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DISHONOUR OF CHEQUE: ANALYSING THE DE-CRIMINALISATION OF SECTION 138 AND ITS APPLICABILITY ON HUF AND TRUST

I. Introduction

A.    Background

The Negotiable Instruments Act, 1881[1] (‘the Act’) was enacted with a view to establish laws relating to promissory notes, bills of exchange and cheques, which at the time were novel financial tools in India. Although promissory notes and bills of exchange have become outdated, today, cheques continue to be the preferred mode for carrying out banking transactions and as such have become essential to the functioning of the economic superstructure of the capitalist world.[2] Chapter XVII of the Act comprises of sections 138 to 142. These are penal provisions, which were inserted in the Act by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988,[3] in order to inculcate faith in the credibility of transacting business on negotiable instruments and in the efficacy of banking operations.[4]

B. Understanding the interpretations provided by the Courts

In the case of Modi Cements v. Kuchil Kumar Nandi[5] the court had emphasized on the need for enacting a legislation so as to incorporate the concept of strict liability with regard to the financial instrument used as a means of credit in the business of trade and commerce by providing due sanctity to the instrument so used in the day-to-day business transactions and therefore as a result of the same the Parliament had come up with the amendment to criminalize the said section and brought sections 138- 142 to catering the same. Further, in the case of Dalmia Cement v. M/S Galaxy Trades and Agencies Ltd. & Ors.,[6] the court held that section 138 of NI Act was never enacted with the purpose of protecting unscrupulous drawers who never intended to honor the cheques issued by them but for the purpose of punishing them for their unscrupulous actions and in fact to protect honest men who so dealt with them in a commercial capacity. It can be further said that this section only targets those unscrupulous drawers and not honest persons and therefore there doesn’t exist a need to decriminalize it. The fact that the credibility of cheques were degraded grossly in the past couple of decades was one of the foremost reasons behind the legislative trying to re-establish the credibility and reliability to cheques as a principal form of payment made as an alternative to cash transactions[7] by enacting section 138 which creates a criminal liability on the drawer of the said cheque.[8]

Section 138 of the Act creates a statutory offence relating to dishonour of cheques. If a cheque is dishonoured for reason of insufficiency of funds in the drawer’s account or if it exceeds the amount arranged to be paid from that account, the drawer is liable to be punished with imprisonment for a term which may extend to two years or with fine, which may extend to twice the amount of the cheque, or with both.[9] Section 141 of the Act deals with offences committed by a company.[10] In the case of such an offence, every person who, at the time when the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company, as well as the company itself, are deemed to be guilty of the offence and can be prosecuted and punished. The Explanation to section 141 specifies that for the purposes of the section, a company means “any body corporate and includes a firm or other association of individuals”.[11] In this context, it becomes important to analyse the applicability

II. Applicability of the provisions of the Act on HUF and Trusts

Just like any other individual, body corporate, firm or company, a Hindu Undivided Family (‘HUF’) and a trust make use of negotiable instruments for the purpose of transacting their day-to-day business. However, they have not been specifically brought within the purview of Chapter XVII. On a joint reading of sections 138 and 141 of the Act, it appears that an HUF or trust could be prosecuted under section 141 of the Act only if they were considered to be an ‘association of individuals’ and therefore, a ‘company’ as stipulated in the Explanation thereunder.

A.    Analysing the regulatory frameworks for HUF and Trusts

In India, HUFs are governed by uncodified Hindu law whereas trusts are governed by codified law. While private trusts are governed by a central enactment, the Indian Trusts Act, 1882, public trusts are governed by the respective state enactments. However, the law pertaining to HUFs and trusts are silent as regards their treatment as an ‘association of individuals’.

In 2008, a division bench of the Supreme Court of India passed a judgment in the case of Ramanlal Bhailal Patel & Ors. v. State of Gujarat[12] (‘Ramanlal’) wherein it held that a mere combination of persons or the mere coming together of persons, with a common purpose but without any intention to have a joint venture or to carry on some common activity would not, by itself, convert the two or more persons into a ‘body of individuals’ or an ‘association of persons’. In this judgment the Apex Court emphasized that the co-existence of the volition of the parties and their common object or purpose were the two main defining characteristics of such a body/association. Over the years, the state judiciaries have passed conflicting judgments as regards the treatment of an HUF and a trust as an ‘association of individuals’ and consequently, their treatment under sections 138 and 141 of the Act have also differed.

In 2008, a single judge of the Bombay High Court (Aurangabad Bench) delivered a judgment in Dadasaheb Rawal Co-operative Bank of Dondaicha Ltd. v. Ramesh s/o Jawrilal Jain & Ors.,[13] opined that the expression ‘association of individuals’ used in the Explanation to section 141 would include an HUF, of which the family business was a joint concern and would also include entities such as a club or trust. However, in 2012, a single judge of the Madras High Court dissented from the view expressed therein.

In Abraham Memorial Educational Trust v. C. Suresh Babu,[14] (‘Abraham’) Nagamuthu J. opined that in the case of an HUF, the essential requirements of an ‘association of persons’, as stipulated by the Apex Court in Ramanlal were absent inasmuch as an individual does not become a member of an HUF of his or her own volition but by birth. On the other hand, as regards a trust, Nagamuthu J. observed that those essential requirements did in fact co-exist. The reasoning provided for the same was that in every trust there would be at least one common purpose, which would be the obligation imposed on it and the trustees that would come together to fulfill that purpose, whether by election or nomination, would do so of their own will and volition.[15]

The difficulty faced by the Madras High Court in this case lay in the fact that a trust consisting of a single trustee could not be considered to be an ‘association’ or ‘combination’ of individuals. As a result, a trust consisting of more than one trustee would fall within the ambit of ‘company’ for the purposes of section 141 but a trust with a single trustee would not. Nagamuthu J. observed that the aforesaid treatment of trusts would lead to an absurdity, which ought to have been avoided in order to give force and life to sections 138 and 141 of the Act. In stating so, Nagamuthu J. concluded that a trust, private or public, charitable or otherwise, having either one trustee or more than on trustee would be a ‘company’ for the purposes of section 141 and would therefore, be liable under sections 138 and 141 of the Act. A special leave petition was filed against the judgment in this case, but a division bench of the Supreme Court dismissed the same in limine and without a speaking or reasoned order.[16]

The views expressed in Abraham were relied upon and re-affirmed in 2017, in two cases before Pardiwala J. of the Gujarat High Court.[17] In Shah Rajendrabhai Jayantilal v. D. Pranjivandas & Sons & Ors.,[18] Pardiwala J. surmised that an HUF was not a legal entity, separate and distinct from the members constituting it and therefore, could not be considered to be a ‘company’ under section 141 of the Act. A few months later, in Hakkimuddin Taherbhai Shakor (Trustee) & Ors. v. State of Gujarat & Ors.,[19] Pardiwala J. applied the same principles as laid down by Nagamuthu J. in Abraham and held that a trust, private or public, charitable or otherwise, having either one trustee or more than on trustee would be considered to be an ‘association of individuals’ and therefore, a ‘company’ for the purposes of section 34 of the Drugs and Cosmetics Act, 1940, dealing with offences committed by companies. In the case of Shah Nitinkumar Dhirajlal vs Patel Mahendrakumar,[20] the Gujarat High Court held that that only a Hindu Undivided Family (HUF) is not an ‘association of individuals’ under Section 141 of the Negotiable Instruments Act (NI Act). Hence, only a ‘Karta’ of a Hindu Undivided Family can be prosecuted for the dishonour of a cheque under Section 138 of the NI Act.

In 2019, a contrary view was taken by a single judge of the Kerala High Court in Shibhu K. P. & Ors. v. State of Kerala & Ors.[21] While scrutinizing the judgment in Ramanlal and referring to the provisions of the Indian Trusts Act, 1882, Kumar J. opined that so inasmuch as a trust does not receive any benefit from the trust property and the benefit is received by the beneficiaries individually or by the beneficiaries together with the author of the trust, it cannot be said that trustees are persons who come together for a common action or to achieve some common benefit. In light of this, Kumar J. concluded that a trust was not an ‘association of persons’ or a ‘body of individuals’ and therefore, was not a ‘company’ under section 141 of the Act. It is, however, pertinent to note that the decision in this case does not show that the attention of the Court was invited to the earlier decisions of the Bombay High Court, Gujarat High Court and Madras High Court mentioned hereinabove.

From the discussion above, it is clear that as far as the prosecution of an HUF or a trust under sections 138 and 141 of the Act is concerned, the state judiciaries have differing views and opinions. Although the matter was brought before the Supreme Court by way of a special leave petition against the judgment in Abraham, it was dismissed without a speaking order. In India, it is settled law that in the absence of a speaking or reasoned order, the simpliciter dismissal of a special leave petition does not operate as a declaration of any law and the doctrine of stare decisis as envisaged under article 141 of the Constitution of India is not attracted.[22]

III. The Decriminalisation of Section 138 of the NI Act

The government recently vide its notification tiled “Statement of Reason”[23] announced the proposal to amend section 138 of the NI Act. The said proposal was carried out in furtherance of the objective of easing the doing of business ranking which has been the hallmark of this governments policy coupled with other reasons like unclogging the court system and increasing the overall efficacy of the system as for a matter of fact more than 20% of litigation the court faces pertain to cheque bounce under section 138 of the NI Act.[24] Section 138 of NI Act has been given a criminal overtone despite it being a civil wrong to deter possible defaulters from defaulting as credit is given on trust and good faith and a single act of dishonestly is bound to have ripple effects on the economy as a whole. The government’s proposal has caused widespread debate as to whether the section should be decriminalized or whether it should be left as it is.

In order to better understand the arguments pertaining to the debate of decriminalisation of section 138 of the NI Act, it is pertinent to look into a few things. In the landmark case of Kusum Ingots and Alloys Ltd. v Pennar Peterson Securities Ltd.[25] the Court held that the necessary pre-conditions should be met to constitute an offense under section 138 of NI Act. Section 138 of Negotiable Instruments Act 1881 states and explains Dishonour of cheque for insufficiency, etc., of funds in the account. It defines as follows:

Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for [a term which may be extended to two years’], or with fine which may extend to twice the amount of the cheque, or with both.[26]

A.    Is this policy one step forward and two steps backwards?

The primary objective of giving compensatory relief to the payee of the cheque is essentially civil in nature. Section 138 of the Act, thus, seeks to provide a civil remedy through the criminal justice apparatus. The Supreme Court has on several instances recognised that cheque dishonour cases “are really civil cases masquerading as criminal cases”.[27] Nonetheless, on the other hand, the whole objective of bringing section 138 of the NI Act was to bring efficiency and making sure of liability in transactions operating via cheques in cases of default or wrongdoings on the part of the drawer.[28] The section is against the very idea of protecting any unscrupulous drawer who do not honor their side of the bargain and impose strict liability.[29] Courts have often times opined that the main object of incorporation of this section is to recover money and criminal liability is to be only exercised when faced with a case involving wilful default.[30]

In Meters and Instruments Private Limited and Anr. v. Kanchan Mehta,[31] the Apex Court has observed the nature of offence under Section 138 primarily relates to a civil wrong, and that while criminalising of dishonour of cheques took place in the year 1988 taking into account the magnitude of economic transactions today, decriminalisation of dishonours of cheque of a small amount may also be considered, leaving it to be dealt with under civil jurisdiction. This further highlighted the importance of introducing a criminality angle by imposing two years of imprisonment on dishonour of cheques which acted as a deterrent for drawers from breaching their obligation as the being tagged as a criminal had various social implications. The criminality so added to the section subsequently thereby safeguarded the interests of the drawee against mala fide and fraudulent drawers.

It undoubtedly can be said that the fear of criminal litigation and imprisonment is the precipitating factor behind making timely payments of cheques. It is also the reason why most cases get settled in the initial stages of criminal proceedings and some even before the case is duly instituted before the court as the fear of imprisonment looms over the defaulter/ drawer of such cheques.[32] The proposed law for decriminalization of the section will remove the fear and as a consequence, there is bound to be a steep rise in the number of cases involving such defaults and the original objective of the government, that is unclogging of the court system and ease of doing business ranking will be obviously defeated. Further, cheque as a negotiable instrument will lose its well-founded value and faith in the market. Gradually the trust that was so accorded to cheques will erode and we could see a gradual decrease in the number of transactions that would be carried through the means of cheque as a negotiable instrument.[33]

Even if the section is decriminalised, the cases for dishonour would be filed under civil courts as cases of cheating under section 420 IPC and relevant provisions, which in turn would be a lengthy and costly procedure without adequate relief at the time when needed, in contrast to the summary trials presently undertaken in such cases with are comparatively less time consuming and cost-effective.[34] The government should not completely base its decision in the light of the COVID-19 situation prevailing today, but shall weigh the far-fetched repercussions of decriminalisation section 138 which prime facie appears to be in contrast to the very objective for which the proposal is made. Decriminalising section 138 of the NI Act in totality does not seems very appealing in its entirety and the government should aim at other effective alternatives to reduce the burden of courts alongside with maintaining the integrity of the instruments. The Delhi High Court in Dayawati v. Yogesh Kumar Gosin,[35] encouraged mediation to resolve cheque bounce disputes. Apparently, the cost of proceeding is far lesser when instituted by the payee under section 138 of the NI as compared to when instituted in civil courts. Upon decriminalization of the offense of cheque bounce the holders of such cheques would have to turn to civil courts for any relief, this in turn would add to the workload of civil courts as it will see an exponential rise in cheque bounce cases before it.[36]

Further in criminal proceedings, usually the holder of the cheque may demand an interim compensation of 20% of the total amount of the cheque under section 143A, decriminalization would take away this right of the holders to recover such sums, which it could have been easily obtained under the above- mentioned section in a trial court. The brunt of decriminalization will be mostly faced by poor litigants, employee belonging to the marginalized sections and they would find it extremely difficult to afford costly and time- consuming civil remedies to recover the amount that has been so due to them from the drawer of the negotiable instrument.[37]

On one hand that court has pendency of cases and decriminalizing would help in reducing the piles of cases lying in the court but on the other hand there increases a risk in the business and the credibility of the cheque system will decrease. Fear of imprisonment and litigation charges along with fine were the main factors for timely payments of the cheques. In case the punishment are removed by decriminalising section 138, definitely creditors will have to incur lot of risk.[38] It is true that section 138 has created lots of cases piled up in the court, but decriminalizing it is not the solution. The credibility of the investors would be shaken if there will be no remedy against dishonored cheques. Instead of people taking interest in the investment, other person may take advantage of it. The provisions of section 138 does not allow any person to take any unfair advantage because of the punishment. If there would be no punishment the other person would be free and can take any advantage of the situation. Decriminalizing section 138 would make the creditor more insecure. There would be a cascading effect and the complete system of negotiable instruments would turn futile.[39]

Normally a large number of criminal complaints instituted under section 138 is settled and compounded well before the first date of hearing or in the initial stages of the court proceedings due to fear of imprisonment. Therefore, it can be said that the object and purpose of the offense being criminalized is achieved for most part of cases instituted for criminal prosecution. With the decriminalization of the offense, litigants have to resort to civil courts and its remedies, often instituting a suit for recovery which are time consuming. Even in cases where courts have adjudicated the matter and judgment has been given, the process of obtaining the court decree as well its successful execution will be cumbersome and a long-drawn battle. The alternative remedy involving institution of civil proceedings for cheque bounce cases is not only costly as court fee payable for filing of criminal complaint is lesser[40] as compared to when a case is filed in civil courts but also time consuming.[41]

On one hand, it can be argued that if the complainant chooses to move only the criminal courts via Section 138 of the Act, the proceedings may not be concluded as expeditiously as required by the Act,[42] and the civil right of action may be lost in the meantime due to the limitation period expiring. This problem came to the fore in R. Vijayan v. Baby,[43] where the criminal case against the accused resulted in the Magistrate levying an inadequate amount of fine, while the limitation period for the civil action expired during the pendency of the appeal from the Magistrate’s judgment. This left the complainant with no means of recovering the cheque amount.

However, per contra, it has also been speculated and rightly so that removal of criminal liability on the commission of the said offense would exponentially increase chances of no recovery and for that matter payment of dues, in the process creating a threat to public security and justice system in the country. It was observed by the Supreme Court in the case Rajesh Laxmichand Udeshi v. Pravin Hiralal Shah[44] that the whole objective of section 138 r/w 139 was to prevent abuse of banking system to commit fraud. The above act of decriminalization will take us back several decades back rather and the progress made till now in the banking system will go in vain.[45] It also has to be understood that the dishonor of cheque by a bank leads to incomputable loss[46] both for the payee and the business environment in the nation and abroad and many businesses and its operations is affected and disturbed as a result of it, causing both irreparable loss and setback as the whole reliability of the business deal is affected both within and outside the nation.[47]

IV. Conclusion

Since the criminal liability associated with the dishonor of checks has been extinguished now, there has been constant debate of whether it has been a right step. The Indian judicial system has been facing new challenges now and again and has always tackled them with utmost precision. From one side it has been argued that the decriminalized provision would render speedy justice has been one such step that would inspire confidence and create respect for the rule of law among the society at large. The judiciary acting as the guardian of the fundamental rights of the society protects the right to free and speedy trial and thereby, civil disputes for cheque dishonor cases would help in achieving the objective.

Nonetheless, on the other hand, Section 138, if decriminalized, has the potential to withdraw the existing fear of payment, which has been so instilled due to the criminal liability imposed on the drawer of the cheque and also the provision has the capacity to encourage further non- payment of dues.[48] However, a debate that had gone under the radar was of the applicability of the provisions and the liability of HUF and a trust under sections 138 and 141 of the Act. It is very important for the government and concerned ministries to keep the trust in the banking operations of the country and the same can only be achieved when the government shows seriousness and is able to provide due mechanisms for the addressal of such disputes in a time bound manner and providing adequate punishment for the crime which has been committed maliciously and with mala- fide intention by the person concerned.[49]

This also remains to be a source of debate between the State judiciaries, and the Supreme Court, despite having the opportunity, did not delve into the discussion to resolve this conundrum. The dishonour of a cheque causes loss and inconvenience to the payee and causes business transactions to suffer a serious setback. Chapter XVII was introduced in the Act with the aim of restoring the credibility of cheques as a trustworthy substitute for cash payments.[50] In order to bring about uniformity, certainty and consistency in the judicial pronouncements of the country as regards the accountability of an HUF and a trust under sections 138 and 141 of the Act, it is necessary for the Supreme Court to declare binding law in respect of their treatment as an ‘association of individuals’ by exercising its jurisdiction under article 141 of the Constitution of India.

WRITTEN BY- SAURAV KAKRODA, LEGAL INTERN, PRIME LEGAL

REVIEWED BY- RITI GUPTA, LEGAL ASSISTANT, PRIME LEGAL

 

References:

[1] The Negotiable Instruments Act, 1881, No. 26, Acts of Parliament, 1881 [“NI Act”].

[2] Sen Gupta, Negotiable Instruments Act 1881, Kamal Law House 112 (1998).

[3] Law Commission of India, Fast Track Magisterial Courts for Dishonoured Cheque Cases, Report No. 213, http://lawcommissionofindia.nic.in/reports/report213.pdf.

[4] Id.

[5] Modi Cement Ltd. v. Kuchil Kumar Nandi, (1998) 3 SCC 249.

[6] M/s Dalmia Cement (Bharat) Ltd. v. M/s Galaxy Traders and Agencies Ltd., AIR 2001 SC 676.

[7] Gupta, supra note 2, at 450.

[8] Damodar S. Prabhu v. Sayed Babalal H., AIR 2010 SC 1907.

[9] NI Act, supra note 1, § 138.

[10] S. Krishnamurthi Aiyar, Law Relating to the Negotiable Instruments Act, Universal Law Publishing (2012) 12.

[11] Id. § 141.

[12] Ramanlal Bhailal Patel & Ors. v. State of Gujarat, (2008) 5 SCC 449 ¶ 22-32.

[13] Dadasaheb Rawal Co-operative Bank of Dondaicha Ltd. v. Ramesh s/o Jawrilal Jain & Ors., 2009 (2) MhLJ ¶ 7-11.

[14] Abraham Memorial Educational Trust v. C. Suresh Babu, 2012 (5) CTC 203.

[15] Id.

[16] Rajiv Runcie Ebenezer & Ors. v. C. Suresh Babu, Special Leave to Appeal (Crl.) Nos. 6763-64/2012.

[17] Murali Krishnan, Only ‘Karta’ of a Hindu Undivided Family can be prosecuted for dishonour of cheques Gujarat HC, Bar & Bench (2017), https://www.barandbench.com/news/karta-can-prosecuted-dishonour-cheque-huf-not-covered-section-141-ni-act-rules-gujarat-high-court.

[18] Shah Rajendrabhai Jayantilal v. D. Pranjivandas & Sons & Ors.,2017 GLH (2) 328.

[19] Hakkimuddin Taherbhai Shakor (Trustee) & Ors. v. State of Gujarat & Ors., 2017 CriLJ 3143.

[20] Shah Nitinkumar Dhirajlal vs Patel Mahendrakumar, R/SCR.A/2750/2015.

[21] Shibhu K. P. & Ors. v. State of Kerala & Ors., 2019 (3) KHC 1.

[22] Workmen v. Board of Trustees, Cochin Port Trust (1978) 3 SCC 119; Indian Oil Corp. v. State of Bihar (1986) 4 SCC 146l; Supreme Court Employees Welfare Association v. Union of India & Ors. (1989) 4 SCC 187.

[23] Ministry of Finance, Government of India, Decriminalization of Minor Offences for Improving Business Sentiment and Unclogging Court Processes (8th June 2020).

[24] Law Commission of India, supra note 2.

[25] Kusum Ingots and Alloys Ltd. v Pennar Peterson Securities Ltd., (2002) 2 SCC 745.

[26] Id.

[27] R. Vijayan v. Baby, (2012) 1 SCC 260, ¶ 16; see also, Rangappa v. Sri Mohan, (2010) 11 SCC 441.

[28] Palash Taing, Decriminalization Of Criminal Offence Under Section 138 Of Negotiable Instruments Act, 1881, (2020), https://www.mondaq.com/india/crime/966664/decriminalization-of-criminal-offence-under-section-138-of-negotiable-instruments-act-1881.

[29] Sakshi Satnalika, Is Decriminalisation of Section 138 of Negotiable Instrument Act, 1881 a Step Ahead?, Neolexvision Blogs (2020), https://www.aequivic.in/post/is-decriminalisation-of-section-138-of-negotiable-instrument-act-1881-a-step-ahead.

[30] Id.

[31] Meters and Instruments Private Limited and Anr. v. Kanchan Mehta, (2018) 1 SCC 560.

[32] Law Commission of India, supra note 2.

[33] Yashika Saravria, Decriminalising The Offence Of Dishonour Of Cheque: Why Not Desirable?, (2021), https://www.mondaq.com/india/financial-services/955680/decriminalising-the offence-of-dishonour-of-cheque-why-not-desirable.

[34] Satnalika, supra note 29.

[35] Dayawati v. Yogesh Kumar Gosin, (2001) 6 SCC 463.

[36] Satya Prashanth, Critical Analysis of Section 138 of the Negotiable Instruments Act, (2020), http://www.legalserviceindia.com/legal/article-1558-critical-analysis-of-section-138-of-negotiable-instruments-act.html.

[37] Law Commission of India, supra note 2.

[38] Agrima Sharma, Section 138 Negotiable Instruments Act, 1881 – An In Depth Analysis, Mondaq (Oct. 9, 2015), https://www.mondaq.com/india/trials-appeals-compensation/433334/section-138-negotiable-instruments-act-1881–an-in-depth-analysis.

[39] Id.

[40] Law Commission of India Report titled “Fast Track Magisterial Court for Dishonoured Cheque cases”, https://lawcommissionofindia.nic.in/reports/report213.pdf.

[41] Court Fees Act, 1870.

[42] NI Act, supra note 1, § 143(4).

[43] R. Vijayan v. Baby, (2012) 1 SCC 260.

[44] Rajesh Laxmichand Udeshi v. Pravin Hiralal Shah, Appeal (L) No.202 of 2012.

[45] Devansi Desai, Decriminalising Section 138 of Negotiable Instruments Act, 1881: Whether a right manoeuvre to boost the economy?, (2020), http://www.tjprc.org/publishpapers/2-52-1600671345-6IJPSLIRDEC20206.pdf.

[46] Goa Plast (P) Ltd. v. Chico Ursula D’Souza, (2004) 2 SCC 235.

[47] Id.

[48] Sharma, supra note 38.

[49] Desai, supra note 45.

[50] Law Commission of India, supra note 2.

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Legal recognition to- ‘Battered Women Syndrome’

Introduction

The battered women syndrome is a psychological condition and describes a pattern of behaviour that develops in victims of domestic violence after suffering long-term abuse. This syndrome can lead to psychological paralysis where the women undergo depression and feel defeated due to continued oppression from her batterer.

In the 1970s Lenore E. Walker explained the psychological state of women who suffer from violence and abuse from their partners. The woman is subjected to long term domestic abuse, verbal harassment, sexual abuse, physical abuse, the threat of punishment etc which affects her psychological state of mind

Domestic violence is considered a social evil under the Indian penal code however no specific provisions are constituting to the battered women syndrome. However, it has been recognized by many state courts and there are helplines available to domestic violence and victims of the battered women syndrome. The judgments pronounced by the judges are mostly in favour of battered women.

Battered women syndrome as a legal defence

The most vital understanding is whether the killing of the abusive partner would amount to murder or can be used as a legal defence most of the case laws have focused on the action of the battered (defendant) that is whether the killing of their husbands have been reasonable or not.

Now under the criminal justice system, the testimonies which supported the existence of psychological trauma suffered by the battered have agreed to use it as a legal defence. In the Indian courts, battered women syndrome has been recognized under the private defence and grace and sudden provocation

Elements of Battered women syndrome

  1. Cyclical violence theory

    This takes place in three stages, it begins with the tension building phase i.e., the tension caused due to physical abuse. Further, the second stage is that the husband becomes uncontrollably violent upon the women and final stage he becomes remorseful. Therefore, the cycle of abuse is complete and ignites a fear within the woman and the next time when the attack occurs, she finally defends herself because it is her only opportunity and ends up killing her partner. The most important question is can be liable under section 300 IPC “Murder”? We will understand how the law treats such an act.

  2. Learned helplessness theory

    The description is that “a state of paralysis gets induced upon the woman by continuous battering which makes her feel perpetually trapped in the relationship”. Due to the abuse, there is a state of helplessness in the woman where she loses all her hope to escape. The response from the woman is to ensure her survival and not escape. This makes her unable to free herself from the abusive control of her partner.

  • Types of abuse that contributes to battered women syndrome
  • Sexual abuse: This includes rape, unwanted sexual contact, and verbal sexual harassment.
  • Stalking: A person uses threatening tactics that cause a person to feel fear and concern for their safety.
  • Physical abuse: Including slapping, shoving, burning, and the use of a knife or gun to cause bodily harm.
  • Psychological aggression: Examples include calling a person name, humiliating them, or coercive control, which means behaving in a way that aims to control the person.
  • Battered women syndrome under the international law

Here we will understand how battered women syndrome has been recognized under international law how it began through justification for the claims of self-defence the most important case laws

  1. R v. Ahluwalia[1]    There was one Kiranjit Ahluwalia an Indian woman who was subjected to 10 years of violence and abuse from her husband and later on was convicted for murdering her husband after setting his feat on fire and he died after 10 days due to the injuries suffered which caused severe burns over 40% of his body, later on, she gave a testimony that she suffered from domestic abuse., physical violence, food deprivation and marital rape.She had fetched some petrol and caustic soda mixture from the garage and mixed it to create napalm, the reason the court convicted her the first time was because creating napalm was not of common knowledge and pre-meditated and had some time to cool off as her husband was sleeping when she created the napalm and due to her broken English and no support from the lawyers she was arrested and charged with murder and was also sentenced to life imprisonment, later on, the case came to the attention of the Southall black sisters who established grounds for a mistrial and her sentenced was reduced and was constituted as manslaughter and not murder.

This case raised awareness worldwide concerning domestic violence and how battered women syndrome can be used as a legal defence especially for the non-English speaking immigrants in western countries. Even the English laws were amended concerning domestic violence.

  1. In –State v Leidholm[2]

    The court held that the “expert testimony was admissible and the court should consider the prior history of abuse suffered by the accused in determining the guilt of the accused”.

  2. In R v Chhay[3]

the husband was killed with a meat cleaver and later the defendant held that she suffered a long term of abuse from her husband and the court held that there is a possibility of a loss of self-control during an abusive relationship even though there has been an absence of a particular triggering incident.

  1. In R v Duffy [4]

    the court emphasized “sudden and temporary loss of control.”  the trial judge left provocation to the jury but erroneously excluded evidence of past sexual abuse of the accused which was relevant to the gravity of the provocation.

  • Battered women Syndrome under the Indian law

The Indian penal code, 1860 has laid down certain general exceptions from sections 96 to 106 where certain crimes committed as exempted from the law or justified by the law due to the circumstances. Section 100 emphasizes private defence and under section 300  the first exception “ Grave and sudden provocation” will also be applicable in the case.

  • The right to private defence

Section 100 indicates certain necessities under which the right of private defence of the body can extend to causing death. When it comes to the situation where the women kill her batterer cannot be easily identified as a private defence. Private defence can only be exercised when there is a reasonable apprehension of danger, to seek relief under this section the battered woman is required to prove that a reasonable apprehension of danger was present and that’s why she caused the death or grievous hurt, now the problem with this is that sometimes the battered women would not be able to prove the conditions under this section that’s why a separate provision for battered women syndrome is required so that no women is oppressed under a batterer. Another main ingredient of private defence is based on the proportionality of a response

    1. R v. Thornton[7]

The husband abused the woman and told her that while she is sleeping he will kill her later due to the battered state of mind the accused stabbed her husband while he was sleeping as she was psychologically paralysed here the circumstances do not satisfy the condition for section 100 and that’s why there is a need for a specific provision for battered women syndrome

2. Malliga v. State by Inspector of Police [8]

the woman was threatened to be murdered by her husband and in her battered state of mind when her husband went to sleep she put an end to his life by dropping heavy stones on him. So in India, there is a need to expand the notion of private defence beyond the immediate physical threat and to include the private defence in case of battered women as they do not kill their batterer in immediate physical self-defence but they kill them to protect their psychological self.

  • Grave and sudden provocation

Under section 300 in the Indian penal code, “Murder”, the first exception to the same is grave and sudden provocation where the death caused by grave and sudden provocation will not be determined as murder but culpable homicide if the offender is deprived of Self Control due to the grave and sudden provocation. Here the battered women can seek relief only when they can prove before the court that she had a loss of self-control which is not always true in the case when it comes to battered women syndrome it is prolonged torture for many years and not a specific incident therefore for a battered woman to seek relief under grave and sudden provocation is difficult another reason as to why the Indian penal code requires a sperate provision for batter women syndrome. The flowing cases indicate where the court reduced the sentence for a battered woman.

  1. Suyambukkani v state of Tamil Nadu [9] 

The wife was facing cruelty from the husband and she was in a battered state of mind to end her misery she decided to jump into the well along with her children however the children died and the women survived and she was charged with murder and attempt for suicide, the High court of madras took into consideration battered women syndrome and her circumstances and reduced her sentence.

  1. Manju Lakra v State of Assam [10] 

The woman was subjected to continuous violence and abuse from her husband, in her battered state of mind, she resisted the violence and took a piece of wood and hit her husband and he later died of injuries and she was charged with murder. However, the Guwahati High Court reduced her conviction to culpable homicide from murder as she was a battered woman. This was the first case to recognize the Nallantangal syndrome in Indian Courts, (Nallathangal syndrome for women who are coerced to commit suicide and kill their kids to escape the misery of the violence they are subjected to).

  • Conclusion

Under Indian jurisprudence, the Battered Women Syndrome has not seen much progress beyond the Nallathangal syndrome. Therefore, the requirement for separate provisions relating to the battered women syndrome is vital the foremost necessity for the Indian law in the matter of Battered Women Syndrome is to recognize the psychological aspect of battered women.

  • FOOTNOTES:

[1] R v Ahluwalia [1992] 4 All ER 889; (1993) 96 Cr App R 133; [1993] Crim LR 63; (1992) 142 NLJ 1159

[2] State v Leidholm 334 N.W.2d 811(N.D. 1983)

[3] R v Chhay (1994) 72 A Crim R

[4] R v Duffy [1949] 1 All ER 932

[5] Stingel v The Queen 1990 171 CLR 312 at 326

[6] Green v The Queen (1997) 191 CLR 334

[7] R v Thornton [1996] 1 WLR 1174

[8] Malliga vs State By Inspector Of Police on 12 September, 2002

[9] Suyambukkani v state of Tamil Nadu LAWS(MAD)-1989-2-14

[10] Manju Lakra vs The State Of Assam on 5 August, 2013 CRIMINAL APPEAL NO. 116 (J) OF 2007

 

ARTICLE BY – A Beryl Sugirtham

Article reviewed by – Riti Gupta, Legal Assistant, Prime Legal

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Can A Financial Creditor Initiate Corporate Insolvency Resolution Process Against Both Corporate Borrower As Well As Corporate Guarantor For The Same Debt Simultaneously?

INTRODUCTION

For any corporate entity, loans play a vital role in maintaining the cash flow in the business during difficult times. However, as easy as it may sound a financial transaction like granting of loan connects a lot of people to liabilities and duties pertaining to such loan. In the case of corporate loans, the banks, and financial institutions while granting loans often include a guarantor which is either a promoter to the company or a parent/group company of such corporations. The relation between the financial creditor, corporate borrower, and corporate guarantor is based on the contract they have agreed on while such financial transaction was carried. The contract and liabilities of the borrower and guarantor are governed under the principle of coextensive liability of the surety and the principal debtor under the Indian Contract Act, 1872.

INITIATION

This issue has always been debatable as to whether a financial creditor can simultaneously initiate two applications under section 7 of Insolvency and Bankruptcy Code, 2016, for the same debt arising out of the same loan agreement. It was first raised in the case of Dr. Vishnu Kumar Agarwal Vs M/s Piramal Enterprises Limited [1] (popularly called the Piramal judgment). In this case M/s. Piramal was the financial creditor and All India Society for Advance Education and Research was the principal borrower to which Dr. Vishnu Kumar Agarwal was a shareholder. Here the principal borrower had borrowed INR 38,00,00,000/- from the financial creditor and had managed to repay 22 crores however, the rest of the amount was due for quite some time. There were two guarantors for this amount. For recovery of the debt, the Financial Creditor had sent two separate notices to the Corporate Guarantors asking them to clear the debt amount. After receiving no response from the guarantors, the Financial Creditor had to file two separate applications in the National Company Law Appellate Tribunal (“NCLAT”) under Section 7 of the Insolvency and Bankruptcy Code, initiating CIRP (“Corporate Insolvency Resolution Process”) against the two Corporate Guarantors for the same claim amount. The NCLAT here observed that where one application had been filed by the financial creditor under section 7 against one ‘Corporate Debtor’ i.e.; ‘Principal Borrower’ or ‘Corporate Guarantor’, then a second application by the same financial creditor on the same claim amount and default against other ‘Corporate Debtor’ i.e.; ‘Principal Borrower’ or ‘Corporate Guarantor’ could not be admitted. But then another issue came into the picture as to whether the financial creditor can approach the Resolution Professional and claim the same amount from the guarantor 1. The Court stated that since the adjudicating authority had already accepted the CIRP application and had initiated CIRP proceeding against Guarantor number 2, it stated that Guarantor 1 was no more liable as guarantor 2 was now burdened with the full debt amount.

The NCLAT held that although there was no bar under section 7 of the code regarding filing two simultaneous applications against the principal debtor as well as the corporate guarantor. However, in this case, it was stated that two simultaneous applications by the financial creditor will not be admitted until proved that the borrower and corporate Guarantor combinedly were a Joint Venture Company. 

THE WAY FORWARD

The Piramal judgment had created unrest in the market since the National Tribunal had recognized and agreed on the principle of co-extensive liability of principal debtor and surety however, had disregarded to consider the principle within the ambit of IBC, 2016.

Later the NCLAT gave a different opinion in the case of State Bank of India Vs Athena Energy Ventures Private Limited[2]. Unlike the Piramal case in this matter, NCLAT specifically focused on section 60(2) and (3) of IBC, 1860, it was observed that under the said sections there was no aversion regarding simultaneous proceedings against the Corporate Debtor and Corporate guarantor. keeping sections 60(2) and (3) of the code in view it stated that if two applications can be initiated against the Principal Borrower and the Guarantor, then such applications can be maintained too. The NCLAT thereby held that in a matter of guarantee, CIRP (Corporate Insolvency Resolution Process) can be initiated both against the principal debtor as well as the guarantor.

RELEVANT PROVISIONS APPLIED

  1. Section 128 of the Indian Contract Act, 1872 states that the surety’s liability is co-extensive with that of the principal debtor unless it is otherwise provided in a contract[3].
  2. As per section 5(8) of the IBC, 2016 defines Financial debt as “a debt along with interest if any, which is disbursed against the consideration of the time value of money and includes money borrowed against the payment of interest, any counter indemnity obligation in respect of a guarantee, bond, documentary letter of credit or any other instrument issued by a bank or financial institution and any amount of liability in respect of any such guarantee or indemnity. This definition clearly shows that the code treats both Principal Borrower as well as Guarantor on a similar footing[4].
  3. Section 60(2) of Insolvency and Bankruptcy Code states that notwithstanding anything to the contrary contained in this Code an application relating to the insolvency resolution or liquidation or bankruptcy of a corporate guarantor or personal guarantor shall be filed before such National Company Law Tribunal where there is already a pending corporate insolvency resolution process or liquidation proceeding initiated by the corporate debtor before a National Company Law Tribunal. Section 60(3) on the other hand states that any CIRP pending in any court or tribunal shall stand transferred to the Adjudicating Authority dealing with insolvency resolution process or liquidation proceeding of such corporate debtor. [5]

A Critical Analysis on Piramal Judgement Vs. Athena Energy Ventures Case

Upon an analysis between the two cases, it can be observed that in the case of Piramal judgment although the court agreed to the principle of co-extensive liability, but did not agree to its application in the case. The tribunal specifically mentioned that where one corporate insolvency procedure was filed and the procedure was initiated by a financial creditor against one corporate debtor which can be either the Principal Borrower or Corporate Guarantor, then a second application for the same claim and default cannot be allowed against the other Corporate Debtor i.e., Principal Borrower or Corporate Guarantor. In the Piramal Judgement, the tribunal failed to recognize that the issue was not whether CIRP can be initiated between principal borrower as well as corporate guarantor but, it was whether simultaneous CIRP’s could be initiated against two guarantors for the same debt and default. Moreover, the Tribunal missed noticing sections 60 (2) and (3) of the code. On the other hand, while pronouncing the judgment of the Athena case the NCLAT considered the liability of Principal Borrower and Guarantor as co-extensive under section 128 of the Indian Contract Act. NCLAT also stated that the Insolvency and Bankruptcy code cannot restrict the Financial creditor from filing the claim against both the principal borrower and the guarantor when both are undergoing the CIRP. Moreover, it also observed that in the contract of guarantee the simultaneous remedy is the center of such contract and the same cannot be prohibited.

For the Athena case, NCLAT focused mainly on section 60(2) and (3) of the code and also relied heavily on one of its previous judgments in the case of “State Bank of India Vs Ramakrishnan[6]” where it had stated that – The IBC has never restricted simultaneous proceedings against both the corporate debtor and corporate guarantor and thus, as per sections 60(2) and (3) of the code, if two applications are allowed to be filed for the same amount against the borrower and the guarantor, the same can also be allowed to be maintained.

CONCLUSION

In a recent judgment by the Supreme Court in the case of Laxmi Pat Surana Vs. Union Bank of India & Anr[7], the apex court stated that a bank or any Financial institution can initiate a proceeding under IBC against a corporate guarantor, in case of default on the part of the principal debtor to repay the loan. The bench stated that the width of section 7 of the code should not be limited, despite where the law permits to initiate CIRP against the corporate borrower, in case of default on the part of the principal borrower in paying off the outstanding dues. Moreover, the court observed that Section 7 is an enabling provision that allows the financial creditor to initiate a proceeding against the corporate debtor irrespective of the fact that the corporate debtor can be the principal borrower and can also be any corporate person holding the status of a corporate debtor on being offered guarantee, where the principal debtor is in default of paying the debts.

Lastly, it can be concluded that a financial creditor can initiate a proceeding against the principal debtor as well as the corporate guarantor since, the Supreme court held that the lender has a right to proceed against the principal borrower and the corporate guarantor, where they are both in default of repaying the amount of debt whether acting jointly or severally.

WRITTEN BY- PRIYANKA PUROHIT, LEGAL INTERN, PRIME LEGAL

REVIEWED BY- RITI GUPTA, LEGAL ASSISTANT, PRIME LEGAL

 

FOOTNOTES/REFERENCES:

[1] Company Appeal (AT) Insolvency No. 346 of 2018

[2] Company Appeal (AT) Insolvency No. 633 of 2020

[3] The Indian Contract Act 1872, Section 128

[4] The Insolvency and Bankruptcy Code 2016, Section 5(8)

[5] The Insolvency and Bankruptcy Code 2016, Section 60(2) & (3)

[6] CIVIL APPEAL NO. 4553 of 2018

[7] CIVIL APPEAL NO. 2734 OF 2020

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The Insolvency & Bankruptcy Code, 2016

Earlier Insolvency Regimes in India:
Prior to the enactment of the Insolvency and Bankruptcy Code, 2016 (the “Insolvency Code”) the existing framework was governed by:-

  • The Companies Act, 1956 and the Companies Act, 2013;
  • The Sick Industrial Companies (Special Provisions) Act, 1985;
  • The Recovery of Debts Due to Banks and Financial Institutions (“RDDBFI”) Act, 1993;
  • The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (“SARFAESI”) Act, 2003;[1]
  • The Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920;
  • Regulations, directions, circulars, rules, notifications, and guidelines of the Reserve Bank of India (“RBI”).

Benefits of this code:

  • Previously, four different forums—High Courts, Company Law Board (CLB), Board for Industrial and Financial Reconstruction (BIFR), and Debt Recovery Tribunal (DRT)—have overlapping jurisdiction, which gives rise to systemic delays and complexities in the process. The code overcomes these challenges and would reduce the burden on the courts as all litigation will be filed under the code before the National Company Law Tribunal (NCLT) for corporate insolvency and insolvency of LLPs, and before DRT for individual insolvency and insolvency of unlimited partnership firms.
  • The code could ensure quicker resolution of NPA problems.
  • Bankruptcy laws accept that business ventures can fail and allow entrepreneurs to make a new start.

Objectives of the Code:
An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit, and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India (IBBI), and for matters connected therewith or incidental thereto.

Application:

The provisions of this code shall apply to:
(a) any company incorporated under the Companies Act, 2013 or under any previous company law;
(b) any other company governed by any special Act for the time being in force.
(c) any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008;
(d) such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf; and
(e) partnership firms and individuals,
in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be.

IBC – The complete CODE: Insolvency & Bankruptcy Code 2016 has been divided into five parts:

Part-I: Preliminary
Part-II: Insolvency resolution & liquidation for Corporate persons
Part-III: Insolvency resolution & bankruptcy for Individuals & partnership firms
Part-IV: Regulations of insolvency professionals, agencies & information utilities
Part-V: Miscellaneous

PART-II: Insolvency Resolution and Liquidation for Corporate Persons

  • 4: Application of this part: Apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one crore rupees:
  • Definition of ‘Corporate Debtors’: Corporate debtors means a Company, LLP or any person incorporated with limited liability under any law for time being in force but not include financial service provider (Corporate Person)who owes a debt to any person (Individual, HUF, Company, Trust, Partnership, LLP, any other entity established under any statute, Person resident outside India)

Sec. 6: Persons who may initiate corporate insolvency resolution process.

  • Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process (CIRP) in respect of such corporate debtor.
  • Definitions:
  • financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred;
  • operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;

Corporate Insolvency Resolution Process
The process consists of the following phases:-

Initiation of the corporate insolvency resolution process (“Phase I”): Phase I of the corporate insolvency process deals with the following:-
1) Filing of the applications with the NCLT;
2) Admission or rejection of the application;
3) In case of rejection, the NCLT may allow the applicant to make changes and/or revisions to the     application and re–apply. On re-application, the NCLT may admit or reject the application.

  • Phase I for the different types of applicants who can trigger the corporate insolvency process are different. The timelines and the process broadly, for Phase I, relating to the different types of applicants who can trigger the corporate insolvency process are provided below:-

Sec.7 to 10: Initiation of corporate insolvency resolution process by financial creditor/Operational Creditor/Corporate Applicant.

Sec. 11: Persons not entitled to make application

  1. a corporate debtor undergoing a corporate insolvency resolution process; or
  2. a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or
  3. a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or
  4. a corporate debtor in respect of whom a liquidation order has been made.

Corporate Insolvency Resolution Process (Sec. 12 to 32): Phase-II

Sec. 12: Time limit for completion of CIRP.

The corporate Insolvency Resolution Process shall be completed within 180 days from the date of admission of the application. NCLT may by order extend the duration not exceeding 90 days.The extension shall not be granted more than once.

Corporate Insolvency Resolution Process:

  • 13: Declaration of moratorium and public announcement

NCLT, after admission of the application, by an order –

  • Declare a moratorium on new and pending suits and enforcement of security interests.
  • Cause a public announcement and call for submission of claims.
  • Appoint an interim resolution professional.

Public announcement shall be made immediately after the appointment of an interim resolution professional.

  • 14: Moratorium

NCLT shall by order declare a moratorium for prohibiting the following –

  • The institution of suits or continuation of pending suits or proceedings against the corporate debtor
  • transferring/ encumbering/ disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein
  • any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the SARFAESI Act, 2003
  • the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor
  • 15: Public Announcement

 Public announcement of the corporate insolvency resolution process shall contain the subsequent information –

  • Name & address of the corporate debtor
  • Name of the authority with which the corporate debtor is registered
  • Last date for submission of claims
  • Details of interim resolution professional who shall be vested with the management of the corporate debtor and be responsible for receiving claims
  • Penalties for false/ misleading claims
  • Date on which the CIRP shall close

Sec.16: Appointment and tenure of interim resolution professional

> NCLT shall appoint an interim resolution professional within 14 days from the insolvency commencement date.

> Where an application for CIRP is made by a financial creditor or corporate debtor, resolution professional as proposed that time, shall be appointed as interim resolution professional if no disciplinary proceedings are pending against him.

> Where an application for CIRP is made by the operational creditor and no proposal for an interim resolution professional is made, NCLT shall make a reference to the Board for the recommendation of an insolvency professional who may act as an interim resolution professional.

> The Board shall, within ten days of the receipt of a reference from NCLT, recommend the name of an insolvency professional to NCLT against whom no disciplinary proceedings are pending.

> Term of interim resolution professional shall not exceed 30 days from date of his appointment

Sec. 17: Management of affairs of corporate debtor by interim resolution professional (IRP).

> From the date of appointment of IRP, –

  • The management of the affairs of the corporate debtor shall vest in IRP
  • the powers of the board of directors or the partners of the corporate debtor, as per the situation, shall stand suspended and be exercised by IRP
  • the officers and managers of the corporate debtor shall report to IRP and provide access to documents and records of the corporate debtor
  • the financial institutions maintaining accounts of the corporate debtor shall act on the instructions of IRP in relation to such accounts and furnish all information relating to the corporate debtor.

Sec. 18: Duties of IRP

  • Collect all information relating to the assets, finances, and operations of the corporate debtor for determining the financial position of the corporate debtor.
  • receive and collate all the claims submitted by creditors.
  • constitute a committee of creditors.
  • monitor the assets of the corporate debtor and manage its operations until a resolution professional is appointed by the committee of creditors
  • file information collected with the information utility.
  • take control and custody of any asset over which the corporate debtor has ownership rights.

Sec. 19: Personnel to extend co-operation to IRP

> The personnel of the corporate debtor, its promoters, or any other person associated with the management of the corporate debtor shall extend all assistance and cooperation to the interim resolution professional as required by him in managing the affairs of the corporate debtor.

Sec. 20: Management of operations of the corporate debtor as going concerned

To preserve the worth of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern, IRP shall have the authority to –

  • appoint accountants, legal or other professionals
  • enter into contracts or to amend/modify the contracts which were entered into before the commencement of the corporate insolvency resolution process
  • raise interim finance
  • issue instructions to personnel of the corporate debtor.

Sec. 21: Committee of creditors

> IRP shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors.

> The committee of creditors shall comprise all financial creditors of the corporate debtor.

> Related party to whom a corporate debtor owes a financial debt shall not have any right of representation, participation, or voting in a meeting of the committee of creditors

> All decisions of the committee of creditors shall be taken by a vote of not less than 75% of the voting share of the financial creditors.

Sec. 22: Appointment of Resolution Professional (RP)

> The first meeting of the committee of creditors shall be held within 7 days of the constitution of the committee of creditors.

> The committee of creditors, may, in the first meeting either resolve to appoint IRP as RP or to replace IRP with another RP.

Sec. 23: RP to conduct CIRP

> RP shall conduct the entire CIRP and manage the operations of the corporate debtor.

> RP shall exercise powers and perform duties as are vested or conferred on IRP.

Sec. 24: Meeting of committee of creditors[i]

> The members of the committee of creditors may meet in person or by electronic means.
> All meetings of the committee of creditors shall be conducted by RP.
>  The directors, partners, and one representative of operational creditors may attend the meetings of the committee of creditors, but shall not have any right to vote in such meetings
>  Each creditor shall vote in accordance with the voting share assigned to him based on the financial debts owed to such creditor.

Sec. 25: Duties of RP

> To preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor, RP shall undertake the following actions –

1) take immediate custody and control of all the assets
2) represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit  of the corporate debtor in judicial, quasi-judicial, or arbitration proceedings
3) raise interim finances
4) appoint accountants, legal or other professionals
5) maintain an updated list of claims
6) convene and attend all meetings of the committee of creditors
7) invite prospective lenders, investors, and other persons to place resolution plans
8) present all resolution plans at the meetings of the committee of creditors
9) file application for the avoidance of transactions
10) Prepare information memorandum

Sec. 26: Application for avoidance of transactions not to affect proceedings
The filing of an avoidance application by the resolution professional shall not affect the proceedings of the corporate insolvency resolution process.

Sec. 27: Replacement of RP by a committee of creditors
Where, at any time during the CIRP, the committee of creditors is of the opinion that an RP appointed under section 22 is required to get replaced, he can replace the existing RP with another RP.

Sec. 28: Approval of committee of creditors for certain actions
RP shall not take any of the following actions without prior approval of the committee of creditors:

  1. a) raise any interim finance
    b) create any interest over the assets of the corporate debtor
    c) change the capital structure
    d) record any change within the ownership interest
    e) give instructions to financial institutions maintaining accounts of the corporate debtor for a debit transaction from any such accounts more than the amount earlier decided
    f) undertake any related party transaction
    g) amend any constitutional documents
    h)delegate its authority to any other person
    i) eliminate of or permit the disposal of shares of any shareholder of the corporate debtor or their nominees to any other third parties
    j) make any change in the management of the corporate debtor or its subsidiary
    k) transfer rights or financial debts or operational debts under material contracts otherwise than in the ordinary course of business
    l) make changes in the appointment or terms of the contract of such personnel
    m)make changes in the appointment or terms of the contract of statutory auditors or internal auditors

Sec. 29: Preparation of information memorandum

> The resolution professional shall prepare an information memorandum containing relevant information as may be specified by the Board for formulating a resolution plan. The resolution professional shall provide to the resolution applicant access to all relevant information in physical and electronic form.

Sec. 30: Submission of resolution plan

A resolution applicant may put forward a resolution plan to the RP prepared on the basis of the information suggested in the memorandum. The RP shall submit the resolution plan as approved by the committee of creditors to NCLT.

Sec. 31: Approval of resolution plan

If NCLT is satisfied, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors, and other stakeholders involved in the resolution plan.

Corporate Liquidation Process (Sec. 33 to Sec. 54)
As per the Insolvency Code, the corporate liquidation process is to be initiated on the occurrence of the following:-

  • Expiry of the Resolution Period (180 days; extendable by 90 days) and no resolution plans have been received;
  • NCLT rejects the resolution plan;
  • Prior to approval of the resolution process, by order of NCLT on intimation by the committee of creditors;
  • Application by the affected person(s) on the contravention of the approved resolution plan.

Corporate Liquidation Process

Position of a secured creditor in liquidation:

  • A Secured Creditor can relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator
  • Realize its security in the manner specified in the code.
  • If the secured creditor realizes security interest, he shall inform the liquidator and identify the asset subject to such security interest.
  • Liquidator to verify security interest by record maintained by Information Utility or any other means as may be specified and permit the secured creditor to realize only such security interest as provable.
  • A secured creditor may enforce, realize, settle, compromise or deal with the secured assets in accordance with the law to recover its dues and incase it faces resistance from Corporate Debtor or any person connected therewith in taking possession or, selling/ disposing of the secured asset it may apply to NCLT to facilitate secured creditor to realize such security interest in accordance with the law for the time being in force and NCLT may pass such order as necessary to permit a secured creditor to realize security interest in accordance with the law.
  • If the amount realized by the secured creditor is more than its dues, the surplus shall be credited to the account of the liquidator.
  • If the amount realized by the secured creditor is less than its dues, the remaining debt shall be paid by the liquidator as per this Code.
  • The insolvency costs or liquidation costs shall be realized from the proceeds of such sale of assets by the secured creditor.
  • Conduct of Liquidation: The liquidation shall be conducted as follows:-
  1. Appointment of the liquidator by order of NCLT;
  2. Declaration of a moratorium on initiation of suits by the NCLT;
  3. Discharge of officers, employees, and workmen shall be discharged, except when the business of the corporate debtor is continued;
  4. Issuance of the public announcement;
  5. Formation of liquidation estate;
  6. Collection, verification, acceptance, and/or rejection of claims;
  7. Orders by NCLT for cancellation of avoidable transactions etc.;
  8. Monetization of assets and distribution of proceeds;
  9. Dissolution of the corporate debtor.
  • Liquidation estate shall comprise of –
  • any assets over which the corporate debtor has ownership rights
  • assets that may or may not be in possession of the corporate debtor including but not limited to encumbered assets
  • tangible assets, whether movable or immovable
  • intangible assets
  • assets subject to the determination of ownership by the court
  • any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest
  • all proceeds of liquidation as and when they are realized
  • Distribution of Assets: The proceeds from the sale of the liquidation estate shall be distributed in accordance with the following waterfall mechanism/order of priority:-
  • The insolvency resolution process costs and liquidation costs;
  • The following debts shall rank equally between and among the following:-
  • Workmen’s dues for the period of twenty – four months preceding the liquidation commencement date;
  • Debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner as provided under the Insolvency Code;
  • Wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding to the liquidation commencement date; Financial debts owed to unsecured creditors;
  • The following dues rank equally between and among the following:-
  • Any amount due to the State Government and the Central Government in respect of the whole or any part of the period of two years prior to the liquidation commencement date;
  • Debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;
  • Any remaining dues and debts;
  • Preference shareholders, if any; and
  • Equity shareholders or partners, as the case may be.

Fast Track Corporate Insolvency Resolution Process (Sec. 55 to Sec. 58)

  • The Insolvency Code further prescribes a fast-track corporate insolvency process for the entities with less complex structuring or businesses.
  • fast track process shall apply to the following categories of corporate debtors:
  • A small company, as defined under clause (85) of section 2 of the Companies Act, 2013; or
  • A Startup (other than the partnership firm), as defined in the notification dated 23rd May, 2017 of the Ministry of Commerce and Industry; or
  • An unlisted company with total assets, as reported in the financial statement of the immediately preceding financial year, not exceeding Rs.1 crore.
  • The fast track corporate insolvency process will be required to be completed within a period of 90 days with a one–time extension of 45 days.

Voluntary Liquidation of Corporate Persons (Sec. 59)

  • A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings.
  • Voluntary liquidation proceedings of a corporate person registered as a company shall meet the following conditions, namely:
  • Declaration from the majority of directors, verified by an affidavit stating that –

(i) they have made a full inquiry into the affairs of the company and they have formed an opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation; and

(ii) the company is not being liquidated to defraud any person

Voluntary Liquidation of Corporate Persons

  • Above declaration shall be accompanied with –
  1. audited financial statements and records of business operations of the company for the previous two years
  2. a report of the valuation of the assets of the company.
  • Within 4 weeks of declaration, company has to pass a special resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily and appointing an insolvency professional to act as the liquidator.
  • If the company owes any debt to any person, creditors representing two-thirds in value of the debt of the company shall approve the resolution passed within seven days of such resolution.
  • Notify the Registrar of Companies and the Board about the resolution to liquidate the company within seven days of such resolution.
  • The provisions of sections 35 to 53 shall apply to voluntary liquidation proceedings for corporate persons with such modifications as may be necessary.
  • Where the affairs of the corporate person have been completely wound up, and its assets completely liquidated, the liquidator shall make an application to the NCLT for the dissolution of such corporate person.
  • NCLT shall pass an order that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly.
  • A copy of an order, shall within fourteen days from the date of such order, be forwarded to the authority with which the corporate person is registered.

REFERENCES

 

Article by- Anklesh Mahunta, Legal Intern at Prime Legal

Article reviewed by Riti Gupta, Legal Assistant at Prime Legal

 

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Traffic Legal Aid

INTRODUCTION

It is pertinent to note that Traffic Legal Rules are one of the most important rules that are in violation, most of the times by both the citizens and the Traffic Police. That is why it becomes important to be acknowledged these rules and some facts that might lead to violation of the basic rights of both citizens and the authorities. It is evident that the instances wherein people might be violating the traffic rules are augmenting with the increase in the level of traffic-on-roads. The idea is not to be acquainted by any law books to have the basic traffic legal aspect through law books, and statutes. These are just simple rules and regulations that also act as guidelines towards your distinct actions as per norms of the roads.

KEEPING IN MIND THE NECESSITIES

It is to be noted that most of the rules are totally ordained by the Motor Vehicles Act of 1988. However, it does not need an arduous interpretation of its provisions, the same is manageable on the reader’s end.

The traffic rules as per Section 3, the basics of the traffic rules emerge. The section simply states the necessity of having a driving license or an instructor (carrying a valid license), to guide the driver of any given vehicle. As we turn around the pages of the act, the whole code of conduct of traffic norms can be seen. It is advised for the drivers, and in fact every citizen to be in cognizance of these major rules, and provisions, provided as per the act. Some of these are mentioned below.

    • Wearing a helmet is a law that has not actually made a legitimized legal impact at some places of the nation. However, it is to be noted that even for the shortest distances, the rider of a two-wheeler vehicle should use helmets to cover his head. The same goes for the passenger. As per Section 129 of the Act, wearing helmet is a necessary pre-requisite to for two-wheeler riders, and their passengers. Moreover, Section 128 of the act limits the passenger upto two on a particular vehicle. However, infants and children can be accommodated.
    • It is to be noted that if a traffic police officer, has ordered you to stop for any enquiry, you have to stop your vehicle, and attend to his queries. But is to be noted that No power is to be given to the Traffic Police Officer, to snatch your keys forcefully, as it is legal and at the same time, actionable in the court.
    • Moreover, it can be seen many a places, wherein Police Officers (wearing Khakis, and not the Traffic Police) are stopping people for traffic laws. It can be rightly pointed out that No such power is vested with Police Officers, to stop people, and to take actions as per the Traffic Police Officers.
    • It is advisable to negate the usage of alcohol while driving. However, there is some limit to it, while driving. A driver, as per the Motor Vehicles Act, section 185 (read with 202) if found with 30 gm of alcohol, in his 100 ml blood sample, shall be subjected to arrest without warrant. Along with it, he/she may be liable to imprisonment or fine, or both.
    • Furthermore, racing and speeding cars, are also seen on empty roads at night. It is highly advisable that despite nightfall, no such speeding or racing is allowed as per the Act, as it is both subjected to imprisonment or fine.
    • It is important to note that proper documentation of the given vehicle should be carried along, if riding or driving the vehicle, as the lack of these documents might be punishable as under the laws. Moreover, it is recommended to drive/ride insured vehicles, as it also might lead to the similar repercussions as stated above.

It can be devised that these regulations are not in contravention to any liberty, or in violence of any fundamental rights, or religious rights. These regulations are simply sanctioned by the government in order to protect the mishaps and other road-accidents that may not only intrude the lucrative flow of traffic but also to avoid deaths, and other hazardous mishaps in the flow of traffic.

CONCLUSION

The dichotomy of “what is legal” or “what is illegal” as per the traffic rules and regulations is quite vast than what one expects it to be. Therefore, it is advised to read the provisions and the guiding regulations provided as per the road and traffic control authorities, and to have a bit cognizance of any new law or any such ordinance that has been mandated. The idea is not only to be fully equipped with lawful actions of driving, but is also to protect the rights of both citizens and the authority in order to maintain law and order in the society, and smooth functioning of traffic on roads.

Written By:

Lakshya Sharma

(Intern at Prime Legal)

Article Reviewed By:

Riti Gupta

(Legal Assistant, Prime Legal)

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