CoRPoRaTE laws Company law update

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1 Janak C. Pandya, Company Secretary CoRPoRaTE laws Company law update Case law No. 1 [2012] 172 Comp Cas 217 (Mad) In the Madras High Court S. R. Kangeyan v. Indian Potash Ltd. In order to make prima facie case under Section 138 of the negotiable Instrument act, 1881, a specific allegation has to be made as to how and in what manner the director is responsible and that such director was in charge of day to day affairs of the company. Brief facts: The Petitioner, one of the directors of Indian Potash Ltd. ( Company ), filed this petition for quashing the proceedings initiated against him u/s 138 of the Negotiable Instruments Act 1881 ( NIA ). The Petitioner has been accused for dishonour of cheque under the NIA. Earlier, the Petitioner had moved a similar petition for granting relief; however, the same was disputed by the Court due to the reason that the Petitioner had not raised certain issues relating to the complaint. Further, in the earlier hearing, the Court has only looked into the point relating to vague allegations that earlier directors who were in charge of day to day affairs of the Company were responsible. In the current petition, the following contemplations were made: 1. There is absolute no allegation as to how and in what manner the Petitioner is responsible for the day to day affairs of the company. 2. The complaint only states that all the directors are responsible and in charge of day to day affairs of the company. 3. The disputed dishonoured cheque was only signed by the other accused director. 4. The Petitioner was only a sleeping partner and was not involved in the day to day affairs of the Company. The Respondent made the following counter arguments: 1. In earlier petition, the Petitioner had raised the same question and the same was rejected by the Court. 2. In one of the paragraphs, similar complaint was made by the Petitioner. judgment and reasoning: The Hon ble Court accepted the Petition and quashed the complaint under the NIA against the Petitioner. While giving the above order, the Court noted the following: 1. The allegations in the complaint are general in nature and does not specify :122 Ml-350

2 as to how and in what manner the Petitioner was responsible for day to day affairs of the Company. 2. In case of another accused, it is specifically stated in the complaint that the accused is the director of the Company and has signed the dishonoured cheque on behalf of the Company. The Court has also looked upon the decision delivered by the Supreme Court in S. M. S. Pharamaceuticals Ltd v Neeta Bhalla in [2005] 127 Comp Cas 563;[2005] 8 SCC 89, which stated that a clear case should be spelt out in the complaint against the person sought to be made liable. When the principal accused is the Company itself, it is departure in the rule in Criminal Law against vicarious liability. The liability under the NIA arises on account of conduct, act or omission on a part of a person being accused and not merely on account of holding an office or a position in a company. The Court also referred the Apex Court s decision in Saroj Kumar Poddar vs State (NCT of Delhi) [2007] 137 Comp Cas 837; [2007] 1 CTC 529. Case law No. 2 [2012] 108 CLA 389 (P & H) In the High Court Of Punjab and Haryana Kundanmal Dabriwala v. Haryana Financial Corporation and another. The surety of any debt to the company is discharged from his liability when the scheme of arrangement is sanctioned by the company court under Section 391 of the Companies act, 1956, which is binding on all creditors including non-consenting creditors. Brief facts: This writ petition is filed by the Petitioner against the show cause notice issued by the Haryana Financial Corporation ( HFC ) under Section 32(G) of the State Financial Corporation Act, 1951 ( SFCA ). The brief facts of the case are as follows: 1. The Petitioner is a promoter director of Dabriwala Steels & Engineering Company Ltd. ( DSE ) which had set up a mini steel plant at Faridabad. 2. Due to financial constraints, BIFR recommended winding up of DSE and the same was approved by this Hon ble Court. The official liquidator ( O.L ) was also appointed who had taken the custody of all assets and properties of DSE. 3. HFC as a secured creditor and having the first charge on the assets sought the permission of this Hon ble Court to sell the land, building and other assets of DSE. The State Bank Of India (SBI), which was holding second charge against the abovesaid properties also agreed. 4. The Court granted permission to the O.L to sell the land and other assets. 5. Further, the SBI also sought the permission of this court to sell another land which had been mortgaged to it for realising its dues. 6. Meanwhile, the Petitioner and other shareholders filed a Petition under Section 391 and 394 of the Companies Act, 1956 ( Act ) for revival of the DSE. 7. The majority shareholders proposed to SBI for one time settlement for its dues. SBI accepted the said proposal and a one-time settlement amount was paid to SBI. 8. However, HFC rejected such settlement proposal. 9. The O.L submitted its report for winding up and also arrived at the Ml

3 amount which was payable to HFC against the claim made by it. 10. The said report of the O.L was accepted by this court for winding up. However, during the final hearing for revival of the DSE, certain objections were raised by the creditors including the auction purchase of DSE properties. Further, HFC counsel made a statement that it had no objection for revival of the Company. The Court also noted that the O.L had paid to HFC its agreed dues. Thus, the Petitioner contended that once the principal debtor has settled its loan account, the guarantor cannot be made liable to pay any amount over and above the amount paid by the principal debtor. Objecting to the above claim by the Petitioner, HFC contended that though it had not objected for revival of DSE, it had reserved its rights upon revival to seek satisfaction of mortgage deed in accordance with law. HFC further stated that since DSE had failed to pay the entire loan amount, the show cause notice was sent under Section 32(G) of SFCA to directors/ promoters/ guarantor of DSE. The question that was raised was that accepting the revival scheme submitted under Section 391 and 394 of the Act amounted to compounding with the principal debtor leading to discharge of the surety within the meaning of Sections 134 and 135 of the Indian Contract Act, judgment and reasoning: The Court allowed the writ petition and declared that the show cause notice issued by HFC was illegal, unwarranted and without jurisdiction. The Court made the following reasoning and analysis: a. The Court analysed the provisions of the Indian Contract Act, 1972 and its Section 128 as to surety s liability and Section 135 as how a surety s liability gets discharged when the creditors compounds or gives time or agrees not to sue principal debtors. It has also noted the provision of Section 134 which states that surety will be discharged upon any contract between the creditor and the principal debtor for release of the principal debtor. Reliance was placed by the Petitioner on the provisions of these sections. The judgements referred were (1) Syndicate Bank vs. Pamidi Somaiah, AIR 2002AP 12; (2) Kurnool Chief Funds P. Ltd vs. P. Narasimha, AIR 2008 AP 38 and (3) Union Bank of India vs. Chairperson, Debts Recovery Appellate Tribunal, [2011] 167 Comp Cas 1 (All.). In case of Union Bank case, the similar fact as this case was considered and single judge of Allahabad High Court had held that in consequences of discharge of principal debtor by the bank before the O.L, liability of surety gets extinguished. b. Scheme of revival under Section 391 for compromise and arrangement with the creditors and members. c. Various judgements of Supreme Court on release of surety s upon the release of principal debtors and surety s coextensive liabilities were considered. Further, other judgements providing opposite views with similarities of the facts and circumstances with current case were also considered. d. Analysis in Halsbury s Laws of England, vol.16, 1935 edn. stated that whatever expressly or impliedly discharges the principal debtor from liability usually discharges the surety by implication... he is discharged where he can establish that the :124 Ml-352

4 alteration changes the nature of his liability, but not otherwise. e. The Supreme Court s decision in Hindustan Lever vs. State of Maharashtra [2003] 57 CLA 256 (SC)/[2004] 9 SCC 438 was also referred. Here it was held that by virtue of provisions of Section 391 of the Act, a scheme sanctioned by a court is statutorily binding on all its shareholders and creditors including those who dissented. Thus, in current case, by virtue of the sanctioned scheme by this court, the liability of principal debtors extinguished and the same was binding on all creditors including HFC, which was a nonconsenting creditor. Thus, it cannot be said that the surety will continue to be liable for payment due to the creditor prior to the settlement. Regulatory update: Company law / SEBI: abbreviations:- Act The Companies Act, 1956 MCA RoC R.D. C.G Ministry of Corporate Affairs Registrar of Companies Regional Director Central Government CLB Or Company Law Board Bench O.L DIN DPIN XBLR SEBI Official Liquidator Director s Identification Number Designated Partners Identification Number Extensible Business Reporting Language Securities and Exchange Board of India NSDL CDSL BSE NSE ELA DLA National Security Depository Ltd. Central Depository Service (India) ltd. Bombay Stock Exchange Ltd. National Stock Exchange of India Ltd. Equity Listing Agreement Debenture Listing Agreement a. Company law 1. notification dated june 5, 2012 published by the Government of India, Ministry of Corporate affairs altering the Companies (Director Identification number) Rules, As per this notification, Form DIN-1 has been changed by inserting a new column as to whether a director is Resident in India or not. 2. notification dated june 5, 2012 published by the Government of India, Ministry of Corporate affairs prescribing rules to amend the limited liability partnership Rules, The following rules are amended /deleted / altered effective from June 11, a. Rule 8 related to Form 2 for consent to be given by individual to act as partner or designated partner. b. Rule 18, in sub-rule (2) clause (ix) for reserving name when no objection certificate is granted by the registered LLP or company. c. Rule 18, in sub-rule (2) clause (xiii) for reserving name when business activities includes certain words like Banks, Insurance, Banking, Venture Capital or Mutual Fund then respective regulatory authorities Ml

5 approval / permission shall be obtained. d. Rule 18, in sub-rule (2) clause (xvi) for reserving name when business activities includes professional in nature then respective council governing the profession shall obtained. e. Prescribing fees for filing of various forms. f. Substituted / altered the existing form from 1 to 31 with new forms. B. sebi 1. SEBI Circular Ref CIR/MRD/ DSa/14/2012 dated May 30, 2012 on Exit policy for de-recognised / non-operational stock exchanges. Vide Circular dated December 29, 2008 SEBI had issued guidelines in respect of exit option to stock exchanges. The current circular is for revising /modifying the same as under: a. The process of De-recognition and exit: (i) exit through voluntary surrender within 2 years from this circular when annual trading on own platform is less than Rs crores. (ii) if an exchange does not apply as above, then SEBI shall proceed with compulsory derecognition and exit of such stock exchanges. (iii) stock exchanges which are already de-recognised, shall make an application for exit within two months from the date of this circular. b. Exit option to the shareholders of listed companies on such exchange must be as per the process given in the circular. c. Trading opportunity must be given to its members to trade on exchange having nationwide terminals through subsidiary companies. d. Treatment of the Assets of derecognised exchanges. e. Appointment of valuation agency by SEBI. f. Other conditions such as transfer of investor protection fund, investor services fund, 1% security deposits etc. g. Payment of dues to SEBI. 2. SEBI Circular Ref CIR/IMD/ FII&C/13/2012 dated june 07, 2012 on revision in framework for qualified Foreign Investor (QFI) investment in Equity Shares and Mutual Fund Schemes. SEBI vide circular ref. Cir/IMD/DF/14/2011 dated August 9, 2011 and Cir/IMD/ FII&C/3/2012 dated January 13, 2012 has allowed QFI s to invest in Indian equity and mutual funds. SEBI has also revised the eligibility criteria for qualified DP vide circular ref. CIR/IMD/FII&C/4/2012 dated January 25, After consulting and review with the Government of India ( GOI ) and RBI, the following have been revised: a. Criteria for QFI has been revised to include such person (as prescribed under FEMA) who resides in a country that is a member of Financial Action Task Force (FATF) or a member of a group which is member of FATF and is a resident of a country which is a signatory to IOSCO s MMOU or a signatory of a bilateral MOU with SEBI. b. Not a resident of a country listed in FATF statement related to Anti Money Laundering / combating financing of terrorism deficiencies. :126 Ml-354

6 c. Person is non-resident in India and not registered with SEBI as FII or subaccount or FVCI. d. The word Purchase in clause 6.1.4, shall be substituted with the word Subscription. e. New clause inserted as to when a person invests in the same company through both QFI/FDI route, total holding shall not exceed 5% of paid up capital at any point of time. f. QFI will have an option to appoint the custodian of securities registered with SEBI and which should also be a qualified DP of QFI. g. QFI to open a single non-interest bearing Rupee Account with AD Category I bank in India. 3. SEBI Circular Ref CIR/IMD/ FIIC/14/2012 dated june 07, 2012 on reporting of offshore Derivative Instruments (odis)/ participatory notes (pns) activity. SEBI refers to its earlier circulars ref. CIR/IMD/FIIC/1/2011 dated January 17, 2011 read with Circular No. CIR/IMD/ FIIC/7/2011 dated June 5, 2011 and CIR/ IMD/FIIC/6/2011 dated MAY 12, 2011 on captioned matter and revised as follows: a. FIIs issuing ODIs/PNs shall submit details of ODI/PN on monthly basis report by 10th of every month. The first report shall be submitted for November 2012 by December 10, b. The ODI/PN transaction from December 2011 to April 2012 shall be submitted within six months. c. For May 2012 to September 2012 details of ODI/PN shall be submitted by November 10, SEBI Circular Ref CIR/MRD/ Dp/15/2012 dated june 14, 2012 on reporting of establishment of connectivity with Both depositories nsdl and CDSl Companies eligible for shifting from Trade for Trade for Trade Settlement (TFTS) to normal Rolling settlement. SEBI has stated that shifting of trading in securities to normal Rolling Settlement provided at least 50% of other than promoter holding as per clause 35 are in demat form. For this, they have to obtain certificate to that effect from the Registrar and Transfer Agent (RTA). If there is no such RTA, then the certificate is required from a practising company secretary / Chartered Accountant 5. SEBI Circular Ref CIR/MRD/ CC/16/2012 dated june 15, 2012 on redressal of complaints against stock exchanges (SEs) and Depositories through SEBI Complaints Redress System. (SCoRES). a. SEBI has commenced the processing of complaints through SCORES. The SEs and Depositories are requested to view the pending complaints on the web site and submit the Action Report with supporting documents electronically. b. SEs and Depositories are required to indicate a contact person in case of SCORES who is an employee heading the complaint services division/cell/ department. c. To address / redress the complaints within a period of 15 days. Additional information to be sought within 7 days of receipt of complaints. d. To maintain monthly record not addressed within 15 days. 9 Ml