Fraudulent Transactions: What To Keep In Mind While Ring Fencing Your Assets
Introduction In light of the worldwide Covid-19 pandemic and the resulting financial slump in the country many companies are likely to find modes to ring fence their assets for better security and protection. Some distressed companies may also look at ring fencing their assets to secure them from any corporate insolvency resolution process (“CIRP”) that these distressed companies may be at the brink of. While doing so, the companies have to ensure that such transfers are in their ordinary course of business and such transfers are not undertaken with an intent for tax evasion or for constituting a fraud or preferential treatment to the creditors. The Insolvency and Bankruptcy Code, 2016 (“the Code”), the Companies Act, 2013 and Transfer of Property Act, 1882 provides for provisions for setting aside any transfers that have been effected with an intent to defraud the creditors of a company. This article enlists various kinds of fraudulent transactions that can be set aside by the Court under the above-mentioned enactments. I The Code: The Report of Bankruptcy Law Reforms Committee 2015 had discussed the possibility of identifying and recovering from vulnerable/fraudulent transactions. These are transactions that fall within the category of wrongful or fraudulent trading by the entity, or unauthorized use of capital by the management. There are two concepts that are recognized in other jurisdictions under this category of transactions: fraudulent transfers, and fraudulently preferring a certain creditor or class of creditors. If such transactions are established, then they will be reversed. Assets that were fraudulently transferred will be included as part of the assets in liquidation. The Committee recommended that all transactions up to a certain period of time prior to the appointment of the interim resolution professional (referred to as the “look-back period”) should be scrutinized for any evidence of such transactions by the relevant Insolvency Resolution Professional (“IRP”). Accordingly, under the Code, Sections 43, 45, 49, 50 and 66, deal with transactions that can be avoided or set aside by the IRP and the Liquidator. These transactions are of five categories: a. Preferential transactions The intention of legislature behind enacting such provisions is that fraudulent transactions are avoided so that such assets would be available either with the IRP or with the liquidator, as the case may be, to put the corporate debtor back on its wheels or if that is not possible, to ensure that the creditors of the corporate debtor get a fair deal. Relevant Period / Look-back Period under the Code: The relevant time period for these transactions to be challenged is 2 years preceding the insolvency commencement date in the case of transaction with a related party and 1 year in case of any other person. A. Preferential and undervalued transactions – entered into for the benefit of one creditor at the relevant period (Section 43): (i) A transaction shall be considered a preferential transaction if there has been a transfer of property of an interest in respect of an existing debt or liability and such transfer has the effect of putting such creditor in a beneficial position than it would have been in the event of a distribution of assets u/s 53 of the Code. But any transfer which is made in the ordinary course of business or which creates a security interest in the property acquired by the corporate debtor shall not be a preferential transaction. The transaction should further fall within the ‘relevant time period’ for it to be preferential. (ii) The Hon’ble Supreme Court has, in the matter of Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited Vs Axis Bank Limited Etc., (Civil Appeal Nos. 8512-8527 of 2019), held that the transfers and mortgages created by Jaypee Infratech Limited for the benefit of the lenders of its holding company Jaiprakash Associates Limited were made to defraud the creditors of the corporate debtor Jaypee Infratech Limited and were not made in ordinary course of business or financial affairs of the corporate debtor. Jaypee Infratech Limited, whose ordinary course of business was of ensuring execution of housing/building projects, had inflated itself to routinely mortgaging its assets and/or inventories to secure the debts of its holding company, and that too, at the cost of its own financial well-being (iii) The Apex Court while setting aside these transactions as being of deemed preference to related party by the corporate debtor during the look-back period of two years and thereby covered within the period envisaged by Sub-section (4) of Section 43 of the Code, laid down that while considering whether a transaction is preferential or not has to answer the following questions: (iv) Examples of preferential transactions may include: B. Undervalued transactions at the relevant period (Section 45): An undervalued transaction, has to have the following requisites: While deciding whether a transaction is an undervalued transaction, the Tribunal has the power to seek an independent expert to assess evidence relating to the value of the undervalued transactions. C. Undervalued transactions entered into for defrauding the creditors (Section 49): (i) The undervalued transactions as defined above entered with mala fide intentions to defraud the creditors by putting the assets of the corporate debtor beyond the reach of creditors or otherwise to prejudice the interest of the creditor who would be entitled to make a claim against the corporate debtor and adversely affect the interests of the said creditor, are covered under this very provision. The important element required for attracting section 49 is that there should be deliberate act on the part of corporate debtor to enter into an undervalued transaction. Exceptions to the above: (ii) In case of an undervalued transaction entered with an intent to defraud a creditor, while protecting the interests of persons who are victims of such transactions, the Tribunal has the power to restore the position of the corporate debtor as it existed before such transaction as if the transaction had not been entered into. D. Exorbitant credit transaction (Section 50): (i) A transaction shall be considered an exorbitant credit transaction if the corporate debtor obtains any credit facility with exorbitant rate of interest or unfair credit terms such as
The Law On Amendment Of Pleadings In Civil Suits
I. OVERVIEW: Order VI Rules 17 of the Code of Civil Procedure, 1908 (the ‘Civil Procedure Code’) forms the cornerstone of the law on the amendment of pleadings. The said rule is reproduced below for your reference: Amendment of pleadings. The Court may at any stage of the proceedings allow either party to alter or amend his pleadings in such manner and on such terms as may be just, and all such amendments shall be made as may be necessary for the purpose of determining the real questions in controversy between the parties : Provided that no application for amendment shall be allowed after the trial has commenced, unless the Court comes to the conclusion that in spite of due diligence, the party could not have raised the matter before the commencement of trial The Hon’ble Supreme Court, in the landmark case of Salem Advocate Bar Association, T.N. v. Union of India1, has noted the history and object of Order VI Rule 17 as follows: “Order 6 Rule 17 of the Code deals with amendment of pleadings. By Amendment Act 46 of 1999, this provision was deleted. It has again been restored by Amendment Act 22 of 2002 but with an added proviso to prevent application for amendment being allowed after the trial has commenced, unless the court comes to the conclusion that in spite of due diligence, the party could not have raised the matter before the commencement of trial. The proviso, to some extent, curtails absolute discretion to allow amendment at any stage. Now, if an application is filed after commencement of trial, it has to be shown that in spite of due diligence, such amendment could not have been sought earlier. The object is to prevent frivolous applications which are filed to delay the trial.” The instant article explores the position of Indian law on when pleadings can be amended and the extent to which Courts would permit such amendment, as evolved and expounded by judicial precedents. II. GENERAL PRINCIPLES ON AMENDMENT OF PLEAINGS: It is fairly settled law that amendment of pleadings under Order VI Rule 17 is to be allowed if such an amendment is required for proper and effective adjudication of controversy between the parties and to avoid multiplicity of judicial proceedings, subject to certain conditions such as allowing the amendment should not result in injustice to the other side. Further, in normal circumstances, an admission made by the defendant, conferring certain rights on Plaintiff is not allowed to be withdrawn, resulting in prejudice to such right of the Plaintiff, depending on the facts and circumstances of a given case. In certain situations, a time barred claim cannot be allowed to be raised by proposing an amendment to take away the valuable accrued right of a party. However, mere delay in making an amendment application itself is not enough to refuse amendment as the delay can be compensated in terms of money. The Hon’ble Supreme Court has held that the purpose and object of Order VI Rule 17, is to allow either party to alter or amend his pleadings in such manner and on such terms as may be just.2 The power to allow amendment is wide and can be exercised at any stage of the proceedings in the interests of justice on the basis of guidelines laid down by various High Courts and the Hon’ble Supreme Court. Amendment of Pleadings cannot be claimed as a matter of right and under all circumstances. However, the Courts, while deciding such prayers, should not adopt a hyper-technical approach. A liberal approach should be the general rule, particularly in cases where the other side can be compensated with costs.3 It has also been held by the Hon’ble Supreme Court4 that a party is not allowed by amendment to set up a new case or a new cause of action, particularly when a suit on a new case or cause of action is barred.5 But it is well recognized that where the amendment does not constitute the addition of a new cause of action or raise a different case, but amounts to no more than a different or an additional approach to the same facts, the amendment will be allowed, even after the expiry of the statutory period of limitation.6 The Hon’ble Supreme Court has also held that it is well settled law that delay in filing the application for amendment of the written statement is not a ground for refusal of prayer for amendment. Further, the Court cannot go into the merit of such amendment. The only question at the time of considering amendment of the pleadings would be whether such amendment would be necessary for decision of the real controversy between parties in the suit.7 In the landmark case of Reevajeetu Builders and Developers v. Narayanaswamy and Sons & Ors.8, it has been held that, on an analysis of English and Indian cases, some of the basic principles which ought to be taken into consideration while allowing or rejecting an application for amendment of pleadings are: III. AMENDMENT TO A PLAINT VIS-À-VIS A WRITTEN STATEMENT: The Hon’ble Supreme Court has held that the amendment of a plaint and amendment of a written statement are not exactly governed by the same principle. While some general principles are common to both, but the rules that the plaintiff cannot be allowed to amend his pleadings so as to alter materially or substitute his cause of action or the nature of his claim has necessarily no counterpart in the law relating to the amendment of the written statement, since adding a new ground of defense or substituting or altering a defense does not raise the same problem as adding, altering, or substituting a new cause of action.9 The Court has thus held that inconsistent pleas can be raised by defendants in the written statement, although the same may not be permissible in case of plaint.10 IV. WHEN DOES TRIAL COMMENCE: The proviso of Order VI Rule 17 states that ”… no application for amendment shall be allowed after the trial
An Overview of Real Estate Laws and Regulations Applicable in India
1. Overview A transaction in real estate in India must take into consideration: The Republic of India is a federation of 28 States and 8 Union Territories, and is governed by laws enacted and rules and regulations framed by: and Many Central legislations on subjects in the Concurrent List (e.g. registration of documents) have State amendments. Customary laws are applicable to the extent not inconsistent with the Constitution of India (e.g. Islamic Law is applicable to succession in the case of Mohammedans). For our responses, Central laws and laws applicable in the state of Maharashtra (of which the capital city is Mumbai) have been taken into consideration. Note that some laws differ from state to state and that local laws may also apply depending upon the type of transaction. 2. What is the main legislation relating to real estate ownership? 3. How is ownership of real estate proved? Any transaction for transfer of interest in immovable property is required to be in writing and registered in the office of the “Sub-Registrar of Assurances”, subject to a few exceptions. A document of transfer of interest in immovable property which is compulsorily registrable but has not been registered is not admissible in evidence in civil proceedings. Registration of instruments which are required to be registered will constitute deemed notice to the public of the immovable property transactions which have been effected by such instruments. Most land holdings have been surveyed by government authorities and allotted a revenue survey number and issued a “Record of Right” (in case of agricultural lands in Maharashtra) or “Property Register Card” (in case of non-agricultural lands in Maharashtra) and similar documents in other parts of India. These revenue documents record the name of the original owner (at the time of first survey of the land by the government) and subsequent transfers as may have been notified to the authorities. The revenue documents provide prima facie evidence of ownership and devolution of title. Documents registered in respect of the property in the office of the Sub-Registrar of Assurances and documents issued by the revenue authorities are necessary steps for establishing the ownership of real estate. However, barring exceptions, an agreement for the transfer of immovable property or an interest therein (which does not itself operate to transfer any interest in land) is not required to be in writing or registered but a suit for specific performance of an unregistered agreement for sale of immovable property may be maintainable. Also, devolution of title on the demise of the owner and whether the names of all heirs of the deceased have been recorded in the revenue records, require consideration. 4. Are there any restrictions on who can own real estate? Persons resident outside India fall into the following three categories: (i) non-resident Indians; (ii) foreign nationals of Indian origin; and (iii) foreign nationals of non-Indian origin. (i) and (ii) can purchase or be gifted residential and commercial property (not agricultural land/plantation property/farm houses/private forest land which may only be inherited by (i) and (ii)). (iii) cannot purchase any immovable property in India unless such property is acquired by way of inheritance from a person who was resident in India. (iii) can, however, acquire or transfer immovable property in India, on lease, for a period not exceeding 5 years. A foreign company cannot acquire immovable property in India. However, a foreign company which has established a branch office in India may acquire immovable property in India which is necessary or incidental to its activity, subject to certain conditions. A foreign company which has established a liaison office in India cannot acquire immovable property in India, but can acquire property by way of lease, for a period not exceeding 5 years. A branch office is subject to taxation in India; a liaison office is not, because it cannot earn revenue in India. Foreign direct investment (“FDI”) into India is governed by the Consolidated FDI Policy. Investment can be made into an Indian company by subscribing to or acquiring instruments which are permitted, including equity shares, compulsorily convertible debentures, preference shares and certain other products available to foreign portfolio investors. External Commercial Borrowing is not permitted for investment in real estate or purchase of land, unless used for affordable housing, construction and development of Special Economic Zones and industrial parks/integrated townships. Under Indian law, a minor is not competent to enter into a contract. However, property can be acquired by a minor by inheritance or by the guardian for the minor or out of funds gifted to the minor. Transfer of immovable property during the minority of the holder can be effected with Court sanction. 5. What types of proprietary interests in real estate can be created? Freehold: Where the owners are dominant owners of the property in perpetuity with no obligation to make any payment to or seek consent from any other person and all other rights and interests in the property emanate from the owner. The absolute ownership of the owner is subject to some statutory restrictions e.g. on excavation and mining and extent of construction. Leasehold/Tenancy: Where the lessee/tenant has possession and use and income of the property for a fixed term or even in perpetuity, on condition that he pays rent and observes and performs the terms and conditions of the lease/tenancy, and the lessor/landlord has the right to terminate the lease/tenancy and take back possession, unless the lessee/tenant can claim protection from eviction under rent control legislation or the Transfer of Property Act. Licensee/Occupancy Rights: Where a person is permitted by the owner or by the lessee/tenant (provided the terms of lease/tenancy permit the lessee/tenant to do so) to carry on a specified activity on the property of the owner/lessee on specified conditions. Common Ownership: Where a building is owned by a Co-operative Society or Limited Company or Association of Apartment Owners/Condominium and individual apartments/offices/premises are acquired and used by Members/Shareholders/Apartment Owners on certain conditions. 6. Is ownership of real estate and the buildings on it separate?
Vidarbha Industries Power Limited v Axis Bank Limited- A temporary storm in the waters?
INTRODUCTION The Supreme Court on 12th July 2022, in Vidarbha Industries Power Ltd. v Axis Bank Ltd. [1] held that Section 7(5)(a) of the Insolvency & Bankruptcy Code (“IBC”) is directory. Enunciating on the same, the Supreme Court held that National Company Law Tribunal (“NCLT”) can reject an application even if the financial creditor fulfills the twin test of establishing “debt” and “default” on the part of the corporate debtor. While a Review Petition was filed against the said judgment due to the untoward path taken, the same was rejected by the Supreme Court. The case analysis seeks to understand the position as adopted by various forums in the present case and seeks to critique the Supreme Court judgment as being violative of the objectives of the IBC. The analysis also tests for the sustainability of this position in the insolvency regime of India in times to come. BRIEF FACTS OF THE CASE Axis bank being the financial creditor of Vidarbha Industries filed an application under Section 7(2) before the NCLT, Mumbai for institution of Corporate Insolvency Resolution Process (“CIRP”). In response, Vidarbha Industries filed a Miscellaneous Application No. 570 of 2020 in C.P. (IB) No. 264 of 2020 before the NCLT seeking stay on proceedings under Section 7 of the IBC in the NCLT as long as Civil Appeal No. 372 of 2017 was pending in the Supreme Court. Vidarbha Industries averred that it was power generating company operating a 600 MW Coal-fired Thermal Power Plant in Maharashtra and had been supplying power to Reliance Infrastructure Ltd. (“RIL”) since 1st April 2014 as per various agreements approved by the Maharashtra Electricity Regulatory Commission (“MERC”). In 2016, Vidarbha Industries filed an application before MERC for truing up the Aggregate Revenue Requirement and for determination of tariff due to increase in fuel costs and cost of procuring coal. MERC disposed off the application in June 2016, by disallowing substantial portions of the fuel costs for financial years (2014-15, 2015-16) and additionally capped the said tariff for (2016-17 to 2019-20). An Appeal was filed before the Appellate Tribunal for Electricity (“APTEL”) which was allowed. Hence Vidarbha Industries claimed that an amount of INR 1,730 Crores (Indian Rupees One Thousand Seven Hundred and Thirty Crores only) is due as per the order passed by APTEL. Though MERC has challenged the said order by way of an Appeal before the Supreme Court, the same is pending adjudication. Hence, in its Miscellaneous Application for stay Vidarbha Industries stated that it was financially healthy and due to unwanted financial stress due to the pending Appeal, debts could not be paid. The NCLT dismissed the stay application by holding Section 7 to be mandatory in its wording and hence Vidarbha Industries approached the NCLAT. The NCLAT held that the issue of liquidity as raised by Vidarbha Industries cannot impact the admission of Application under Section 7 of the IBC when the twin test of existence of a debt and default to pay the debt is proven. The said decision was finally brought before the Supreme Court and the question raised was “whether Section 7(5)(a) is mandatory or a discretionary provision?” SUPREME COURT JUDGMENT Vidarbha Industries’ Stance Vidarbha Industries basis the facts stated that the only reason for the existence of debt was the pending appeal and once the same is adjudicated in its favor, it would realize a sum of INR1,730 Crores (Indian Rupees One Thousand Seven Hundred and Thirty Crores only) and would be able to satisfy the debt. Basis the law, it was strongly contended that a perusal of Section 7(5)(a) indicates the use of “may” when admitting an application for initiating the CIRP process. Hence, Vidarbha Industries averred that the NCLT can reject an application even if there is existence of debt for meeting the ends of justice and achieving the true objective of the IBC, i.e., revival of the company and value maximization. Axis Bank’s Stance Solely relying on the statute, Axis Bank Ltd. vehemently argued that once default in payment of dues has been admitted, application must be allowed. While relying on Swiss Ribbons Pvt. Ltd. & Anr. v Union of India & Ors. [2] it was contended that the legislative policy as established by the IBC was to shift from “inability to pay debts” to “determination of default.” It was further stated that the adjudicating authority under Section 7 was merely required to ascertain existence of default within 14 days of receipt of such application and if the default was found, the adjudicating authority should allow the application. It was concludingly argued that the said section was mandatory in nature and pointed out that since the application being instituted in the NCLT, one year had lapsed and there was no change in the solvency of Vidarbha Industries. JUDGMENT OF THE SUPREME COURT The Supreme Court stated that both the previous fora as per the requirements of Section 7 of the IBC had only observed whether a debt and requisite default had occurred. It concluded that both the institutions had not entered into the merits of the matter. While not agreeing with the view taken by the previous forums, the Supreme Court held that the award of the ATEPL cannot completely be disregarded, and the viability and overall financial health of Vidarbha Industries cannot be held as extraneous matters. While holding that the use of the word “may” under Section 7(5) to be directory, the Supreme Court stated that the rule of literal construction must be taken into consideration while viewing statutes. The Supreme Court also enumerated the difference between the CIRP Proceedings lodged by an Operational Creditor and Financial Creditor. While the former under Section 9(5) having filed an application “shall” be allowed to initiate CIRP upon existence of debt and default therein, the latter “may” be permitted to do the same if the tribunal is satisfied that no other reasons preclude the application from being allowed as was seen in the present case. Due to these reasons, the Orders
22Light v OSEPL Pvt. Ltd.: An able defense to appointment of an arbitrator?
1. Introduction 2. Facts of the Matter 3. Was there an Arbitrable Dispute? 4. Scope of Judicial Review of Claims 5. Why is such prima facie examination necessary? 6. Conclusion – Nikhilesh Koundinya, Associate, Solomon & Co. About Solomon & Co. Solomon & Co. (Advocates & Solicitors) was founded in 1909 and is amongst India’s oldest law-firms. The Firm is a full-service firm that provides legal service to Indian and international companies and high net-worth individuals on all aspects of Indian law. “Disclaimer” The information contained in this article is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. The application and impact of laws can vary widely based on the specific facts involved. As such, it should not be used as a substitute for consultation with a competent adviser. Before making any decision or taking any action, the reader should always consult a professional adviser relating to the relevant article posting. Copyright © 2020 Solomon & Co., All rights reserved.
Overview of the Mediation Bill, 2021
Introduction In a world where disputes are an inevitable facet of human interaction, governments and legal systems are increasingly turning to alternative methods of conflict resolution to alleviate the burden on courts and promote more efficient and harmonious solutions. One such significant stride towards streamlining conflict resolution mechanisms is through the Mediation Bill, 2021 (“Bill”), which has made its mark in the legislative landscape of India. The journey of the Bill through the review process of the Standing Committee, the Rajya Sabha, and the Lok Sabha reflects a meticulous approach to institutionalise the mediation process within the country’s legal framework. This approach specifically focuses on institutional mediation to resolve disputes, encourage community mediation, and make online mediation an acceptable and cost-effective process. Various provisions such as section 89 of the Code of Civil Procedure, 1908, section 28 of the Indian Contract Act, 1872, and section 442 of the Companies Act, 2013 provide for mediation as a viable option for resolving disputes amicably. However, there was a vacuum prior to the introduction of the Bill, as no legislation provided for the procedure and related intricacies of this mechanism. Therefore, there was a need for a stand-alone law to remove the inconsistencies between the various pieces of existing legislation. The key features of the Bill are abridged below: Applicability of the Bill The provisions of the Bill apply to the mediation proceedings conducted in India where: Non-applicability of the Bill The Bill states that certain disputes should not be referred for mediation, such as: Pre-litigation mediation The Bill introduces a concept of pre-litigation mediation wherein the parties may voluntarily attempt to resolve the disputes before filing any suit and the same can be carried out irrespective of the existence of any mediation agreement. The procedure for court-annexed mediation shall be determined by the Supreme Court or the High Court wherein the Supreme Court or the High Court will constitute a mediation committee that will maintain a panel of mediators for conducting mediations. The Bill also permits online mediation, provided that both parties agree in writing to mediate disputes online. The parties must also only use secure computer networks, or video/audio conferencing when conducting online mediation. Appointment of mediator A person of any nationality may be appointed as a mediator provided that he possesses such qualifications, experience and accreditation as may be prescribed. The parties can either mutually agree upon a mediator and the procedure of its appointment or in cases of a dispute, a mediator shall be appointed by a mediation service provider from the panel of mediators within seven (7) days of such application. To ensure a bias-free and fair mediation process, a mediator is required to be a neutral third party and should be impartial in its conduct. The Bill recognizes and enforces the same by obligating the mediators to disclose any potential circumstance that may constitute a conflict of interest or is likely to give rise to justifiable doubts as to the independence or impartiality of the mediator in the conduct of the mediation before the commencement of the mediation process itself. Interim relief prior to mediation A party may file a lawsuit or other appropriate legal action before a court or tribunal with appropriate jurisdiction to request immediate interim relief prior to the start of, or throughout, mediation proceedings under the Bill. In addition, the Bill gives courts and tribunals the authority to refer parties to mediation at any point during the legal process. Withdrawal from mediation Either party may withdraw from mediation at any time after completion of the first two (2) mediation sessions. In case, any party fails to attend the first two mediation sessions without any reasonable cause which results in the failure of mediation, the court, in subsequent litigation proceedings on the same subject matter between the parties, may impose necessary costs on the party who had failed to attend the mediation sessions. Time limit for completion of mediation Mediation shall be completed within a period of one twenty (120) days from the date fixed for the first appearance before the mediator which may be extended for a period as agreed by the parties, but not exceeding sixty (60) days. Mediation settlement agreement It is a written agreement signed by the parties to settle their disputes which is authenticated by the mediator. The parties herein can also settle disputes that were not part of the scope of mediation prior to the commencement of the mediation proceedings. The mediation settlement agreement has the same binding effect and enforceability as a Court’s judgment or a decree, challengeable only on the grounds of fraud, corruption, impersonation or relating to any dispute not fit for mediation. Confidentiality of mediation proceedings All parties are required to keep the following aspects related to mediation confidential: Mediation Council of India The Bill also talks about establishing a Mediation Council of India (“Council”) to promote and regulate both domestic as well as international mediation in India. The members of the Council are to be selected from amongst the Supreme Court or the High Court judges, eminent persons and academicians in the field of mediation, and key government officials. The Bill also lays down the roles, responsibilities, and duties of the Council. Analysis The Bill was further amended in the year 2023 based on the suggestions and recommendations of the Standing Committee. Few suggestions have been incorporated; however, a plethora of shortcomings persist and warrant careful consideration and reflection. Some of such lacunas are elucidated herein: Firstly, in pre-litigation mediation, the parties have the option to seek interim relief from a court or a tribunal in “Exceptional Circumstances” under section 8 of the Bill. However, there lies ambiguity surrounding what constitutes an exceptional circumstance as there exists no qualifying criteria for the same. This may lead to multiple court interventions along with delay which fails to fulfil the object of the Bill. Further, there is no appeal mechanism available against an order passed under the relevant section. Furthermore, in the pursuit of
Compliance Checklist – Foreign Companies under the Companies Act 2013(“Act”)
In the age of globalization, foreign companies venturing into India encounter the comprehensive regulatory framework of the Companies Act 2013 (the “Act”), governing their operations, management, and compliance obligations. Navigating this landscape is vital to ensure legal adherence, transparency, and market presence. The Act mandates foreign companies to meet diverse compliance requirements, spanning registration, operations, and reporting, aimed at safeguarding stakeholders, ensuring fairness, and upholding corporate governance. This article offers a tailored “Compliances Checklist,” guiding foreign companies to establish, sustain, and prosper in India while conforming to legal standards. By addressing these obligations, businesses can mitigate risks, foster growth, and align with the country’s business environment. Definition of Foreign Company: – As per section 2(42) of the Act, a foreign company is any company or body corporate incorporated outside India which, — (a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and (b) conducts any business activity in India in any other manner. Governing Chapter and Sections of the Act: – Chapter XXII of the Act, Section 379 to 393. Applicable Rules: – The Companies (Registration of Foreign Companies Rules) 2014 (“Rules”). Outlined below is the compliance checklist for foreign companies under the Act – Sr. No Activity e-Form Required Documents/Information required Timeline Establishment of place of business in IndiaRef: – Section 380 of the Act read with (i) Rule 3 of The Companies (Registration of Foreign Companies Rules) 2014 and (ii) Instruction Kit for filing Form no. FC-1. FC-1 Certified copy of the chartered documents and/or other instrument constituting or defining the constitution of the company and, if the instrument is not in the English language, a certified translation thereof in the English language.Full address of the registered or principal office of the company.List of directors and secretary of the company.Name and address or the names and addresses of one or more persons resident in India authorised to accept on behalf of the company service of process and any notices or other documents required to be served on the company.Full address of the office of the company in India which is deemed to be its principal place of business in India.Power of attorney or board resolution in favour of the authorised representative(s)Particulars of opening and closing of a place of business in India on earlier occasion or occasions.Declaration that none of the directors of the company or the authorised representative in India has ever been convicted or debarred from the formation of companies and management in India or abroad.Translated version of the documents in English (in case the documents attached are not in English). Within 30 days of establishment of place of business in India. Alteration of Charter Documents, change in the registered office of the company in the country of incorporation, change in address in India, Change in Directors, secretary, authorised representative, Intimation of New place of business in India, closure of place of business in IndiaRef: – Section 380 of the Act read with (i) Rule 3 of the Companies (Registration of Foreign Companies Rules) 2014 and (ii) Instruction Kit for filing Form no. FC-2. FC-2 Certified true copy of the Board resolution approving such change.Copy of the general meeting resolution approving such change.Copy of approval letter if any approval is required for such alteration.Translated version of the documents in English (in case documents attached are not in English). Within 30 days of such change/alterationbeing made Filing of Financial StatementsRef: – Section 381 of the Act read with (i) Rules 4,5 and 6 of the Companies (Registration of Foreign Companies Rules) 2014 and (ii)Instruction Kit for filing Form no. FC-3. FC-3 Copy of the latest consolidated financial statement of the parent company.Copy of balance sheet and profit and loss account duly authenticated under section 381(1).Statement of related party transactions.Statement of repatriation of profits.Statement of transfer of funds between the place of business of a foreign company in India and any other related party of the foreign company outside India including its holding, subsidiary and associate company;Copy of Approval letter of extension of validity period if applicable;Approval of Reserve Bank of India or any other authority as may be required;Details of other entity(s) through CSR Activities have been undertaken if applicable.Translated version of the documents in English (in case the documents attached are not in English). Within 6 months of the close of the financial year of the foreign company to which the financial statements relate. Annual ReturnRef: – Rule 7 of The Companies (Registration of Foreign Companies Rules) 2014 read along with Instruction Kit for Form no. FC-4. FC-4 Details of Promoters, Directors and Key managerial personnel and changes therein since the close of the previous financial year;Details of directors and key managerial personnel and their remuneration;Details of the meeting of the members or class thereof, board and its various committees along with attendance details;Particulars of members and debenture holders along with changes therein since the close of the previous financial year. Within 60 days from the last day of its financial year Appointment of Auditor for audit of accounts pertaining to the Indian business operationsRef: – Section 139 and 381 of the Act read with Rule 4 and 5 of The Companies (Registration of Foreign Companies Rules) 2014. ADT-1 Certified copy of the resolution for the appointment of an auditor;Consent and eligibility certificate from proposed auditor. Within 15 days of the appointment of the auditor – Surendra Rahalkar, Associate, Solomon & Co. About Solomon & Co. Solomon & Co., (Advocates & Solicitors) was founded in 1909 and is amongst India’s oldest law firms. The Firm is a full-service firm that provides legal services to Indian and international companies and high-net-worth individuals on all aspects of Indian law. “Disclaimer” The information contained on this article is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. The application and impact of laws can vary widely based on the specific facts involved.
Navigating the Zee-Sony Merger: Insights and Challenges
Foreword One of the most significant business transactions to ever occur in the Indian entertainment industry is the Zee-Sony merger. One of the India-based subsidiaries of the Japanese company Sony Pictures Networks, Sony Pictures Networks India Private Limited (“Sony“) (now known as “Culver Max Entertainment Private Limited”), and Zee Entertainment Enterprises Limited (“Zee“), an Indian listed company of Essel Group, will merge in a deal that has been under negotiations since 2021 and finally approved on August 10, 2023 by the Mumbai bench of the National Company Law Tribunal (“NCLT“). The need to scale up in the fiercely competitive media and entertainment industry, as well as the desire to combine the strengths of the two businesses to build a more inventive and varied entity, are said to be some of the driving forces behind the said merger. La Raison of the Merger In response to fierce competition from Disney-Star’s collaboration, Sony had been striving to come to an arrangement with an Indian company to improve its operations in India. Digital streaming and content providers like Netflix, Amazon Prime Video, and Disney+ Hotstar gave a competitive edge to Zee and Sony. The Zee-Sony merger will establish a strong force in India’s media and entertainment industry that will help them compete more successfully against their digital rivals. With a combination of advertising and subscription video on demand, India boasts one of the largest and most intensely competitive streaming scenes in the world. Both Sony and Zee have reliable multi-platform platforms with various genres that audiences can engage with. The merger is well timed as the Indian television business undergoes a significant transformation brought on by streaming video services and improved broadband connectivity. The Merger Shareholding and Board Sony’s shareholders and promoters will own 50.86% in the merged entity, while Zee’s promoters will own 3.99% and the public will own the remaining 45.15% as the merged entity will be a listed entity. Since Zee will no longer exist as a separate company following the merger, its shareholders will be issued proportionate shares in the merged entity. Furthermore, five (5) executives of Sony will serve on the merged entity’s nine-member board. Roadblocks prior to the grant of approval Despite approval from NCLT, the Zee-Sony Merger faced numerous obstacles throughout the process. Though the merger was approved by the Securities and Exchange Board (“SEBI“), certain objections were raised by the country’s anti-trust body, the Competition Commission of India (“CCI“). The CCI believed that the proposed Zee-Sony merger would result in a significant market share (40-45%) for the parties in Hindi-language TV channels, creating a prohibited horizontal combination under the competition regime. Additionally, the merger could lead to market dominance and monopolistic pricing for advertisement slots, potentially affecting advertisers with higher costs and lower-quality services. Furthermore, the merged entity’s influence as a major broadcaster and a vital distribution platform operator partner could allow it to increase prices for channel bundles, impacting end-consumers. Such actions might breach section 6 of the Competition Act 2002 which states that ‘if a combination causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India, it can be modified/prohibited by the Commission’. Consequently, the CCI believed the merger could cause appreciable adverse effect on the competition. Addressing these objections of CCI, the parties proposed a voluntary remedy proposal, wherein Zee proposed to divest three of its TV channels namely, Big Magic (in the Hindi general entertainment channel market) and Zee Action and Zee Classic (in the Hindi Films channels market). This proposal was accepted by the CCI with the condition that Star India Private Limited and Viacom18 Media Private Limited (including its affiliates) cannot compete for divestiture of the channels since they are the next credible players with substantial dominance in the market. This step aimed towards preserving competition in the market. Consequently, the objections raised by CCI were resolved, and non-objection was granted to the scheme in March 2022. Besides that, the said merger was fiercely opposed by Invesco, one of the shareholders of Zee holding 5.11% of shares. Nevertheless, over time, Invesco totally sold its shares in Zee, and as a result, such concerns were resolved. Furthermore, several creditors, including Axis Finance Limited, JC Flower Asset Reconstruction Private Limited, IDBI Trusteeship Services Limited, Imax Corporation, and IDBI Bank Limited (“Creditors”), who were associated with the Essel Group have expressed their opposition to the non-compete fee of around INR 1101 crores (Indian Rupees One Thousand One Hundred and One Crores) payable by SPE Mauritius Investment Limited (a Sony group entity) to Essel Mauritius SPV. Since such a sizable sum could have been used to pay off Zee’s debts, the Creditors appeared dissatisfied with the non-compete agreement and believed it to be fraudulent. To the Creditors’ astonishment, the NCLT dismissed their argument on the grounds that the Creditors had claims against the other Essel Group firms, of which Zee is merely one, and that none of them were Zee’s direct creditors, depriving them of contractual privity. Also, the proposal that Mr. Punit Goenka, Zee’s CEO, and MD would be designated to run the merged entity, was challenged due to a disqualification order against him issued by the Securities Appellation Tribunal (“SAT“) in June 2023. The SAT affirmed the imposition of one-year limitations on Subhash Chandra and Punit Goenka from serving on the boards of publicly traded firms due to suspected misallocation and round-tripping of funds. Concerns were expressed by Creditors for the termination of the Zee-Sony merger based on SAT’s Order, citing regulatory constraints on Punit Goenka’s ability to occupy the position of CEO and MD of the merged entity. However, NCLT dismissed such accusations that were impeding the approval of the Zee-Sony merger, claiming that this was a management issue that could be dealt with at the board level after the scheme was approved. Synergies of Merger The Zee-Sony merger will combine the best aspects of the two businesses and will have a sizable content library, a broad channel selection, and a
Powers of Shareholders and Directors: A Brief Recapitulation
Introduction The shareholders being the owners of a company, appoint directors in a company and directors acting as agents of a company play a significant role in effectuating the business operation of a company and taking key managerial decisions in accordance with the Memorandum of Association (“MOA”) and Articles of Association (“AOA”) of the company. There are various statutory provisions with respect to appointment, removal, meetings, and powers of the directors under the Companies Act, 2013 (the “Act”). It is important to focus on the powers of the board of directors and shareholders as disputes among the board of directors may arise from time to time. To have a better understanding of the concept, let us understand this through a hypothetical situation. For instance, in XYZ private limited company (the “Company”) there are three directors “A”, “B” and “C”. “A”, being an NRI is also the majority shareholder in the Company, “B” is the minority shareholder and is an Indian Resident Director and “C” is also an Indian Resident Director in the Company. There has been a dispute between the directors of the Company and “A” wants to understand his legal rights under the Act to protect his interest in the Company. To have a deeper understanding of the above-mentioned scenario, some of the fundamental questions that may arise are elucidated herein. 1. Does “A” require other director’s approval to make decisions in relation to the Company? Yes, the power to make key decisions with respect to the functioning of the Company lies with the Board of Directors. As per section 179 of the Act, the Board of Directors of the Company is entitled to exercise all such powers and to do all such acts and things, as the Company is authorized to perform as per AOA and MOA. The Board of Directors may exercise the following powers on behalf of the Company by means of resolutions passed at the meetings of the Board, namely: To exercise the above-mentioned powers, a resolution is to be approved by the Board of Directors of the Company with a majority as per the quorum of a meeting of the Board of Directors. Further, for the regularization of the director and appointment of an auditor, approval by a majority of shareholders will be required. The quorum of the meeting of the Board of Directors of the Company, as per section 174 of the Act, shall be at least one-third of its total strength or two directors, whichever is higher. The directors may also participate by way of video conferencing or by any other audio-visual means and such participation shall also be counted for the purposes of the quorum. Therefore, “A” shall require support from one of the other directors in order to exercise the aforesaid powers. 2. What are the rights of “A”? Can “A” terminate the services of the other directors and appoint new directors of his choice? Set out below are the following ways in which “A” can terminate the services of other directors: Removal of director by shareholders Section 169(1) of the Act empowers the Company to remove a director from its board unless he has been appointed as a director by the tribunal. This power may be exercised by the shareholders by passing an ordinary resolution after giving him a reasonable opportunity to be heard. The procedure for the removal of the director is as follows: Suo Moto resignation from the director Other directors may suo moto resign from the directorship of the Company. Thereafter, “A” shall undertake the noting of their resignation/acceptance of their resignation in the board meeting of the Company as per section 168 of the Act. Once the Company/board of directors has accepted the resignation, thereafter, the necessary form i.e., e-Form DIR-12 is required to be filed with the Registrar of Companies (“ROC”), Ministry of Corporate Affairs (“MCA”) to effectuate the resignation of the director. The Resigning Director may also notify his resignation separately to ROC, MCA by filing e-form DIR-11. Vacation of office of the director If any director fails to comply with any of the provisions under section 167 of the Act, then he shall be required to vacate the office of the director. As per section 167(1)(b) of the Act, a director has to vacate his office if he remains absent for a continuous period of twelve (12) months from the board meeting of the Company even if the leave of absence has been granted to him by the board. This would be adequate grounds to disqualify him and remove him from the office of director. In such a scenario, “A” would be required to establish the proof of service of notices of board meetings to the concerned director(s) whom he wishes to remove from the post of directorship. The notice of the board meeting shall be dispatched through the registered post with acknowledgement due, as the postal department now has ceased the certificate of posting facilities and also through the registered email address of the director(s) with read receipts of the mail sent with clear seven (07) days notice under the Act or such longer time as provided under AoA of the Company. Further, the notice should specify that if the director wants to participate through audio or video conferencing, then such director has to give prior intimation for the same to the company to make necessary arrangements. This will ensure that the director(s) have received the notice and have gone through the contents of the notice of the board meeting. 3. Can “A” shut down the Company? Yes, “A” may shut down the Company in accordance with section 248 of the Act. A company not carrying on any business or operation for a period of two (02) immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company, then a company may, after extinguishing all its liabilities, upon receiving approval from a majority of the board of directors and passing a special resolution
Mapping the Data Protection Regime in India
Data protection encompasses laws, rules, and processes that limit the collection, storage, and sharing of personal data to safeguard privacy. Indian Constitution does not explicitly establish privacy as a fundamental right, but through Supreme Court cases, privacy has been linked to existing rights like freedom of speech (Article 19(1)(a)) and right to life (Article 21). Until August 2023, India lacked specific data protection regulations. Instead, data protection was governed by the Information Technology Act, 2000; Indian Contract Act, 1872; Information Technology Rules for Sensitive Data, 2011; and Intermediaries Guidelines for Digital Ethics, 2021. While these rules outlined security measures for handling such data, they proved inadequate for modern data protection challenges. India required a comprehensive and specialized data protection framework to address these evolving issues. The efforts to enact a robust framework began with the introduction of the Personal Data Protection Bill, 2018 (“PDP Bill 2018”) and paved the way through the Personal Data Protection Bill, 2019; The Digital Personal Data Protection Bill, 2022 and finally operationalized in 2023 through the Digital Personal Data Protection Bill, 2023 which got ratified as the Digital Personal Data Protection Act, 2023 (“the Act”). This article maps the data protection regime in India from the PDP Bill of 2018 to the Act of 2023. PARTICULARS PERSONAL DATA PROTECTION BILL, 2018 DIGITAL PERSONAL DATA PROTECTION ACT, 2023 Applicability Applies to:processing of personal data where such data has been collected, disclosed, shared, or otherwise processed within the territory of India; processing of personal data by the State, any Indian company, any Indian citizen or any person or body of persons incorporated or created under Indian law;processing of personal data by data fiduciaries or data processors not present within the territory of India, only if such processing is in connection with any business carried on in India, or any systematic activity of offering goods or services to data principals within the territory of India or in connection with any activity which involves profiling of data principals within the territory of India. Applies to: digital personal data and data collected offline and later digitized.processing of personal data outside India if it is for offering goods or services to Data Principals within the territory of India.Does not:personal data processed by an individual for any personal or domestic purpose.personal data that is made or caused to be made publicly available by (a) the Data Principal to whom such personal data relates; (b) any other person who is under an obligation under any law for the time being in force in India to make such personal data publicly available. Categorization of Data A comprehensive reading of the Bill highlights three categories of data, i.e., personal data, sensitive personal data, and critical personal data. A comprehensive reading of the Act indicates that there is no categorization of data into sensitive personal data and critical personal data. Categorization of Data Fiduciaries Section 38 of the Bill, clearly classified certain data fiduciaries as significant data fiduciaries. Section 10 of the Act classifies certain data fiduciaries as significant data fiduciaries. Consent and Notice Section 8 and 12 of the Bill provide for consent and notice for such consent are required before processing the personal data.The notice must include all the specifications mentioned in Section 8 of the Bill, which includes, but is not limited to – (i) the purposes for which the personal data is to be processed; (ii) the categories of personal data being collected; (iii) the details of the data protection officer; (iv) the right of the data principal to withdraw such consent; (v) the procedure for such withdrawal, etc.Section 8(2) provides for translation of notice into “multiple language”, however, does not mandate it and neither does it specify the languages. Section 5 and 6 of the Act specifies that consent and notice for such consent are required before processing the personal data.Notice must include – (i) a description of personal data to be processed and the purposes of processing; (ii) the manner in which a data principal is to withdraw such consent and right to grievance redressal under Section 13; and (iii) the manner and right to make complaints to the Board.Section 5(3) mandates the requirement to translate such notice into local Indian languages, as specified under the Eighth Schedule to the Indian Constitution. Deemed Consent Does not provide for the concept of “deemed consent” Introduced the concept of deemed consent under the head of “certain legitimate uses” in Section 7.Data Principal is ‘deemed’ to have given consent for processing where the data principal voluntarily provides personal data to the data fiduciary.The Act provides a list wherein data principals will be deemed to have given consent for processing personal data. Such legitimate uses include but is not limited to: (a) when the Data Principal voluntarily provides personal data to a Data Fiduciary; (b) when such personal data is provided for the State and any of its instrumentalities to provide or issue subsidy, benefit, service, certificate, licence or permit as may be prescribed; (c) performance by the State or any of its instrumentalities of any function under any law for the time being in force in India or in the interest of sovereignty and integrity of India or security of the State; (d) for compliance with any judgment or decree or order issued under any law for the time being in force in India, or any judgment or order relating to claims of a contractual or civil nature under any law for the time being in force outside India; (e) for responding to a medical emergency involving a threat to the life or immediate threat to the health of the Data Principal or any other individual; (f) for taking measures to provide medical treatment or health services to any individual during an epidemic, outbreak of disease, or any other threat to public health; (g) for taking measures to ensure safety of, or provide assistance or services to, any individual during any disaster, or any breakdown of public order. Limitation on Data Collection/ Data Minimization Section
