Case Law Update: Issue 2

Transcription

1 Case Law Update: Issue 2 Team Vinod Kothari & Company corplaw@vinodkothari.com 23 rd June, 2017 For more, visit: Copyright: This write up is the property of Vinod Kothari & Company and no part of it can be copied, reproduced or distributed in any manner. Disclaimer: This write up is intended to initiate academic debate on a pertinent question. It is not intended to be a professional advice and should not be relied upon for real life facts.

2 A. Insolvency and Bankruptcy Code, M/s. Innoventive Industries Ltd. v. ICICI Bank & Anr. (NCLAT Principal Bench, Order dated ) Facts of the case: Original application filed u/s 7 by ICICI was admitted by NCLT Mumbai. Main Contention or question to be addressed by the Court/Tribunal: a. Whether impugned order has been passed by the Tribunal without notice to the Appellant against the principle of rules of natural justice, as stipulated under Section 424 of the Companies Act, b. Whether (Maharashtra Relief Undertaking (Special Provisions Act (Bombay Act XCVI of 1958) (hereinafter referred to as MRU Act, 1958), being a piece of legislation intended 5 to give relief to industrial undertakings will prevail over I&B Code, c. Whether the Ld. Tribunal while ascertaining the fact that whether there is default or not satisfied itself on perusal of documents produced by both the parties, as subsection (4) and (5) of Section 7 of Code, 2016 casts duty on the Tribunal to first ascertain default and satisfy itself of default. d. Default on the part of the Appellant has been dealt with by Tribunal holding that the Respondent No. 1 has placed the Information Utility; however, a perusal of the application filed by ICICI would show that the Respondent has not produced any such material. e. ICICI has not obtained permission/ consent from Joint Lender Forum (hereinafter referred to as 'JLF' for short) to initiate the present proceedings even though their application would adversely affect the loans of other members of JLF. Significant Case Law relied upon by the court/tribunal for judgment: a. Hon'ble Supreme Court in Union of India v J N Sinha (1970) 2 SCC 458 (applicability of natural justice) b. Maneka Gandhi v UoI & Anr (1c78) 1 SCC 248 (applicability of natural justice) c. Swadeshi Cotton Mills v. Union of India, (198 1) 1 SCC 664 (applicability of natural justice) d. Several other judgments (refer order) Detailed Interpretation and Final judgment: a. The exception on the Principle of Rules of natural justice can be summarised as follows:- (i) Exclusion in case of emergency, (ii) Express statutory exclusion (iii) Where discloser would be prejudicial to public interests (iv) Where prompt action is needed, (v) Where it is impracticable to hold hearing or appeal, (vi) 1

3 Exclusion in case of purely administrative matters. (vii) Where no right of person is infringed, (viii) The procedural defect would have made no difference to the outcome. (ix) Exclusion on the ground of 'no fault' decision maker etc. (x) Where on the admitted or undisputed fact only one conclusion is possible - it will be useless formality. b. The Adjudicating Authority is bound to issue a limited notice to the corporate debtor before admitting a case for ascertainment of existence of default. c. The AA is bound to find out whether the application is complete and or there is any other defect required to be removed. d. Thereby, merely on the ground that the Appellant was not given any notice before admission of the case cannot render the impugned order illegal as the Appellant has already been heard. Even though no notice had been served, the Appellant intervened before the admission of the case and all the objections raised by appellant has been noticed, discussed and considered by the 'adjudicating authority' while passing the impugned order. e. The Schedule to the MRU Act specifies only certain acts to which the restriction applies. The protection under the MRU Act, therefore, cannot be extended to other legislations especially to union legislation which is subsequent to the MRU Act and related to insolvency resolution i.e. I&B Code, f. Insofar as Master Restructuring Agreement dated 8th September 2014 is concerned; the appellant cannot take advantage of the same. Even if it is presumed that fresh agreement came into existence, it does not absolve the Appellant from paying the previous debts which are due to the financial creditor. Held, the appeal was rejected. Read the order here 2. Smart Timing Steel Ltd v. National Steel and Agro Industries Ltd (NCLAT Principal Bench, Order dated ) Facts of the case: The application filed u/s 9 as an OC was rejected on the grounds that the Operational Creditor failed to annex copy of Certificate from financial institutions. The OC is a foreign company and thus has no bank account in India. Main Contention or question to be addressed by the Court/Tribunal: a. Whether filing of "a copy of certificate from the "Financial Institution" maintaining accounts of the Operational Creditor confirming that there is no payment of unpaid operational debt by the 'Corporate Debtor' as prescribed under clause (c) of sub-section 3 of Section 9 of the 'I & B Code' is mandatory or directory. 2

4 Significant Case Law relied upon by the court/tribunal for judgment: a. "Kailash Vs. Nanhku and Others"- (2005) 4 SCC 480 b. Hon'ble Supreme Court in State of Mysore Vs. V.K.Kangan (1976) 2 SCC 895 (provision being mandatory or directory) c. J.K.Jute Mills Company Limited Vs. M/s Surendra Trading Company - Company Appeal (AT) No. 09 of 2017 (time limite of 7 days to rectify the application) Detailed Interpretation and Final judgment: a. It is clear that the word 'shall' used in sub-section (3) of section 9 of 'I & B Code' is mandatory, including clause 3 therein. b. From the record we find that the appellant was given opportunity to complete the record by enclosing the certificate of "Financial Institution" and thereby to remove the defects within 7 days but failed to do so. Appeal rejected. Read the order here 3. Starlog Enterprises Limited v. ICICI Bank Limited (NCLAT Principal Bench, Order dated ) Facts of the case: Ex-parte order passed by NCLT, Mumbai admitting application filed by ICICI u/s 7 of the Code as a financial creditor. Main Contention or question to be addressed by the Court/Tribunal: a. Whether absence of submission of notice to the corporate debtor (appellant here) before admitting application u/s 7 violates the rules of natural justice. b. Whether original application u/s 7 by ICICI was incomplete, misleading and not bonafide. c. Whether non-submission of notice in a. above denied the appellant s right to submit its contentions as given in b. above. Significant Case Law relied upon by the court/tribunal for judgment: a. M/s. Innoventive Industries Limited vs ICICI Bank & Anr. in CA (AT) (Insolvency) No. 1 & 2 of 2017 b. Sree Metaliks Limited & Anr. Detailed Interpretation and Final judgment: a. It is the duty of the tribunal to issue notice before admitting an application under section 9. Rule of natural justice shall prevail. b. While it was also pointed out by the appellant (in this case), that the respondent (ICICI) is part of JLF constituted under JLF Mechanism of RBI, where it chose to opt fpr rectification as the corrective action plan (CAP) and the same is evident from the minutes of the meeting of such JLF forum in which everyone including appellant, respondent and other lenders to appellant had participated.; the respondent however contends that since rectification under 3

5 JLF failed, it was decided that the lenders are free to explore options to regularize their accounts and by the time the correct minutes were circulated, the application had been already filed. c. There is gross mismatch between claim mentioned in the demand notice and that in the application made by the respondent (in this case). The appeal was admitted. Ex-facie illegal and ought to be set aside by the Appellate Tribunal. Read the order here 4. Philips India Ltd v. Goodwill Hospital and Research Centre Limited & Karina Healthcare Private Limited (NCLAT Principal Bench, Order dated ) Facts of the case: Application was made by Philips as the originally u/s 9 of the Code which was rejected by NCLT on the grounds that dispute has been raised under the Code by the Corporate Debtors. Main Contention or question to be addressed by the Court/Tribunal: Whether there is any existence of dispute or not and whether the dispute is as per the definition u/s 5(6) of the Code. Significant Case Law relied upon by the court/tribunal for judgment: Kirusa Software Pvt Ltd v. Mobilox Innovations Pvt Ltd Detailed Interpretation and Final judgment: On the grounds as mentioned in Kirusa Software v. Mobilix Inovations, dispute raised by the CD is valid. In the present case the Respondent - Corporate Debtor much prior to issuance of notice under Section 8 of 'I & B code', raised a dispute relating to quality of service/ maintenance pursuant to notice under Section 433(e) and 434 (1)(a) of the Companies Act 2013 to the notice of the 'Operational Creditor'. In that view of the matter, it can be safely being stated that there is 'existence of dispute' about the claim of debt. Objection raised by Respondent - 'Corporate Debtor', not raised for the first time while replying to the notice issued by 'Operational Creditor' under Section 8 of the 'I & B code'. The objection cannot be called to be mere objection raising a dispute for the sake of 'dispute' and/or unrelated to Clause (a) or (b) or (c) of sub-section (6) of Section 5 of 'I & B code'. The application was rejected. Read the order here 4

6 5. MCL Global Steel Pvt. Ltd.v. Essar Projects India Ltd. (NCLAT Principal Bench, Order dated ) Facts of the case: Essar Projects filed as Operational Creditors u/s 9 of the Code, the application was admitted and an IRP was duly appointed by the NCLT, Mumbai. Main Contention or question to be addressed by the Court/Tribunal: a. Whether the original order of NCLT was passed ex-parte b. Whether passing ex-parte order resulted in denial of non-representation with regard to existence of dispute by the corporate debtor. c. Whether the fact of winding up order was concealed by the operational creditor, to which due reply was also made by the corporate debtor a lot before issuance of notice u/s 8 of the Code. d. Whether there is any existence of dispute and whether the definition of dispute under the Code is an illustrative one or exhaustive one. Significant Case Law relied upon by the court/tribunal for judgment: a. M/s Innoventive Industries Ltd., Company Appeal (AT) (Insolvency) Nos. 1 and 2 of 2017" decided on 15th May (for ex-parte order) b. Kirusa Software Private Limited Vs. Mobilox Innovations Private Limited (for existence of dispute) Detailed Interpretation and Final judgment: a. The passing of ex-parte order violates the principle of natural justice and that notice has to be served to the original respondent by the tribunal. b. With regards to dispute and existence of dispute, it was held that the Legislature used the words 'dispute includes a suit or arbitration proceedings'. If this is harmoniously read with Section (2) of Section 8 of the 'I& B Code', where words used are 'existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings,' the result is disputes, if any, applies to all kinds of disputes, in relation to debt and default. Hence, there is existence of dispute as per the Code. In the view above, the impugned order of NCLT was therefore set aside. Appeal allowed with no order as to costs. Read the order here 5

7 B. Company Law 1. In the matter of Scheme of Arrangement between RS LIVEMEDIA PRIVATE LIMITED ( the Company ) and Equity shareholders and Creditors of the Company (Company Petition No. 912 of 2016 Principal Bench NCLT New Delh [Order dated ]) Section 391 read with Section 100 to 104 of the Companies Act, 1956 Facts of the case in brief: The Company entered into a scheme of arrangement with its equity shareholders for purchase of 60,00,000 of its own equity shares of Re 1 each (fully paid up) by the Company for an agreed consideration of 15,00,00,000 at INR per share, thus resulting in the cancellation of 60,00,000 equity shares. Upon cancellation of equity shares, the paid up capital will be written off by INR 60,00,000/-. Consideration payable will be adjusted against paid up share capital to the extent of the share capital being reduced. The amount of consideration over and above the par value will be 1 st adjusted towards share premium account and balance, if any, would be adjusted against the credit balance o/s in P/L account. The Company applied to the Hon ble High court of Delhi for dispensation of meeting of equity shareholders, secured and unsecured creditors and court granted dispensation from the meeting of equity shareholders and unsecured creditors upon receipt of their consent. There was no secured creditor therefore, question of their meeting does not arise. This scheme got transfer to NCLT vide notification dated become effective w.e.f Main Contention or question to be addressed by the Court/Tribunal: NCLT observed that the scheme is not in compliance with section 230(10) of the Companies Act, 2013 ( Act 2013 ). Section 230(10): No compromise or arrangement in respect of buyback of securities under this section shall be sanctioned by the Tribunal unless such buyback is in accordance with the provisions of section 68 The Learned counsel for the petitioner contended that scheme was originally filed with Hon ble High Court of Delhi under the provisions of section 391 of the Companies Act, 1956 ( Act 1956 ) which did not contain the provisions similar to the one contained in Act Two questions were to be decided:- 1. Whether the Petitioner is right in contending that a Vested right had accrued to it under the Act 1956 which cannot be taken away by the notification of the provisions relating to sanction of compromises and arrangements by the Tribunal under the Act 2013 as in relation to substantive rights the subsequent enactment, namely Act 2013 can be only prospective and not retrospective; 6

8 2. Whether in relation to transferred cases from Hon ble High Courts relating to sanction of compromise and arrangements the provisions of the Act 1956 should alone be applied as against those of Act 2013 Significant Case Law relied upon by the court/tribunal for judgment: Hon ble Bombay High Court in SEBI and Union of India versus Sterlite Industries (India) Ltd (2003) 113 Comp Cas 273 while interpreting the provisions of section 391 read with section 394 and 77A, 100 to 104 of Act 1956 has held that company could purchase its own shares prior to introduction of section 77A provided the scheme or arrangement thereof have been sanctioned under section 100 to 104. Section 100 do not prescribe the manner of reduction of capital. Nor there is any limitation in the power of court to confirm the reduction except that it must be first satisfied consent of creditors have been received or being paid or secured. It also held that when the shareholders have approved the scheme, then the company court has no right to sit in judgment over that commercial wisdom and to interfere with that decision. Suhas H. Pophale vs. Oriental Insurance Company Limited (2014) 4 SCC 657 with regard to effect on vested rights Parshotam Dass vs. State of Haryana AIR 2003 Pb&Hry 301 with regard to the interpretation of vested right. Any detailed interpretation of the Provisions of Law: In Parshotam Dass vs. State of Haryana it was observed in relation to vested right: An acquired or vested right would be one which is acquired and enjoyed and it would not include a right which is yet to accrue on some future date. Reference in this regard may be made to the cases relating to public services. It is fairly settled that in cases where a person has already promotion, the same cannot be impliedly taken away by subsequent amendment of the statutory rules because it becomes a vested right. It is further advantageous to point out that a mere existence of a right to appeal on the date of repeal of a statue cannot be considered a vested right or an accrued right. An available right would become vested right only when it is exercised otherwise it would continue to embryological rights. A bare reading of section 434(1)(c) it makes it clear that all proceedings which have been transferred from High Court to the Tribunal, the same has to be dealt with in accordance with the provisions of Act 2013 and not under Act Further, a tribunal is a creature of the Act 2013 and cannot travel beyond the contours of the same unless specifically empowered cannot arrogate to itself powers beyond it. Final judgment: It was decided that no vested right has accrued to the petitioner which is sought to be taken away by repeal and subsequent enactment. After taking 7

9 consideration of the position of law presently in force, the tribunal is unable to sanction the scheme and the same stand dismissed. 3. The Oriental Insurance Company limited vs. M/s. MRF Limited(Company Petition No. 13 of 2015 NCLT Chennai) Section 59 of the Companies Act, 2013 Facts of the case in brief: Petitioner is a company incorporated under Insurance Act as a subsidiary of General Insurance Company of India and respondent 2 had executed a transaction for sale of fifty shares of respondent 1.Respectively the shares were to be delivered to NSE for pay-in-date but the insured realized that the shares were missing from their office and lodged a complaint with New Delhi, Police station. Respondent 1 informed the insured that any request for stop of transfer of shares will be entertained only on receipt of letter from respondent 3 since shares were registered in their name and subsequently an order from court restricting such transfer of shares. Petitioner appointed a survey to assess the losses and claim of insured has been settled by the petitioner. The insured executed subrogation-cum-special power of attorney in favour of petitioner and transferred all rights, title and interest in shares covered therein including fifty shares of respondent 1 in favour of petitioner. The petitioner based on the facts claims that he has acquired all rights, title, & interest in said fifty shares of respondent 1 from the date of purchase and became entitled to obtain duplicate share certificates in lieu of original shares and get benefits like dividend, bonus and other benefits. Main contention or question to be addressed by the Court/ Tribunal: 1. Whether petitioner has approached court with delay and laches. 2. Petitioner is guilty of forum shopping as they had already filed a civil case with respect to same in suit no 3653 of 1997 which has been dismissed due to default by petitioner. 3. Whether petitioner has raised disputed and complicated questions as to title of shares cannot be decided by Hon ble Bench. 4. Whether the contentions raised in this case attract section 59 of Companies Act Any detailed interpretation of Provisions of Law: It has been mentioned in the counter by respondent 1 that petitioner did not lodge any shares for transfer in its name and there is no default on delay by respondent 1 8

10 in registering the transfer of any shares. Based on these reasons the counsel for respondent 1 stated that petition does not fall within the purview of section 59 of Companies Act 2013.Undoubtedly clear that respondent 1 was approached for stopping transfer of share but respondent 1 has desired that a competent court be approached for seeking injunction. This amounts to unnecessary delay therefore the contention of respondent 1 is not tenable in the eyes of law. Significant Case Law relied upon by the court/tribunal for judgment: In the matter of Finolex Ind Vs Anil Chhabria in 2000 it has been held that the rectification is available in the cases of loss of shares, bad delivery, theft, and forgery. Thus the rectification is available to all kinds of shares held in public company. Also in recent case titled Oriental Insurance Company Ltd Vs Siemens Ltd and others, the NCLT, Bombay bench has decided the matter in favour of the petitioner having similar set of facts and circumstances as involved in the petition. Final judgment: It is otherwise fact that respondent 1 seek indulgence of court for obtaining appropriate order and also that the shares were in the name of 3 rd respondent which by the process of trading has gone to Respondent 2 who insured the same with the petitioner and when the shares were lost lodged a complaint and made a claim against the petitioner.the petitioner after following the procedure has settled the claim and made the payment and obtained subrogation cum special power of attorney from respondent 2. In the light of subrogation the petitioner seems to be entitled to have shares registered in his name and removal of name of respondent 3 thereby he will be entitled to get duplicate share certificates with all consequential benefits thereon. Respondent 1 is directed to rectify the register of members by entering the name of petitioner and deleting the name of respondent 3 then to issue the duplicate share certificate in favour of the petitioner with all consequential benefits accrued thereon. The petitioner is directed to produce all the papers relevant to the case to the case to respondent 1 along with an indemnity bond within a period of three weeks. Respondent 1 shall comply with the order within ten days. 9

11 C. SEBI 1. Nirmal Singh Bhangoo vs. Securities and Exchange Board of India (Securities Appellate Tribunal, Order dated ) Facts of the case: PACL Ltd and its present and past directors including the appellant have been held guilty of running Collective Investment Scheme) in contravention of Securities and Exchange Board of India Act, 1992 and Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 ( CIS Regulations, 1999 for short). By the said order, PACL Ltd. and its present directors have been directed to wind up all the existing CIS and refund the monies collected from the investors with promised returns. Proceedings were initiated against PACL Ltd. and its present and past directors including the appellant. Main Contention: Counsel for the appellant submitted that as a director, the appellant was not involved with the day to day management and was merely carrying out his role as an advisor and therefore, for the violations committed by PACL Ltd and its present directors the appellant could not be held guilty of violating SEBI Act and the CIS Regulations, 1999 Significant Case Law relied upon by the tribunal for judgment: SEBI vs. Gaurav Varshney reported in (2016) 14 SCC 430 Any detailed interpretation of the Provisions of Law: Fact that the appellant cannot be held guilty of violating the CIS Regulations would not mean that the appellant cannot be held guilty of violating Section 12(1B) of SEBI Act. All those schemes run by PACL Ltd have been found to be CIS and run without obtaining registration from SEBI in violation of Section 12(1B) of SEBI Act. Therefore, issuing directions against the appellant for violating Section 12(1B) of SEBI Act cannot be faulted. Final judgment: SAT upholds the impugned decision of the WTM of SEBI to the extent it holds that the appellant is liable for violating Section 12(1B) of SEBI Act and set aside the impugned decision to the extent it holds that the appellant is liable for violating the CIS Regulations, Read the order here 10

12 D. Taxation 1. B.A. Mohota Textiles Traders Pvt. Ltd., v DCIT (Bombay High Court) (Order Dated June 12, 2017) Facts of the Case: The appellant is a Private Limited Company where 80 % of its share capital is held by the family members of Mr.Girdhardas Mohota, Mr.Gwaldas Mohota and Mr.Ranchhoddas Mohota referred to by the Tribunal as Groups 'A', 'B' and 'C' respectively. Disputes and differences arose between three groups of family i.e. Groups A, B and C. Consequently, with a view to settle the differences between them and restore family peace and harmony, it was decided by the three groups to refer their dispute by an agreement. The settlement inter alia required members of Group 'B', who were in control of appellant/assessee, to transfer the shares held by the appellant/assessee in M/s.R.S.Rekhchand Mohta Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Mills Ltd. in favor of members of Groups 'A' and 'C' collectively. Main Contention or question to be addressed by the Court/Tribunal: The questions addressed by the court were: (i) Whether in the facts and circumstances of the case and in law the Tribunal was right in holding that the transaction of transfer of shares by the assessee company in pursuance of family arrangement amounted to transfer and was eligible to capital gains tax? (ii) Whether in the facts and circumstances of the case and in law the Tribunal was right in not accepting the fact that the transfer of shares by the assessee company being only incidental and in consequence of allotment and control of management of companies in pursuance of family arrangement, took the transaction out of purview of Section 2 (47) of I.T. Act, 1961? (iii) Whether in the facts and circumstances of the case and in law merely because the assessee/company has a corporate veil, will it make the transfer of shares by it assessable to capital gains tax even though such transaction is in pursuance of family arrangement? Significant Case Law relied upon by the court/tribunal for judgement: The Mumbai bench of High Court while pronouncing its judgement cited the following case laws: (i) T.R. Pratt (Bombay) Ltd. vs. E.D. Sassoon and Co. Ltd., AIR 1936 (Bombay) 62 (ii) Dinshaw Maneckjee Petit, AIR 1927 (Bombay) 371, 11

13 Final judgement: The bench after hearing the parties concerned addressed that since the appellant is a company which has an identity different from its members, therefore the transfer of shares pursuant to family arrangement by company would be chargeable to tax. The Court further concluded that the Tribunal was true in holding that transaction of transfer of shares by the independent corporate entity was assessable to capital gain tax. Therefore appeal was dismissed. Read More 12