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Delhi High Court Transfers Winding-Up Petition to NCLT Due to Rent Payment Defaults.

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Case Title: ATAMJIT SINGH & ORS. Vs. SPORTS FIT WORLD PVT. LTD.

Case No.: CO.PET. 48/2016

Dated on: May 07, 2024

Quorum: HON’BLE MR. JUSTICE DHARMESH SHARMA

Facts of the Case:

The case involves a petition filed by Atamjit Singh & others against Sports Fit World Pvt. Ltd. under Sections 433(e) and (f) of the Companies Act, 1956, seeking winding up of the respondent company due to non-payment of outstanding rent amounting to Rs. 1,99,70,730/- for the period from June 2013 to November 2015. The petitioner leased commercial property to the respondent with a monthly rental of Rs. 9,25,000/-, but the respondent repeatedly defaulted on payments, leading to legal notices and court proceedings. Despite the petitioner’s efforts, no liquidator was appointed, prompting the court to transfer the case to the National Company Law Tribunal (NCLT) as per the provisions of the Companies Act, 2013.

Issues framed by the Court:

  1. Whether there lies a default in fulfilling lease agreement obligations?
  2. Whether the failure of the respondent to reply to legal notice discharge its liabilities?
  3. Whether the proceedings should be transferred to the National Company Law Tribunal based on the stage of the winding-up proceedings?

Legal Provisions:

Section 433 (e) of the Companies Act, 1956: Deals with the power of the court to wind up a company.

Section 433 (f) of the Companies Act, 1956: It states that a company can be wound up if the company has acted against the interests of the sovereignty and integrity of India, security of the State, friendly relations with foreign States, public order, decency or morality.

Section 434 of the Companies Act, 1956: It pertains to the jurisdiction of the court for the winding up proceedings.

Section 439 of the Companies Act, 1956: Empowers the HC to make rules for regulating the proceedings under the Act.

Section 13 of the Punjab Rent Control Act: It provides for the tenant’s obligation to pay rent.

Section 485 (1) of the Companies Act, 1956: Deals with the power of the Central Government to make rules for carrying out the provisions of the Act.

Rule 26 of the Companies (Court) Rules, 1959: Pertains to the submission of documents and petitions in court proceedings under the Companies Act. It outlines the requirements and procedures for filing documents, petitions, or applications with the court.

Section 290 of the Companies Act, 2013: Pertains to the power of the Central Govt. to make rules regarding the winding up of companies.

Contentions of the Appellant:

The contentions of the appellants, Atamjit Singh & Ors., revolve around their petition seeking the winding-up of Sports Fit World Pvt. Ltd. due to non-payment of rent. The appellants assert that Sports Fit World Pvt. Ltd. has constantly defaulted on rent payments for the commercial property leased to them. Despite agreements and legal actions taken against the respondent, the outstanding rent remains unpaid. Further, they highlight that they served legal notices to the respondent regarding the outstanding rent and initiated legal proceedings under Section 138 of the Negotiable Instruments Act, 1881, and Section 13 of the Punjab Rent Control Act. However, the respondent failed to respond adequately, leading to the filing of the present petition.

The appellants argue that the respondent’s failure to pay its debts in the ordinary course of business justifies the filing of a winding-up petition under Sections 433(e) and (f) of the Companies Act, 1956, read with relevant provisions of the Act. They acknowledge the enactment of the Insolvency and Bankruptcy Code, 2016, and the Companies Act, 2013, during the proceedings. They contend that given the absence of appointed liquidators and the progression of legal frameworks, transferring the case to the National Company Law Tribunal (NCLT) is appropriate, as per Section 434 of the Companies Act, 2013.

Contentions of the Respondent:

A mere interpretation can be brought in order to determine the contentions of the respondent herein, which may include: Dispute over Rent Payment, Legal Defenses, Counterclaims, Procedural Objections and Request for Alternative Remedies. 

Court’s Analysis and Judgement:

The court’s analysis and judgment focus on the petitioner’s request for winding up of the respondent company due to non-payment of rent. The court notes the sequential default by the respondent in rent payments, legal actions taken by the petitioner, and the absence of appointed liquidators in the case.

However, it cites certain relevant legal provisions, including Section 434 of the Companies Act, 2013, which allows for the transfer of winding-up proceedings from High Courts to the National Company Law Tribunal (NCLT). The court also references a Supreme Court decision indicating that cases at a nascent stage should be transferred to the NCLT. Therefore, the court decides to transfer the case to the NCLT, disposing of the current petition and directing the electronic record to be transmitted to the NCLT. The judgment emphasizes the NCLT’s authority to consider the matter further and pass appropriate orders.

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Delhi High Court Upholds Petitioner’s Appeal, Transfers Case to NCLT and Dismisses Tribunal’s Liability Order

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 Case Name: Gurbakhsh Singh Ba, Buliders Private Limited v. Fortis Hospital Limited Escort Heart Institute & Research Centre 

Case No.: CO.APPL. 1353/2015 

Dated: May 14,2024 

Quorum:  Justice Dharmesh Sharma  

 

FACTS OF THE CASE: 

In order to carry out specific work at Fortis Hospital in Ludhiana, the respondent company issued a work order on May 15, 2014, with No. LDH-1/Addl Work/0101/R-1, in favour of the petitioner company. The petitioner completed the work to the satisfaction of the respondent company within the time frame specified in the work order.  

The petitioner company raised bills in accordance with the work completed. Dated August 14, 2014, and August 20, 2014, for a total of INR 2,52,59,522/- and transferred the same to the respondent company’s office for money exchange. The petitioner in this instance is the one who, via email dated on August 21, 2014, the responding company verified the amount of the work completed and provided the petitioner with an assurance that the sum owed will be properly compensated.  

But in spite of several reminders, the respondent company refused to release the outstanding payment. As a result, the petitioner was forced to serve the respondent company with a formal demand notice dated October 16, 2014. Following that, the petitioner company served the respondent company with a statutory legal notice dated November 13, 2014, in accordance with Sections 271 (1)(a) and 271 (2) (a) and (c) of the Companies Act, 2013. 

In response to the aforementioned legal notices dated 16.10.2014 and 13.11.2014, the respondent company, through its counsel, responded on 11.12.2014 and 26.12.2014, respectively. Suffice it to say, while the respondent company acknowledged issuing the Work Order, they denied any further obligation to pay the petitioner, claiming that the payment had already been made in accordance with the Memorandum of Understanding dated 22.05.2014 and that the Work Order in question was an internal adjustment issued for accounting purposes.  

 

 

LEGAL PROVISIONS: 

  • Section 433 of the Companies Act, 1956. Circumstances in which company may be wound up by Tribunal. The Tribunal has the authority to wind up a company for the following reasons: if the company has decided by special resolution to be wound up by the Tribunal; if the company defaults on delivering the statutory report to the Registrar or on holding the statutory meeting; if the company does not begin operations within a year of its incorporation, or suspends operations for an entire year; if the number of members is reduced below two, or below seven in the case of a private company; if the company is unable to pay its debts 

 

 

ISSUES: 

  • Whether respondent is entitled to the recovery of Rs.5,91,906/- towards balance amount for supply of goods to the appellant? 
  • Whether respondent is entitled to interest claimed @ 18%per annum w.e.f. July, 2019 till the filing of the suit, amounting to Rs.2,57,479/- from the appellant? 

 

CONTENTIONS OF THE PETITIONERS: 

The petitioners vehemently argued that the petitioner company is requesting the respondent company be wound up because it has unpaid debts totaling Rs. 2,48,39,128 and Rs. 2,34,53,258 in two different petitions. In compliance with the work orders dated May 15, 2014, and May 12, 2014, the petitioner finished the work to the respondent’s satisfaction within the allotted time.  

The respondent company promised payment and validated the amount of work completed via email, however they did not transfer the money in spite of several reminders. In order to recover money, the petitioner issued the respondent business with statutory legal notices and legal demand notices in accordance with the Companies Act of 2013.  

 

CONTENTIONS OF THE RESPONDENT:  

The respondent’s counsel strongly contends that the issuing of the work order but disclaimed any further responsibility, claiming that payment had been made in accordance with a Memorandum of Understanding (MoU) dated May 22, 2014, which had nothing to do with the work carried out in accordance with the Work Order dated May 14, 2014. 

They asserted that the disputed Work Order was an internal modification made for accounting purposes. According to the respondent, the work order dated May 12, 2014, was revoked, and a new work order dated May 14, 2014, was issued for internal accounting purposes. This new work order adjusted the amount already paid under the May 22, 2015, memorandum of understanding.  

 

COURT’S ANALYSIS AND JUDGMENT: 

The court found that a review of the record confirms that the current winding up petitions are completely unworkable. The current procedures are in its early stages, to the extent that neither an Official Liquidator nor a Provisional Liquidator has been designated to assume control over the assets and operations of the responding company. Therefore, in these company petitions, no significant orders have been issued.  

The parties’ learned counsels have made representations in this regard. On behalf of the Petitioner’s learned Counsel, it has been argued that the purpose of the provisions pertaining to the transfer of pending winding up proceedings—particularly the fifth proviso to Section 434—is to prevent the emergence of parallel proceedings. In relation to the current case. 

As per the court’s ruling, all cases filed before the date in any District Court or High Court under the Companies Act, 1956 (1 of 1956), including those pertaining to arbitration, compromise, arrangements, reconstruction, and winding up of companies, will be transferred to the Tribunal. The Tribunal will then be able to handle these cases starting from the point where they were filed.  

Additionally, the court held that the Supreme Court had taken into consideration the entire statutory framework pertaining to company winding up as well as a number of rulings when it held that, even after admission, the High Court may transfer a petition of this kind to the NCLT, provided that no irreversible actions have been taken in connection with the company’s winding up. In addition, the petitioner’s experienced counsel has submitted that no application has been moved to transfer the current petitions to the NCLT, and this cannot be accepted.  

The court after considering the previous debate, this Court believed that the current petitions cannot be allowed to be continued before it because no substantive actions have been made to wind up the corporation. The instant petitions are therefore moved to the NCLT. The NCLT has the authority to decide these cases based on their merits and issue relevant rulings that comply with the law. 

 

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Doon Valley Institute of Education’s Recognition Restored by Delhi High Court, Criticizes NCTE’s Withdrawal Decision for Lack of Merit

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Case Title – Doon Valley Institute of Education Vs. National Council for Teacher Education & Anr.

Case Number – W.P. (C) 6277/2024

Dated on – 10th May, 2024

Quorum – Justice C. Hari Shankar

FACTS OF THE CASE
In the case of Doon Valley Institute of Education Vs. National Council for Teacher Education & Anr., the Doon Valley Trust was initially formed and registered on the 13th of November, 2000 as a society under the Societies Registration Act, 1860. The Trust procured around 2 Acres of land in Karnal, Haryana, for the purpose of establishment of a teacher training educational institution. The institution was named as Doon Valley Institute of Education and was granted recognition by the National Council for Teacher Education (NRC) for the conduction of a B.Ed. course with an initial admission of 100 seats, later increased to 300 seats. In the year 2011, the Trust sought for surrendering its registration under the Societies Registration Act, 1860 and acquired permission to incorporate as a private limited company under Section 25 of the Companies Act, 1956. The Trust was thereafter incorporated as a private limited company on the 18th of April, 2011. On the 21st of March, 2023, the NRC issued a show cause notice to the Appellant Institution, stating concerns about its change from a trust to a private limited company and questioning its compliance with the regulations of the NCTE. The Appellant responded to the show cause notice, still the NRC decided to issue another show cause notice. This decision was challenged by the Appellant, which was later disposed of by the court with the directions to respond to the show cause notice and for the NRC to decide according to the law. The Appellant, on the 8th of May, 2023, submitted its reply to the show cause notice, but the NRC decided to withdraw the recognition granted to the Appellant institution on the 15th of September, 2023, stating the reason as non-compliance with the regulations of the NCTE regarding the change in the nature of the Trust. The Appellant instituted a statutory appeal against the withdrawal order, which was dismissed on the 12th of April, 2024, by the Appellate Committee, confirming the withdrawal of recognition.

ISSUES
The main issue of the case whirled around whether the conversion of the Doon Valley Trust from a society to a private limited company complies with the regulations of the NCTE?
Whether the withdrawal of recognition by the NRC was justifiable on the basis of the change in the nature of the Trust and the compliance of the institution of the Appellant with the regulations of the NCTE?

LEGAL PROVISIONS
Section 25 of the Companies Act, 1956 prescribes the Power to dispense with “Limited” in name of charitable or other company
Section 14(3) of the National Council for Teacher Education Act, 1993 prescribes the Recognition of institutions offering course of training in teacher education
Section 17(1) of the National Council for Teacher Education Act, 1993 prescribes that Once the recognition of a recognized institution is withdrawn under sub-section(1), such institution shall discontinue the course or training in teacher education, and the University or the examining body shall cancel affiliation of the institution in accordance with the order passed under sub-section(1), with effect from the end of the academic session next following the date of communication of the said order
Section 18(1) of the National Council for Teacher Education Act, 1993 prescribes that Any person aggrieved by an order made under Section 14 or 15 or 17 of the Act may prefer an appeal to the council within such period as may be prescribed

CONTENTIONS OF THE APPELLANTS
The Appellants, through their counsel, in the said case contented that the impugned order violates the Section 17(1) of the NCTE Act, 1993, which only allows the withdrawal of the recognition if there is a contravention of the Act, Rules, Regulations, or Conditions of Recognition and that there are no such provisions prohibiting the change of management from a registered society to a company.
The Appellants, through their counsel, in the said case contented that the reliance of the Respondent on an internal communication from the NCTE to SRC is unjustifiable as it does not constitute a legal basis for the withdrawal of the recognition.
The Appellants, through their counsel, in the said case contented that there was no change in the management when the institution transitioned from a registered society to a company and that the same individuals continued to manage the institution, and both the societies and companies are eligible for recognition under the regulations of the NCTE.
The Appellants, through their counsel, in the said case contented that the Respondents could not invoke a condition from the Regulations of the 2007 which was omitted in subsequent regulations to withdraw recognition.
The Appellants, through their counsel, in the said case contented that the accusations of a change in management was only made in the Appellate order and wasn’t mentioned in the show cause notice or withdrawal order, which is unjust.

CONTENTIONS OF THE RESPONDENTS
The Respondents, through their counsel, in the said case contented that this case involves more than just a change in the management and that it is about an entirely new entity running the institution, different from the one granted recognition by the NRC.
The Respondents, through their counsel, in the said case contented that there is no explicit prohibition on changing from a society to a company, the new entity is not the one originally granted recognition, and hence, making the withdrawal of recognition is justified.
The Respondents, through their counsel, in the said case contented that there is no provision explicitly prohibiting such a change, but since the entity running the institution changed entirely, the question of continuing the recognition does not arise.

COURT ANALYSIS AND JUDGMENT
The court in the case of Doon Valley Institute of Education Vs. National Council for Teacher Education & Anr., post hearing all the arguments from both the Appellant as well as the Respondents, examined the legal provisions and factual circumstances scrupulously. The court scrutinized the relevant regulations, especially the Regulation 4 of the 2014 Regulation, to determine the eligibility criteria for recognition. The court emphasized that the focus should be on the institution itself rather than the entity managing it. Both the Trusts and the Companies were deemed eligible to seek recognition, and a change in the managerial control did not automatically invalidate the recognition. The court conducted a scrupulous review of the show cause notice and withdrawal order issued by the NCTE and observed that the accusations pertained to the change in the status of the managing entity, rather than any violation committed by the institution itself. Thus, the withdrawal of recognition was deemed unjustifiable. The court held that the withdrawal of the recognition lacked merits and quashed the order of the withdrawal and directed the restoration of the recognition of the institution of the Appellant. Additionally, the court instructed that the NCTE to update the status of the institution on its website and inform relevant bodies accordingly.
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Kingfisher Airlines’ Merger Process Validated: Karnataka high Court Upholds Decision Amidst Allegations

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Case Name: Srividya C G v. Serious Fraud Investigation Office  

Case No.: (WP No. 4380 of 2018) 

Dated: April 15, 2024 

Quorum: Justice Hemant Chandangoudar 

 

FACTS OF THE CASE: 

Under the direction of accused No. 5 (Mr. Vijay Mallya), Kingfisher Airlines Limited (KFAL) was founded in 2004 and is mainly involved in domestic civil aviation. It was created under the Companies Act, 1956. In order to operate internationally, airlines must have a fleet of 20 aircraft and five years of domestic commercial operation under the 5/20 Rules, which were introduced by the Indian government. 

KFAL attempted to purchase Deccan Aviation Limited (DAL), which accused No. 10 controlled, despite not fulfilling the necessary standards. Acted No. 5, taking into account KFAL’s current loss of Rs. 1,234 crore and the possible capital gain from the acquisition of DAL, conspired with other accused to manufacture false documents, deceive, and cause loss to violating several sections of the Income Tax Act and the Companies Act, as well as DAL’s shareholders and stakeholders. 

There were three steps to the process: pre-merger, merger, and post-merger. The accused chose to create two non-existent undertakings as part of a fake de-merger during the pre-merger phase in order to satisfy the demerger requirements. A plan of arrangement was submitted during the merger stage in order to de-merge the airline business from KFAL and combine it with DAL in accordance with Sections 391(2) and 394 of the Act, 1956. The faked paperwork was an attempt to evade capital gain taxation. 

Following the merger, KFAL suffered losses; these were held by KFAL and rebranded as Kingfisher Training and Aviation Services Limited (accused No.1) rather than being transferred to the accused No. 2 – Company. This was done in an effort to present the accused No. 2 Company as a successful business in order to obtain more funding.  

Following the merger, KFAL suffered losses. These losses were held by KFAL and rebranded as Kingfisher Training and Aviation Services Limited (accused No.1) rather than being transferred to the accused No. 2 – Company. This was done in an effort to present the accused No. 2 Company as a successful business in order to obtain more funding. 

Accused No. 4: United Breweries (Holding) Ltd., the holding/promoter company of Accused Nos. 1 & 2, was instrumental in the transfer of monies to Accused No. 2 and provided a corporate guarantee in behalf of Accused No. 2. It was represented by its director, Mr. Vijay Mallya.  

Mr. A Harish Bhat, the seventh accused (WP Nos. 3943–3947/2018), One of the main players in the coordination between the valuers for the Share Swap Ratio during the merger and the fraudulent brand valuation for the purpose of securing bank funding based on fictitious predictions was Mr. A Harish Bhat, Treasurer of the UB Group and Director of Accused No. 4 Company. Mr. Ashok Wadhwa is Accused No. 12. The approach to continue the merger process in a dishonest manner was proposed by Mr. Ashok Wadhwa, a director of Accused No. 11 and a chartered accountant. 

 

CONTENTIONS OF THE PETITIONERS: 

The petitioners contended that criminal complaints are not permitted to reopen the merger procedure, which was approved by the Court in accordance with the Companies Act. They contended that issues that have already been decided upon in processes conducted in accordance with the Companies Act ought not to be brought up again unless there is proof of the concealing of important facts. 

The petitioners highlighted that shareholders and creditors are required by law to participate in schemes approved under Section 391 of the Companies Act. The approved plans can only be changed with the approval of the court, notwithstanding the existence of opposing views. 

The Company Court’s responsibility in approving a scheme is supervisory; it makes sure that the law is followed and that no boundaries are crossed. While ensuring that the valuation procedure complies with legal criteria, the court does not serve as an appellate authority. 

Unless there is an obvious breach of the law, courts should not be interrogating the business acumen of parties engaged in schemes. Disparities in valuation should not be the only reason for the court to get involved. 

The appropriate line of action for contesting a fraudulently rendered decision is to file an application with the court that made the decision. Without proof of material facts, criminal complaints cannot be used to reopen cases that have previously been decided in proceedings under the Companies Act. Suppressing the material facts is not acceptable. 

 

CONTENTIONS OF THE RESPONDENTS: 

The responders vehemently argued that the charges against the accused should be brought under the previous Act since the acts were committed under it. As a result, a complaint was made outlining the accused’s violations of the previous Act. Following the repeal of the previous Act, the Companies Act, 2013 was passed and went into force on September 12, 2013. The new Act required the investigation to be carried out, therefore as a result, the investigation. 

The respondents strongly argued that as per the terms of the new Act, the SFIO, a statutory investigation authority, has conducted an investigation, presented a report, and filed the complaint; therefore, the restrictions mentioned in Section 202 of Cr.PC would not apply in this particular case. 

It was further argued that in this particular case, the officer was authorised by the central government to submit a complaint with the special court. Therefore, the need to record the public servant’s statement and carry out the investigation envisioned under Section 202, sub-clause 1, does not exist because the complaint was lodged by a public worker who was lawfully authorised by the central government. As such, the petitioners’ argument that the process of issuing the order is invalid because it does not follow the procedure for an inquiry as specified by Section 202 of the CRPC is baseless. 

The plan was approved by the necessary majority of unsecured creditors. Deccan Aviation Ltd. subsequently filed Company Petition in 2008. Via an affidavit, the Regional Director of the Ministry of Corporate Affairs, Southern Region, Chennai, submitted objections to each and every petition with the Registrar of Companies, Bengaluru. 

The Assistant Solicitor General of India, speaking on behalf of the Registrar of Companies, limited objections to just three, despite the affidavit raising six to seven concerns. The objections were centred around the valuation figures of Rs. 69 crore for the sale of Deccan’s charter services operation to DCL. Concerning the confusion created by the firms’ names, the Assistant Solicitor General further suggested that Sections 21 and 23 of the firms Act be followed.  

It was rather vehemently contended that the fact that United Breweries Ltd. failed to obtain Central Government approval before to purchasing shares was also pointed out as a violation of Section 108A of the Act. 

 

LEGAL PROVISIONS: 

  • Section 391 of the Companies Act, 1956: This clause ensures single-window clearance by acting as a comprehensive code for schemes of arrangement. Even if creditors and stockholders disagree or object, the schemes approved under Section 391 are legally binding on them. 
  • Section 212 of the Companies Act, 2013: The inquiry conducted by the Serious Fraud Investigation Office (SFIO) into a company’s operations is covered in this section. By virtue of the Companies Act, the SFIO is empowered to look into and prosecute fraud cases. 
  • Section 212(3) of the Companies Act, 2013: According to this clause, the Central Government’s investigation has to be finished in a certain amount of time. There could be consequences for bail and other legal actions if the inquiry is not finished in the allotted time frame. 
  • Section 36: Punishment for Fraudulently Inducing Persons to Invest Money: The deceptive acts that are intended to persuade people to invest money in a corporation are covered in this section. Anybody who gains a loan, incentive, or benefit from a business, its officer, representative, or another individual by making a false statement or using a fake document may be held accountable. 
  • Section 448: Punishment for False Statement: According to Section 448 of the Companies Act of 2013, anyone who provides a false appearance of title or obligation to any person or obtains a loan, reward, or benefit of any kind from a company, company officer, representative, or other person through the use of a false statement or document will be subject to legal action. 
  • Section 447: Punishment for Fraud: Regarding the operations of a corporation or any corporate body, fraud is defined in Section 447. In order to deceive, obtain unfair advantage, or do harm, it encompasses any act, omission, hiding of facts, or abuse of position carried out by one individual or in collusion with others. 

 

COURT’S ANALYSIS AND JUDGMENT: 

The court noted that unless the amending Act specifically or implicitly states differently, procedural adjustments are typically assumed to be retroactive. Unless the amending act specifically states otherwise, modifications to the trial forum are usually regarded as procedural and are assumed to be retrospective.  

The statute loses its retroactive effect if a new forum is exclusively open to claims brought after it was established. On the other hand, the normal rule is to make it retrospective if no such restriction is clearly expressed.  

The court additionally noted that if the new Act specifically permits such continuity and if the repealing Act does not indicate a contradictory purpose, the competence of a Special Court established under a new Act to try charges under a repealed Act may be preserved.  

The court noted that the Act, 1956 was purportedly violated in the charges. Following the Act of 2013, the petitioner’s allegations of offences were the subject of an investigation. A First Class Magistrate presided over the trial of the offence punishable under Section 68 of the Act, 2013. In order to exercise its authority under Section 212 of the Act of 2013, the SFIO carried out an inquiry.  

The court further observed that According to Section 435, the Special Court is limited to trying cases involving offences under this Act (i.e., the Act, 2013) and not the Act, 1956, which carry a sentence of two years or more in jail. Regarding the other violations punishable by the Act of 1956 or acts punishable by prior company law that carry a sentence of less than two years in prison.  

The Act of 2013 and its associated offences are the only ones for which the Special Court created under Section 435 has jurisdiction; the Act of 1956 and its associated offences are not covered by this jurisdiction.  

The jurisdiction of the Special Court is restricted to the Companies Act, 2013, as opposed to the proviso to Section 435(1), which states that all other offences shall be tried, as the case may be, by the Magistrate to try any offence under this Act or under any previous Company Law. That is because the Special Court was established specifically to try offences under the Act, 2013, and as such, its jurisdiction cannot be extended retroactively to try offences under the Act, 1956.  

As per the court’s observation, any individual who satisfies the specified requirements may be subject to prosecution under Section 68 of the Act, 1956. It does not expressly state that just the company’s directors or officers will be covered by the provisions. This clause imposes liability on anybody who willfully and deliberately misleads others by making false claims, projections, or assertions or by hiding important information in order to persuade them to purchase shares or debentures.  

As a result, it covers everyone engaged in these kinds of fraudulent actions, regardless of their status within the organisation, and it can also cover those who work for the organisation as professionals. The term “Any Person” refers to professionals working for the company and cannot be limited to “Officer who is in default,” as that term is defined in section 5 of the Act, 1956.  

the court decided that following the aforementioned discussion, it became clear that the learned judge of the special court, which was created in accordance with the Companies Act of 2013, lacked legal jurisdiction in taking the reconnaissance. It is also not possible to reexamine the question of whether fraud tainted the merger process by starting a criminal investigation because this court had already approved the scheme of arrangement. Consequently, it would be an abuse of the judicial system to permit the criminal procedures to continue. 

 

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Maximum Stamp Duty of Rs. 25 lakhs is applicable only as a one-time measure and not on each subsequent increase in the share capital of a company: Supreme Court

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Case title: State of Maharashtra & Anr. Vs National Organic Chemical Industries Ltd.

Case no.: Civil Appeal No. 8821 of 2011

Decision on: April 5th, 2024

Quoram: Justice Sudhanshu Dhulia and Justice Prasanna B. Varale

Facts of the case

The respondent company was incorporated with an initial share capital of Rs. 36 crores and in 1992, it increased its share capital to Rs. 600 crores and accordingly paid a stamp duty of Rs.1,12,80,000/- as per Article 10 of Schedule-I of the Bombay Stamp Act, 1958. The State/appellant amended Article 10 and introduced a maximum cap of Rs. 25 lakhs on stamp duty which would be payable by a company. Subsequently, the respondent passed a resolution for a further increase in its share capital to Rs. 1,200 crores and paid Rs. 25 lakhs as stamp duty. However, according to the respondent, this was done inadvertently as it was soon realized that stamp duty was not liable to be paid by them since the maximum stamp duty which was of Rs. 25 lakhs payable on Articles of Association (AOA) as per the provisions of the Stamp Act, had already been paid by them in 1992.

Consequently, the respondent wrote a letter seeking a refund of the payment of Stamp Duty of Rs. 25 lakhs but this request was turned down stating that whenever the authorized share capital of a company is increased, the stamp duty is payable on each such occasion at the time of filing of Form No. 5 and it is not a one-time measure. Aggrieved by the same, the respondent filed a writ petition before the High Court seeking a refund of Stamp Duty of Rs. 25 lakhs with interest, paid by them inadvertently. The High Court ruled in favor of the respondent and held that Form No.5 is not an instrument as defined by Section 2 of the Stamp Act and that stamp duty can only be charged on AOA, where the maximum duty (Rs.25 Lakhs), payable as per the amendment has already been paid. An appeal contesting the same was preferred before the Apex Court.

Submissions on behalf of the Appellants/State

The Counsel submitted that every time a company increases its share capital, it is a separate taxing event and stamp duty is liable to be paid irrespective of whether the maximum amount payable under the section has previously been paid. Further, he relied on Section 14 A of the Stamp Act and contended that any material or substantial alteration in the character of an instrument requires a fresh stamp duty according to its altered character. Hence, the maximum cap of Rs. 25 lakhs which was introduced after the payment of Stamp Duty of Rs.1,12,80,000/- cannot be taken into consideration in any case.

Submissions on behalf of the Respondents

The Counsel submits that it is only the Articles of Association of a company which are chargeable to Stamp Duty under Article 10. The Form No.5 which is being contended by the appellants to be a separate instrument is completely alien to the Stamp Act as it serves a very limited purpose of giving notice to the Registrar that a company has increased its share capital beyond the authorised share capital. She further submitted that increase in the share capital of a company does not materially or substantially alter the character of the Articles of Association so as to fall within Section 14A of the Stamp Act. Thus, the counsel through a catena of judgement contended that the fiscal statutes have to be construed strictly

Court’s Analysis and Judgement

The Court examined the relevant provisions of Stamp Duty Act and quoted the definition of instrument. The first question before the Court was whether the notice sent to the Registrar in Form No.5 is an “instrument” as defined under Section 2(l). On perusal of the provisions of Companies Act noted that it is the Registrar who is the custodian of the articles of a company and not the company. Thus, when a company has to alter the same or modify its share capital as recorded therein, it has to pass a resolution and file its Form No. 5. It relied on the decision of Allahabad High Court in New Egerton Woollen Milthels, In re, where the Court answered the above question in negative. The Court noted that filing of Form No. 5 is only a method prescribed, whereby “notice” of increase in share capital has to be sent to the Registrar, within 30 days of passing of such resolution. It further emphasized that it is only the articles which are an instrument within the meaning of Section 2(l) of the Stamp Act and not the Form No. 5.

Further, the Court addressed the question on whether the increase in share capital of the respondent would mandate the payment of Stamp Duty on the materially alters the character of the instrument, i.e., Articles of Association or whether the same could be considered as a part of and valid according to Section 31(2) of the Companies Act. The Court asserted that it is a settled position of law that in case of conflict between two laws, the general law must give way to the special law. A conjoined reading of the Stamp Act and the Companies Act would show that while the former governs the payment of stamp duty for all manner of instruments, the latter deals with all aspects relating to companies and other similar associations. Hence, stated that the Companies Act which is the special law overrides the General Law (Stamp Act) and thereby, any increase in the share capital of the company also shall be valid as if it were originally there when the Articles of Association were first stamped.

Secondly, on the question of whether the maximum cap on stamp duty is applicable every time there is an increase in the share capital or it is a one-time measure. The Court ruled that the Maharashtra Stamp (Amendment) Act, 2015 which amended the charging section for Articles of Association i.e., Article 10 of the Stamp Act fortifies on the fact that the maximum cap of Rs. 25 lakhs would be applicable as a one-time measure and not on each subsequent increase in the share capital of a company.

The Court rejected the contention of appellant that the stamp duty paid before the amendment cannot be taken into account and held that it is true that the amendment does not have retrospective effect, however since the instrument ‘Articles of Association’ remains the same and the increase was initiated by the respondent after the cap was introduced, the duty already paid on the same very instrument will have to be considered and that it is not a fresh instrument which has been brought to be stamped, but only the increase in share capital in the original document, which has been specifically made chargeable by the Legislation.

The Apex Court therefore, dismissed the appeal and upheld the order of the Bombay High Court. Accordingly, it directed the appellants to refund Rs. 25 lakhs paid by the respondent.

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Judgement Reviewed by – Keerthi K

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