Op EdsOP. ED.

   

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

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

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

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

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

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

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

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

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

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

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


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

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

1. Companies Act, 2013.

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

3. Companies Act, 2013, S. 205.

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

5. 2022 SCC OnLine NCLT 223.

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

7. Companies Act, 2013, S. 184.

8. 2022 SCC OnLine NCLT 223.

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

   

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

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

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

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

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

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

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

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

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

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

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

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

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


Advocates who appeared in this case :

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

Ankit Shah, Advocate, for the Respondent.

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi: The Bench of Ashok Kumar Bhushan, J., Chairperson, M. Satyanarayana Murthy, J., Judicial Member, and Barun Mitra, Technical Member set aside an order given by the National Company Law Tribunal, New Delhi (NCLT, New Delhi) and held that the Appellant, Entertainment City Ltd., is an affiliate of the Unitech Group. Hence, the moratorium imposed by the Supreme Court in orders given in the case of Bhupinder Singh v. Unitech Ltd. Civil Appeal No. 10856 of 2016, on 20-01-2021 and 24-03-2021 would apply to the Appellant and the application filed by the Respondent for initiation of Corporate Insolvency Resolution Process under Section 7 of the Insolvency and Bankruptcy Code, 2016 stood adjourned sine die.

The Appeal was filed against the order dated 06-04-2022 wherein NCLT, Delhi rejected the prayer of the Appellant, that the proceedings in Section 7 Application be adjourned sine die because of the Moratorium passed by the Supreme Court in Bhupinder Singh v. Unitech Limited.

The Bench noticed that the order of the Supreme Court dated 20-01-2020, referred to the expression which “included all its affiliates, trusts, subsidiaries, etc.” Hence, the Bench referred to the definition of ‘affiliate‘ defined in the Subscription-cum-Shareholders Agreement. As per paragraph 1 of the agreement, an affiliate refers to “Affiliate” means in relation to any party, (i) any person that directly or indirectly Controls, is Controlled by, such party; or (ii) any person, the legal and beneficial ownership of at least 26% of which is directly or indirectly held (including through one or more persons) collectively or severally by such party; (iii) any trust in respect of which such party is a direct or indirect a beneficiary; and (iv) in the case of a natural person, any Relative of such person.” Further, “the term “Affiliate” shall include (i) any fund, collective investment scheme, trust, partnership (including without limitation anyco-investment partnership), special purpose or other vehicles, or any subsidiary or Affiliate of any of the foregoing, in which any member or subsidiary of Investor is a general or limited partner, shareholder, investment manager or advisor, member of a management or investment committee, nominee, custodian, trustee or unit holder

In the light of the above definition, the Bench concluded that Unitech Holdings Ltd, a wholly owned subsidiary of Unitech Ltd, has a shareholding to the extent of 41.95% in the Appellant. Hence, the Appellant is an affiliate of Unitech Group.

Therefore, the Bench held that the order dated 06-04-2022 passed by the NCLT, Delhi was set aside and the Application under Section 7 filed by the Respondent was adjourned sine die till the Moratorium imposed by the orders of the Supreme Court.

[Entertainment City Ltd v. Simran Kaur, 2022 SCC OnLine NCLAT 334, decided on 25-07-2022]


Advocates who appeared in this case :

Siddharth Batra, Shivani Chawla, and Chinmay Dubey, Advocates, For Appellants;

Piyush Singh and Aditi Sinha, Advocates, for the Respondents.

Case BriefsSupreme Court

Supreme Court: The bench of Indira Banerjee* and JK Maheshwari, JJ has rejected the view of NCLT and NCLAT that once it is found that a debt existed, and a Corporate Debtor is in default in payment of the debt there would be no option to the Adjudicating Authority (NCLT) but to admit the petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).

Going by the scheme of IBC and the legislative intent, the Court observed that the Adjudicating Authority (NCLT) would have to exercise its discretion to admit an application under Section 7 of the IBC of the IBC and initiate CIRP on satisfaction of the existence of a financial debt and default on the part of the Corporate Debtor in payment of the debt, unless there are good reasons not to admit the petition.

However, even though Section 7 (5)(a) of the IBC may confer discretionary power on the Adjudicating Authority, such discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances warrant exercise of discretion in a particular manner, discretion would have to be exercised in that manner.

“The object of the IBC is to first try and revive the company and not to spell its death knell. This objective cannot be lost sight of, when exercising powers under Section 7 of the IBC or interpreting the said Section.”

Stating that the Adjudicating Authority (NCLT) has to consider the grounds made out by the Corporate Debtor against admission, on its own merits, the Court explained by way of the following illustration,

“When admission is opposed on the ground of existence of an award or a decree in favour of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) of the IBC to keep the admission of the application of the Financial Creditor in abeyance, unless there is good reason not to do so. The Adjudicating Authority may, for example, admit the application of the Financial Creditor, notwithstanding any award or decree, if the Award/Decretal amount is incapable of realisation.”

Facts of the case

In the case at hand, the Appellant, a Power Generating Company, was awarded the contract for implementation of a Group Power Project (GPP) by the Maharashtra Industrial Development Corporation (MIDC). The GPP was later converted into an Independent Power Project (IPP). When the appellant was disallowed the actual fuel cost for the Financial Years 2014-2015 and 2015-2016 by the Maharashtra Electricity Regulatory Commission (MERC), it approached the Appellate Tribunal for Electricity (APTEL), challenging the same.

APTEL allowed the appeal and directed MERC to allow the Appellant the actual cost of coal purchased for Unit-1, capped to the fuel cost for Unit 2 in terms of the FSA that had been executed, till such time as a FSA was executed in respect of Unit 1. The Appellant claims that a sum of Rs.1,730 Crores is due to the Appellant in terms of the said order of APTEL.

NCLT simply brushed aside the case of the Appellant that an amount of Rs.1,730 Crores was realizable by the Appellant in terms of the order passed by APTEL in favour of the Appellant, with the cursory observation that disputes if any between the Appellant and the recipient of electricity or between the Appellant and the Electricity Regulatory Commission were inconsequential.

Referring to the judgment in Swiss Ribbons v. Union of Indian, (2019) 4 SCC 17, the NCLT held that the imperativeness of timely resolution of a Corporate Debtor, who was in the red, indicated that no other extraneous matter should come in the way of expeditiously deciding a petition under Section 7 or under Section 9 of the IBC. NCLAT affirmed the NCLT’s finding while observing that NCLT was only required to see whether there had been a debt and the Corporate Debtor had defaulted in making repayment of the debt, and that these two aspects, if satisfied, would trigger the CIRP.

Ruling

The Court observed There can be no doubt that a Corporate Debtor who is in the red should be resolved expeditiously, following the timelines in the IBC. No extraneous matter should come in the way. However, the viability and overall financial health of the Corporate Debtor are not extraneous matters.

On NCLT’s finding that the dispute of the Corporate Debtor with the Electricity Regulator or the recipient of electricity would be extraneous to the matters involved in the petition, the Court observed that while the disputes with the Electricity Regulator or the Recipient of Electricity may not be of much relevance, an award of the APTEL in favour of the Corporate Debtor, cannot be completely be disregarded by the NCLT, when it is claimed that, in terms of the Award, a sum of Rs.1,730 crores, that is, an amount far exceeding the claim of the Financial Creditor, is realisable by the Corporate Debtor.

Further, the Court was of the opinion that NCLAT erred in holding that NCLT was only required to see whether there had been a debt and the Corporate Debtor had defaulted in making repayment of the debt, and that these two aspects, if satisfied, would trigger the CIRP.

“The existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP. The Adjudicating Authority (NCLT) was require to apply its mind to relevant factors including the feasibility of initiation of CIRP, against an electricity generating company operated under statutory control, the impact of MERC’s appeal, pending in this Court, order of APTEL referred to above and the over all financial health and viability of the Corporate Debtor under its existing management.”

The Court, hence, set aside the NCLAT and NCLT orders and directed NCLT to re-consider the application of the Appellant for stay of further proceedings on merits in accordance with law.

[Vidarbha Industries Power Ltd v. Axis Bank Ltd.,2022 SCC OnLine SC 841, decided on 12.07.2022]


*Judgment by: Justice Indira Banerjee


Counsels

For Financial Creditor: Senior Advocate Dhruv Mehta

For Appellant: Senior Advocate Jaideep Gupta

Op EdsOP. ED.

At the beginning of 2016, the law of insolvency and bankruptcy in India could be found in a bric-a-brac of statutes.[1] They related to differing legal entities and drove parties to varying forums for their enforcement. In its seminal report, the Government appointed Bankruptcy Law Reforms Committee criticised this “highly fragmented framework”. It called for a “deeper redesign” of the entire insolvency resolution process, rather than working on strengthening any single piece of it.[2] The Insolvency and Bankruptcy Code, 2016[3] the result of the Committee’s recommendations, was, by any standards, a unique and remarkable piece of legislation.

The Code’s showpiece mechanism was the corporate insolvency resolution process (immediately reduced by lawyers to its acronym “CIRP”). The CIRP was originally intended as a direct attack on the country’s massive corporate non-performing assets (NPAs). The way it worked was simple – bids would be called for a bankrupt company, and the person making the “best” bid (invariably the largest monetarily) would, after getting the nod from the company’s creditors and the NCLT, take over its affairs, and the old management would be ousted.

One would think, given the centrality of bidders and their deep pockets to the success of the new law, that they would be lavished and fawned upon at every turn, have their every need attended to with alacrity and swiftness, and veritably sped to the point where they would open their purse strings and pay up. One would be triply wrong. Not only do resolution applicants (IBC legalese for bidders) have no legal rights till their plan for the company is approved, they also cannot leave the process once they enter it, and may in some instances even be forced into a “fight to the death” with other bidders. What follows is an appraisal of the indelicate and short-sighted handling of resolution applicants since the Code was enacted.

The enactment of Section 29-A

One of the main prejudices that the Bankruptcy Law Reforms Committee wanted to dispel was that all default involves malfeasance. The Committee thought that this thinking was the hallmark of a “weak insolvency regime”, and the new law ought to recognise that some business plans will always go wrong, and this was no reason to disincentivise risk-taking. “If default is equated to malfeasance, then this can hamper risk-taking by firms”, said the Committee, in a section titled “Drawing the line between malfeasance and business failure”.[4]

The Code was structured to give the company’s earlier management inducement to share its knowledge of the company, with the promise that if it could convince the company’s creditors, it might resolve the company’s loan default and jump back in the saddle and run its business anew.

Section 29-A[5] changed all that. In his speech to the Lok Sabha, the Finance Minister railed against the fact that “the man who created the insolvency pays a fraction of the amount and comes back into management”.[6] This, he said, was “morally unacceptable”, and so we needed Section 29-A, which disqualifies inter alia any person who has an account which is classified as an NPA from submitting a resolution plan to the committee of creditors. With the legislation of Section 29-A, the line between malfeasance and business failure was obliterated. A host of potential resolution applicants were turned away at the doorstep.

An added shortcoming of Section 29-A is that ever since it was introduced, it has been the source of torrential litigation between rival resolution applicants. In their eagerness to eliminate competitive bids, bidders spiritedly term each other as being in violation of Section 29-A. “Like wolves in long winters,” wrote Dr Samuel Johnson in an 18th-century essay, “they are forced to prey upon one another.[7]

The long winter of the IBC began with Section 29-A.

The elimination of legal rights

In Essar Steel case,[8] the Supreme Court upheld the principle that a resolution applicant has no vested right that its plan be considered. Elaborating on the consequence of such a principle, the court observed that a resolution applicant had no right to challenge the rejection of its plan by a resolution professional, or even by the Committee of Creditors when the plan does not receive 66% of the Committee’s votes.[9] This was a reasonable interpretation, and obviously intended to slice away some of the cancerous litigation that has afflicted the Code.

But in Bank of Baroda v. MBL Infrastructures Ltd.,[10] even this salutary principle was taken to an extreme. The issue was the applicability of Section 29-A to a bidder that had submitted its bid before the provision had been introduced. The Court held that this did not matter, “the concern of the Court is only from the point of view of two entities viz. corporate creditors and corporate debtors”. The bidder, the Court observed, “has no role except to facilitate the process”. “No role except to facilitate the process” is, like George Orwell’s “All animals are equal, but some are more equal than others,” a paradox that reveals more than it intends to. Surely, the entity tasked with facilitating the process has the largest role in it?

The sealing of escape routes

When a resolution applicant submits its bid, it should ordinarily expect a quick, two-step appraisal – first by the Committee of Creditors and then by the NCLT. Instead, the CIRP often gets derailed by side issues for unreasonable lengths of time, and the bidders find themselves having to pay last year’s price for a company that has depreciated rapidly since.

In Ebix Singapore (P) Ltd. v. Educomp Solutions Ltd.[11] the Supreme Court simultaneously considered three cases, in each of which the resolution applicants sought to withdraw their bids after waiting for the NCLT’s consent for over a year after the Committee of Creditors granted its approval. (Incidentally, the IBC prescribes a limit of 330 days for the completion of the entire CIRP.)[12] One of the resolution plans even came with a self-imposed validity period of six months.[13] But the Supreme Court refused to release the resolution applicants, however, long they may have languished in the waiting room, maintaining that the IBC did not provide for such a procedure.[14]

The result of such a coercive process is that the resolution applicants will naturally discount the costs of delay and uncertainty when making their bids. Who would bid the full price for a company that may wither and decay for conceivably over a year before its management gets transferred? Worse still, an unascertainable number of potential resolution applicants may decide that the IBC process is not worth the bother, and never bid at all.

In conclusion

The corporate insolvency resolution process is like a Roman galley – it depends upon several arms rowing in the same direction as one. Resolution applicants sit perched at the head of the ship; on them rests the success of the journey. They cannot be made into castaways.

It is in everybody’s interest that the bidders are given every incentive to put in their bids, that their rights are respected, and that they are not made to pay for an unreasonably delayed process. As things stand, they can be forgiven for giving the IBC a pass.


Advocate, Bombay High Court. Author can be reached at adityasbapat@gmail.com.

[1] For the resolution of insolvencies in companies, the law provided two alternatives: “winding up” under the Companies Act, 1956 and reconstruction under the Sick Industrial Companies (Special Provisions)  Act, 1985 (SICA).

[2] The Report of the Bankruptcy Law Reforms Committee,  Para 3.3.1.

[3] Insolvency and Bankruptcy Code, 2016.

[4]  The Report of the Bankruptcy Law Reforms Committee, Para 3.2.3.

[5] Insolvency and Bankruptcy Code, 2016, S. 29-A.

[6] <https://www.youtube.com/watch?v=5Yujf1DJRUo> accessed on 10-5-2022.

[7] Samuel Johnson, “A Project for the Employment of Authors” in The Works of Samuel Johnson, LLD, 200, 206 (1788), Vol. XIV.

[8] Arcelormittal India (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1.

[9] (2019) 2 SCC 1, pp. 86 and 87.

[10] 2022 SCC Online SC 48.

[11] (2022) 2 SCC 401.

[12] Insolvency and Bankruptcy Code, 2016, S. 12. The Supreme Court later held that this time limit was merely directory, but that the process must ordinarily be completed in this time. See Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531, 628.

[13] (2020) 8 SCC 531.

[14] (2020) 8 SCC 531.

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Read more, here…

Delayed payment of employee’s contribution to EPF/ESIC is not disallowable as amendments to S. 36(1) (va) and S. 43B effected by Finance Act, 2021 were applicable prospectively; appeal allowed

The Coram of Pradip Kumar Kedia (Accountant Member) and Narender Kumar Choudhry (Judicial Member) allowed an appeal which was filed at the instance of the assessee against the order of the Commissioner of Income Tax (Appeals) -XXXVI, New Delhi passed by the Assessing Officer under Section 143(3) of the Income Tax Act, 1961 concerning AY 2013-14. The instant appeal challenged the disallowance of Rs 45,60,061 on account of delayed payment of employee’s contribution towards EPF and ESIC.

Read more, here…

Whether gift received from HUF to any member of HUF is exempt from taxable income?

The Coram of Sanjay Garg (Judicial Member) and Annapurna Gupta (Accountant Member) examined the issue as to the taxability of the amount of gift received by the assessee from his ‘HUF’.

Read more, here…


Insolvency and Bankruptcy Board of India (IBBI)


Name and Designation of Officers of IBBI is exempted under S. 8(1)(j) of the RTI Act

“Section 8(1)(j) exempts information which relates to personal information, the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual unless a larger public interest justifies the disclosure of such information.”

Read more, here…


National Green Tribunal (NGT)


Fine of Rs 41.21 Crores imposed on a Government Corporation for excess mining and violation of conditions of Environmental Clearance: NGT issues 10 directions || If no fine, would rule of law be impacted? Read

While imposing a fine of Rs 41.21 crores on Singareni Collieries Company Limited, for violation of environmental clearance conditions and mining excess coal, the Coram of Justice K. Ramakrishnan (Judicial Member) and Dr Satyagopal Korlapati (Expert Member) expressed that,

“The Government Corporations are expected to be more law abiding and if any leniency or discrimination is shown for committing violation, then it is very difficult to maintain the rule of law, if any violations were committed by other persons. There will not be any moral right for the regulators to take action against others, if similar violations were committed by them.”

Read more, here…


National Consumer Disputes Redressal Commission (NCDRC)


If a person makes an investment in shares, will he be considered a Consumer under S. 2(1)(d) of Consumer Protection Act? NCDRC elaborates in view of ‘earning livelihood’

Viswanath, Presiding Member, held that the complainant was not investing money in the share market exclusively for earning his livelihood, hence the same was he did not fall under the definition of Consumer.

Read more, here…

[Medical Negligence] Consumer Protection Act should not be a halter round the neck

In an alleged medical negligence casethe Coram of R.K. Agrawal, President and Dr S.M. Kantikar, Member, reiterates that the “Consumer Protection Act should not be a halter round the neck.”

Read more, here…

“Negligence per se may be declared when …”: NCDRC explains in medical negligence case while awarding Rs 25 lakh compensation plus interest

While addressing a medical negligence case, the Coram of Dr S.M. Kantikar (Presiding Member) and Binoy Kumar, Member, observed that, Negligence per se is not a separate cause of action from negligence suits. Negligence per se, however, assumes the duty because of public policy or law.

Read more, here…

Due to burglary, customers lost their valuable articles from bank lockers. Will Bank be liable for deficiency in service?

The Coram of Justice R.K. Agarwal (President) and Dr S.M. Kantikar (Member) expressed that, customer avails of Locker hiring facility is so that they may rest assured that their assets are being properly taken care of, but in the present matter, OP Bank failed to take care of the assets.

Read more, here…

Sudden cancellation of rooms booked for daughter’s marriage 3 months prior on account of maintenance: Is it an acceptable reason? Can consumers claim compensation?

“The memories of marriage ceremonies are lifetime events in the life of bride and bridegroom and their family members to make their moments memorable. In our country, certainly, it is not an easy task for the parents to arrange their daughter’s marriage in a five-star hotel in place like Jaipur or any big cities. All of sudden cancellation of booking about 3 months prior to the date of marriage on account of maintenance is not acceptable reason.”

Read more, here…

After forceps delivery, patient developed 4th degree perineal tear losing chance for normal delivery: Will doctor be liable for medical negligence?

After forceps delivery, a woman lost her control over passing urine and stool due to the negligence of a doctor, the Coram of R.K. Agrawal (President) and Dr S.M. Kantikar (Member) upheld the decision of State Commission with respect to compensation of Rs 8 lakhs.

Read more, here…


National Company Law Tribunal (NCLAT)


Whether Homebuyer’s’ decision as a Class will be binding on every Homebuyer?

The Coram of Justice Ashok Bhushan (Chairperson) and Shreesha Merla (Technical Member) held that decision taken by the class of Homebuyers will be binding on all the homebuyers.

Read more, here…

Once insolvency proceedings are put on Stay, Can resolution professionals still be entitled to fees during Stay?

In a matter with regard to fees of resolution professional, the Coram of Justice Ashok Bhushan (Chairperson) and Shreesha Merla (Technical Member) held that, when proceedings in a matter are put to stay, the resolution professional is not entitled to fees during the stay on insolvency.

Read more, here…

Can territorial jurisdiction of NCLT be decided on basis of a Facility Agreement between parties?

The Coram of Justice Ashok Bhushan (Chairperson) and Shreesha Merla (Technical Member) held that, the territorial jurisdiction of NCLT to decide a case under Insolvency and Bankruptcy Code, 2016 cannot be taken away by the Facility Agreement between the parties.

Read more, here…

Whether fixation of salary of the MD is within the domain of IBC?

“There is no crystallised quantum of amount which can be claimed as salary/remuneration fixed by the Board of Directors as contemplated under Section 196 of the Companies Act, 2013.”

Read more, here…

Article 1 of Limitation Act deals with suits relating to accounts: NCLAT highlights scope of Art. 137 of Limitation Act

The Coram of Justice Ashok Bhushan (Chairperson) and Dr Alok Srivastava (Technical Member) observed that, provisions of the Limitation Act are applicable to proceedings under IBC.

Read more, here…

Jet Airways Resolution Plan’s implementation is subject to the outcome of?

The Coram of Justice Ashok Bhushan (Chairperson) and Shreesha Merla (Technical Member), held that the implementation of the Jet Airways Resolution Plan will be subject to the outcome of appeals filed against the order of National Company Law Tribunal which approved the resolution plan for Jet Airways.

Read more, here…


National Company Law Tribunal (NCLT)


Whether salary during notice period falls within definition of Operational Debt under IBC?

The Coram of H.V. Subba Rao, Judicial Member and Chandra Bhan Singh, Technical Member deliberated on what amounts to a pre-existing dispute.

Read more, here…


Securities Appellate Tribunal (SAT)


Insider Trading | SEBI’s restriction on Infosys employees for trading securities lifted by SAT: Read 5 reasons why SAT lifted restrictions

While lifting the restriction of buying or selling any securities, laid down by SEBI on employees of Infosys for allegedly violating the insider trading regulations, the Coram of Justice Tarun Agarwala (Presiding Officer) and Justice M.T. Joshi (Judicial Member) reiterated the settled law that burden of proof is always upon the prosecution, SEBI to prove that he had access to UPSI.

Read more, here…

Once a statute is repealed, will subordinate legislation made under statute ceases to have effect or can it be avoided by a saving clause?

“A statute after its repeal is completely obliterated as it had never been enacted. The effect is to destroy all inchoate rights and all causes of action that may have arisen under the repealed statute.”

Read more, here…

Logix Insolvent? NCLT initiates insolvency proceedings against Logix City Developers

The Coram of Bachu Venkat Balaram Das (Judicial Member) and Narender Kumar Bhola (Technical Member) initiates insolvency proceedings against Logix City Developers due to default in payment.

Read more, here…


Maharashtra Real Estate Appellate Tribunal


If change of promoter is left to wisdom of society, it will create chaos and uncontrollable situation leaving fate of flat purchasers in doldrum

The Coram of Indira Jain J., (Chairperson) and Dr K. Shivaji, Member (A), expressed that, if the change of promoter without following the procedure prescribed under the law is left to the wisdom of society, it will not only render the relevant provisions of revocation of registration redundant but also create chaos and uncontrollable situation leaving the fate of allottees /flat purchasers in doldrum.

Read more, here…

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi (NCLAT): The Coram of Justice Ashok Bhushan (Chairperson) and Dr Alok Srivastava (Technical Member) observed that, provisions of the Limitation Act are applicable to proceedings under IBC.

An appeal was filed against the order passed by the National Company Law Tribunal, Mumbai, by which the application filed by the appellant had been rejected as barred by time.

Contentions

Appellant’s counsel submitted that both the parties were maintaining a running account and there have been transactions inter se which was reflected from the ledger account filed by the respondent.

Further, in the facts of the present case, Article 1 of the Limitation Act was attracted as per which the limitation period of 3 years began to run from the close of the year in which the last item admitted or proved was entered into the amount.

Analysis, Law and Decision

Tribunal expressed that in the application under Section 9 IBC, the appellant had claimed payment of outstanding dues on the basis of different invoices issued in the year 2015-16.

The Adjudicating Authority after perusing the date of all the invoices returned a finding that Application under Section 9 having been filed on 24th October, 2019 even the last invoices dated 29.09.2016 and 10.10.2016 were more than three years prior to filing of Section 9 Application hence the Application having been not filed within limitation, the same is rejected.

Coram observed that the Limitation Act is applicable in IBC Proceedings and IBC does not exclude the application of Sections 6 to 14 or 18 and any provision of the Limitation Act.

Whether appellant can take benefit of Article 1 of the Limitation Act, 1963?

Supreme Court in B.K Educational Services (P) Ltd. v. Parag Gupta, (2019) 11 SCC 633 after considering the provisions of IBC and the Limitation Act had laid down that for filing application under Sections 7 and 9, it is Article 137 which is attracted.

Supreme Court in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1 has reiterated the applicability of the Limitation Act and it was again reiterated that period for limitation is governed by Article 137 of the Limitation Act.

It was noted that Article 1 is in Part-I of the Schedule of the Limitation Act dealing with suits, under the “suit relating to accounts”. The application filed under Section 9 of the appellant cannot be said to be a suit relating to accounts.

Tribunal concluded stating that, limitation as per Article 137 will begin to run from the date when the right to apply accrues and the application filed on the basis of invoices were prior to much before three years period from filing of Section 9 application, NCLT had rightly rejected the application.

Therefore, the appeal was dismissed. [S.M. Ghogbhai v. Schedulers Logistics India (P) Ltd., 2022 SCC OnLine NCLAT 216, decided on 23-5-2022]


Advocates before the Tribunal:

For Appellant: Advocate Ekta Mehta

For Respondent: Advocate Kayomars K. Kerawalla, Advocate Kunal Mehta and Advocate Robin Fernades.

Case BriefsSupreme Court

Supreme Court: The Division Bench of Dinesh Maheshwari and Aniruddha Bose, JJ., issued notice to Topworth Urja & Metals Ltd. in a case alleging oppression and mismanagement in appointment of additional directors.

The question of law before the Court was whether a non-member/non-shareholder director is barred from raising a dispute regarding oppression/mismanagement and the illegal appointments of directors before the Civil Court u/s 430 of the Companies Act, 2013?

The appellant, Manish Kumar was holding the directorship in the respondent Company, which was engaged in the business of manufacturing of state-of-art range of steel, pipes, tubes, mining offered steel et cetera. The grievance of the appellant was that the respondent company had illegally appointed respondents 2 to 6 as the Additional Directors of the company. Further, the appellant alleged that the appointment was made without giving notice to the appellant and other aggrieved directors.

Therefore, the appellant had approached the Civil Court, alleging that the conduct of the company amounted to mismanagement qua the directorial appointments which were per se illegal in nature and were made with the intention to siphon off funds. The Civil Court had dismissed the application and relegated the appellant to National Company Law Tribunal (NCLT) to agitate his issues.

Aggrieved, the appellant approached the Bombay High Court seeking declaration that the alleged appointment of directors was illegal and void-ab-initio and to restore status quo ante with respect to directorship as on 23-11-2021. The appellant argued that he being a director without being a shareholder was not a ‘member’ within the meaning of Section 2(55), therefore, he could not seek relief for oppression before NCLT u/s 241 of the Act, 2013, since the said section is restricted to “a member of the Company”.

Rejecting the contentions of the appellant, the High Court held that the word ‘matter’ used in Section 430 is of wide amplitude and it cannot be read in a constricted way to limit it to an individual, but it will have to be given the widest meaning to cover any matter which the Tribunal is empowered to determine under the Act and this would necessarily cover the dispute regarding the affairs of the Company alleged to be conducted prejudicial to the interest of the Company or even any allegation of oppression or mismanagement.

Therefore, dismissing the appeal, the High Court observed that if any person, who is interested in the affairs of the Company alleges mismanagement or oppression, he shall not be restrained from knocking the doors of the Tribunal merely because the words employed in Section 241.

The High Court held that the words ‘any member’ if read constrictively and confining it only to member as defined, it would result in defeating the intention of law makers, who created the special Tribunal with exclusive jurisdiction only for corporate and reduce the multiplicity of litigation before different forums, including civil courts and to provide justice at close range.

The appellant had challenged the impugned High Court order stating that both the Civil Court and the High Court had fell into grave error by misinterpreting the law on the issue of jurisdiction under Section 430 of the Companies Act, 2013 and relegating the appellant to approach NCLT.

Further, the appellant alleged that the both the Civil Court and the High Court had erroneously relied on Chiranjeevi Rathnam vs. Ramesh, (2017) SCC OnLine Mad 23049, and had failed to appreciate the plain interpretation of the wording of Sections 2(34), 2 (55) and Section 244 of the Act, 2013.

Reliance was placed by the appellant on the decision of NCLT in Jithendra Parlapalli v. Wirecard India (P) Ltd. (judgment dated 16-02-2022), wherein the NCLT had, by detailed reasoning, distinguished the judgment of Chiranjeevi (supra) and held that, a non-member director cannot file an application before NCLT under Sections 241 and 242 of Companies Act, 2013 due to the embargo under Sec. 244 of the Companies Act, 2013.

The Court had issued notice to the respondent company.

[Manish Kumar v. Topworth Urja & Metals Ltd., Special Leave to Appeal (C) No. 9191 of 2022, order dated 18-05-2022]


Appearance by:

For Petitioner(s): Siddharth Bhatnagar, Sr. Adv.

Swarnendu Chatterjee, AOR

Aditya S., Adv.

Pranav Auhad, Adv.

Darshana Naval, Adv.

Yashwardhan Singh, Adv.


Kamini Sharma, Editorial Assistant has put this report together 


Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi (NCLAT): The Coram of Justice Ashok Bhushan (Chairperson) and Shreesha Merla (Technical Member) held that, the territorial jurisdiction of NCLT to decide a case under Insolvency and Bankruptcy Code, 2016 cannot be taken away by the Facility Agreement between the parties.

Instant appeal was filed against the order passed by the National Company Law Tribunal, New Delhi, by which the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 had been admitted.

The Appellant’s counsel submitted that there was no jurisdiction with the Principal Bench, Delhi to entertain Section 7 Application. He referred to a Clause from the Facility Agreement, as per which Courts at Mumbai had jurisdiction in respect of any matter of the Facility Agreement.

Analysis, Law and Decision

First, the Tribunal referred to Section 60(1) of the Code provides for Adjudicating Authority for Corporate Persons. Section 60(1) is as follows:

  1. (1) The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate persons located.

Coram expressed that, Adjudicating Authority in relation to Insolvency Resolution shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate persons is located.

Tribunal stated that, the appellant cannot rely on clause 24.12 of the Facility Agreement which provides jurisdiction to the Mumbai Courts.

Noting the above, Coram held that, for filing an Application under Section 7 of the Code, the provisions of Section 60(1) read with Section 238 of the Code shall be overriding clause 24.12 of the Facility Agreement.

Further, not denying that Corporate Debtor’s registered office was situated in New Delhi where the territorial jurisdiction to entertain such application was with NCLT, Delhi, Coram did not accept the submissions of Counsel for the appellant.

In view of the above, the appeal was dismissed. [Anil Kumar Malhotra v. Mahindra & Mahindra Financial Services Ltd., 2022 SCC OnLine NCLAT 200, decided on 19-4-2022]


Advocates before the Tribunal:

For Appellant:  Mr. Yajur Bhalla, Mr. Siddharth Srivastava, Sumeir Ahuja, Advocates

Advocate Gunjan Chauvey, for R-1

For Respondent: Mr. Rajesh Kumar Mittal, Advocate for IRP, R-2.

Hot Off The PressNews

The Central Bureau of Investigation has arrested an Interim Resolution Professional (IRP), National Law Tribunal (NCLT), Mumbai and two private persons including the Proprietor of Mumbai based firm in a  bribery case of Rs Two Lakh.

            A case was registered on complaint against an Interim Resolution Professional (IRP), National Company Law Tribunal (NCLT), Mumbai and unknown others on the allegations of demanding undue advantage of Rs.20 lakh for settling the NCLT matter of Complainant’s company. It was further alleged that the accused demanded initial part payment of Rs.2 lakh, out of the total demand of Rs.20 lakh from the Complainant and told him that a private person would come to collect the said amount at Pune.

            CBI laid a trap and caught the said private person while accepting the initial part payment of Rs.2 Lakh from the Complainant. Later, the Interim Resolution Professional (IRP) and the Proprietor/Jeweller of Mumbai whose alleged role came in the case were also caught.

            Searches were conducted at the premises of the accused at Pune, Navi Mumbai which led to recovery of incriminating documents etc.

            All the three arrested accused are being produced today in the Court of Special Judge, CBI Cases, Pune.


Central Bureau of Investigation

[Press Release dt. 5-5-2022]

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, Delhi (NCLAT): The Coram of Justice Ashok Bhushan (Chairperson) and Shreesha Merla (Technical Member) held that decision taken by the class of Homebuyers will be binding on all the homebuyers.

An appeal was filed against the Order passed by the Adjudicating Authority (NCLT, New Delhi).

The observation of Adjudicating Authority was that the class of Homebuyers were already represented in the matter and the applicant had already filed the application question rejection of the claim which was still pending before the Adjudicating Authority. The intervention applications were rejected.

Appellant’s Counsel submitted that even the authorized representation of the Homebuyer was not being provided for the facts and information and hence, the appellant filed an Intervention Application.

Analysis and Decision

Tribunal held that the appellant as a homebuyer had to go with the class of Homebuyers and the decision taken by the class of Homebuyers was binding.

The authorised representative in the event of any difficulty, it is always open for him to approach the Resolution Professional and Adjudicating Authority, if so required.

Concluding the matter, Tribunal held that the Adjudicating Authority did not commit any error in rejecting the Intervention Application of the appellant and there was no merit in the appeal. [Sandeep Kumar Jain v. Anil Tayal Resolution Professions of AVJ Developers (India) (P) Ltd., 2022 SCC OnLine NCLAT 187, decided on 27-4-2022]


Advocates before the Tribunal:

For Appellant: Mr. Harshit Aggarwal, Advocates.

For Respondent: Mr. Abhishek Anand and Mr. Karan Kohli, Advocates for RP.

Case BriefsHigh Courts

Bombay High Court: A very interesting question was considered by G.S. Kulkarni, J., the question being, whether mere filing of a proceeding under Section 7 of the Insolvency and Bankruptcy Code, 2016 would amount to an embargo on the Court considering an application under Section 11 of the Arbitration and Conciliation Act, 1996, to appoint an arbitral tribunal?

Factual Background


 In the present matter, the respondent provided financial assistance to the applicant of an amount of Rs 4,50,00,000 for which a loan agreement was entered between the applicant and the respondent, referred to as Agreement 1.

Due to a change in the business scenario, another Agreement was executed referred to as Agreement 2, under which the date of repayment of the borrowing was extended.

There were defaults on the part of the applicant in the payment of the loan instalments.

Applicant’s case was that in the discharge of its liability towards the respondent under the above-stated agreements, the applicant issued a cheque to the respondent, of an amount of Rs 31,08,33,457 being the repayment of the respondent’s dues, which was in accordance with the terms and conditions of the loan agreement.

Respondent had approached the NCLT by initiating proceedings against the applicant under Section 7 of the Insolvency and Bankruptcy Code, 2016.

Though, so far, no order had been passed by the NCLT admitting the petition as per the provisions of Section 7(5) of the IBC.

Analysis and Decision


High Court observed that there was no dispute in regard to the arbitration agreements between the parties and there was a dispute in regard to the invocation of the arbitration agreement.

Thus, the primary considerations for this Court to exercise jurisdiction under Section 11(6) were certainly present.

The Bench stated that, even if an application under Section 8 of the ACA is filed, the adjudicating authority has a duty to advert to the contentions put forth under an application filed under Section 7 of the IBC by examining the material placed before it by the financial creditor and record a satisfaction as to whether there is default or not.

“…if the irresistible conclusion of the adjudicating authority (NCLT) is that there is default and the debt is payable, the bogey of arbitration to delay the process would not arise despite the position that the agreement between the parties contains an arbitration clause.”

The Bench observed that,

“…mere filing of the proceedings under Section 7 of the IBC cannot be treated as an embargo on the Court exercising jurisdiction under Section 11 of the ACA, for the reason that only after an order under sub-section (5) of Section 7 of the IBC is passed by the NCLT, the Section 7 proceedings would gain a character of the proceedings in rem, which would trigger the embargo precluding the Court to exercise jurisdiction under the ACA, and more particularly in view of the provisions of Section 238 of IBC which would override all other laws.”

Hence, as noted in the present case, the Corporate Insolvency Resolution Process initiated by the respondent is yet to reach a stage of the NCLT passing an order admitting the said proceedings, the Court would not be precluded from exercising its jurisdiction under Section 11 of the ACA, when admittedly, there was an arbitration agreement between the parties and invocation of the arbitration agreement had been made, which was met with a refusal on the part of the respondent to appoint an arbitral tribunal.

While concluding the matter, Bench held that, the Court would be required to allow the present application by appointing an arbitral tribunal for adjudication of the disputes and differences which arose between the parties under the agreements in question.

Though the Court added that a formal order appointing an arbitral tribunal was not required to be made as after the judgment was reserved, the parties just two days back, settled the disputes stating that arbitration was not warranted. [Jasani Realty (P) Ltd. v. Vijay Corpn., 2022 SCC OnLine Bom 879, decided on 25-4-2022]


Advocates before the Court:

Dr. Birendra Saraf, Senior Advocate a/w. Anshul Anjarlekar i/b. Raval- Shah & Co., Advocate for the Applicant.

Mr.Yusuf Iqbal Yusuf i/b. Y. and A Legal, Advocate for the Respondent.

Akaant MittalExperts Corner


A. Introduction


The IB Code differentiates between financial creditors and operational creditors. Financial creditors are those having a relationship with the corporate debtor that is purely a financial contract, such as a loan or a debt security. Whereas, operational creditors are those who have due from the debtor on account of transactions made for the operational working of the debtor.[1]

 

For the purposes of the definition of the term “goods”, the Sale of Goods Act, 1930 can be referred to; whereas, the definition of the term “services” is still not concretely defined. A claim on operational debt may be on account of breach of an agreement or a decree of a court of law; still the same must relate to the supply of goods and services.

 

Now issue arises as to the status of lease dues forming an “operational debt”. The question has two aspects, namely, one whether the landlord could claim to be an operational creditor against the tenant for the rental dues outstanding; and two whether a tenant while using the tenanted premise, if suffers any damages, could claim to be an operational creditor.

 


B. Landlord claiming to be an Operational Creditor


The Bankruptcy Law Reforms Committee Report that formed the basis of the IB Code illustratively suggested that the definitions of “operational creditor” and “operational debt” include wholesale vendors of spare parts whose spark plugs are kept in inventory by the car mechanic and who gets paid only after the spark plugs are sold, thus making them operational creditors. Similarly, the lessor who rents out space to an entity is an operational creditor to whom the entity owes monthly rent on a three-year lease.[2] Operational creditors, in other words, maybe employees, rental obligations, utilities payments and trade credit.[3]

 

While the landlord certainly could claim to be an operational debtor in light of what the Bankruptcy Law Reforms Committee seems to suggest, however, in Annapurna Infrastructure (P) Ltd. v. SORIL Infra Resources Ltd.[4], such an issue was left open by the NCLAT to be decided by the NCLT. In this case, the landlord had initiated proceedings under Section 9 against the tenant on the basis of an arbitral award which awarded rent due towards the landlord on the part of the tenant. The NCLAT, however, left this contention unaddressed and remitted the matter on other grounds.

 

In Sarla Tantia v. Nadia Health Care (P) Ltd.,[5] the question before the NCLT was whether the recovery of arrears of rent can be claimed as operational debt within the meaning of Section 5(21) of the IB Code. The counsel for the corporate debtor i.e. Nadia Health Care relied on the input output test arguing that the operational debt are only those debts that have “a correlation of direct input to output produced or supplied by the corporate debtor”. However, the NCLT herein relied on the observations from the decision of the Supreme Court in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd.,[6] to conclude that the Supreme Court in the affirmative settled the issue of lease dues being an operational debt.

 

It is submitted that the same is erroneous because (i) the Supreme Court in Mobilox Innovations[7] did not discuss the issue of lease deeds in its own observations. The court had merely reproduced paragraphs from the report of the Bankruptcy Law Reforms Committee, a part of which had also touched upon rental and lease dues as a type of operational debt; and (ii) to begin with, the issue was not the subject-matter of dispute before the Supreme Court at all.

Therefore, the opinion of the NCLT in Sarla Tantia[8] may not be on strong footing.

 

Split in jurisprudence

A split in the jurisprudence before the NCLAT is found in the two rulings rendered by the NCLAT in M. Ravindranath Reddy v. G. Kishan,[9] on one side and Anup Sushil Dubey v. National Agriculture Coop. Mktg. Federation of India Ltd.[10] on the other.

 

In Ravidranath, the specific query was addressed by the NCLAT on whether a landlord by providing lease could be treated as operational creditor. The same was held by the Full Bench of NCLAT to not fall within the ambit of the definition of the term “operational debt”.[11] The NCLAT in Ravidranath[12] opined that the recommendation of the Bankruptcy Law Reforms Committee pertaining to the treatment of lessors/landlords as operational creditors, was not adopted by the legislature and only the claim in respect of goods and services were kept in the definition of operational creditor and operational debt under Sections 5(20) and 5(21) of the IB Code. Resultantly, it was concluded that the definition of an operational debt and operational creditor could not be interpreted to include rent dues as operational debt. Therefore, non-payment of rent does not amount to an operational debt.

 

There is a qualification added to the ruling in M. Ravindranath[13], when the NCLAT in Sanjeev Kumar v. Aithent Technologies (P) Ltd.[14] distinguished the former. In Sanjeev Kumar, the relationship between the creditor landlord and the debtor tenant was found to be not merely of the one to that of a landlord tenant but was held to also include certain provision of services such as electricity, diesel, sewer and water charges amongst others given to the debtor tenant. In such cases once the dues were found to be more than the pecuniary threshold, the debt was held to fall under the definition of an operational debt and an application under Section 9 of the Code was admitted.[15]

 

On the other hand in Anup Sushil Dubey[16] the NCLAT held that lease and licence agreements fall within the ambit of Section 5(21) of the IB Code. The NCLAT here noted that the appellants had leased out the premises for “commercial purpose” and the same fell within the meaning of term “service” under Section 5(21) of the IB Code. Then the NCLAT found the definition of “service” under the Consumer Protection Act, 2019 to be of relevance, which defines a service in the following manner :

(42) “service” means service of any description which is made available to potential users and includes, but not limited to, the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, telecom, boarding or lodging or both, housing construction, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service.

 

The NCLAT similarly referred to the provisions of the Central Goods and Services Tax Act, 2017, which under the Schedule II lists down the activities that are to be treated as supply of goods or services, and in Para 2 of the Schedule stipulates as follows:

(a) any lease, tenancy, easement, licence to occupy land is a supply of services;

(b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

 

On the basis of the above, taking into account that the premises were leased out for a commercial purpose, it was held that the dues claimed by the creditor squarely fell within the ambit of the definition of “operational debt” as defined under Section 5(21) of the Code.

 

It is essential to note that while M. Ravindranath[17] was a decision by a Full Bench of the NCLAT, the ruling in  Anup Sushil Dubey[18] was by a Division Bench. Furthermore, the NCLAT in Anup Sushil Dubey[19] while noted that the corporate debtor appellant before it, cited the ruling in M. Ravindranath[20]; the NCLAT however did not render any findings on the reference to M. Ravindranath[21].

 


C. Tenant claiming to be an Operational Creditor


On the other hand, as regards the claim of a tenant in its tenant landlord relationship is concerned, the position seems to be settled in Jindal Steel & Power Ltd. v. DCM International Ltd.[22] wherein it was held that tenants do not come within the meaning of “operational creditor” as defined under Sections 5(20) and (21), IB Code. In this case, the tenant sought to recover the security deposit on account of the termination of the lease agreement with the landlord. The NCLAT upheld the order of the NCLT rejecting the application filed under Section 9 by the tenant holding that the tenant does not come within the meaning of the term “operational creditor”.

 

It must also be noted here that while in Sarla Tantia,[23] the NCLT had referred to the Schedule II of the CGST Act, 2017[24] which in context of land and buildings, classifies “any lease, tenancy, easement, licence to occupy land” as a supply of services. Here in Jindal Steel[25], the NCLT held that the definition of “service” in the fiscal statutes has no bearing because the purpose of fiscal statutes is to generate revenue for the Government in the form of taxes, whereas the purpose of the IB Code is to consolidate and amend the laws relating to reorganisation and insolvency resolution.

 

Similar position was maintained in  D & I Taxcon Services (P) Ltd. v. Vinod Kumar Kothari,[26] where a tenant filed a claim on account of suffering damage in the tenanted premises due to a fire incident. The NCLAT clarified that the claim of the tenant does not constitute any operational debt since by using the demised premises as a tenant, the appellant could not be said to have been providing any “services”.

 

However, sub-tenants cannot be treated as a corporate debtor even if part of the payment is made directly by such sub-tenants to the operational creditor since the same will not create any relationship of operational creditor and debtor.[27]


Conclusion


On account of the differing viewpoints expressed by the NCLT and NCLAT, the issue on whether a landlord could claim to be an operational creditor remains unresolved.

 

Since different types of creditors are granted distinct rights under the IB Code framework, it is necessary to determine to which category, a creditor belongs to. In this context, it is possible that, in the future, a leasing agreement may not fall within either of the two categories of creditors who can file for initiating a corporate insolvency resolution process (CIRP), namely, financial and operational creditors, and that they will have to make a claim as other creditors. Categorisation as such would also lead to a significant loss of rights as such creditors would have no participatory role (whatsoever) in the CoC working.

The issue is now pending before the Supreme Court in Promila Taneja.[28]

 

Given the ambiguity surrounding the problem, the Supreme Court must evaluate the larger issue of claims resulting from the use of immovable property and other associated costs, and eventually resolve the question of whether rent arrears constitute as operational debt.

 

To sum up, unless the existing gaps in the Code regarding lease transactions, their treatment as secured creditors, the right to relinquish, and other factors discussed above are addressed, the true devil will lie in the strategically drafting of lease agreements, which will essentially make or break the rights available to the lessor.


Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is also a visiting faculty at the National Law University, Mumbai and the author of the commentary Insolvency and Bankruptcy Code – Law and Practice.

“The author gratefully acknowledge the research and assistance of Sh. Priyanshu Fauzdar, pursuing law at NLU, Assam in writing this article.”

[1] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design (Nov. 2015), Ch. 5.2.1, available online at HERE .

[2] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design, (Nov. 2015), Ch.

5.2.1.

[3] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design, (Nov. 2015), Ch.3.2.2.

[4] 2017 SCC OnLine NCLAT 380.

[5] 2018 SCC OnLine NCLT 16726.

[6] (2018) 1 SCC 353.

[7] (2018) 1 SCC 353.

[8] 2018 SCC OnLine NCLT 16726.

[9] 2020 SCC OnLine NCLAT 84.

[10] 2020 SCC OnLine NCLAT 674.

[11] The ruling in M. Ravindranath case, 2020 SCC OnLine NCLAT 84 has been followed subsequently in Aurora Accessories (P) Ltd. v. Ace Acoustics & Audio Video Solutions (P) Ltd., 2020 SCC OnLine NCLAT 527; Promila Taneja v. Surendri Design (P) Ltd., 2020 SCC OnLine NCLAT 1105.

[12] 2020 SCC OnLine NCLAT 84.

[13] 2020 SCC OnLine NCLAT 84.

[14] 2020 SCC OnLine NCLAT 734.

[15] 2020 SCC OnLine NCLAT 734.

[16] 2020 SCC OnLine NCLAT 674.

[17] 2020 SCC OnLine NCLAT 84.

[18] 2020 SCC OnLine NCLAT 674.

[19] 2020 SCC OnLine NCLAT 674.

[20] 2020 SCC OnLine NCLAT 84.

[21] 2020 SCC OnLine NCLAT 84.

[22] Jindal Steel & Power Ltd. v. DCM International Ltd., 2017 SCC OnLine NCLAT 441 upholding the order of the NCLT in Jindal Steel and Power Ltd. v. DCM International Ltd., 2017 SCC Online NCLT 989.

[23] 2018 SCC OnLine NCLT 16726.

[24] Central Goods and Services Tax, 2017, Schedule II read with S. 2(a).

[25] 2017 SCC Online NCLT 989.

[26] 2020 SCC OnLine NCLAT 878.

[27] Rahul Gupta v. Mahesh Madhavan, 2018 SCC OnLine NCLAT 263.

[28] Promila Taneja v. Surendri Design (P) Ltd., Civil Appeal No. 4237 of 2020, order dated 28-1-2021. (SC)

Legal RoundUpTribunals/Regulatory Bodies/Commissions Monthly Roundup

18 Reports to Read


Competition Commission of India (CCI)


Star India providing bouquet of channels at lesser prices resulting significant loss in consumer base of Asianet Digital Network: Star India abusing dominance of its position? 

The Coram of Ashok Kumar Gupta (Chairperson) and Sangeeta Verma and Bhagwant Singh Bishnoi (Members) noted allegations against Star India for providing a bouquet of channels at lesser prices resulting in denying of market access and also amounting to unfair pricing.

Read full report here…

7 entities indulged in anti-competitive agreement for supply of signages for branches/offices/ATMs of SBI: E-mails exchanged between parties formed basis for manipulation of bidding process

Noting that in respect of cases concerning cartels that are hidden or secret, there is little or no documentary evidence and may be quite fragmentary, Coram of Ashok Kumar Gupta (Chairperson) and Sangeeta Verma and Bhagwant Singh Bishnoi (Members)  imposed penalties on 7 entities and signages for bid-rigging activities and cartelization with respect to the supply of signage for branches, offices and ATMs of State Bank of India.

Read full report here…

Forcing buyers to purchase insurance policies?  Even if dealers offer to sell insurance policies to customers, customers may yet have option to buy such policies from alternative channels

The Coram of Ashok Kumar Gupta (Chairperson) and Sangeeta Verma and Bhagwant Singh Bishnoi (Members) addressed a matter wherein it was alleged that certain Car Companies were abusing their dominant position and denying the cashless claim to consumers if the insurance policy had not been obtained through them, their dealers or their insurance broking companies.

Read full report here…


Customs, Excise and Service Tax Appellate Tribunal (CESTAT)


Amount deposited during the investigation, ipso facto, becomes pre-deposit when the assessee carries the dispute before the Appellate Forum

Anil Choudhary (Judicial Member) dismissed applications filed by the Revenue pertaining to rectification of mistakes.

Read full report here…


Income Tax Appellate Tribunal (ITAT)


Notice issued against a dead person is null and void and all consequent proceedings/orders being equally tainted are liable to be set aside

The Coram of Amit Shukla (Judicial Member) and Pradip Kumar Kedia (Accountant Member) allowed an appeal against a revisional order passed under Section 263 of the Income Tax Act, 1961.

Read full report here…

Does Income Tax Act prohibit HRA Exemption On Rent Paid To Wife?

An appeal was filed by the assessee against the order of CIT(A)-21, New Delhi dated 21-01-2019 before the bench comprising of Sh. A. D. Jain (Vice-President) and Dr. B. R. R. Kumar (Accountant Member).

Read full report here…


National Consumer Disputes Redressal Commission (NCDRC)


When a Statute provides for a particular period of limitation, it has to be scrupulously applied, as an unlimited limitation leads to a sense of uncertainty

The Coram of Justice R.K. Agrawal (President) and Dr S.M. Kantikar (Member) expressed that, when a Statute provides for a particular period of limitation, it has to be scrupulously applied, as an unlimited limitation leads to a sense of uncertainty.

Read full report here…

Will Tax deducted at source be attracted on compensation awarded under Consumer Protection Act “in the form of simple interest”?

The Coram of Dinesh Singh (Presiding Member) and Justice Karuna Nand Bajpayee (Member) expressed that in the ‘service’ of ‘housing construction’, if, in a particular case, “compensation” is computed “by way of interest” on the deposited amount it shall not be differently treated than the other cases in which the term “interest” may not at all be used in computing the compensation.

Read full report here…

If a person conceals facts about pre-existing fatal disease at the time of taking insurance, would it be a breach of insurance contract?

The Coram of Dinesh Singh (Presiding Member) and Karuna Nand Bajpayee (Member) upheld the decision of the District Commission with respect to concealment of pre-existing fatal diseases at the time of taking insurance.

Read full report here…

Consensus between dentists and patients essential to standardize treatment plans and methods: No X-ray conducted prior to performing root canal treatment: Read how NCDRC found dentist negligent

Expressing that, the consensus between the dentists and patients is essential to standardize treatment plans and methods, Coram of Justice R.K. Agrawal (President) and Dr S.M. Kantikar (Member) addressed a case of dental negligence and remarked that,

“The teeth are only part of the face and it cannot be simply concluded that the whole face will become more beautiful once the teeth become neat.”

Read full report here…


National Company Law Tribunal (NCLT)


Whether Shareholders have the right to remove Directors of a company? NCLT explains in light of Companies Act, 2013

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

Read full report here…

National Company Law Tribunal orders insolvency proceedings against Supertech: Indebted and defaulted repayment of loan

The Coram of P.N. Prasad, Judicial Member and Rahul Bhatnagar, Technical Member, declared insolvency proceedings against the builder Supertech Limited.

Read full report here…

Logix Insolvent? NCLT initiates insolvency proceedings against Logix City Developers

The Coram of Bachu Venkat Balaram Das (Judicial Member) and Narender Kumar Bhola (Technical Member) initiates insolvency proceedings against Logix City Developers due to default in payment.

Read full report here…


National Company Law Appellate Tribunal (NCLAT)


Reduction of Capital’ is a ‘Domestic Affair’ of a particular company in which, ordinary, a Tribunal will not interfere because of the reason that it is a ‘majority decision’ which prevails

“A ‘special resolution’ is required to determine those matters for which the Act requires a ‘special resolution’ and except these matters in all other situations an ‘Ordinary Resolution’ is to be passed.”

Read full report here…


National Green Tribunal (NGT)


Unregulated tourism activities resulting in damage to environment in eco-sensitive Himalayan States of India: NGT takes suo motu cognizance

The Coram of Justice Adarsh Kumar Goel (Chairperson) and Justice Sudhir Agarwal (Judicial Member), Prof. A. Senthil Vel (Expert Member) and Dr Vijay Kulkarni (Expert Member) took suo moto cognizance based on media report highlighting the damage to the environment in eco-sensitive Himalayan States of India due to unregulated tourism.

Read full report here…


Securities Exchange Board of India (SEBI)


Can SEBI proceed against a Chartered Accountant for lack of due diligence? SAT analyses

The Coram of Justice Tarun Agarwala (Presiding Officer) and Justice M.T. Joshi (Judicial Member) while addressing a matter whether a Chartered Accountant could be held guilty by SEBI for lack of due diligence, held that,

Lack of due diligence can only lead to professional negligence which would amount to a misconduct which could be taken up only by ICAI.


Uttar Pradesh Real Estate Appellate Tribunal


Developer issued two allotment letters, increasing cost of a unit in second by correcting taxes, lease rent and advance maintenance charges: Read whether UPRERA finds it to be illegal

The Division Bench of Justice Dr D.K. Arora (Chairman) and Rajiv Misra (Administrative Member) set aside the decision of the Regulatory Authority and held that the developer did not conceal the details of the project including the status of the same.

Read full report here…


West Bengal Taxation Tribunal


Can States levy ‘Entry Tax’?

The Coram of Justice Malay Marut Banerjee (Chairman) and Suranjan Kundu (Judicial Member) and Chanchalmal Bachhawat (Technical Member), expressed that, Article 304(a) frowns upon discrimination (of a hostile nature in the protectionist sense) and not on mere differentiation.

Read full report here…

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal: The Coram of Bachu Venkat Balaram Das (Judicial Member) and Narender Kumar Bhola (Technical Member) initiates insolvency proceedings against Logix City Developers due to default in payment.

The Operational Creditors, Colliers International (India) Property Services Private Limited sought an order to initiate the Corporate Insolvency Resolution Process of the Corporate Debtor viz., Logix City Developers Private Limited, declare  moratorium and appoint Interim Resolution Professional.

Background

The Operational Creditor’s case was that the parties entered into an agreement for providing construction for Bloom Zest Project at Noida and appointed the operational creditor as its project manager. On providing various services, the Operational Creditor raised various invoices and against some of the invoices raised, the Corporate Debtor being unable to pay its obligations allotted a residential unit to the Operational Creditor.

Vide an email, the Corporate Debtor was requested to pay the Operational Debt. However, he failed to do so. Hence, a demand notice was issued to him.

Corporate Debtor acknowledged and admitted its liability to pay the Operational Debt. Therefore, the present petition was filed.

Corporate Debtor on realizing the prevalent real estate conditions caused due to COVID-19 pandemic, failed in paying the amounts as claimed by the Operational Creditor under Demand Notice. Further, it stated that the delay in payment of installment amounts was due to the fact that the construction of the said project was stopped due to various EPCAJ NGT Orders and thereafter unprecedented conditions created due to COVID-19 Pandemic.

Additionally, the Corporate Debtor stated that it is an indisputable fact that the Real Estate Business is going through slump whereby all the builders and promoters of the real estate projects are experiencing heavy economic losses.

Analysis and Decision

Tribunal found that the Corporate Debtor failed to discharge its liability as the admitted amount remained unpaid as on date.

“…this authority has to only satisfy itself regarding default in payment by the corporate debtor towards the operational creditor and there is no pre-existing dispute”

In the present matter, the above two conditions are fulfilled, hence it deserves to be admitted. Therefore, the Tribunal initiated the CIR Process of Corporate Debtor.

Tribunal appointed Insolvency Resolution Professional Yogesh Kumar Gupta as Interim Resolution Professional as proposed by the Operational Creditor.

Further, Moratorium was declared which shall have effect from this Order till the completion of CIRP for the purposes referred to in Section 14 of the IBC, 2016. [Colliers International (India) Property Services (P) Ltd. v. Logix City Developers (P) Ltd., 2022 SCC OnLine NCLT 37, decided on 22-3-2022]


Advocates before the Tribunal:

Operational Creditor: Adv. S. Sriranga, Adv. Balaji Srinivasan, Adv. Garima Jain and Adv. Gayatri Mohite

Corporate Debtor: Adv. Vijay Kaundal

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, New Delhi: The Coram of P.N. Prasad, Judicial Member and Rahul Bhatnagar, Technical Member, declared insolvency proceedings against the builder Supertech Limited.

An application was filed to initiate the Corporate Insolvency Resolution Process against Supertech Limited under Section 7 of the Insolvency and Bankruptcy Code 2016 for the alleged default by the respondent in settling an amount of Rs 431,92,53,302.

Counsel for the Corporate Debtor had admitted the debt and default.

“In order to initiate CIRP under Section 7 the applicant is required to establish that there is a financial debt and that a default has been committed in respect of that financial debt.”

Tribunal on perusal of the documents found that the Corporate Debtor had indebted and defaulted the repayment of loan amount.

Therefore, Coram admitted the present petition and initiated CIRP on the Corporate Debtor with immediate effect.

Mr Hitesh Goel was appointed as Interim Resolution Professional.

Material on record clearly depicted that the respondent had availed the credit facilities and committed default in repayment of the outstanding loan amount.

Tribunal on being satisfied that the present application was held that the applicant financial creditor was entitled to claim its outstanding financial debt from the corporate debtor and that there had been default in payment of the financial debt.

Further, the Coram directed that in terms of Section 13(2) of the Code, public announcement shall be made by the Interim Resolution Professional immediately with regard to the admission of this application under Section 7 of the Insolvency and Bankruptcy Code, 2016.

Moratorium in terms of Section 14 of IBC was declared. Thus following prohibitions are imposed:

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitization and reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

It was made clear that the provisions of the moratorium shall not apply to transactions which might be notified by the Centre or supply of essential goods or services to the Corporate Debtor are not to be terminated or suspended or interrupted during the moratorium period. As per IBC, the provisions of the moratorium shall not apply to the surety in a contract of guarantee.

Registrar of Companies shall update its website by updating the status of ‘Corporate Debtor’. [Union Bank of India v. Supertech Ltd., 2022 SCC OnLine NCLT 40, decided on 25-3-2022]


Advocates before the Tribunal:

Counsel for the Petitioner: Alok Kumar, Advocate

Counsel for the Respondent: Kanishk Khetan, Advocate

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi (NCLAT): The Coram of Justice Venugopal. M, Judicial Member and Kanthi Narahari, Technical Member, held that ‘Reduction of Capital’ is a ‘Domestic Affair’ of a particular company in which, ordinary, a Tribunal will not interfere because of the reason that it is a ‘majority decision’ which prevails.

The present Company Appeal was focused on being dissatisfied with the order of the National Company Law Tribunal in rejecting the petition filed under Section 66(1)(b) of the Companies Act, 2013 and granting liberty to file a fresh application.

The reason for the filing the company petition by the appellant was seeking an order confirming the reduction of share capital.

The appellant/company had sought relief to confirm the reduction of issued, subscribed and paid-up equity share capital of the petitioner company (appellant) as resolved by the Members in the Annual General Meeting by passing the special resolution.

Further, the pre-mordial plea of the appellant was that the NCLT had failed to appreciate the creeping in of an ‘inadvertent typographical error’ figuring in the extract of the Minutes of the Meeting characterizing the special resolution as a unanimous ordinary resolution. Moreover, the appellant had fulfilled all the statutory requirements of its own ‘Articles of Association’ which had resulted in the dismissal of the petition seeking approval of ‘Reduction of Share Capital’.

On behalf of the Respondents, it was represented that the members of the Appellant/Company at the ‘Annual General Meeting’ that took place among other things resolved that pursuant to Section 66 of the Companies Act, 2013 and subject to other requisite approvals, the paid-up share capital of the Company would reduce from its present level of Rs 67,47,90,000/- to Rs 4,90,00,000/-.

Analysis and Decision

The Resolution passed in the ‘Annual general Meeting’ of the appellant’s company under Section 66 of the Companies Act was found to be in order by the respondents. Registrar of Companies, Delhi found that the appellant had filed the said resolution keeping in tune with the ingredients of Section 66 of the Companies Act, 2013.

‘Reduction of Capital’ is a ‘Domestic Affair’ of a particular company in which, ordinary, a Tribunal will not interfere because of the reason that it is a ‘majority decision’ which prevails.

A ‘special resolution’ is required to determine those matters for which the Act requires a ‘special resolution’ and except these matters in all other situations an ‘Ordinary Resolution’ is to be passed.

Conclusion

Tribunal after subjectively satisfying itself that the appellant has tacitly admitted its creeping in of typographical error in the extract of the minutes and also taking into consideration of 1st respondent’s stand that the appellant had filed the special resolutions with it, which satisfied the requirement of Section 66 of the Companies Act, 2013 and allows the appeal by setting aside the impugned order passed by the NCLT, thereby confirming the reduction of share capital of the appellant.[Economy Hotels India Service (P) Ltd. v. Registrar of Companies, 2020 SCC OnLine NCLAT 653, decided on 24-8-2020]


Advocates before the Tribunal:

For Appellant: Mr. Sujoy Dutta, Mr. Satvinder Singh, Mr. NPS Chawla and Mr. Surek Kant Baxy, Advocates

For Respondent: Mr. P S Singh, Advocate for ROC, Ms. Chetna Kandtal, Company Prosecutor for R1 and R2

Case BriefsHigh Courts

Meghalaya High Court: Sanjib Banerjee, CJ, addressed a petition wherein a creditor’s winding-up petition was instituted under Section 433 of the Companies Act, 1956 and the same was not yet advertised.

Section 433 of the Companies Act, 1956

  1. Circumstances in which company may be wound up by Court. A company may be wound up by the Court,-

(a) if the company has, by special resolution, resolved that the company be wound up by the Court;

(b) if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting;

(c) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year;

(d) if the number of members is reduced, in the case of a public company, below seven, and in the case of a private company, below two;

(e) if the company is unable to pay its debts;

(f) if the Court is of opinion that it is just and equitable that the company should be wound up.

High Court expressed that there was a divergence in the practice followed in different High Courts since the inception of the Companies Act, 1956. Some High Courts required the immediate publication of an advertisement upon the creditor’s winding-up petition being filed; whereas others, including Calcutta and Gauhati, required the Company Court to first be satisfied as to the existence of the indisputable debt before directing the publication of the advertisement.

Invariably, when the Court was satisfied that the debt was indisputably due, an option would be given to the company to pay off the same, failing which, the advertisement would ensue.

With respect to the present matter, the advertisement had not yet been published.

Though the petition was filed before the relevant provisions of the Companies Act, 2013 were notified and the Insolvency and Bankruptcy Code, 2016 came into effect, the law, as it stands now, permitted only matter that has been advertised to be retained by the Court and requires all other matters to be transferred to appropriate Company Law Tribunal since the entire regime as to insolvency had been recognized and parked with such authority.

Hence, the entire matter stood transferred to the National Company Law Tribunal, Guwahati.[Walchandnagar Industries Ltd. v. Green Valley Ind. Ltd., 2022 SCC OnLine Megh 44, decided on 23-2-2022]


Advocates before the Court:

For the Petitioner/Appellant (s)

: Mr. K.K. Mahanta, Sr. Adv. With Mr. K.M. Mahanta, Adv.

Mr. S. Gautam, Adv.

For the Respondent (s)

: Mr. K. Paul, Sr. Adv.

Mr. JM Thangkhiew, Adv.

Case BriefsDistrict Court

Dwarka Courts, New Delhi: Noting the complaint to be a complete abuse of process of law or in a manner sort of forum shopping, Sumit Dass, Additional Sessions Judge—03, dismissed the complaint expressing that,

“..it would be apt to nip this litigation in the bud rather than keeping it pending and burdening the docket of the Court.”

The present order shall dispose of the present complaint filed by the company under Section 439(2) read with Section 436(1)(A) and (D) read with Section 212 of the Companies Act, 2013 read with Section 62(1) of the Companies Act, 1956 read with Section 193 of the Code of Criminal Procedure, 1973.

  • Complainant company had filed a petition under Section 213 of the Companies Act 2013 which was pending before the NCLT and to that aspect the complainant’s counsel submitted that the said petition was pending and infact they had also sought for an SFIO probe/exhaustive probe insofar as the violation and the criminal acts committed by the Company and its management.

Court’s opinion:

Bench held that since the petition had been pending before the NCLT, there was no reason to file the present complaint.

This Court cannot and should not overreach and rather should lay its hands off and let those proceedings continue/attain finality.

Further, the Court also expressed that,

NCLT is a designated tribunal for the said purposes and in eventuality if any probe or any investigation is ordered the same would cover or encompass the allegations made in the complaint.

High Court stated that the complainant ought to have come before this Court with clean hands and informed that such a petition was pending/prosecuted before the NCLT.

Non-Disclosure of the said facts amounts to concealment of facts. 

Instant complaint only mentioned a petition filed under Sections 241 and 242 of the Companies Act, 2013 and does not mention the petition which had been filed under Section 213 of the Companies Act.

In Court’s opinion, any pending litigation is a material fact that should be placed before the Court.

While adjudicating the application under Section 156(3) of the CrPC, in view of the Supreme Court decision in Priyanka Srivastava v. State of U.P., (2015) 6 SCC 287, the complainant is enjoined to file a detailed affidavit mentioning all the relevant facts.

Insofar as the complaints under the Companies Act, 2013 are concerned the complainant should disclose all the material facts by way of a detailed affidavit.

Another significant point was with respect to Section 439(2) of the Companies Act, which is read as under:

“No Court shall take cognizance of any offence under this Act which is alleged to have been committed by any company or any officer thereof except on the complaint in writing of the Registrar, a shareholder of the company, or of a person authorized by the Central Govt. in that behalf.” [emphasise mine].” 

The said section vests a shareholder with a right to prefer a complaint seeking action under the Companies Act, 2013 however the shareholder should be in a sense an “undisputed shareholder” qua which there should not be any sort of dispute pending.

The Court can take cognizance of the grievances of the “shareholder” but cannot decide as to whether the complainant is a “shareholder” or not.

Deciding whether the complainant is a shareholder or not, would be venturing into the uncharted territory/travelling beyond the jurisdiction of this Special Court constituted under the Companies Act.

In view of the above discussion, the present complaint does not lie before this Court as it would be a futile exercise to continue with the same – rather would not be in consonance with judicial propriety on account of the pendency of the matter before the NCLT, also this Court cannot adjudicate the right of the complainant being a shareholder or otherwise aggrieved of which the complainant could vindicate by filing a criminal complaint.[Green Edge Infrastructure (P) Ltd. v. Magic Eye Developers (P) Ltd., CC No. 693 of 2020, decided on 4-3-2022]

Case BriefsHigh Courts

Delhi High Court: Amit Bansal, J., expressed that an LLP or any other business entity can carry out business in different parts of the country, but that would not mean that a suit with regard to disputes between the partners, could be filed in any place where the business of the firm/LLP is carried out.

A petition was filed under Article 227 of the Constitution of India which impugned the order passed by the District Judge whereby the application was filed on behalf of the petitioners/defendants under Order VII Rule 10 and 11(d) of the Code of Civil Procedure, 1908 had been dismissed.

The plaint from which instant petition arose was filed by the respondent/plaintiff, being one of the partners of the petitioner 3/defendant 3 which was a Limited Liability Partnership (LLP) and against the respondents 1 and 2/defendants 1 and 2 who were the remaining partners of the said LLP.

Petitioners/Defendants counsel submitted that the registered office of the LLP was in Hyderabad, hence the Courts in Delhi did not have any jurisdiction.

Respondent/Plaintiff submitted that the business of the LLP was duly being carried out in Delhi through the respondent/plaintiff and therefore, the cause of action would arise in Delhi. Hence, the Courts in Delhi would be competent to try and entertain the present suit.

Grievance in the Matter

Respondent/plaintiff was aggrieved that he had been denied access to the business accounts of the respondent 3/defendant 3.

Analysis and Discussion

In the plaint it was nowhere submitted that the business accounts, in respect of which access has been sought were kept in Delhi, in fact, the plaint is conspicuously silent on the aspect of the cause of action for filing of the suit.

The entire basis of the respondent/plaintiff for filing the suit in Delhi was on account of the fact that the LLP carried out business in Delhi and that the products of the LLP were regularly sold in Delhi by means of online sales as well as through physical stores such as Nature’s Soul, which is in Delhi.

High Court opined that the fact that business of the LLP was being carried out in Delhi would not vest the Courts of Delhi with jurisdiction to try and entertain the present suit.

Additionally, the Bench stated that Section 13 of the LLP Act provides that every LLP shall have a registered office, where all communications and notices may be addressed and shall be received. In terms of Section 34(1) of the LLP Act, the books of account in respect of an LLP shall be maintained at the registered office.

Further, in view of the facts and circumstances of the case, Court decided that the jurisdiction to entertain the present suit shall vest with the Courts in Hyderabad.

Since there was no principal or subordinate office of the LLP in Delhi and neither the books of accounts were kept in Delhi, therefore, there was no cause of action in respect of the present suit which was arising within the territorial limits of the Courts in Delhi.

Parties by agreement cannot give jurisdiction to a Court which otherwise does not have such jurisdiction. 

Maintainability in Civil Court

Bench elaborated that, merely because the definition of the “body corporate” under Section 2(1)(d) of the LLP Act includes an LLP, it is not automatically implied that the NCLT would be the competent forum for deciding all disputes inter se the partners of an LLP. Unlike Section 430 of the Companies Act, 2013, there is no bar on the jurisdiction of the Civil Courts under the provisions of the LLP Act. Therefore, in terms of Section 9 of the CPC, the suit shall be maintainable in a Civil Court.

Decision

Courts in Delhi lack the territorial jurisdiction to try and entertain the present suit.

In view of the above discussion, the present suit stood allowed. [Aanchal Mittal v. Ankur Shukla, 2022 SCC OnLine Del 633, decided on 25-2-2022]


Advocates before the Court:

For the Petitioners: K.C. Mittal with Yugansh Mittal and Sanjay Kumar, Advocates

For the Respondent: Vishal Singh, Advocates