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

 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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Judgment reviewed by Riddhi S Bhora 

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Zee And Sony’s Proposed Merger Encounters A Hurdle – A Closer Examination Of The Shelved Deal

ABSTRACT:

ZEE Entertainment and Sony’s Indian intended to merge to become one of the biggest entertainment companies in India. The two-year-old announcement of the $10 billion merger included plans to combine two streaming platforms, over 75 television channels, and film assets. Sony, however, has cancelled the merger due to unfulfilled requirements. There have been rumours of a dispute among the leadership, and ZEE has hinted that it might sue Sony. The parties have now cancelled the agreement and filed lawsuits against each other.

INTRODUCTION:

In the fast-paced world of media and entertainment, the proposed merger of ZEE Entertainment Enterprises Ltd. and Sony Pictures Networks India was a watershed moment with the potential to reshape the Indian entertainment industry. However, the highly anticipated merger was officially terminated on January 22, 2024.

ORIGIN AND TERMINATION OF THE DEAL:

In September 2021, the two media behemoths announced their initial merger agreement, which was a calculated decision to merge their digital assets, production operations, linear networks, and programme libraries. The goal of the merger was to establish the biggest entertainment business in India, with a broad range of products and services to appeal to different types of consumers. On December 21, the two companies signed the merger agreement following the completion of the 90-day due diligence period.

The proposed merger would give the Japanese group a sizable market share at a time when consolidation is changing the media landscape in India by creating a 74-channel powerhouse. Sony has pledged to invest $1.6 billion to increase its footprint, and the company will own 53% of the merged company.

Now, Sony Group Corp terminated its merger with ZEE Entertainment Enterprises Ltd. on January 22nd, after nearly two years of negotiating the $10 billion transaction. The situation was first reported on by Bloomberg, who cited leadership conflicts exacerbated by Indian regulatory authorities.

REASON FOR TERMINATION:

Sony released an official statement stating that the definitive agreements required the parties to discuss in good faith an extension of the end date required to make the merger effective by a reasonable period of time in the event that the merger did not close by the date twenty-four months after their signature date. It said that, among other reasons, the closing conditions of the merger had not been met by that date, which is why it did not close by the deadline.

The issues with the appointment were one of the primary reasons for cancelling the deal. Sony and Zee disagreed about who should lead the merged entity. Sony advocated for NP Singh, its India managing director and CEO, to take over as managing director in the interim, citing concerns about Punit Goenka, Zee’s managing director and CEO. These were exacerbated when the Securities and Exchange Board of India (SEBI) barred Goenka from holding any managerial positions while investigating allegations of fund siphoning. Goenka’s ban was eventually lifted. Nonetheless, Sony remained hesitant to proceed. Goenka offered to step down just days before the merger deadline, but he disagreed with N P Singh’s authority over the deal.

AFTERMATH THE TERMINATION:

Sony invoked arbitration and legal action against ZEE for alleged breaches along with a $90 million termination fee with this cancellation, which could result in a protracted legal battle. ZEE, under the direction of Punit Goenka, has declared that it will refute Sony’s assertions.

At the Singapore International Arbitration Centre (SIAC), Sony has filed for arbitration against ZEE. To put the previously approved merger plan into effect, ZEE has filed a petition with the National Company Law Tribunal (NCLT) in Mumbai.

CONCLUSION:

It’s possible that the merger’s termination will be detrimental to both parties. Sony and ZEE were both thinking about growing into the Indian market. Both businesses lost out on a chance to solidify their positions in India’s fiercely competitive entertainment sector as a result of the failed merger.

In conclusion, the ZEE-Sony merger’s unravelling serves as a reminder of the difficulties associated with media mergers and acquisitions. It highlights how crucial it is for all parties involved in such transactions to communicate clearly and conduct due diligence. It will be interesting to watch how ZEE and Sony face the legal implications and handle the opportunities and challenges in the rapidly evolving Indian entertainment industry once the dust settles.

 

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Written by – Surya Venkata Sujith

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INSOLVENCY LAWS AOUND THE WORLD

Introduction

Though the terms “insolvency” and “bankruptcy” are frequently used interchangeably in everyday speech, they have distinct meanings. Insolvency and Bankruptcy are not the same thing. The term “insolvency” refers to a person’s situation in which their assets are insufficient to cover their debts or their overall incapacity to do so. In a narrow sense, the term “bankruptcy” refers to a party’s inability to pay his obligations when they fall due during normal business operations.

A decade ago, the idea of India being a premier commercial location appeared far-fetched. In India, one had to go through difficult procedures in order to launch a business. In addition, once the companies were up and running, unfavorable circumstances made it look difficult to wind down operations in India, which diminished investor trust[1].

he IBC, enacted in 2016, is a comprehensive legislation that addresses the insolvency and bankruptcy resolution process in India. It streamlines the resolution process for distressed entities, promotes a time-bound and transparent mechanism for dealing with insolvency, and aims to maximize the value of assets. The IBC has significantly improved the ease of doing business in India by providing a structured framework for the resolution of stressed assets, reducing the burden on the traditional legal system. The code has been instrumental in promoting a creditor-friendly environment, fostering investor confidence, and contributing to the overall efficiency of the Indian financial system. Following a settlement agreement between Coffee Day Global Ltd (CDGL) and its financial creditor IndusInd Bank, the NCLAT has revoked the insolvency decision against the business that owns and runs the coffee chain Cafe Coffee Day.

UNCITRAL and Insolvency Laws

The General Assembly of the United Nations has given the United Nations Commission on International Trade Law (UNCITRAL) the authority to harmonies and standardize international trade law.  The commission created a Model Law on Cross-Border Insolvency (“the Model-Law”) as part of its project of harmonization. The United Nations (UN) General Assembly founded the UNCITRAL in 1966.  The General Assembly acknowledged that disparities in national laws governing trade were obstacles to the efficient flow of commerce.  UNCITRAL was established to forward plans for the harmonization and unification of international trade laws. The development and harmonization of bankruptcy rules on a worldwide basis are greatly aided by the work of the United Nations Commission on International Trade Law (UNCITRAL). The inability of a debtor to pay its debts, or insolvency, is a complex problem that impacts people, companies, and economies all over the world. In order to ease cross-border bankruptcy processes, safeguard creditors’ interests, and advance economic stability, there is an increasing need for international collaboration and insolvency law harmonization. This article examines UNCITRAL’s importance in the area of insolvency legislation, its goals, and how they have influenced the development of the global insolvency landscape.[2].

A lack of international coordination in insolvency matters can frequently result in office holders or relevant authorities being unable to deal with assets effectively, leading to the concealment or removal of assets and, in some cases, a reduced return to creditors or, as the case may be, a reduced chance of saving a failing business.  If there is no legal framework permitting cooperation in the state where an insolvent has an interest, it may be difficult to effectively advance matters relating to cross-border insolvency due to the need to follow complicated and unfamiliar procedural and judicial systems.

Objectives of UNCITRAL

One of the key purposes of UNCITRAL is to simplify and improve cross-border insolvency processes. Businesses with assets, creditors, and activities in numerous countries are increasingly common as a result of globalization. The Model Law establishes a legal framework for cross-border recognition and coordination of insolvency cases, resulting in a more expedient resolution procedure.

By setting clear principles for the handling of creditors’ claims in bankruptcy proceedings, UNCITRAL tries to defend the interests of creditors, both domestic and international. This serves to level the playing field for creditors and stimulates foreign investment by increasing the certainty of their rights’ execution.

UNCITRAL helps to economic stability by aiding nations in implementing efficient bankruptcy systems. Insolvency rules that are effective can assist reduce systemic risks connected with financial crisis, eventually encouraging economic growth.

UNCITRAL provides technical support and capacity-building programmes to nations in order to assist them in implementing the Model Law and improving their insolvency systems. This assistance is especially beneficial to emerging economies seeking to modernize their insolvency procedures.

Impact of UNCITRAL

The Model Law has been accepted in over 50 nations, and its concepts have been integrated in various forms into national bankruptcy legislation. This harmonization has sped up cross-border insolvency processes, lowering legal complications and expenses.

The use of UNCITRAL standards has increased the efficiency and efficacy of insolvency systems. Cases involving various jurisdictions are now concluded faster and with fewer legal squabbles.

Creditor confidence in foreign transactions has increased as a result of UNCITRAL’s efforts to defend creditors’ interests. This has benefited both investment and global trade.

UNCITRAL’s technical assistance programmes have helped a number of nations build bankruptcy frameworks that are in line with international best practices.

Comparison of Insolvency Laws

Insolvency Framework in United Kingdom[3]

The Insolvency Act of 1986 and the Insolvency Rules of 1986 govern the United Kingdom’s insolvency structure. The Cork Review Committee Report on Insolvency Law and Practise (1982) provided the basis for the 1986 Insolvency Act. Prior to the enactment of the Insolvency Act, 1986, insolvency law in the United Kingdom was fragmented and was contained in the Bankruptcy Act, 1914, the Deeds of Arrangement Act, 1914, the Companies Act, 1948, and elements of the Country Code Act, 1959. They were reinforced by common law and equity concepts.

The Insolvency Act, 1986, which deals with insolvency of both people and businesses, is broken down into the three categories below. Group I addresses Corporate Insolvency Group II focuses on personal insolvency and Group III handles many issues relating to both corporate and individual insolvency. The following additional processes were implemented by the Insolvency Act of 1986 in an effort to determine if it was possible to revive a burdened firm as a functioning concern. This provision of the UK Insolvency Act, 1986 is an effort to imitate the “rescue Culture,” a trait of the US business sector.

  1. CVAs (Company Voluntary Agreements)
  2. Administration
  3. Administrative Receivership

Insolvency Framework in USA

In the United States of America, bankruptcy is governed by a federal statute known as the “Bankruptcy Code”. All bankruptcies in America are governed by the same federal statute. Title 11 of the United States Code contains the Bankruptcy Code, which was established in 1978 by Section 101 of the Bankruptcy Reform Act. The Federal Rules of Bankruptcy Procedure (Bankruptcy Rules) regulate the procedural components of the bankruptcy procedure. The Bankruptcy Code specifies six fundamental categories of bankruptcy cases. “Liquidation” is the chapter 7 title. In Chapter 7 bankruptcy, non-exempt property is taken over by a court-appointed trustee or administrator, who subsequently sells it and distributes the money to creditors.[4]

Chapter 9 deals with “Adjustment of Debts of a Municipality”. Municipalities have the option of reorganization under Chapter 9 bankruptcy proceedings. Municipalities (which include cities, towns, villages, counties, taxing districts, municipal utilities, and school districts) are protected from creditors in Chapter 9 Bankruptcy proceedings and are able to repay debt through an approved payment plan.

Chapter 11 deals with “Reorganization”. As contrast to contrast to Chapter 7, when the company shuts down and a trustee sells everything, under Chapter 11 the debtor maintains control over its business activities while simultaneously repaying creditors through a court-approved reorganization plan. 1986 saw the addition of Chapter 12 to the Bankruptcy Code. It enables a small-scale farmer or fisherman to keep running their company while the plan is implemented.

Insolvency Framework in INDIA

A specifically created “Bankruptcy Law Reforms Committee” (BLRC) under the Ministry of Finance prepared the Insolvency and Bankruptcy Code Bill. On December 21, 2015, the Insolvency and Bankruptcy Code was presented in the Lok Sabha and then submitted to a Joint Committee of Parliament. The Committee presented its recommendations, and on May 5, 2016, the Lok Sabha approved the revised Code. The Code was approved by the Rajya Sabha on May 11, 2016, and on May 28, 2016, the president gave his assent to it.

India as a whole is covered under the Insolvency and Bankruptcy Code, 2016. According to Section 1 of the Code, the Central Government may designate several dates for the implementation of the Code’s various provisions, and any reference to the beginning of the Code in a particular provision should be understood to relate to that provision’s implementation of that provision. The Insolvency and Bankruptcy Code, 2016, unifies the existing framework by combining insolvency and bankruptcy under a single piece of legislation. Companies, partnerships, limited liability partnerships, individuals, and any other entity that the central government may define are subject to the Code’s provisions.

The Insolvency and Bankruptcy Code, 2016, unifies the existing framework by combining insolvency and bankruptcy under a single piece of legislation. Companies, partnerships, limited liability partnerships, individuals, and any other entity that the central government may define are subject to the Code’s provisions.

According to Section 2 of the Insolvency and Bankruptcy Code, 2016 as amended by the Insolvency and Bankruptcy Code (Amendment) Act, 2018, the provisions of the Code shall apply to: any company incorporated under the Companies Act, 2013 or under any prior company law; any other company subject to any special Act currently in effect; any Limited Liability Partnership incorporated under the Immediate Liability Partnership Act, 2008; Such other body incorporated under any other company law; and any other person.

Landmark Cross Border Insolvency Cases

  1. Case: State Bank of India vs. Jet Airways (India)[5]

The case starts with the opening of corporate bankruptcy proceedings against Jet Airways and continues with NCLT’s ultimate approval of a resolution plan for its turnaround over a period of two years in three distinct courts. Due to a large amount of unpaid debt, three petitions to begin Corporate Insolvency Proceedings (CIRP) were filed against Jet Airways, the corporate debtor in this case. The NCLT bench was informed at the first hearing that a Dutch district court had initiated bankruptcy proceedings against Jet Airways a month earlier. In this regard, the Council determined that concurrent procedures on the same matter would cause delays and skew the course of this case’s proceedings.

The justification offered is that the Code on Recognition of Orders of Foreign Jurisdictions’ Sections 234 and 235 specify the conditions under which the Government of India may enter into reciprocal agreements with other nations. The Court concluded that, in this instance, no common understanding had been formed with the Dutch authorities. Additionally, the Bench thought NCLT had the required jurisdiction because Jet Airways has its registered office and significant assets in India. By ruling dated June 20, 2019, the Bench nullified and voided the District Court of Netherlands proceedings. The NCLT approved the beginning of corporate bankruptcy proceedings against Jet Airways in India. Insolvency procedures involving Jet Airways were ongoing simultaneously in India and the Netherlands.The Dutch Trustees appealed NCLAT decisions issued by the NCLT Benchmark about non-approved parts of the Dutch procedure. After reviewing the appeal, NCLAT requested that the “Resolution Professional” hired by Jet Airways work with the Dutch Trustee to determine whether a joint “Corporate Insolvency Resolution Process” was feasible. Following this request, the RP and the Dutch trustee came to an agreement to speed up the settlement process using a “proposed model of co-operation.” The suggested model was finally agreed upon by the parties and presented to NCLAT for approval. On order dated September 26th, NCLAT subsequently accepted the model.  Dutch court representatives were permitted by Bank to attend talks with Jet Airways.[6]

According to the protocol, “The Parties recognize that the Company is an Indian company with its Centre of Main Interest in India, the Indian Proceedings are the main insolvency proceedings, and the Dutch Proceedings are the non-main insolvency proceedings,” meaning that Indian laws apply to foreign assets located in the Netherlands. NCLAT gave the Dutch government permission to participate in the creditors’ committee, but without voting privileges. In order to pursue the bankruptcy procedures jointly, the Resolution Professionals and the creditor’s committee were given instructions to work with the Dutch trustees and to sign into such cooperation agreements. Both parties had complied with the NCLAT’s directive and joined the “cross-border insolvency protocol.”

The Insolvency Professional and Dutch Trustees might combine the claim within their authority in accordance with this protocol, and depending on the information collected, they could also evaluate alternative procedures. A request for the NCLT Mumbai Bench’s final approval of the resolution plan was made. By ruling dated June 22, 2021, Bench accepted the majority of the “windup plan” and given the consortium 90 days to get the required regulatory clearances. Bench also ordered the creation of a Monitoring board to monitor the entire process and approval from the Directorate General of Civil Aviation (DGCA). The bankruptcy and Bankruptcy Code’s first cross-border bankruptcy in India for 2016 came to an end with this.

  1. Case: M/S Shilpi Cable Technologies Ltd. v. Macquarie Bank Ltd[7]

In M/S Shilpi Cable Technologies Ltd. v. Macquarie Bank Ltd., the court provided an interpretation of numerous clauses included in Section 8 of the 2016 Insolvency and Bankruptcy Code.  Section 9 of the law also addresses how to apply the Act’s requirements for the Operational Creditor to initiate the insolvency proceedings against a corporate debtor.

Hamera International Private Limited and Macquarie Bank Limited, Singapore entered a contract under which the appellant bought the rights, titles, and interests of the original supplier under a supply agreement in favour of Shilpi Cable Technologies Ltd. Hereafter referred to as “Respondent.”[8]

The respondent was served with two invoices from the appellant demanding payment of the outstanding balance, with a 150-day payment period beginning on the date of the bills of lading. The appellant issued an email requesting payment of the sums as soon as they were due. When the appellant received a denial of any such payment default, it sent the respondent a statutory notice according to Sections 433 and 434 of the Companies Act of 1956 to collect the unpaid balance. Additionally, the appellant sent a demand notice under Section 8 of the Insolvency and Bankruptcy Code 2016 at the respondent’s registered office, requesting that it pay the unpaid balance. In response, the opposing respondent claimed that they owed the appellant nothing and further questioned the legality of the purchase agreement in the appellant’s favour. As a result, the Appellant started the insolvency process by submitting a petition in accordance with Section 9 of the Code.

After hearing from both parties, the court ruled that Section 9(3) is not mandatory and will not be interpreted as a prerequisite in the current case. Instead, the operational creditor may designate a lawyer as an authorized agent under Section 8 of the code to deliver the demand notice. As a result, the Indian Supreme Court annulled the NCLAT’s ruling.

Conclusion

Since the Code is not properly governed, the cross-border insolvency process is seriously problematic. Although the Insolvency Law Committee has suggested a draught, a Bill must first be drafted in order for it to be put into effect. However, a change made in accordance with the Code will make it easier for creditors to do business and improve their business climate. The effectiveness of the legal system also affects how often people file for bankruptcy. More bankruptcy filings are linked to higher judicial efficiency, but more creditor rights combined with higher judicial efficiency results in less filings, indicating some trade-off between creditor rights and judicial efficiency. Greater creditor rights and effective judicial procedures in bankruptcy systems encourage less risky behavior and more out-of-court settlements. They also contend that in order to make up for inadequate legal enforcement, robust creditor rights are especially crucial in nations with weak judicial systems.

“PRIME LEGAL is a full-service law firm that has won a National Award and has more than 20 years of experience in an array of sectors and practice areas. Prime legal fall into a category of best law firm, best lawyer, best family lawyer, best divorce lawyer, best divorce law firm, best criminal lawyer, best criminal law firm, best consumer lawyer, best civil lawyer.”

Written by- Hargunn Kaur Makhija

[1] STIJN CLAESSENS and LEORA KLAPPER (no date) Insolvency laws around the world – a statistical analysis. Available at: https://www.ifo.de/DocDL/dicereport106-forum2.pdf (Accessed: 23 September 2023).

[2] Haywood, G. (2008) UNCITRAL model law on cross-border insolvency, GOV.UK. Available at: https://www.insolvencydirect.bis.gov.uk/freedomofinformationtechnical/technicalmanual/ch37-48/chapter42/part%202/PART%202.htm (Accessed: 23 September 2023).

[3] CS Kajal, C.K.G. (2020) Insolvency and bankruptcy law in various countries, TaxGuru. Available at: https://taxguru.in/chartered-accountant/insolvency-bankruptcy-law-countries.html#:~:text=It%20is%20a%20legal%20status,creditors%20in%20accordance%20with%20Law. (Accessed: 23 September 2023).

[4] CS Kajal, C.K.G. (2020) Insolvency and bankruptcy law in various countries, TaxGuru. Available at: https://taxguru.in/chartered-accountant/insolvency-bankruptcy-law-countries.html#:~:text=It%20is%20a%20legal%20status,creditors%20in%20accordance%20with%20Law. (Accessed: 23 September 2023).

[5] 2019 SCC Online NCLAT 1216

[6] Rakhi Nargolkar (2022) Cross border insolvency- State Bank V. Jet Airways (india) ltd.., IJCLP. Available at: https://ijclp.com/cross-border-insolvency-state-bank-of-india-v-jet-airways-india-ltd/ (Accessed: 23 September 2023).

[7] (2018) 2 SCC 674

[8] Rao, P. (2018) Macquarie Bank Limited vs. Shilpi Cable Technologies – corporate and Company Law – India, Macquarie Bank Limited vs. Shilpi Cable Technologies – Corporate and Company Law – India. Available at: https://www.mondaq.com/india/corporate-and-company-law/664032/macquarie-bank-limited-vs-shilpi-cable-technologies (Accessed: 23 September 2023).

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Navigating the Transition: Delhi High Court’s Decision on Transfer of Winding Up Proceedings to NCLT under IBC   

Case Title: Uma Sharma v. Octagon Builders & Promoters & Anr. 

Date of Decision: 21st September 2023 

Case Number: CO.PET. 147/2014 & CO.APPLs. 858/2018, 301/2023, OLR 211/2019, OLR 293/2019 

Coram: Justice Prathiba M. Singh 

 

Introduction 

 

Uma Sharma (the petitioner) filed a petition under Section 433(e) and Section 439 of the Companies Act, 1956, seeking the winding up of Octagon Builders & Promoters (the respondent company). Multiple petitions were filed against the respondent company on the grounds that payments made to the company had not been returned. The court appointed an Official Liquidator (OL) for CO.PET. 147/2014 and disposed of the other petitions, allowing the petitioners to file claims before the OL. However, proceedings evolved as the company went into liquidation, and the Insolvency and Bankruptcy Code, 2016 (IBC) was enacted. 

 

Factual Background 

 

Several petitions were filed before the High Court against Octagon Builders & Promoters, alleging non-repayment of amounts paid to the company. The court appointed the OL for CO.PET. 147/2014 and disposed of the other petitions, granting the petitioners the right to file claims. Meanwhile, a petition was filed in the National Company Law Tribunal (NCLT), Allahabad Bench, related to the same company. The court considered the implications of the IBC and pending proceedings under Section 434 of the Companies Act, 1956.  

   

Legal Issues 

 

  1. Whether winding up proceedings under Section 434 of the Companies Act, 1956 should be transferred to the NCLT due to the enactment of the Insolvency and Bankruptcy Code, 2016? 
  2. How should the pending winding up petitions be dealt with, considering the objectives of IBC and the stage of proceedings?

 

Observation and Analysis 

 

The court considered the provisions of IBC and the Supreme Court’s guidance regarding the transfer of winding up proceedings. It noted that IBC aims to revive corporate debtors, and liquidation should be the last resort. The court reviewed Rule 5 of the Ministry of Corporate Affairs’ notification, which determined the transfer of winding up cases to NCLT. It emphasized that cases not at an advanced stage should be transferred.  

   

Decision of the Court 

 

The court recalled the order appointing the Liquidator for CO.PET. 147/2014 and transferred the petition to NCLT, Allahabad Bench. It allowed the claimants to pursue their claims before the NCLT. The court emphasized that transactions post-petition filing would be subject to NCLT proceedings and would not prejudice the claimants’ interests. The court also ordered the transmission of electronic records to the NCLT and allowed another claimant to implead in the case.  

   

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Written by – Ananya Chaudhary 

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The Three Major and Developments in Indian Corporate Law

Abstract

This paper explores three interconnected topics influencing the evolution of corporate India. Part 1 examines the landmark Supreme Court verdict on tribunalisation of company law in India, highlighting the debate over legislative competence, separation of powers, and the constitutionality of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT). Part 2 delves into the concept of independent directors, underscoring the need for redefining their roles, responsibilities, and selection processes. It discusses the challenges in maintaining true independence and suggests measures to enhance their effectiveness. Part 3 analyzes the position of statutory auditors in companies, particularly whether they hold an “office of profit.” It examines legal principles, corporate structure, and implications of appointing auditors without shareholder resolutions. By addressing these themes, the paper sheds light on critical facets shaping the trajectory of corporate India.

 

Introduction

The corporate landscape in India is undergoing transformative changes due to global market shifts, economic growth, power dynamics, and climate concerns. This paper delves into three interconnected topics that are shaping the evolution of corporate India. Part 1 focuses on the Supreme Court’s watershed judgment on tribunalisation of company law, discussing its implications, challenges, and debates. Part 2 examines the concept of independent directors and their role in corporate governance, suggesting reforms to enhance their efficacy. Part 3 analyzes the position of statutory auditors and the question of whether they hold an “office of profit” under the Companies Act.

Part 1: Tribunalisation of Company Law in India:

The Supreme Court’s judgment on the establishment of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) is a critical development in the evolution of corporate India. This judgment has sparked debates about legislative competence, separation of powers, and the constitutional framework. The court’s decision to uphold the legislative competence of the Parliament to create NCLT and NCLAT is a significant validation of its authority to reform corporate justice. However, the judgment has also deemed specific aspects of the tribunal’s structure unconstitutional, necessitating amendments. This held in the case of Union of India v. R. Gandhi[1].

The question of legislative competence revolves around the constitutional provisions of Article 323A and 323B, which deal with tribunals’ establishment. Some argue that the court’s interpretation of these provisions can lead to potential conflicts with the principles outlined in Schedule VII of the Constitution. While the court’s judgment suggests a harmonious interpretation, concerns are raised about the potential erosion of separation of powers and the independence of the judiciary. This debate prompts reflection on the delicate balance between administrative efficiency and safeguarding the core principles of governance.

The issue of vesting judicial functions in technical members of the tribunal also draws significant attention. While the court acknowledges the importance of domain expertise, questions arise about the potential compromise of judicial independence. The requirement of technical members to possess certain qualifications might inadvertently dilute the tribunal’s decision-making autonomy. This leads to contemplation on whether expertise can genuinely replace the attributes of impartiality, judicial wisdom, and protection against external influences.

In the case of State of UP v. McDowell & Co.[2], a three-judge bench of the Supreme Court underscored that a law enacted by the legislature could only be invalidated based on two specific grounds: (1) lack of legislative competence, and (2) contravention of any fundamental right enshrined in Part III or other constitutional provisions. These two aspects form the core of the author’s argument, with the remaining aspects being extraneous to the present discussion.

However, the judgment does not definitively clarify whether the Parliament possesses the requisite competence or whether its actions run afoul of Article 323B of the Constitution. An additional concern revolves around the involvement of non-judicial individuals as adjudicators.

In this context, the foundational principle of the “separation of powers,” an inherent element of our constitutional framework, appears to be in jeopardy. While this concern is intuitively comprehensible, the author refrains from delving further into this extensively addressed topic.

Part 2: Independent Directors and Corporate Governance:

The concept of independent directors is integral to maintaining corporate governance and stability. However, the practical implementation often falls short of expectations. The definition of independent directors, as outlined by SEBI in Clause 49, is considered inadequate in ensuring genuine independence. The Enron case, where even the Dean of Stanford Business School failed to detect irregularities, and the Satyam fraud, which exposed gaping weaknesses in governance, underscore the urgency for reform.

The suggestion of statutory protection against arrest for independent directors becomes crucial in light of cases like Nagarjuna Finance, where arrests of former independent directors raised concerns. The fear of legal action can deter competent professionals from accepting directorships, leading to a potential shortage of qualified candidates. Transparency in the selection process, minimizing cozy relationships between boards and independent directors, and addressing conflicts of interest are all necessary steps to enhance the effectiveness of independent directors.

Furthermore, the paper’s recommendation for retirement policies for independent directors is based on the idea of maintaining fresh perspectives and preventing entrenchment. While concerns about industry experience are valid, the role of independent directors as enlightened generalists cannot be understated. Striking a balance between experience and a forward-looking approach is essential for a robust governance framework.

Part 3: Position of Statutory Auditors in Companies:

The role of statutory auditors in corporate financial irregularities has prompted discussions about their liability and accountability. The question of whether they hold an “office of profit” under the Companies Act raises pertinent issues. By examining legal principles and corporate structure, it becomes evident that statutory auditors are appointed by shareholders, indicating a distinction from the company itself. The intention of ensuring independence and an unbiased audit process reinforces the argument against considering them to hold an “office of profit.”

The term “office of profit” remains undefined within the Constitution of India. Through a series of judicial pronouncements[3], the Supreme Court of India has established a set of criteria to determine whether a given position qualifies as an office of profit under the government. These criteria encompass:

  1. The origin of the appointment, whether it emanates from the government;
  2. The authority vested in the government to terminate or dismiss the incumbent;
  3. The source of remuneration, whether disbursed by the government;
  4. The nature of duties undertaken by the holder, including their alignment with government functions;
  5. The extent of control exercised by the government over the execution of these responsibilities.

However, Section 314 of the Companies Act presents a challenge. This section requires shareholder approval for appointments to offices of profit, leading to potential conflicts with the role of statutory auditors. The paper highlights the need for careful consideration of these conflicts and their implications on auditor independence. Balancing the regulatory framework to prevent undue interference while maintaining transparency and accountability is essential.

While assuming an office inherently implies wielding some degree of authority, whether significant or subordinate, on behalf of a company, the assumption of a position or role need not invariably entail exercising authority. [4]In light of this context, it is not legally sustainable to assert that statutory auditors of a company hold a position of profit within the company. According to Section 314(1), the appointment of specified individuals to an office or position of profit necessitates shareholder approval through the passage of a special resolution during a general meeting. This requirement applies to instances like the appointment of a relative of an Independent Director to a position of profit within the company.

Taking into consideration the aforementioned rationale and in conjunction with Section 314 of the Companies Act, it becomes apparent that a statutory auditor can be designated without necessitating a shareholder resolution, even in cases where the auditor has a relationship with one of the Directors. Such a scenario could potentially compromise the autonomy of the Statutory Auditor, undermining their ability to function independently, devoid of undue influence from the company itself

Conclusion

the evolution of corporate India is at a critical crossroads, driven by factors spanning economic shifts, legal transformations, and ethical considerations. The analysis of tribunalisation, independent directors, and statutory auditors exemplifies the intricate landscape that shapes the future of Indian corporates.

The Supreme Court’s stance on tribunalisation highlights the delicate equilibrium between judicial autonomy and operational efficiency. Debates over legislative jurisdiction, separation of powers, and technical expertise underscore the need for a balanced approach that upholds legal principles while accommodating modern business complexities.

Within the realm of independent directors, fundamental challenges arise, evident in cases like Enron and Satyam. Calls for safeguards against unwarranted arrest, transparent selection processes, and well-defined tenures emphasize the urgency to foster a cadre of directors capable of championing robust corporate governance.

Amidst these debates, the role of statutory auditors emerges as a linchpin. The question of whether they hold an “office of profit” intertwines legal interpretation, corporate autonomy, and accountability. As the nexus between shareholder appointments and auditor insulation from direct company influence counters such categorization, their interplay with Section 314 necessitates nuanced consideration.

Overall, these deliberations encapsulate the convergence of legal doctrines, economic realities, and ethical imperatives in the corporate landscape. The pursuit of regulatory oversight while preserving entrepreneurial vigor stands paramount. As India strides forward, these issues signify not just legal concerns, but essential societal benchmarks. They underscore that the transformation of corporate India is not just a process of change, but a profound reimagining. The amalgamation of law, economics, and ethics constitutes a complex mosaic, posing challenges alongside transformative prospects for India’s corporate trajectory.

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Written by- Ankit Kaushik

[1]  Civil Appeal No. 3067 of 2004 with Civil Appeal No. 3717 of 2005, unanimous, judgment dated May 11, 2010, per Justice Raveendran)

[2] (1996)3SCC 709

[3] See Maulana Abdul Shakur v. Rikhab Chand and another (1958) SCR 387; M Ramappa v. Sangappa & others, (1959) SCR 1167; Guru Govinda Basu v. Sankari Prasad Ghosal & Others, (1964) 4 SCR 311; and Shivamurthy Swami Inamdar & another v. Agadi Sanganna Andanappa & Another, (1971) 3 SCC 870, Pradyut Bardolai v. Swapan Roy, JT (2001) 1 SC 136.

[4] Rendell v. Went [1964]2 All ER 464(HL)

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