Exemption notification dated 13th June 2017 for Pvt.Ltd. cos.

MCA NOTIFICATION DATED 13^TH JUNE 2017

FOLLOWING EXEMPTIONS HAVE BEEN PROVIDED FOR PRIVATE LIMITED COMPANIES

(THESE EXEMPTIONS HAVE TO BE READ ALONGWITH THE PREVIOUS NOTIFICATION DATED 5^TH JUNE 2015)

Chapter I, Section 2(40)

1. “financial statement” in relation to a company, includes—

(i) a balance sheet as at the end of the financial year;

(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;

(iii) cash flow statement for the financial year;

(iv) a statement of changes in equity, if applicable; and

(v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv):

[Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement]

New Proviso substituted

Provided that the financial statement, with respect to one person company, small company, dormant company private company (if such private company is a start-up) may not include the cash flow statement;

Explanation. – For the purposes of this Act, the term ‘start-up’ or “start-up company” means a private company incorporated under the Companies Act, 2013 (18 of 20’l3) or the Companies Act, 1956 (‘l of 1956) and recognised as start-up in accordance with the notification issued by the Department of lndustrial Policy and Promotion, Ministry of Commerce and Industry.”

(Startup Definition (As defined by DIPP)

Startup means an entity, incorporated or registered in India :

Not prior to seven years, however for Biotechnology Startups not prior to ten years,

With annual turnover not exceeding INR 25 crore in any preceding financial year, and

Working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation

Provided that such entity is not formed by splitting up, or reconstruction, of a business already in existence. Provided also that an entity shall cease to be a Startup if its turnover for the previous financial years has exceeded INR 25 crore or it has completed 7 years and for biotechnology startups 10 years from the date of incorporation/ registration. Provided further that a Startup shall be eligible for tax benefits only after it has obtained certification from the Inter-Ministerial Board, setup for such purpose.)

Chapter V, Section 73(2)(a)-(e)

73. (2) A company may, subject to the passing of a resolution in general meeting and subject to such rules as may be prescribed in consultation with the Reserve Bank of India, accept deposits from its members on such terms and conditions, including the provision of security, if any, or for the repayment of such deposits with interest, as may be agreed upon between the company and its members, subject to the fulfilment of the following conditions, namely:—

(a) issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and such other particulars in such form and in such manner as may be prescribed;

(b) filing a copy of the circular along with such statement with the Registrar within thirty days before the date of issue of the circular;

(c) depositing such sum which shall not be less than fifteen per cent of the amount of its deposits maturing during a financial year and the financial year next following, and kept in a scheduled bank in a separate bank account to be called as deposit repayment reserve account;

(d) providing such deposit insurance in such manner and to such extent as may be prescribed;

(e) certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits; and]

Subject to additional conditions as prescribed below:

(A) which accepts from its members monies not exceeding one hundred per cent. of aggregate of the paid up share capital, free reserves and securities premium account; or

(B) which is a start-up, for five years from the date of its incorporation; or

(C) which fulfils all of the following conditions, namely:-

(a) which is not an associate or a subsidiary company of any other company;

(b) if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and

(c) such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section:

Provided that the company referred to in clauses (A), (B) or (C) shall file the details of monies accepted to the Registrar in such manner as may be specified.”.

Chapter VII – Section 92(1)(g)

92. (1) Every company shall prepare a return (hereinafter referred to as the annual return) in the prescribed formcontaining the particulars as they stood on the close of the financial year regarding—

(a) its registered office, principal business activities, particulars of its holding, subsidiary and associate companies;

(b) its shares, debentures and other securities and shareholding pattern;

(c) its indebtedness;

(d) its members and debenture-holders along with changes therein since the close of the previous financial year;

(e) its promoters, directors, key managerial personnel along with changes therein since the close of the previous financial year;

(f) meetings of members or a class thereof, Board and its various committees along with attendance details;

³[(g) remuneration of directors and key managerial personnel;]

(g) aggregate amount of remuneration drawn by directors;

Chapter VII – Section 92(1)- New proviso to be substituted

^[Provided that in relation to One Person Company and small company, the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company

Provided that in relation to One Person Company, small company and private company (if such private company is a start-up), the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company.”.

Chapter X section 143 (3) (i)

(3) The auditor’s report shall also state—
(a) whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements;

(b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him;

(c) whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report;

(d) whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;

(e) whether, in his opinion, the financial statements comply with the accounting standards;

(f) the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;

(g) whether any director is disqualified from being appointed as a director under sub-section (2) of section 164;

(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;

⁴[(i) whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls;]

Shall not apply to Private Company subject to condition below:

• which is a one person company or a small company; or
• which has turnover less than rupees fifty crores as per latest audited financial statement or which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than rupees twenty five crore.”.

 Chapter XII, Section 173(5)

173. (1) Every company shall hold the first meeting of the Board of Directors within thirty days of the date of its incorporation and thereafter hold a minimum number of four meetings of its Board of Directors every year in such a manner that not more than one hundred and twenty days shall intervene between two consecutive meetings of the Board:

Provided that the Central Government may, by notification, direct that the provisions of this sub-section shall not apply in relation to any class or description of companies or shall apply subject to such exceptions, modifications or conditions as may be specified in the notification.]

(2) The participation of directors in a meeting of the Board may be either in person or through video conferencing or other audio visual means, as may be prescribed, which are capable of recording and recognising the participation of the directors and of recording and storing the proceedings of such meetings along with date and time:

Provided that the Central Government may, by notification, specify such matters which shall not be dealt with in a meeting through video conferencing or other audio visual means.

(3) A meeting of the Board shall be called by giving not less than seven days’ notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means:

Provided that a meeting of the Board may be called at shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting:

Provided further that in case of absence of independent directors from such a meeting of the Board, decisions taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one independent director, if any.

(4) Every officer of the company whose duty is to give notice under this section and who fails to do so shall be liable to a penalty of twenty-five thousand rupees.

(5) A One Person Company, small company and dormant company shall be deemed to have complied with the provisions of this section if at least one meeting of the Board of Directors has been conducted in each half of a calendar year and the gap between the two meetings is not less than ninety days:

Provided that nothing contained in this sub-section and in section 174 shall apply to One Person Company in which there is only one director on its Board of Directors.]

New sub-section to be substituted

(5) A One Person Company, small company, dormant company and a private company (if such private company is a start-up) shall be deemed to have complied with the provisions of this section if at least one meeting of the Board of Directors has been conducted in each half of a calendar year and the gap between the two meetings is not less than ninety days:

Provided that nothing contained in this subsection and in section 174 shall apply to One person Company in which there is only one director on its Board of Directors.

Chapter XII, Section 174(3)

174.

[(1) The quorum for a meeting of the Board of Directors of a company shall be 1[one third of its total strength or two directors, whichever is higher], and the participation of the directors by video conferencing or by other audio visual means shall also be counted for the purposes of quorum under this sub-section.]

(2) The continuing directors may act notwithstanding any vacancy in the Board; but, if and so long as their number is reduced below the quorum fixed by the Act for a meeting of the Board, the continuing directors or director may act for the purpose of increasing the number of directors to that fixed for the quorum, or of summoning a general meeting of the company and for no other purpose.

[(3) Where at any time the number of interested directors exceeds or is equal to two-thirds of the total strength of the Board of Directors, the number of directors who are not interested directors and present at the meeting, being not less than two, shall be the quorum during such time.

Explanation.—For the purposes of this sub-section, “interested director” means a director within the meaning of sub-section (2) of section 184.]

The above sub-section (3) shall apply with the exception that the interested director may also be counted towards quorum in such meeting after disclosure of his interest pursuant to section 184.

Insertion of paragraph 2A after para 2 of notification dated 5^th June 2015

Paragraph 2 of Notification dated 5^th June 2015

“2. The private companies, while complying with such exceptions, modifications and adaptations, as specified in column (3) of the aforesaid table, shall ensure that the interests of their shareholders are protected.”

“2A. The exceptions, modifications and adaptations provided in column (3) of the aforesaid Table shall be applicable to a private company which has not committed a default in filing its financial statements under section 137 of the said Act or annual return under section 92 of the said Act with the Registrar.”

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Case: Where company shifted its registered office from one State to another without issuing notice to its shareholder holding substantial shares in company, shifting of office was illegal.

 Shabbir Ahmed v. Safedabad   Cold Storage & Allied Industries (P.)Ltd.

Facts:

• Directors of respondent-company convened on Extraordinary General Meeting of the company for shifting its registered office from the State of West Bengal to the State of Uttar Pradesh and in the said meeting, a special resolution was passed by the members. Whereas the petitioner holding 21.76 per cent of the shares of the company, had challenged the holding of the said meeting in his petition as due process was not followed while convening the meeting and the petitioner was not served with any notice and have no knowledge with regard to convening of any Extraordinary General Meeting.
• The another shareholder-non-applicant, had also filed an affidavit and alleged that the company had shifted its registered office from the State of West Bengal to the State of Uttar Pradesh without issuing any notice to him, being shareholder of 15.26 per cent of the total paid up and issued share capital. Hence, such shifting of the registered office from the State of West Bengal to the State of Uttar Pradesh is illegal.
• It is pertinent to note that on perusal of the application/ record/ documents, no proof is filed with regard to resolution taken by the Board calling Extraordinary General Meeting of the company for transacting specific urgent business of the company; before issuance of the notice of the extraordinary general meeting to the members, shareholders, Directors, Auditors, creditors etc.
• Further, no document has also been annexed so as to show the attendance of the members, shareholders, Directors, Auditors, creditors etc. in the extraordinary general meeting of the applicant/ respondent Company, purportedly.
• On perusal of the record, it is found that the registered Office of the applicant/respondent company since its incorporation was at 55, Bhupendra Bose Avenue, Kolkata and is admittedly shifted to 65, Dilkhusa Street, Kolkata with effect from 21-1-2015 as reflected in the Master data obtained from the MCA portal also annexed therein.
• However, no document has also been produced to show that due procedures were complied, in regard to the shifting of the registered office of the Company within local jurisdiction.
• On perusal of the main CP, the petitioner/non-applicant has challenged the alleged change of the registered Office of the company from 55, Bhupendra Bose Avenue, Kolkata to 65, Dilkhusa Street, Kolkata with effect from 21-1-2015 and thereafter by alleged resolution dated 17-2-2015 from 65, Dilkhusa Street, Kolkata, State of West Bengal to the State of Uttar Pradesh as reflected in Para VI- Page 36 of the Company Petition with heading “ Alleged change in registered Office of the Company with effect from 21^st January, 2015, and thereafter alleged resolution dated February 17, 2015”.
• Had there been any proof of notice or the list of creditors or newspapers publication, the applicants/respondents would have annexed at least the copy of same while taking the issue of territorial jurisdiction by way of filing the instant application. Instead, they have relied only upon the order passed by the Regional Director, Ministry of Corporate Affairs, Government of India, West Bengal dated 11-2-2016, approving/confirming the application of the respondents for alteration in the situation clause in Memorandum of Association as to change of place of the registered Office of the applicant/respondent Company from the State of West Bengal to the State of Uttar Pradesh.
• It is the conduct of the applicant/respondent 1, Company and the applicants/respondents 2 and 3, as detailed above, which has been prejudicial to the interest of the petitioners/non-applicants and it would be highly unjust to allow the prayers sought by the applicants/respondents 1, 2 and 3 to transfer the Company petition to Safedabad (UP).
• The relief as prayed by the applicants/respondents 1, 2 and 3, if granted, would be highly oppressive to the petitioner/non-applicant as the applicants/respondents 1, 2 and 3 have acted in the manner not only prejudicial to the interest of the petitioner/non-applicant but also acted in violation of the established principles/procedures of law while shifting the registered office of the respondent No. 1, Company from the local jurisdiction to other and thereafter, from State of West Bengal to the State of Uttar Pradesh.
• In view of the above discussion and observations, the IA No. 20/2016 stands rejected.

Conversion from public to private company

In the case of DIANA BUILDWELL LTD., IN RE.

Companies Act, 2013 – Sections 18 and 14 read with rule 68 of the National Company Law Tribunal Rules, 2016 and rule 33 of Companies (Incorporation) Rules, 2014 – Conversion from public to private company – When permissible – Whether since the company had complied with the provisions of section 14 and conversion was in the interest of the company with a view to complying efficiently with the provisions of the Act causing no prejudice either to its members or to creditors, conversion was to be allowed – Held, yes – Whether the petitioner is to be directed to give effect to the conversion by requisite alteration in its articles, and communication the altered articles within a period of 15 days to the Registrar of Companies – Held, yes [Para 8].

Synopsis

Where the conversion from public to private company is being made in the interest of the petitioner-company with a view to comply efficiently with the provisions of the Act causing no prejudice either to the members or to the creditors of the company, a conversion that will be allowed, and the petitioner will be directed to give effect to the conversion by requisite alteration in its articles, communicating the altered articles to the register of company within a period of 15 days.

Excerpts from ORDER

Petition under consideration was filed on 9th December, 2016 under the provisions of section 14 of Companies Act, 2013 (‘the Act’).

It is important to clarify that the transition period of Companies Act, 1956 into Companies Act, 2013 was fairly large ; hence, in the interregnum, certain arrangements were made by the Ministry of Corporate Affairs, and one of such arrangements was in respect of the provisions of section 14 of Companies Act, 2013. In this regard, during the hearing of this CP, a notification dated 11th June, 2014 is placed on record ; relevant portion extracted below :

“…. Attention of the Ministry has been drawn to difficulties being faced by stakeholders while filing Form INC-27 for conversion of a public company into a private company. The relevant provisions of Companies Act, 2013 [second proviso to sub-section (1) and sub-section (2) of section 14] have not been notified. In view of this, the corresponding provisions of Companies Act, 1956 [Proviso to sub-section (1) and sub-section (2A) of section 31] shall remain in force till corresponding provisions of Company’s Act, 2013 are notified. The Central Government has delegated such powers under the Companies Act, 1956 to the Registrar of Companies (‘RoCs’) vide item No. (c) of the notification number SO 1538(E) dated the 10th July, 2012 and this delegated power remains in force. Applications for such conversions, therefore, have to be filed and disposed as per the earlier provisions.

2. This issues with the approval of the Competent Authority….”

By issuance of the Notification, it was made clear that the corresponding provisions of Companies Act, 1956 shall remain in force till corresponding provisions of Companies Act, 2013 are notified. As a result, the impact of this Notification was that after the MCA Notification dated 1st June, 2016 (to be discussed herein below), the applicability of the old provisions along with the attached rules got suspended. To proceed with the matter, it is requisite to hold that rule 33 of the Companies (Incorporation) Rules, 2014, which had prescribed that for effecting the conversion of a private company into a public company was to be approved by the competent authority, i.e., Central Government ; had become redundant.

My reason to hold rule 33 as redundant is two-fold :

First is that section 14(2) of the Act, 2013 vide an Official Gazette of India, Extraordinary Part II dated 1st June, 2016 [SO 1934(E)] in exercise of the powers conferred the Central Government has appointed/declared the date 1stJune, 2016, as the date on which certain provisions of the Act came into force, and among the long list of several sections, the second proviso to sub-section (1) of section 14 and sub-section (2) of section 14 were included. As a result, the powers conferred vide section 14(2) of the Act to the Tribunal (NCLT) to pass an appropriate order in connection of proposed conversion had superseded the old provisions. Therefore, the operation of rule 33 of the Companies (Incorporation) Rules, 2014 shall be limited to give effect of the order of NCLT by the Registrar within fifteen days on receipt.

Second reason to proceed with the matter is that once the provision of section 14(2) (now stood notified supra) has enshrined power to NCLT ; hence, the statute prevails over the Rules. There are no two opinions in respect of this accepted position of interpretation of statute.

The outcome of the above discussion is that the issue of conversion of private company into public company and vice versa is to be dealt with by NCLT within the ambits of section 14 of the Act. This section prescribes that a company, either a public company or a private company, can alter its article if such condition is contained in its memorandum, but by a special resolution. Such alteration, for the purpose of this section, has the effect of conversion of a public company into a private company. The issue in hand is dealt with by second proviso to section 14(c) which says that any alteration having the effect of conversion of a public company into a private company shall not come into operation except with the approval of the Tribunal (NCLT). The Tribunal shall make such order as it may deem fit. Further, a procedure is also laid down to give effect of the order of the NCLT in sub-section (2) of section 14 of the Act. This sub-section has prescribed that a copy of such alteration of the articles along with a copy of the order of the NCLT, approving the alteration, is required to be filed with the Registrar of Companies, within fifteen days. The Registrar thereupon shall register the change. The Companies Act, 2013 has further made it clear to remove any ambiguity by legislating sub section 3 of section 14 that any such alteration of the articles registered shall be valid as if it were originally in the articles, meaning thereby, the change so incorporated of “Conversion” shall be in supersession of the old such clauses of an article.

In addition to the introduction of section 14 in Companies Act, 2013, the MCA vide a Notification dated 21st July, 2016 [published in Gazette of India on 22nd August, 2016, GSR 716(E)] also framed National Company Law Tribunal Rules, 2016. The Rule connected to conversion of public company to private company is rule 68 which has laid down the guidelines for the implementation of such conversion. A petition for conversion of public company to private company is required to accomplish the conditions laid down under rule 68 of NCLT Rules, 2016. For the purpose of disposal of this company petition the conditions accomplished by this petitioner as prescribed in the Rule are examined as under :

The Board of directors of Diana Buildwell Ltd. (petitioner) have approved in their meeting held on 26th August, 2016 to convert the petitioner-company “Diana Buildwell Ltd.” to private limited company by the name and style of “Diana Buildwell (P.) Ltd.”. Thereafter, at the annual general meeting held on 30th September, 2016 at the petitioner-company’s registered office at Abil House, 2, Range Hill Corner, Ganeshkhind Road, Pune, Maharashtra-411 007, a resolution has been passed for conversion of the petitioner company from public limited company to private limited company. The Members have also approved the conversion.

The reason for conversion into a private company [rule 68(2)(e)] as set out in the petition is specified as under :

“IX. Reasons for conversion from public limited into private limited :

At present, the company is public limited company. It was also observed that there are lesser compliances in case of private limited company, which facilitates better management, quick decision making and is also economical in terms of various compliance related cost in long run. Considering the aforesaid, the directors have unanimously approved to convert the company into a private limited entity at their meeting held on 26th August, 2016, subject to the approval of the members and other statutory approvals from the regulatory bodies.

Moreover, the conversion into a private limited company shall not affect any debts, liabilities, obligations or contracts incurred or entered into, by or on behalf of the company before conversion and such debts, liabilities, obligations and contracts may be enforced in the manner as if such conversion had not been done.

Therefore the directors are of the opinion that it would be advantageous and economical to convert the status of the company from public limited into private limited.”

 

In the light of the foregoing legal position, it is hereby summarised that the petitioner has complied with provisions of section 14 to be read with rule 68 of NCLT Rules, 2016. Therefore, having regard to all the circumstances, the conversion from public to private is in the interest of the company which is being made with a view to comply efficiently with the provisions of Companies Act, 2013 causing no prejudice either to the members or to the creditors of the petitioner. Therefore, the conversion is hereby allowed, with no order as to cost and to be consigned to the Records.

Is intervention by major creditor permissible in a winding up petition when the petitioner himself has a very small percentage in the total debt?

IDFC BANK LTD. V. RUCHI SOYA INDUSTRIES LTD. AND OTHERS

Where the petitioner filing winding up petition has a very small percentage of total debts recoverable from the respondent-company, an application by the bank for intervention is to be allowed at the initial stage as the bank is one of the major creditors, who must be heard at the initial stage

Where the petitioner’s alleged liability recoverable from the respondent-company is hardly 2 per cent of the total debts, the interveners are entitled to oppose the petition for winding up and they are to be heard at the admission stage, because once the petition for winding up is admitted, chances of revival of the company become remote. Before admitting the petition, the court has to apply its mind and consider the wishes of the major creditors, if they intervene in the proceedings.

Since RBI circulars issued under sections 21 and 35 of the Banking Regulation Act, 1949 are mandatory in nature, it is not open to the dissenting lender to continue with its existing exposure and simultaneously not agree for rectification or restructuring as part of the corrective action plan drawn by joint lenders’ forum

RBI circular dated 26th February, 2014 issued under sections 21 and 35 of the Banking Regulation Act, 1949 is of mandatory nature and it binds the petitioner. The circular, inter alia, provides that if any lender does not wish to be part of the scheme, it has to sell its exposure to another lender. Hence, the petitioner has to go along with the joint lenders’ forum which is in the overall interest of all concerned, including the petitioner.

Winding up petition at the instance of the petitioner claiming just 2 per cent of the total debts cannot be entertained, where 98 per cent of the creditors in value of the total debts have agreed to oppose the petition

Where 98 per cent of the creditors in value of the total debts of the respondent-company have agreed to oppose the petition for winding up and have been participating in the joint lenders’ forum (JLF) meetings to take steps for rectification and restructuring of the respondent company, and some decisions taken by the said JLF are under implementation, the winding up petition at the instance of the petitioner claiming about 2 per cent of the total debts of the respondent-company cannot be entertained.

Synopsis

The National Company Law Tribunal has allowed the application of the intervenor, dismissing the petition for winding up. It has also observed that the respondent-company has a temporary set back, and it is making a sincere attempt for its revival with the assistance of large number of creditors. It would not be desirable and in the interest of all creditors, including the petitioner to pass an order for winding up against the respondent-company.

Case law on disputed debt

SATLUJ JAL VIDYUT NIGAM LTD.
V.
CONTINENTAL FOUNDATION JOINT VENTURE

A company court is required to act with circumspection, care and caution and ensure that any attempt made to pressurise the company to pay a debt which is seriously and substantially disputed is liable to be rejected. The company court cannot function as a debt collecting agency and has to guard itself against vexatious abuse of its process and should, therefore, not permit a party unreasonably set the law into motion, especially when the defence raised by the company sought to be wound up is bona fide and substantial one and in these circumstances the remedy of the aggrieved party is elsewhere. Thus, where the debt is not admitted debt and the dispute is not only a substantial but a bona fide one, it cannot be held that the company has neglected to pay and the case would not fall under clause (e) of section 433.

Companies Act, 1956 – Section 433(e) – Winding up – Inability to pay debt – Debt not admitted and bona fide disputed – Is winding up petition liable to be dismissed – Whether a company court is required to act with circumspection, care and caution and ensure that any attempt made to pressurise the company to pay a debt which is seriously and substantially disputed is liable to be rejected – Held, yes – Whether the company court cannot function as a debt collecting agency and has to guard itself against vexatious abuse of its process and should, therefore, not permit a party unreasonably set the law into motion, especially when the defence raised by the company sought to be wound up is bona fide and substantial one and in these circumstances the remedy of the aggrieved party is elsewhere – Held, yes – Whether where the debt is not admitted debt and the dispute is not only a substantial but a bona fide one, it cannot be held that the company has neglected to pay and the case would not fall under clause (e) of section 433 – Held, yes.

Case law under Insolvency and Bankruptcy Code, 2016

Case law: Mr. Ishwar Khandelwal, Operational creditor/Applicant

Vs. Amrapali Infratsructure Pvt. Ltd., Corporate Debtor

 

 

The petition was filed  by petitioner seeking to set in motion Corporate Insolvency Resolution process (IRP) as contemplated under section 9 of the Insolvency and Bankruptcy Code, 2016 (Code) in relation to Amrapali.

The company is engaged in real estate business including estate development. The petitioner described itself to be a sole proprietary concern in the name of shri Balaji International supplying various types of goods like steels and iron goods/raw materials strictly as per needs, requirements and specifications of the company against detailed invoices duly issued by Amrapali group. E petitioner claimed that out of total billing of Rs.1,97,85,018.44/- a sum of Rs.10,00,000/- by cheque and Rs.300,000 by NEFT transfer had been  paid leaving all other amount at unpaid balance.

Non-payment of balance forced petitioner to serve a notice of demand as contemplated under section 8 of the code and also by email. The same was not replied till the date of filing.

As per the order of Hon’ble Chief Justice (retd) Shri M.M.Kumar:-

“The above petition came to be listed on 14.03.2017. at the outset we are unable to fathom the logic of the petitioner in trying to enforce so called liabilities of Amrapali group, described in some places of the petition as Corporate Debtor against one company from the details given in the preceding paragraphs. It is seen that elevent companies have been named to whom goods is alleged to have been supplied by the petitioner and with all of whom it is claimed that running accounts are being maintained.

However when the Counsel for the Petitioner was put forth with the query as to whether he is demanding such amoun against one company or against the group of companies to all of whom it had supplied the materials, the counsel for the petitioner was not able to answer the paradox.

In order to apply the provisions of the code, it is necessary that it must be against a corporate person as defined under section 3(7) of the code who must also be a Corporate Debtor as defined under section 3(8) of the Code.

In the instant case, it is evident that the Petitioner is collectively trying to enforce liabilities owed by a group of companies (Amrapali Group) against a single Company which is not given taking into consideration the nature of the code.

Hence, the remedy of the petitioner lies elsewhere and not under the provisions of the Code. Before parting we make it clear that any observations made in this order shall not be construed as an expression of opinion on the merit of controversy as we have refrained from entertaining the application at the initial stage itself.

For the reasons afore stated we reject the application/petition filed by the petitioner/operational creditor without any cost.”

AN ANALYSIS ON NOTICE UNDER SECTION 248 RECEIVED BY COMPANIES

BELOW GRAPHICAL PRESENTATION DEPICTS AN AERIAL VIEW OF REMOVAL OF NAME UNDER BOTH OPTIONS:

Section 248 comes under Chapter XVIII of the Companies Act, 2013, and was notified on 26/12/2016 and states as under:

Power of Registrar to Remove Name of Company from Register of Companies.

248. (1) Where the Registrar has reasonable cause to believe that—

(a) a company has failed to commence its business within one year of its incorporation 1[or];

(b) 2[Omitted].

(c) a company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455, he shall send a notice to the company and all the directors of the company, of his intention to remove the name of the company from the register of companies and requesting them to send their representations along with copies of the relevant documents, if any, within a period of thirty days from the date of the notice.

(2) Without prejudice to the provisions of sub-section (1), a company may, after extinguishing all its liabilities, by a special resolution or consent of seventy-five per cent. members in terms of paid-up share capital, file an application in the prescribed manner to the Registrar for removing the name of the company from the register of companies on all or any of the grounds specified in sub-section (1) and the Registrar shall, on receipt of such application, cause a public notice to be issued in the prescribed manner:

Provided that in the case of a company regulated under a special Act, approval of the regulatory body constituted or established under that Act shall also be obtained and enclosed with the application.

(3) Nothing in sub-section (2)shall apply to a company registered under section 8.

(4) A notice issued under sub-section (1) or sub-section (2)shall be published in the prescribed manner and also in the Official Gazette for the information of the general public.

(5) At the expiry of the time mentioned in the notice, the Registrar may, unless cause to the contrary is shown by the company, strike off its name from the register of companies, and shall publish notice thereof in the Official Gazette, and on the publication in the Official Gazette of this notice, the company shall stand dissolved.

(6) The Registrar, before passing an order under sub-section (5), shall satisfy himself that sufficient provision has been made for the realisation of all amount due to the company and for the payment or discharge of its liabilities and obligations by the company within a reasonable time and, if necessary, obtain necessary undertakings from the managing director, director or other persons in charge of the management of the company:

Provided that notwithstanding the undertakings referred to in this sub-section, the assets of the company shall be made available for the payment or discharge of all its liabilities and obligations even after the date of the order removing the name of the company from the register of companies.

(7) The liability, if any, of every director, manager or other officer who was exercising any power of management, and of every member of the company dissolved under sub-section (5), shall continue and may be enforced as if the company had not been dissolved.

(8) Nothing in this section shall affect the power of the Tribunal to wind up a company the name of which has been struck off from the register of companies.

SUO MOTO POWER CANNOT BE EXCERSIZED UNDER THE CIRCUMSTANCES ENUMERATED U/R 3 OF THE COMPANIES (REMOVAL OF NAME FROM THE REGISTER OF COMPANIES) RULES, 2016:

3. Removal of name of company from the Register on suo-motu basis.-

(1) The Registrar of Companies may remove the name of a company from the register of companies in terms of sub-section (1) of section 248 of the Act:

Provided that following categories of companies shall not be removed from the register of companies under this rule and rule 4, namely:-

(i)  listed companies;

(ii) companies that have been delisted due to non-compliance of listing regulations or listing agreement or any other statutory laws;

(iii) vanishing companies;

(iv) companies where inspection or investigation is ordered and being carried out or actions on such order are yet to be taken up or were completed but prosecutions arising out of such inspection or investigation  are pending in the Court;

(v) companies where notices under section 234 of the Companies Act, 1956 (1 of 1956) or section 206 or section 207 of the Act have been issued by the Registrar or Inspector and reply thereto is pending or report under section 208 has not yet been submitted or follow up of instructions on report under section 208 is pending or where any prosecution arising out of such inquiry or scrutiny, if any, is pending with the Court;

(vi) companies against which any prosecution for an offence is pending in any court;

(vii) companies whose application for compounding is pending before the competent authority for compounding the offences committed by the  company or any of its officers in default;

(viii) companies, which have accepted public deposits which are either outstanding or the company is in default in repayment of the same;

(ix) companies having charges which are pending for satisfaction; and

(x)  companies registered under section 25 of the Companies Act, 1956 or section 8 of the Act.

“Content of the notice issued by ROC:

 Pursuant to sub-section (1) of section 248 of the Companies Act, 2013, notice is hereby given that as per available record the company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455.

• Therefore, on the basis of aforesaid ground, I intend to remove name of company from the register of companies and request you to send your representation along with copies of the relevant documents, if any, within 30 days from the date of receipt of this notice.
• Unless the cause to the contrary is shown within the time period above mentioned, the name of the above mentioned company, shall be liable to be removed from the register of companies. However, the directors of the company shall be liable for appropriate action under the act.”

 Not: Company to serve this notice on all directors/officers of the company, as per the provisions of section 20 of the Companies Act, 2013. You are also directed to inform this office if the company is falling under any of the criteria as stated in the Annexure attached with this notice alongwith your reply within the time period as given in Para 2 of the notice in absence of which it shall be presumed that the information for the categories in the Annexure is “No” in each case.

Annexure:

1. Whether the company has ever been de-listed from any of the stock exchanges due to non-compliance of listing regulations or listing agreement or any other statutory laws?(Y/N) 

2. Whether any inspection or investigation has been ordered and carried out or yet to be carried out or being carried out against the company and whether any inspection or investigation has been carried out, and Whether any prosecution is pending in any court arising out of such inspection or investigation; (Y/N) 

3. Whether the company is having any public deposits which are outstanding or if the company is in default in its repayment or interest thereon; (Y/N) 

4. Whether the company has any outstanding loans, secured or unsecured; (Y/N) 

5. Whether the company has any dues towards Income Tax, VAT, Excise Duty, Service Tax or any other tax or duty, by whatever name called, payable to the Central or any State Government, statutory authority or local authority; (Y/N) 

6. Whether all the other liabilities of the company have been settled or discharged or extinguished; (Y/N) 

7. Whether there is any compounding application filed by company and is pending in court or any other compounding authority; (Y/N) 

8. Whether any other prosecution is pending against the company in any court of law in respect of any matter. (Y/N)

QUESTIONS THAT EMERGE

• Can a company after receiving this notice u/s 248(1), now make an application for dormancy under section 455?

Ans: Company should be given a chance to file for dormancy before striking off.

• Like mentioned in the notice received from ROC, that “directors of the company shall be liable for appropriate action under the act”, so even if they choose to fulfill all the pending compliance and pay all fees and other dues, will they still be liable to be penalized? If yes, under which section?

Ans: All sections pertaining to non-compliances for annual filing will be triggered.

• If after 30 days, as mentioned in the notice, the name of the company is liable to be removed from the Register of Companies, who shall be responsible for disposing off the assets of the company, as provided in section 248(6) and (7) and in how much time?

Ans: ROC may be endowed with the power to appoint a liquidator for such purposes or an Insolvency professional.

• Can a director who has resigned long back, but whose form was pending filing, can upload the form and technically be out of the company and MCA master data? Should the ROC system accept such a filing?

Ans: Ideally should be dealt on a case to case basis, with discretionary powers with ROC.

• As per the provisions, ROC is required to issue notice in official gazette twice, once when the notice is sent to the company and directors suo moto and second when company is struck off the register of Companies. On checking the Official Gazette, it is found that no such notice has been issued by MCA. Hence, does it impact the right of people interested in the company?

Ans: Ideally it should not, but all other modes in which such notice is published shall be brought to the knowledge of the company and other stakeholders.

• No procedure has been prescribed for handling grievance of an aggrieved person.

Ans: Based on the nature of grievance, they shall be directly entertained by the Registrar of Companies, otherwise aggrieved will be required to go through stringent court or Tribunal procedures.

• Supposing the Directors do not respond to the notice served under section 248(1), can ROC strike off the name of the company without giving any further opportunity to be heard to the respective directors? There are many other actions/requirements under various laws that may be applicable and gets triggered,before strike off, how the interest of all such stakeholder is ensured by the regulator?

 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official views of any Institution. Examples of analysis performed within this article are only examples. They should not be utilized in real-world analytic products as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of any position under any law explicitly provided for; hence, any action taken by anyone interested in the subject matter shall be at their own discretion and self-study.

Whether Managing Director appointed before the act of 2013, is disqualified on attaining the age of 70?

Whether there is automatic termination of appointment on attaining the age of 70 years?

After the amendment of the Companies Act, in 2013 which was brought into force with effect from 1^st April, 2014, whether any Managing Director who was appointed prior to the amendment act ie before 1^st April, 2014 would have a right to continue to act as the Managing Director after his attaining the age of 70 years without special resolution being passed by the company in a general meeting?

Whether appointment of a person as Managing Director came to an end in view of his attaining the age of 70 years by virtue of the provisions contained in section 196(3)(a) of the Companies Act, 2013?

Section 196(3) states as under:-

(3) no company shall appoint or continue the employment of any person as managing director,  whole time director or manager who-

(a) is below the age of twenty-one years or has attained the age of seventy years:

Provided that appointment of a person who has attained the age of seventy years may be made by passing a special resolution in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person;

(b) is an un-discharged insolvent or has at anytime been adjudged as an insolvent;

(c) has at anytime suspended payment to his creditors or makes, or has at any time made, a composition with them; or

(d) has at anytime been convicted by a court of an offence and sentenced for a period of more than 6 months.

The position changed after the amendment in 2013. By virtue of Amendment act of 2013, one additional qualification was added to the existing list of disqualifications for appointment or continuation as MD of the company under section 267 of the old act. Section 196(3) provided disqualification for appointment as well as for continuation of person as MD.

Section 196(3) of the companies Act, 2013 not only incorporated three disqualifications which were mentioned in section 267 of the old act for a person to be appointed as MD, viz. (a) is an undischarged insolvent, or has at any time been adjudged an insolvent; (b) suspends, or has at any time suspended, payment to his creditors, or makes, or has at any time made, a composition with them; or (c) is or has at any time been, convicted by a Court of an offence involving moral turpitude, but one more disqualification was added to section 196(3) by way of the said amendment that a person who was below the age of 21 years or who had attained the age of 70 years could not be appointed or could not continue as MD, if he had attained the age of 70 years.

The Court in the case of Sridhar Sundarajan V. Ultramarine & Pigments Ltd. held that since a new clause was added as further disqualification for appointment or continuation as MD of the company, it would operate not only at the stage of appointment but would also operate in the case of a person who has already been appointed and attained the age of 70 years.

Such a person by virtue of disqualification had no right to continue as MD, unless a special resolution was passed by the company.

There is no question of retrospective application of the provision. Since section 196(3)(a) would apply prospectively, whoever attained the age of 70 years after the amendment act came into force would cease to function as MD by operation of statue.

The principle of “Alter Ego”

Dictionary meaning of the phrase: As given in Advanced Law Lexicon-

“(Latin, literally second I) second self, especially as person or entity vicariously liable for another (as an agent) (had the officer been the alter ego of the Corporation- JJ White and R.S. Summers). The concept of legal alter ego is used primarily to hold the controlling parties of a corporation personally liable instead of limiting liability to the Corporate entity (Merriam Webster)”.

Many a times we have been intrigued by this question that when a company is a legal person, who cannot think or act on its own, but does that through the representatives who manage the affairs of the same, then why only when it is proved that the particular individuals, who are in the position of directing mind, are held liable for any misconduct by the company, while, in all cases where the directing mind is found guilty, the company is always held responsible or convicted.

Corporate entity	Controlling parties
Always held responsible for all acts of controlling parties	Controlling parties are not always responsible for all acts of the company
Principle applied – Agency principle	Principle applied – Alter ego

 

The general principle is that the acts of individuals, who is in the control of affairs of the company and is a directing mind, are attributed to the company. And hence, whenever such a person who is controlling the affairs of the company is made an accused, the company can also be implicated as accused person. While, it is a well recognized principle that the company does not act on its own, but through its directors or officers and when such directors or officers act on behalf of the company, the company is also held liable for these acts on the application of “principle-agent” principle. It has never been a case, where for the act of the company, an individual is made accused, unless there is a categorical provision in the statue making such a person vicariously liable or there is enough material to attribute the alleged acts of criminality to the said person.

Hence, the principle of ‘alter ego’ do not operate in a two way direction vis-à-vis a company. While a company can be held liable for the acts of its directors/officers when acting on behalf of the company, directors/officers cannot be held liable for the acts of the company. If a metaphor to be considered, it is just like holding parents responsible for all acts of children, while not vice versa, children cannot be held responsible for any acts of parents. Though here, of course both can think, but fundamentally this is the accepted notion.

The principle has been reiterated by Lord Denning in Bolton (H.L.) (Engg.) Co. Ltd. Vs. T.J. Graham & Sons Ltd. in the following words: (AC p.172):

“A company may in many ways be likened to a human body. They have a brain and nerve centre, which controls what they do. They also have hands, which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents, who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers, who represent the directing mind and will of the company and control what they do. The state of mind of these managers is the state of mind of the company and is treated by the law as such. S you will find that in cases, where law requires personal fault as a condition of liability in tort, the fault of the manager will be the personal fault of the company. That is made clear in Lord Haldane’s Speech in Lennard’s Carrying Co. Ltd. V. Asiatic Petroleum Co. Ltd. (AC at pp.713,714). So also in the criminal law, in cases where the law requires a guilty mind as a condition of a criminal offence, the guilty mind of the directors or the managers will render the company themselves guilty.”

Section 138, read with section 141 of the Negotiable Instruments Act, 1881

Supreme Court of India held in the case of Tamil Nadu News Print and Papers Ltd. Vs. D. Karunakar, that where the directors who were involved in day to day working of the company and a complaint was lodged against dishonor of cheque, the High Court erred in quashing the proceedings.

The appellant was a manufacturing company in news print and papers. It had business dealings with the accused co., numbered as respondent no.1 and other directors from respondent no.2-10. A cheque was issued by respondent no.2, on behalf of the company, which was never honoured despite statutory notices.  Respondent filed petition for quashing the said complaint u/s 482 of CrPC. The High Court quashed the proceedings in respect of all the accused, other than accused No.1, which was the company and accused no.2, who was the MD, who had issued the cheque.

Upon perusal it was found that an averment has been made to the effect that Accused no.3-10 were in fact in charge of the day to day business of the company. It is an admitted position that simply because someone is a director in the company, he cannot be held responsible in respect of a cheque issued on behalf of the company, but if the concerned director is in charge of and is responsible to the company for its conduct of business, he can be held to be guilty of the offence under section 138, therefore the High Court ought not to have quashed the proceedings against such directors. The high Court made an error by making such an observation. Hence, the impugned order passed by the High Court is set aside.