 10 SCC 32.

Case BriefsTribunals/Commissions/Regulatory Bodies

Security and Exchange Board of India (SEBI): S. K. Mohanty, (Whole Time Member) granted exemptions to the United Provinces Sugar Company Ltd. from the requirements of complying with Minimum Public Shareholding (“MPS”) norms as mandated under rule 19 (2) (b) of provisions of Securities Contracts (Regulations) Rules, 1957 (“SCRR”) and further from the provisions of regulation 27(3)(d) of SEBI(Delisting of Equity Shares) Regulations, 2009 (“Delisting Regulations, 2009”).

The company filed an application before SEBI under Regulation 25A of Delisting Regulations, 2009 seeking certain relaxations for voluntary delisting of the company. The equity shares of the Company were listed on CSE for more than 40 years, of which 94.88% were held by the promoters and the balance shares representing 5.12% were held by 274 public shareholders. There had been no change in the shareholding of the promoters and promoter group of the Company since 1997. The Company asserted that since CSE is non-operational and it is not listed on any nationwide stock exchange, there is no investor interest in the shares of the Company and hence, various methods prescribed by SEBI to achieve MPS compliance were not feasible. It was submitted that since most of the public shareholders were inactive, it was highly unlikely to receive the required 90% consent from such public shareholders for delisting.

The issues before the Board were:

  • Whether a company can be exempted from minimum public shareholding requirement and also
  • Whether the requirement for receiving the consent of the shareholders holding at least 90% of public shareholding of a company, as mandated under Regulation 27(3) (d) of the Delisting Regulations, 2009 can be relaxed?

The Board noted that SEBI Circular CIR/MRD/DSA/18/2014 dated 22-05-2014, inter-alia, exempted companies which were listed exclusively on de-recognized or non-operational stock exchanges from the requirements of MPS prescribed in rules 19(2)(b) and 19A of SCRR and Clause 40A of the Listing Agreement, for the purpose of enabling such companies to opt for voluntary delisting.

For the aforesaid reasons, SEBI, in the interest of investors granted relaxation from the applicability of regulation 27(3) (d) of Delisting Regulations, 2009 to the Company, with further directions that, the Company should ensure compliance with provisions of all other applicable laws including regulation 27(3)(c) of Delisting Regulations, 2009. Additionally, the Applicant should cause to publish the newspaper advertisement in at least one national newspaper in English and in local vernacular newspapers in each State where its public shareholders are residing, as per the addresses available in its records, announcing its delisting proposal within 30 days of this Order, and at least 10 days before the letter is sent to the public shareholders seeking their consent for the delisting proposal. [Delisting of The United Provinces Sugar Company Ltd., In Re., 2020 SCC OnLine SEBI 214, decided on 21-12-2020]

COVID 19Op EdsOP. ED.

1. INTRODUCTION

The on-going global Coronavirus disease (“COVID-19”) has affected a countless number of people around the world, businesses and the global economies alike. On March 11, 2020, the World Health Organisation declared COVID-19 a pandemic. In India too, the government has also termed COVID-19 as a pandemic. In testing times like these, India is slowly coming out of an unprecedented nationwide lockdown; which incidentally has been termed to be as one of the biggest lockdown in the world and has resulted in a temporary or partial shutdown of many businesses in India.

The Ministry of Home Affairs (“MHA“) along with various other relevant Indian governmental authorities to safeguard the interests of employees — ­particularly the inter-State migrant workers have come out with a series of notifications, advisories, circulars and orders (collectively referred to as  “the COVID Circulars”), many of which have cast onus on the ’employers’ and companies – whether they be in the industry or shops and commercial establishments,which (broadly) include but are not limited to the following:

(i) making payment of wages to their workers at their workplace, on the due date, without any deduction, for the period their establishments are or previously have been under closure during the lockdown (“MHA Circular”)[1]; and

(ii) ensuring fixed working hours and adequate safety of their employees[2], for the safety measures announced by the relevant governmental authorities, in light of the COVID-19 pandemic. ­

This article seeks to discuss in light of the COVID Circulars and keeping in view the ever-increasing popularity of the appointment of non-executive directors (“NED”) in Indian companies, whether such NEDs can be held liable for non-compliance of the obligations which the COVID Circulars have cast upon companies and employers.

2. ROLE OF NON-EXECUTIVE DIRECTORS WITH REGARD TO COVID CIRCULARS AND APPLICABLE INDIAN LEGISLATIONS  

2.1  Due to the ever-growing participation of private equity and venture capital investments by investors in Indian companies, as a recently evolving trend, such investors in return for their investments have been demanding a board seat of an authorised individual representative of their choice, usually by way of appointing a NED.

2.2 Obligations of Employers with Regard to the COVID Circulars

 As indicated above, several COVID Circulars have cast obligations on ’employers’, especially, when it comes to payment of wages to their workers employed at their workplace, during the period of lockdown. For instance, Labour Departments of States such as Maharashtra and Telangana had even prior to the MHA Circular, directed that during the lockdown period (which was announced by the said States before the nationwide lockdown was announced on March 24, 2020), the employees/workers were to be paid salary and allowances in full, as a paid holiday during such period. As on date, however, there is no clarification from the relevant governmental authorities as to whether a NED will constitute as an ’employer’ and hence, there remains ambiguity regarding whether a NED can be held accountable for any act of non-compliance by a company, in light of the COVID Circulars.

With no ‘explicit’ clarity on the issue of liability of a NED, with regard to COVID Circulars, as a stop-gap measure, guidance on the role and responsibilities, and general actions from the definitions, and cases which have dealt with the said issue in the past, interpretation can be drawn, in terms of the relevant Indian statutes, which include but are not limited to: (i) the  Companies Act, 2013[3] (“the Act”); and (ii) applicable provisions of the Indian labour legislations, which have been analysed (in brief) below.

2.3 Definition and analysis of a NED in line with the Act and the allied Rules made thereunder

 NEDs in India are viewed as a custodian of the company[4]. Under the Act, the liability in case of a default is cast upon the “officer who is in default”[5]. The question which has been repeatedly tested and challenged in the competent court(s) of law is whether a NED in a company can be equated on the same footing as an “officer who is in default”[6]. The extant law, provides a way out for the directors of a company including the NEDs, who can prove that any breach or non-compliance was not intentionaland neither was it an intentional breach by him/her, however, the burden to establish innocence would always lie on the NED. Additionally, the Act provides that a NED should be held liable only in respect of any contravention of any provisions of the Act which had taken place with his knowledge (attributable through board processes) and where he has not acted diligently, or with his consent or connivance[7], a fact which has been reiterated by the MCA, on numerous occasions[8].

To clear the ambiguity around the issue of liability of a NED, the Ministry of Corporate Affairs (“MCA”) had issued a circular[9] (“the Circular”), wherein it clarified that the liability of a NED (not being a promoter or KMP) under the Act, is only for the acts of omission or commission by a company which had occurred with his knowledge, attributable through the ‘board’ process, and with his connivance or where he had not acted diligently (“the Criteria”). The Circular further states that unless the Criteria is met, a NED (who is not a promoter or KMP), should not be arrayed in any criminal or civil proceedings under the Act. The Circular also discusses the need to examine the Criteria, before serving notices to the NED of a company, for a potential non-compliance and default by him/her.

The MCA, through the said Circular, has also prescribed SOPs (standard operating procedures) for the Registrars, before initiating proceedings against the ‘officers in default’, for offences which include but are not limited to ascertaining the nature of default and officer in default. The MCA has further clarified that in case of any doubts pertaining to the liability of any director for proceedings to be initiated, guidance may be sought from the office of the Director General of Corporate Affairs, MCA, and consequently, such proceedings must only be initiated after receiving due sanction from the MCA. Also note, only where lapse(s) are attributable to the decisions which are taken by the board or its committees which include the NED, adequate care and responsibility must be taken to ensure that unnecessary proceedings are not initiated against such NEDs unless there is evidence to the contrary.

2.4 Definition of ‘Employer’: Guidance from various Indian labour statutes

In light of the COVID-19 Circulars, it appears that most of the advisories seem to be directed towards “employers”, and the roles and responsibilities which would need to be followed during the lockdown. For instance, in light of the hardships faced by the inter-State migrant workers, the MHA Circular called upon all “employers”– whether in industry or in shops and commercial establishments, to make payment of wages of their workers at their workplace on the due date without any deduction in the wages during the lockdown period. On similar lines, relevant State Government authorities of various States, such as (i) Maharashtra; (ii) Uttar Pradesh; (iii) Haryana; and (iv) Karnataka, had issued advisories/orders on similar lines refraining employers from terminating their employees and workers, and/ or to reduce their wages.

As indicated at Point 2.2. above, since the COVID Circulars are silent on who an “employer” is, nor have the relevant governmental authoritiesas on date clarified on who would fall under the definition and ambit of an “employer”, in the interim reliance can be placed on the relevant provisions of the applicable Indian labour laws, where an “Employer” has been defined under various statutes.

For instance, Section 2(7) of the Bombay Shops and Establishment Act, 1948[10], defines an “employer” as a person who owns or has ultimate control over the affairs of an establishment, whereas Section 2(g) of the Industrial Disputes Act, 1947, defines an “employer” to be: ‘(i) in relation to an industry carried on by, or under the authority of any department of the Central Government or a State Government, the authority prescribed in this behalf, or where no authority is prescribed, the head of the department; (ii) in relation to an industry carried on, by or on behalf of a local authority, the chief executive officer of that authority’. Additionally, Section 2(l) of the Code on Wages, 2019, defines an “employer” as: “a person who employs, whether directly or through any person, one or more employees in his establishment”.

Hence, who would fall under the definition of an “employer” would depend on factors such as:

(i) the nature of the business;

(ii) the type of workers employed; and

(iii) the place of operations of a business or an establishment.

3. JUDICIAL PRECEDENTS AND SUBSEQUENT RELAXATIONS BY RELEVANT GOVERNMENTAL AUTHORITIES

3.1 Judicial Precedents

3.1.1 The question of liability of the NEDs has been challenged and discussed upon in the court of law, time and again. Listed below is a brief analysis of the important judicial precedents on this issue, in the recent past:

  • In Chaitan M. Maniar v. State of Maharashtra[11], the Bombay High Court observed that for the acts of a few dishonest people, the NEDs, who were not concerned with the day-to-day functioning of the company will not be held responsible, unless there is valid evidence backed by proof, to prove the active participation of the NEDs in question.
  • In Poonam Garg v. Securities and Exchange Board of India[12],  the appellant (i.e. Poonam Garg) acted in the capacity of a NED in the company and her husband was the promoter, managing director and the compliance officer in the company. The Securities Appellate Tribunal, Mumbai Bench after examining the merits of the case held that: (i) as the appellant’s (i.e. Poonam Garg) husband, was also a promoter/Managing Director/Compliance Officer of the company, the same was sufficient to hold that the appellant (i.e. Poonam Garg) was an ‘insider’ ; (ii) it could be deduced that she was reasonably privy to the PSI or ‘Price Sensitive Information’; (iii) it was not open to the appellant (i.e. Poonam Garg) to feign ignorance of the Prohibition of Insider Trade Regulations; and (iv) take shelter under the violations committed by her husband.
  • For cases pertaining to liability under the Negotiable Instruments Act, 1881, the Supreme Court of India in Pooja Ravinder Devidasani v. State of Maharashtra[13] held that: “a non-executive director is no doubt a custodian of the governance of the company but is not involved in day-to-day affairs of the running of its business and only monitors the executive activity”.

As can be seen from the cases cited above the courts usually examine the liability of a NED, individually on a case-to-case basis, and as such, there is no ‘one size fits all’ formula of the judicial tests, which the judicial courts, examine and has been laid down, to determine the liability of a NED.

3.1.2 Further, as discussed above, several COVID Circulars have imposed various obligations on the “employers” until a few relaxations by the relevant governmental authorities were announced[14]. Additionally, many COVID Circulars, such as the MHA Circular has been challenged by numerous aggrieved parties, before various courts having judicial jurisdiction, primarily on account of the inability of companies to pay wages during the period of lockdown. Listed below is a brief analysis of a few of such cases:

  • The Supreme Court of India in the matter of Hand Tools Manufacturers Association v. Union Of India[15], in its order stated that no coercive action was to be taken against an association of 52 (fifty-two) companies from Punjab for failing to comply with the MHA Circular, wherein the employers were compelled to pay wages to workers during the period of lockdown on account of COVID-19. The Hand Tools Manufacturers Association had challenged the constitutional validity of the Notification dated March 20, 2020, issued by the Secretary (Labour & Employment) and select portion of Clause III of the MHA Circular, both of which compelled payment of full wages to workers and employees during the period of lockdown.
  • The MHA Circular was also  challenged in  Ficus Pax Pvt.    v. Union of India[16], in the Supreme Court of India, wherein the appellant (Ficus Pax Pvt. Ltd. ) approached the Court to quash the MHA Circular directing payment of full wages to workers and employees during the lockdown as  “arbitrary, illegal, irrational, unreasonable and contrary to the provisions of law including Article 14 and Article 19(1)(g) of the Constitution of India.”

3.2  Subsequent relaxations by the relevant governmental authorities at the Central level

 There have been a few relaxations announced by the relevant governmental authorities with regard to the liabilities which the COVID Circulars have placed on the ’employers’.  For instance, the relevant governmental authority on the issue of ‘payment of wages’ to temporary/casual/daily wage workers in light of the lockdown, has clarified that the lockdown period is part of the moral/humanitarian/contractual obligations of all companies irrespective of whether they have any legal obligation for CSR contribution under Section 135 of the Companies Act, 2013, and hence, payment of wages to temporary or casual or daily wage workers during the lockdown period will not count towards CSR expenditure[17].

Additionally, the MHA has by way of issuing an order[18] dated May 17, 2020 (“New Order”) announced various relaxations, wherein the previously issued SOPs, including the MHA Circular, has now been replaced with new guidelines. This would mean that the restrictions which had been imposed by the MCA Circular pertaining to mandatory payment of wages, during the period of lockdown would with effect from May 18, 2020, no longer be applicable and as a result of this move, any termination measures or reduction in wages by an employer would be governed by applicable provisions of the Indian labour statutes.

As on date, however, there appears to be ambiguity regarding the New Order i.e. whether it would apply to establishments which were not operational previously during the period of lockdown, and unless the courts decide otherwise, companies including the employers would be bound by guidelines issued by the MHA Circular from its enforcement (i.e. March 29, 2020), until the day of enforcement of New Order (i.e. May 18, 2020). Additional relaxations in the form of the previously issued standard operating protocol (“SOP”) have been now replaced with the new lockdown guidelines, for instance, it is no longer mandatory for the employer to ensure that its employees have installed the ‘Arogya Setu’ app but the same is to be done by the employer on a ‘best effort basis’ only.

3.3. Subsequent Relaxations by Various State Governments

In light of the COVID-19 pandemic, many State Governments have also provided a few relaxations in the compliance requirement for a few of the applicable labour laws, as a result of which the onus on the part of the employers or the “officer in charge” which may include NEDs by virtue of the role played by them in the company has significantly been reduced. For instance, the State of Uttar Pradesh provided relaxations to the “employers”, by way of issuing an Ordinance[19], in complying with certain requirements of the applicable legislation, such as exemptions from complying with the provisions of the Industrial Disputes Act, 1947 (“IDA”) and the Factories Act, 1948 for 3 (three) years, starting from the date of the said Ordinance.

4. CONCLUSION

4.1 To conclude and to answer whether a NED can be held liable for any non-compliance in light of the  COVID Circulars, the following points provide an overview of the issue:

(i) As discussed above, as on the date of this article, there is no explicit clarity from the relevant governmental authorities, regarding whether a NED would fall under the definition of an “employer”. Hence, the liability of a NED, would need to be determined individually and on a case to case basis, till the time further clarity by a relevant governmental authority is provided.

(ii) In the interim, guidance can be drawn to applicable provisions of the Indian legislations, as discussed in line at Points 2.3 and 2.4 of this article (i.e. the definition of NED and definition of an ’employer’).

(iii) Several petitions challenging the legality of the COVID Circulars, have been filed by affected parties, many of which are still pending to be adjudicated upon by the courts, and are likely to be answered in the coming few days.

4.2 In the interim, in light of the COVID Circulars, to better protect the interest of the NEDs, the following measures should ideally be adopted by the companies:

(i) Obtaining a D&O (director and officer) insurance to better protect the interests of NEDs in a company;

(ii) Indemnification rights as part of the definitive agreements to protect the rights of the NED should be sought by the investors wanting to appoint a NED (i.e. in the form of their representative on the board of a company);

(iii) Clear demarcation of the roles and responsibilities of a NED in the company should be ideally defined and documented; and

(iv) As a stop-gap arrangement, companies may choose to nominate an individual/group of individuals (which may also include NEDs), to oversee the compliance requirements, including the requirements stemming from the COVID Circulars. This may however not be a fool-proof method to safeguard the interest of NEDs, as different courts, may take a different view on this.

4.3 In continuation to recommendations discussed at Point 4.2 above, NEDs may also make a recommendation to the KMPs or the members of the board of directors (as the case may be) and ensure that the employees are paid their wages on time – in line with the advisories issued by the relevant governmental authorities from time-to-time, and further, written consent of employees stating that the company is complying with the norms laid down by the relevant governmental agencies can be obtained, to protect the interests of the NEDs in a company.


*Lawyer from New Delhi/Mumbai, India. Author can be reached at ‘aseem.sahni@outlook.com’.

[Disclaimer: The content of this article is intended to provide a general guide to the subject. Specialist advice should be sought about your specific circumstances.]

[1] Refer to Order issued by the Ministry of Home Affairs – No. 40-3/ 2020- DM-I (A), dated March 29, 2020.

[2]MHA in its directive issued on May 1, 2020 had made installation of ‘AarogyaSetu’ App mandatory for both private and public sector employees and had called upon the head of the respective organisations to ensure 100 per cent coverage of the app among the employees.

[3] The Companies Act, 2013

[4] Chintalapati Srinivasa Raju  v. Securities and Exchange Board of India, (2018) 7 SCC  443, dated May 14, 2018.

[5] Section 2(60) of the Act defines an “Officer who is in default” and provides a list of officers of a company, who will be held accountable in case of default by the company, which include but are not limited to: (i) whole-time director; (ii) key managerial personnel; or (iii) any person in accordance with whose advice, directions or instructions, the board of directors of the company is accustomed to act, other than a person who gives advice to the board of directors in a professional capacity.

[6]Please refer to Point 3.1 of this article, for a discussion on an overview of the judicial interpretation.

[7]Section 149(12) of the Companies Act, 2013.

[8]Refer to ‘Report of Expert Committee’, available at:http://www.mca.gov.in/Ministry/reportonexpertcommitte/chapter4.html (last visited on May 24, 2020).

[9]Refer to General Circular No. 1 / 2020 (F.No. 16/1/2020-Legal) dated March 2, 2020.

[10]Also referred to as the Maharashtra Shops and Establishment Act, 1948.

[11]2004 SCC OnLine Bom 139

[12]  2018 SCC Online SAT 99.

[13] (2014) 16 SCC  1 

[14]Brief analysis of the relaxations announced by the various relevant governmental authorities in light of the COVID Circulars has been discussed at Point(s) 3.2 and 3.3 of this article.

[15]Writ Petition (Civil) Diary No. 11193/2020, order dated 15-5-2020.

[16] (2020) 4 SCC 810

[17]Ministry of Corporate Affairs  General Circular No. 15/2020 (F. No. CSR-01/4/2020-CSR-MCA), ‘COVID-19 related Frequently Asked Questions (FAQ No. 6) on Corporate Social Responsibility (CSR)’ dated April 10, 2020.

[18]Refer to order issued by the Ministry of Home Affairs – No. 40-3/2020-DM-I(A) – dated May 17, 2020, available at https://www.mha.gov.in/sites/default/files/MHAOrderextension_1752020_0.pdf

[19]Refer to Ordinance entitled “Uttar Pradesh Temporary Exemption from Certain Labour Laws Ordinance, 2020”, dated May 08, 2020. It has since been withdrawn.

OP. ED.Practical Lawyer Archives

Introduction

Meetings have a very important role to play in the functioning of company where decisions are taken and recorded. In case of companies, whether Board meetings or shareholders’ meetings, there is an exchange of idea, proposal, problems and decision on the further of action. In case of companies, a meeting of members, directors, debenture holders, class shareholders, creditors can be called and conducted. This article is a checklist for preparation and sending of the notice of shareholders’ meeting by a private company or unlisted public company under Sections 101 and 102 of the Act read with the Rules.

  1. Applicability of Provisions.—The said provisions are applicable to annual general meeting or extraordinary general meeting of the members of private company or unlisted public company. A listed company shall also comply with the provisions of the Act and Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations, 2018.
  2. Contents of the Notice of Meeting.—Every notice of a general meeting shall specify the place, date, day and the hour of the meeting and shall contain a statement of the business to be transacted at such meeting. The statement of business includes the resolutions that are proposed for the voting of the shareholders of the company. Ordinary business (as referred to in Section 102 of the Act) means: (i) consideration of financial statements and the reports of the Board of Directors and auditors; (ii) declaration of any dividend; (iii) appointment of Directors in place of those retiring; and (iv) appointment of, and the fixing of the remuneration of, the auditors. Any other business shall be considered as “special business”. Necessary reference of type of business (ordinary or special) and type of resolution (ordinary or special) shall be given in the notice of the general meeting.
  3. Contents of the Notice of General Meeting through Videoconferencing (VC).—Ministry of Corporate Affairs has allowed companies to hold the general meeting through VC or other audio-visual means (OAVM). In addition to any other requirement provided in the Act or the Rules, the notice for the general meeting shall make disclosures with regard to the manner in which framework provided in the MCA Circular (i.e. General Circular No. 14/2020 [F. No. 2/1/2020-CL-V] dated 8-4-2020) shall be available for use by the members and also contain clear instructions on how to access and participate in the meeting. The company shall also provide a helpline number through the registrar and transfer agent, technology provider, or otherwise, for those shareholders who need assistance with using the technology before or during the meeting. A copy of the meeting notice shall also be prominently displayed on the website of the company and due intimation may be made to the exchanges in case of a listed company.
  4. Explanatory Statement.—A statement setting out the material facts concerning each item of “special business” to be transacted at a general meeting, shall be annexed to the notice calling such meeting. The statement shall set out the nature of concern or interest, financial or otherwise, if any, in respect of each item of every director, key managerial personnel, manager and their relatives. The explanatory statement shall also include information and facts that may enable members to understand the meaning, scope and implications of the items of business and to take decision thereon.
  5. Length of Notice of Meeting.—A general meeting of a company may be called by giving not less than clear 21 days’ notice. In case of private company, the articles of association may provide for a shorter period for the length of notice of general meeting. In case of companies incorporated under Section 8 of the Act, a general meeting of a company may be called by giving not less than clear 14 days’ notice.
  6. Mode of Sending Notice of General Meeting.—The notice of general meeting can be given either in writing or through electronic mode in such manner as may be prescribed.
  7. Sending of Notice through Electronic Mode.—Rule 18 of the Companies (Management and Administration) Rules, 2014 prescribes detailed procedure for sending notice in electronic mode[1]. A notice may be sent through e-mail as a text or as an attachment to e-mail or as a notification providing electronic link or uniform resource locator (URL) for accessing such notice. The e-mail shall be addressed to the person entitled to receive such e-mail as per the records of the company or as provided by the depository. The subject line in e-mail shall state the name of the company, notice of the type of meeting, place and the date on which the meeting is scheduled. If notice is sent in the form of a non-editable attachment to e-mail, such attachment shall be in. PDF or in a non-editable format together with a “link or instructions” for recipient for downloading relevant version of the software. The company should ensure that it uses a system which produces confirmation of the total number of recipients e-mailed and a record of each recipient to whom the notice has been sent and copy of such record and any notices of any failed transmissions and subsequent resending shall be retained by or on behalf of the company as “proof of sending”. The company’s obligation shall be satisfied when it transmits the e-mail and the company shall not be held responsible for a failure in transmission beyond its control. The company may send e-mail through in-house facility or its registrar and transfer agent or authorise any third-party agency providing bulk e-mail facility. The notice of the general meeting of the company shall be simultaneously placed on the website of the company, if any, and on the website as may be notified by the Central Government.
  8. Opportunity for E-mail Address Registration.—The company shall provide an advance opportunity at least once in a financial year, to the member to register his e-mail address and changes therein. Such request may be made by only those members who have not got their e-mail id recorded or to update a fresh e-mail id and not from the members whose e-mail ids are already registered. If a member entitled to receive notice fails to provide or update relevant e-mail address to the company, or to the depository participant as the case may be, the company shall not be in default for not delivering notice via e-mail.
  9. Shorter Notice Consent for Shareholders Meeting.—A general meeting may be called after giving shorter notice than clear 21 days’ notice (or any other period as mentioned in the articles of association of the company), if consent, in writing or by electronic mode, is accorded thereto:

(i) In Case of an Annual General Meeting (Company with Share Capital or without Share Capital).—By not less than 95% of the members entitled to vote thereat.

(ii) In the Case of Extraordinary General Meeting (for Company with Share Capital).—By members of the company holding majority in number of members entitled to vote and who represent not less than 95% of such part of the paid-up share capital of the company as gives a right to vote at the meeting.

(iii) In the Case of Extraordinary General Meeting (for Company without Share Capital).—By members of the company having, if the company has no share capital, not less than 95% of the total voting power exercisable at that meeting.

  1. Recipients of Notice of Shareholders’ Meeting.—The notice of every meeting of the company shall be given to: (a) every member of the company, legal representative of any deceased member or the assignee of an insolvent member; (b) auditor(s) of the company; and (c) every director of the company.
  2. Accidental Omission to Give Notice of General Meeting.—Any accidental omission to give notice to, or the non-receipt of such notice by, any member or other person who is entitled to such notice for any meeting shall not invalidate the proceedings of the meeting.

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

[1] Here, “electronic mode” means any communication sent by a company through its authorised and secured computer program which is capable of producing confirmation and keeping record of such communication addressed to the person entitled to receive such communication at the last electronic mail address provided by the member.

Case BriefsHigh Courts

Allahabad High Court: The Division Bench of Pankaj Mithal and Vivek Agarwal, JJ. concurred that any amount already recovered by the respondents from  the petitioner shall be invested by the respondents in a fixed deposit with a Nationalised Bank in a short term deposit

Petitioner 1 had approached this Court seeking ad-interim mandamus commanding Respondent 15, Celebration City Projects Pvt. Ltd., not to take any coercive measure against him in pursuance of the recovery certificate worth Rs 150 crore.

Counsel for the petitioners, Anoop Trivedi submitted that there is no recovery neither in the name of Petitioner 1 nor Petitioner 2. Therefore, the dues of Respondent 15 cannot be recovered from the properties of petitioners.

Petitioner 1, Rakesh Jain, was legally detained and arrested so as to recover the aforesaid amount. He was forced to sign certain cheques and was released thereafter.

Counsel for Respondent 2, GDA, Vrindavan Mishra submitted that if the corporate veil is lifted the entire responsibility to discharge the liability of Respondent 15 would ultimately fall upon Petitioner 1.

After analyzing the submissions of the parties, the Court observed that petitioners are separate legal entities other than Respondent 15 and therefore, dues of Respondent 15 cannot be recovered from the properties of petitioners. [Rakesh Jain v. State of U.P., 2019 SCC OnLine All 4261, decided on 05-11-2019]

Case BriefsForeign Courts

Court of Appeal for the Democratic Socialist Republic of Sri Lanka: The petition of a liquidator was entertained by Samayawardhena, J. and was eventually dismissed due to lack of locus standi. 

The petitioner was the liquidator of Dart West Asia Holdings Ltd., he filed an application for issue of certiorari against the order of Commissioner General of Labour directing the Director of the said company to pay EPF and Gratuity to a former employee of the aforementioned company. 

At the argument, learned senior counsel for the respondent inter alia took up a preliminary objection regarding the standing of the petitioner to file an application. He further contended that the petitioner wanted to give an impact that the said company is still under liquidation. 

The Court observed that, winding up procedure is now concluded and the final account of the liquidator has also been sent to the Registrar General of Companies. Hence, declared that such winding up was voluntary and after the affairs of the company were fully wound up, Final General Meeting was held. Court highlighted the provisions of Companies Act, 2007 which provided that the Registrar General of Companies upon receiving the final accounts shall forthwith register them and on the expiration of three months, the company is dissolved automatically.

Court further held that from the application of petitioner it was clear that the application was filed several months after the company was dissolved. The contention of the petitioner that he was still a liquidator was not maintainable and the writ was disposed because the petitioner didn’t have any locus standi once the company was dissolved. [Chandanie Rupasinghe Weragala v. Deputy Commissioner, CA. Writ No. 429 of 2015, decided on 02-05-2019]

OP. ED.Practical Lawyer Archives

The provision relating to “related party transactions” have been incorporated for the first time in the Indian Company Law. The provisions are prescribed in Section 188 of the Companies Act, 2013 (Act). Under the Companies Act, 1956, there was no explicit provision as “related party transaction”, however, it can be said that Section 297 of the Companies Act, 1956 slightly corresponds to Section 188 of the Act. The scope and nature of transactions, number of related parties involved, compliances and disclosure requirements contemplated have significantly been enhanced under the provisions of Section 188 of the Act.

This article is a compilation and analysis of the relevant provisions relating to related party transactions. The article also contains the checklist on ensuring compliance of relevant provisions relating to related party transactions.

Following is the basic checklist for identifying the applicability of Section 188 of the Act:

(1) Transactions with company— It is necessary that a company is a party to the said transactions. The company can either provide or avail the necessary services or the company can sell or purchase or supply of any goods or materials.

(2) Identification of prescribed transaction— It is necessary that the company enters into a prescribed transaction [as provided in sub-section (1) of Section 188 of the Act], which includes: (i) sale, purchase or supply of any goods or materials; (ii) selling or otherwise disposing of, or buying, property of any kind; (iii) leasing of property of any kind; (iv) availing or rendering of any services; (v) appointment of any agent for purchase or sale of goods, materials, services  or property; (vi) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and (vii) underwriting the subscription of any securities or derivatives thereof, of the company.

(3) Identification of prescribed “related party”— It is necessary that the company enters into a prescribed transaction with a “related party” [as provided in sub-section (76) of Section 2 of the Act]. Some of the related parties are: director, relative of director, key managerial personnel, relative of key managerial personnel, firm in which director or director’s relative is a partner, private company or public company in which director or manager is interested [as prescribed in Section 2(76) of the Act], subsidiary company, holding company, associate company, investing company, venturer company (as defined).

If all the three conditions are satisfied, then it is necessary to proceed with the approvals, compliances and disclosures under the provisions of Section 188 of the Act. The checklist for the identified related party transactions is as follows:

(1) Approval of Audit Committee (under Section 177 of the Act)— The Audit Committee shall approve the related party transactions or approve any modification to the related party transactions. The Audit Committee can also give an omnibus approval to certain related party transactions. The Committee shall consider two factors while specifying the criteria for making omnibus approval, namely, (i) repetitiveness of the transactions (in part or in future); and (ii) justification for the need of omnibus approval. Such omnibus approval for the related party transactions shall be obtained on annual basis [Rule 6-A of the Companies (Meetings of Board and its Powers) Rules, 2014]. Such omnibus approval shall be valid for a period not exceeding 1 financial year and shall require fresh approval after expiry of such financial year. Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

(2) Approval of the Board of Directors (under Section 188 of the Act)— The Board of Directors shall give consent to the related party transactions at its meeting only. Such meeting can be held in person or through video conferencing or other audio-visual means as may be prescribed. Such consent of the Board of Directors cannot be obtained by passing a circular resolution or by any other mode (as prescribed in Section 175 of the Act). Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides for the requisite disclosures to the Board of Directors in agenda of the meeting at which the resolution is proposed to be moved. The director interested in any contract or arrangement shall not be present at the meeting during discussion on such subject- matter of the resolution relating to such contract or arrangement.

(3) Approval of the shareholders (under Section 188 of the Act)— Prior approval of the shareholders by ordinary resolution shall be required if the company is entering into a contract or arrangement with a related party if the transaction(s) exceeds the prescribed limits [i.e. as prescribed in Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014]. The said rule has prescribed monetary threshold for each type of prescribed transaction. The limits specified shall apply for transaction(s) to be entered into either individually or taken together with the previous transactions during a financial year. The said rule provides for the disclosures in the explanatory statement to be annexed to the notice of general meeting. Following are some important points relating to approval of shareholders:

  (i) Member of the company shall not vote on the ordinary resolution approving related party transaction if such member is a related party (this provision is not applicable to private companies. MCA Notification dated 5-6-2015).

  (ii) Approval of the shareholder is not applicable in the cases where 90% or more members (in number) are the relatives of promoters or are related parties (applicable to private company and public company, both).

  (iii) In case of wholly-owned subsidiary company, the ordinary resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between the wholly-owned subsidiary company and the holding company, subject to the condition that the accounts of the subsidiary company are consolidated with holding company and placed before shareholders at the general meeting for its approval.

  (iv) Certain exemptions are applicable to government company (MCA Notification dated 5-6-2015).

(4)Exemption from the compliances of Section 188 of the Act— Consent of the Board of Directors and prior approval of the shareholders is not required when such related party transaction is in the ordinary course of its business and on arm’s length basis. The Act has not defined “ordinary course of its business”. For this purpose the Board of Directors is required to exercise their judgment. However, the Act has defined transaction on arm’s length basis. It means a transaction between two related parties that is conducted as if they were unrelated so that there is no conflict of interest. There is no exemption for obtaining the approval of the Audit Committee.

(5)Disclosures in Board’s report— Every contract or arrangement entered into by the company shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement [Section 188(2) of the Act]. Pursuant to Section 134(3) of the Act, the Board’s report shall include particulars of contracts or arrangements with related parties in prescribed form (Form AOC-2).

(6)Register of contracts or arrangements in which directors are interested— According to Section 189 of the Act, the company shall maintain a register (Form MBP-4) for related party transactions. After entering the particulars in the register, such register shall be placed before the next Board meeting and signed by all directors present at the meeting. The entries in the register shall be made at once, whenever there is a cause to make entry, in chronological order and shall be authenticated by the Company Secretary of the company or by any other person authorised by the Board for the purpose. Such register shall be kept at the registered office of the company. The register shall be preserved permanently and shall be kept in the custody of the Company Secretary of the company or any other person authorised by the Board for the purpose.

(7)Other important checkpoints— Section 188 (3) of the Act provides for ratification of the related party transaction entered into by a director or any other employee without consent of the Board of Director or approval of shareholders in general meeting. Ministry of Corporate Affairs (by its Circular dated 17-7-2014) has exempted companies from the compliance of Section 188 of the Act, arising out of compromises, arrangements and amalgamations dealt under the specific provisions of the Companies Act.

The provisions relating to related party transactions are one of the most amended provisions under the Act. In my view, “related party transactions” is one of the critical tests of corporate governance. The above checklist relates to related party transactions by private companies or unlisted public companies. In case of listed companies, the provisions of Section 188 of the Act and Regulation 23 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, both shall be complied with.


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

Practical Lawyer Archives

Section 186 of the Companies Act, 2013 (“the Act”) relates to “loan and investment by company”. It provides for monetary threshold, approval matrix, recordkeeping, exemption from compliances, restrictions for giving loan, guarantee, security or making investment in another entity. The other relevant provisions are Rules made under Section 186 of the Act, Section 179 (relating to “powers of the Board of Directors”), Section 185 (relating to “loans to Directors”), Section 187 (relating to “investments of company to be held in its own name”). This article is a compilation and analysis of the relevant provisions relating to giving loan, guarantee or security or making investment under Section 186 of the Act. The article also contains the checklist for maintenance of documents, records and register under Section 186 of the Act. The company shall ensure compliance of the following provisions:

(1) Monetary threshold for approval of the Board of Directors— A company (i.e. private company or public company) with the approval of the Board of the Directors can directly or indirectly: (i) give any loan to any person or other body corporate; (ii) give any guarantee or provide security in connection with a loan to any other body corporate or person; and (iii) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, up to 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account. In a company, the Accounts Department or Finance Committee or Chief Financial Officer (CFO) or Company Secretary (CS) shall monitor such limits on a regular basis.

(2) Exclusion from the said monetary limit—The word “person” does not include any individual who is in the employment of the company i.e. loan, guarantee or security provided by the company to its employees shall not be counted in the said limits. Therefore, loans, guarantee or security given by the company to its employees shall not be considered in the prescribed monetary limits.

(3) Monetary threshold for approval of the shareholders—Company shall not make any further investment, loan, guarantee or security unless it is previously authorised by a special resolution passed in a general meeting, if the aggregate of such investment, loan, guarantee or security made or given by the Board of Directors, exceed the prescribed limits (as discussed above). The special resolution passed at a general meeting shall specify the total amount up to which the Board of Directors is authorised to give such loan or guarantee, to provide such security or make such acquisition. The company shall obtain the prior approval of shareholders and the resolution shall specify further monetary limit i.e. the resolution cannot be an open-ended resolution.

(4) Exemption from the approval of shareholders—The previous approval of the shareholders by special resolution shall not be required where a loan or guarantee is given or where a security has been provided by a company to its wholly-owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of the securities of its wholly-owned subsidiary company. However, the company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement.

(5) Disclosure in the financial statement—The company shall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security. Such disclosure can be part of Board’s report [Section 134(3)(g) of the Act] and notes to accounts.

(6) Mode of obtaining the approval of the Board of Directors—Investment, loan, guarantee or security shall be given by the company after the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting i.e. not by circular resolution. Pursuant to Section 179(3) of the Act, the Board of Directors of a company shall exercise the power to invest the funds of the company by means of resolutions passed at meetings of the Board of Directors. Such power can be delegated by the Board of Directors to any committee of directors, managing director, manager or any principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office. Such delegation shall be made by passing a resolution at its meeting i.e. not by circular resolution.

(7) Prior approval of the public financial institution, in certain cases—The prior approval of the public financial institution is required where any term loan is subsisting and there is default in repayment of loan installments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution. The prior approval of public financial institution is required when there is default in payment of loan or interest and not when the payment is made regular basis.

(8) Rate of interest of the loan—The loan shall not be given under Section 186 of the Act at a rate of interest lower than the prevailing yield of 1-year, 3-year, 5-year or 10-year government security closest to the tenor of the loan.

(9) Restriction on giving loan, guarantee or security—A company which has defaulted in the repayment of any deposits accepted or in payment of interest thereon, shall not give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting. Such prohibition is applicable company makes a default in payment of loan or interest on deposits.

(10) Loan, guarantee or security to directors or relatives of directors—Section 185 of the Act relates to “loans to directors”. A company (whether private company or public company) shall not advance any loan (including any loan represented by a book debt to) or give any guarantee or provide any security in connection with any loan taken by: (i) any director of company, or director of a company which is its holding company or any partner or relative of any such director; and (ii) any firm in which any such director or relative is a partner. Therefore, the company shall confirm the party and its relation with the directors before advancing any loan or giving any guarantee or providing any security in connection with any loan. In certain cases, the company shall ensure compliance of Sections 185 and 186 of the Act.

(11)?Maintenance of register— Every company giving loan or giving a guarantee or providing security or making an acquisition shall keep a register which shall contain such particulars and shall be maintained in such manner as may be prescribed. Following are some important points relating to maintenance of the register :

(i) The company shall, from the date of its incorporation, maintain a register in Form MBP 2 and enter therein separately, the particulars of loans and guarantees given, securities provided and acquisitions made.

(ii) The entries in the register shall be made chronologically in respect of each such transaction within 7 days of making such loan or giving guarantee or providing security or making acquisition.

(iii) The register shall be kept in the custody of the Company Secretary of the company or any other person authorised by the Board for the purpose.

(iv) The register can be maintained either manually or in electronic mode.

(v) The entries in the register (either manual or electronic) shall be authenticated by the Company Secretary of the company or by any other person authorised by the Board of Directors for the purpose.

(12) Inspection and extracts of the register—The register maintained under Section 186 of the Act shall be kept at the registered office of the company. Such register shall be open to inspection at such office. The extracts of the register may be taken therefrom by any member, and copies thereof may be furnished to any member of the company on payment of such fees.

(13) Non-applicability of the provisions—The provisions of Section 186 of the Act (except the provisions relating to layers of investment companies) shall not apply: (i) to any loan made, any guarantee given or any security provided or any investment made by a banking company, or an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities; (ii) to any investment made by an investment company, investment made in shares allotted in pursuance of rights issues; and  (iii) to any investment made in respect of investment or lending activities, by Non-Banking Finance Company (NBFC) registered the Reserve Bank of India (RBI) Act and whose principal business is acquisition of securities.


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

Case BriefsHigh Courts

Patna High Court: The Bench of Ahsanuddin Amanullah, J. allowed an application filed under Section 482 of the Code of Criminal Procedure, 1973 seeking quashing of a criminal case.

Respondent 2 herein had filed a complaint against petitioner and few other people alleging that he had induced him to invest Rs 28 lakhs in a construction company. The Magistrate took cognizance of the said offence under Sections 120 B, 420 of the Penal Code, 1860 and Section 138 of the Negotiable Instruments Act, 1881 and issued summon against the petitioner. Aggrieved thereby, the instant application was filed.

The petitioner’s case was that there was no material on record to show that he had induced respondent 2 to invest in the company. It was argued that making the petitioner an accused in the case, only because he was a Director of the Company, was abuse of process of the Court.

The Court noted that there being absolutely no allegation against petitioner in the entire complaint with regard to either inducement or entrustment of money or even issuance of cheque; just because he was a Director in the concerned company, it would not make him liable for any of the allegations levelled against other co-accused. It was concluded that prosecution against the petitioner was with malafide intention and only to harass him. Accordingly, the entire criminal proceeding against him was quashed.[Ramanjee Jha v. State Of Bihar, 2019 SCC OnLine Pat 228, Order dated 21-02-2019]