Corporate Litigation

We do not guarantee result in litigation – why…

We do not guarantee result, one way or the other, in litigation. In fact no one can. Why ….. keep reading.

The out come of litigation depends upon a lot many factors like facts, legal position, manner of presenting the case, the efficiency and skill of the advocates, the care taken by the clients in presenting all relevant facts and the understanding capacity, personal beliefs/prejudices and philosophy, integrity and impartiality of Judges. Consider this :

A litigant may win in the trial court, but may loose in the first appeal; may win in appeal but loose in second appeal. Or a litigant may loose at trail and first appellate court but win at the second appellate court. The hierarchy of appeals, revisions and reviews may lead to reversal and further reversal.

If litigating before tribunals (quasi courts), chances are Judges are not trained or experienced. Also there may not be sufficient number of Judges at tribunal (which is common even for Courts in India). Add to that the lack of judicial discipline like a Judge fully aware of the fact that she/he is retiring, still continues to hear matters and may even reserve orders for pronouncing at a later date. And before his last date of retirement may not be able to pronounce the orders which were reserved. In such situation, litigant need to wait for reconstitution of the bench of tribunal and then hearing starts again from the beginning. All this at the cost of the litigant.

This leads to a lot of uncertainty and if any one tells you or promises about certainty of result and if you know what is stated here … you know there is no guarantee of result in litigation.

If you want to know how judges decide the cases, search on internet “Nature of the Judicial Process”.


When can you initiate IBC action, if the Arbitration award is in your favour?

Hon’ble Supreme Court in K. Kishan vs. M/s. Vijay Nirman Company Pvt. Ltd. (in Civil Appeal No.21824 of 2018, decided on 14.08.2018) addressed – whether the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the IBC”) can be invoked in respect of an operational debt where an Arbitral Award has been passed against the operational debtor, which has not yet been finally adjudicated upon.

M/s Vijay Nirman Company Pvt. Ltd. (the Respondent) entered into a sub-Contract Agreement with one M/s Ksheerabad Constructions Pvt. (‘KCPL’) on 01.02.2008.

Apart from this Agreement, a separate agreement of the same date was entered into between the said KPCL and one M/s SDM Projects Private Limited, Bangalore, as a result of which, a tripartite Memorandum of Understanding was entered into on 09.05.2008 between KCPL, M/s SDM Projects Pvt. Ltd. and the Respondent.

During the course of the project, disputes and differences arose between the parties and the same were referred to an Arbitral Tribunal, which delivered its Award on 21.01.2017. One of the claims that was allowed by the said Award was in favour of the respondent for a sum of Rs.1,71,98,302/-.

At this stage, a notice dated 06.02.2017 was sent by the Respondent to KCPL to pay an amount of Rs. 1,79,00,166/-. This notice was stated to be a notice under Section 8 of the IBC. Within 10 days, by a letter dated 16.02.2017, KCPL disputed the invoice that was referred to in the said notice, stating that the said amount was, in fact, the subject-matter of an arbitration proceeding.

After the notice and reply, on 20.04.2017, a Section 34 petition was filed by KCPL under the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Arbitration Act”) challenging the aforesaid Award. The same was filed within the period of limitation set down in Section 34(3) of the Arbitration Act.

It is only thereafter that a petition was filed under Section 9 of the IBC, on 14.07.2017 with the National Company Law Tribunal (NCLT).

According to the NCLT, the fact that a Section 34 petition was pending was irrelevant for the reason that the claim stood admitted, and there was no stay of the Award. For these reasons, therefore, the Section 9 petition was admitted.

An appeal filed to the National Company Law Appellate Tribunal (NCLAT) met with the same fate, as according to the NCLAT, the non-obstante clause contained in Section 238 of the IBC would override the Arbitration Act. Also, according to the NCLAT, since Form V of Part 5 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 requires particulars of an order of an arbitral panel adjudicating on the default, this would have to be treated as “a record of an operational debt”, as a result of which the petition would have to be admitted, as was correctly done by the NCLT.

The Apex Court relied upon its ruling in Mobilox Innovations Private Limited vs. Kirusa Software Private Limited, (2018) 1 SCC 353 – in particular para 13 thereof on the legislative history; para 27 on the notes on clauses annexed to the Bill; para 32 where it is noticed that the original Bill which ultimately became the IBC had the expression “bona fide dispute” contained in an inclusive definition. It is significant to note that by the time the IBC was enacted the expression “bona fide” was dropped and an observation therein that what is important is that the existence of the dispute and/or a suit or arbitration proceeding must be pre-existing i.e. it must exist before the receipt of the demand notice or invoice; para 38 and para 51 of the said ruling in Mobilox case.

Hon’ble Supreme Court observed that “the alarming result of an operational debt contained in an arbitral award for a small amount of say, two lakhs of rupees, cannot possibly jeopardize an otherwise solvent company worth several crores of rupees”. And that that the judgment in Mobilox Innovations (supra) has made it clear that the insolvency process, particularly in relation to operational creditors, cannot be used to bypass the adjudicatory and enforcement process of a debt contained in other statutes.

And held that the filing of a Section 34 petition against an Arbitral Award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an Award, continues even after the Award, at least till the final adjudicatory process under Sections 34 & 37 has taken place.

The Apex Court has thrown important light by making its observation that-

(i) that there may be cases where a Section 34 petition challenging an Arbitral Award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the Court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed. And in such cases insolvency process under the IBC can commence.

(ii) There may also be other cases where a Section 34 petition may have been instituted in the wrong court, as a result of which the petitioner may claim the application of Section 14 of the Limitation Act to get over the bar of limitation laid down in Section 34(3) of the Arbitration Act. In such cases also, it is obvious that the insolvency process under the IBC cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act.

Companies Act 2013

Whether SFIO needs to complete the investigation within the time specified by the Central Govt.?

The Apex Court held that the period that the Central Govt. may prescribe to complete investigation u/s.212(3) is directory and no fixed period is provided for completion of investigation by SFIO; transfer of investigation by other agencies to SFIO u/s.212(2) of the Companies Act 2013 is irrevocable; when accused is directed to remand by a competent court in exercise of judicial function then the same cannot be challenged by writ of habeas corpus; and about territorial jurisdiction of High Court held that even if the arrests were effected within the jurisdiction of the High Court, since the accused were produced before a competent court in pursuance of Sections 435, 436 of the Companies Act 2013, the High Court ought not to have entertained the writ petition.

Hon’ble Supreme Court in  SFIO vs. Rahul Modi and Another etc. 2019 SCC OnLine SC 423 vide judgement dt. 27/03/2019:

Factual matrix:

a) The investigation into the affairs of Adarsh Group of Companies and LLPs was assigned by the Central Government to SFIO vide Order dated 20.6.2018, per section 212(1)(c) of the Companies Act, 2013. This Order did stipulate in para 6 that the Inspectors should complete their investigation and submit their report to the Central Government within three months.

b) On 20.6.2018 itself, the Director, SFIO appointed investigating officers.

c) The period of three months expired on 19.09.2018. However, the investigation was not over.

d) The proposal to arrest three accused persons was placed by the Investigating Officers before the Director, SFIO and after being satisfied in terms of requirements of Section 212(8) of 2013 Act approval was granted by Director, SFIO on 10.12.2018.

e) After they were arrested on 10.12.2018, the accused were produced before the Judicial Magistrate, Gurugram, Haryana, who by his order dated 11.12.2018 remanded them to custody till 14.12.2018 and also directed that they be produced before the Special Court, Gurugram on 14.12.2018.

f) On 13.12.2018 a proposal seeking extension of time for completing investigation in respect of 57 cases including the present case was preferred by SFIO before the Central Government.

g) On 14.12.2018 the Special Court, Gurugram remanded the accused to custody till 18.12.2018.

h) On the same date i.e. on 14.12.2018 the proposal for extension was accepted by the Central Government in respect of the Group and extension was granted upto 30.06.2019.

i) On 17.12.2018 the Writ Petitions were preferred, inter alia, seeking prayer of writ of habeas corpus, which came up for the first time before the High Court of Delhi on 18.12.2018.

j) On 18.12.2018 itself the accused were further remanded to police custody till 21.12.2018 by the Special Court, Gurugram.

k) On 20.12.2018 Hon’ble High Court at Delhi issued notice returnable on 31.1.2019 and proceeded to consider ad interim relief for immediate release of the accused. It held arrest as illegal detention which cannot be sanctified by subsequent remand orders passed by the concerned Magistrate. And pursuant to said order, the original Writ Petitioners were released on bail. This ad interim relief was challenged by the SFIO before Hon’ble Supreme Court in the present case.

  1. Whether the the date with reference to which the legality of detention can be challenged in a Habeas Corpus proceeding is the date on which the return is filed in such proceedings and not with reference to the initiation of the proceedings?

Held yes, as decided by the Federal Court in Basanta Chandra Ghose vs. King Emperor (1945)7 FCR 81. Similar question was considered in Kanu Sanyal vs. District Magistrate, Darjeeling and Others (1974) 4 SCC 141. The law is thus clear that “in Habeas Corpus proceedings a Court is to have regard to the legality or otherwise of the detention at the time of the return and not with reference to the institution of the proceedings”.

Hon’ble Supreme Court also considered its recent decision of division bench in Manubhai Ratilal Patel through Ushaben vs. State of Gujarat and others (2013) 1 SCC 314; in Saurabh Kumar vs. Jailor, Koneila Jail and another (2014) 13 SCC 436 and a bench of three learned judges in State of Maharashtra and Others vs. Tasneem Rizwan Siddiquee (2018) 9 SCC 745 and held that act of directing remand of an accused is thus held to be a judicial function and the challenge to the order of remand is not to be entertained in a habeas corpus petition.

  1. Whether Delhi High Court have territorial Jurisdiction?

Section 435 of the Companies Act 2013 contemplates establishment of Special Courts for the purpose of providing speedy trial of offences under the said Act. Section 436 then provides that “offences specified under sub-section (1) of Section 435 shall be triable only by Special Court established or designated for the area in which the Registered Office of the Company, in relation to which the offence is committed ……”. Soon after the arrest, the accused were produced before the Judicial Magistrate, Gurugram and then before the Special Court, Gurugram. Special Court, Gurugram would be competent to deal with the matter in terms of Section 436.

However, Learned counsel for the writ petitioners, however, contend that since the accused were arrested in Delhi, were kept in custody in Delhi, and the SFIO office being in Delhi, the High Court of Delhi was competent to entertain and consider the writ petitions so preferred by the writ petitioners. Reliance was placed by them on the decision of this Court in Navinchandra N. Majithia v. State of Maharashtra and others (2000) 7 SCC 640.

However, the Apex Court found that the judgement in Navinchandra Majithia, was not dealing with the matter.  And it relied upon Dashrath Rupsingh Radhod vs. State of Maharashtra and another (2014) 9 SCC 129 and found that “It is true that the decision in Dashrath Rupsingh Radhod 15 was in the context of a criminal complaint under Section 138 of the Negotiable Instruments Act and not while dealing with an issue of maintainability of a writ petition under Article 226 of the Constitution. It cannot, therefore, be said that in the present case, the High Court completely lacked jurisdiction to entertain the petition. However, since the challenge was with respect to the detention pursuant to valid remand orders passed by the Judicial Magistrate and the Special Court, Gurugram, in our considered view, the High Court should not have entertained the challenge. If the act of directing remand is fundamentally a judicial function, correctness or validity of such orders could, if at all, be tested in a properly instituted proceedings before the appellate or revisional forum. In the circumstances even if the arrests were effected within the jurisdiction of the High Court, since the accused were produced before a competent court in pursuance of Sections 435, 436 of 2013 Act, the High Court ought not to have entertained the writ petition. “

  1. The period within which an investigation report is contemplated to be submitted to the Central Govt. u/s.212(3) is mandatory or directory? And where the initial Order of arrest itself was invalid then can such illegality be sanctified by subsequent Order of remand?

Under sub-Section (3) where the investigation is so assigned by the Central Government to SFIO, the investigation must be conducted in the manner and in accordance with the procedure provided in the Chapter and a report has to be submitted to the Central Government within such period as may be specified. This provision contemplates submission of a report within the period as may be specified. The subsequent provisions then contemplate various stages of investigation including arrest under sub-Section (8) and that SFIO is to submit an interim report to the Central Government, if it is so directed under sub Section (11). Further, according to sub-Section (12), on completion of the investigation, SFIO is to submit the “investigation report” to the Central Government. This report under sub-Section (12) may lead to further follow up actions. Under sub-Section (13) a copy of the “investigation report” could be obtained by any concerned person by making an application in that behalf to the Court while under sub-Section (14) on receipt of said “investigation report” the Central Government may direct SFIO to initiate prosecution against the Company. And the provisions of Section 43(2) of the Limited Liability Partnership Act, 2008 do not postulate any such period. Hon’ble Apex Court finds that Section 212(3) of 2013 Act by itself does not lay down any fixed period within which the report has to be submitted. Even under sub-Section (12) which is regarding “investigation report”, again there is no stipulation of any period. In fact such a report under sub-Section (12) is to be submitted “on completion of the investigation”. There is no stipulation of any fixed period for completion of investigation which is consistent with normal principles under the general law. For instance, there is no fixed period within which the investigation under Criminal Procedure Code must be completed.

Again, sub-Section (2) of Section 213 of 2013 Act does not speak of any period for which the other Investigating Agencies are to hold their hands, nor does the provision speak of any re-transfer of the relevant documents and records from SFIO back to said Investigating Agencies after any period or occurring of an event (unlike Section 7 of the National Investigation Agency Act, 2008). The idea under sub-Section (2) is complete transfer of investigation. The transfer under sub-Section (2) of Section 213 would not stand revoked or recalled in any contingency.

“It is well settled that while laying down a particular procedure if no negative or adverse consequences are contemplated for non-adherence to such procedure, the relevant provision is normally not taken to be mandatory and is considered to be purely directory. Furthermore, the provision has to be seen in the context in which it occurs in the Statute. There are three basic features which are present in this matter:-

1. Absolute transfer of investigation in terms of Section 212(2) of 2013 Act in favour of SFIO and upon such transfer all documents and records are required to be transferred to SFIO by every other Investigating Agency.

2. For completion of investigation, sub-Section (12) of Section 212 does not contemplate any period.

3. Under sub-Section (11) of Section 212 there could be interim reports as and when directed.”

And held that In the absence of any clear stipulation an interpretation that with the expiry of the period, the mandate in favour of SFIO must come to an end, will cause great violence to the scheme of legislation. If such interpretation is accepted, with the transfer of investigation in terms of sub Section (2) of Section 212 the original Investigating Agencies would be denuded of power to investigate and with the expiry of mandate SFIO would also be powerless which would lead to an incongruous situation that serious frauds would remain beyond investigation. That could never have been the idea. The only construction which is, possible therefore, is that the prescription of period within which a report has to be submitted to the Central Government under sub-Section (3) of Section 212 is purely directory.

And further held that therefore it cannot be said that in the instant case the mandate came to an end on 19.09.2018 and the arrest effected on 10.12.2018 under the orders passed by Director, SFIO was in any way illegal or unauthorised by law.


Asset held in trust not subject to the moratorium u/s.14 of the IBC

Asset held in trust not subject to the moratorium u/s.14 of the IBC.

Sun Pharmaceutical Industries Ltd. filed application before NCLT, Chandigarh bench seeking its direction to allow it to lift its stock of raw materials of approx. Rs.14 crore in possession of the Parabolic Drugs Ltd (Corporate Debtor). The Corporate Debtor was undergoing the corporate insolvency resolution process and the Resolution Professional appointed was managing the affairs. In terms of “Manufacturing & Supply Agreement” dated 11.02.2010 entered with the Corporate debtor. And as per the said agreement, Sun Pharma supplied the raw-material to the Corporate Debtor for the purpose of manufacturing of the agreed Drug. As per the agreement, the Corporate Debtor agreed to keep the raw materials supplied by the Sun Pharma in trust and to be used only for the purpose of manufacturing finished product and such finished product should be supplied to Sun Pharma only. Further, as per the said agreement, the property and ownership in the raw materials, packaging or other materials and the finished Products or stock in-process of manufacture shall at all times remain and shall be deemed to be vested in RANBAXY (as acquired by Sun Pharma).

The grievance of the Sun Pharma was that neither the manufactured product was made available nor raw material was returned to the Sun Pharma. And after the

pronouncement of moratorium Sun Pharma had not been allowed to visit the manufacturing unit and even electricity connection at the factory of the Corporate Debtor was disconnected. The apprehension is that the raw material being a sensitive chemical might get perished by the passage of time.

Representatives appeared on behalf of the CoC and the Resolution Professional,  opposed the application. It is pleaded that once the Moratorium u/s 14 of IBC is in operation, then the recovery of any property by any owner which is in possession of the Corporate Debtor is prohibited, referred section 14(1)(d) of the Code.

It was also argued that the term “property” is defined u/s 3(27) of the insolvency code which includes money, goods, actionable claim, land, etc. The raw material which is supplied is the “Property” as mentioned in section 14(1)(d) which is under prohibition, therefore, cannot be recovered from the possession of the Corporate Debtor.

Held: The statute has mandated vide section 18(1)(f) that the Interim Resolution Professional shall perform several duties such as ‘take control and custody of any asset over which the Corporate Debtor has ownership rights as recorded in the Balance Sheet of the Corporate Debtor’. Tangible assets whether movable or immovable is within the category of “Assets” as defined in this section vide insertion of an Explanation. Through this explanation an exception is carved out that for the purpose of this section i.e. section 18(1)(f) the followings shall not constitute an Asset and therefore, an Asset owned by a third party, however, in possession of the Corporate Debtor, held under trust or under contractual arrangement.

In the light of this provision if we examine the facts of this case, it is not in dispute that the Operational Creditor M/s. Sun Pharmaceutical Ltd. has supplied the raw material which is in possession of the Corporate Debtor i.e. Parabolic Drugs Ltd. should be released without delay being perishable in nature, following section 18(1)(f) r/w Explanation.

The distinction between Sec.14 and Sec.18 was considered and held that the general rule of Sec.14 is that property in possession of the Corporate Debtor at the commencement of corporate insolvency resolution process cannot be recovered. However, an exception to the said general rule is carved out in the explanation to section 18. When Sec. 18 r/w explanation the term ”asset” shall not include an asset owned by third party in possession of Corporate Debtor, either (i) under trust, or under (ii) contractual arrangements including bailment.

[CA 206/2019, decided on 26/4/2019]

Corporate Litigation

An arbitration clause that is contained in a contract would not “exist” as a matter of law until the contract is duly stamped

The Hon’ble Supreme Court on 10 April 2019 in Garware Wall Ropes Ltd vs Coastal Marine Constructions & Engineering Ltd. (Civil Appeal No. 6361/2019) ruled that when the Supreme Court or the High Court when considers an application under Section 11(4) to 11(6) under Arbitration and Conciliation Act, 1996 (Act or Arbitration Act) and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Indian Stamp Act, 1899 (Indian Stamp Act) to first impound the agreement or conveyance and see that stamp duty is paid before the agreement can be acted upon.

Thus, held that an arbitration clause that is contained in a contract would not “exist” as a matter of law until the contract is duly stamped.

Facts in brief:

The respondent filed a petition under Section 11 of the Arbitration Act. The Bombay High Court allowed the Section 11 petition and appointed an arbitrator. The appellant challenged the same in the present appeal before the Supreme Court.

Issues before the Court:

The question before the Supreme Court was the effect of an arbitration clause contained in a contract which was not stamped.

This itself involved another question – whether the judgment of the Supreme Court in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. [(2011) 14 SCC 66] was still valid or not?

  • In SMS Tea Estate, the issue before the Supreme Court was whether an application under Section 11 of the Act can be rejected on the ground that the arbitration agreement was contained in a lease deed which was not sufficiently stamped.
  • Referring to Sections 33 and 35 of the Indian Stamp Act, the Supreme Court had ruled in that case that unless the stamp duty and penalty due on the instrument is paid, the Court cannot act upon the instrument, which means it cannot act upon the arbitration agreement also which is part of the instrument.

However, Section 11(6A) was introduced in the Arbitration Act by way of 2015 amendment. Hence, the question was whether Section 11 (6A) removed the basis of this judgment, so that the stage at which the instrument is to be impounded is not by the Judge hearing the Section 11 application, but by an arbitrator who is appointed under Section 11.


The Court held that introduction of Section 11(6A) in the Act by way of 2015 amendment does not, in any manner, deal with or get over the basis of the judgment in SMS Tea Estates v. Chandmari Tea Co. (P) Ltd. , which continues to apply even after the amendment.

The Court held that introduction of Section 11(6A) in the Act by way of 2015 amendment does not, in any manner, deal with or get over the basis of the judgment in SMS Tea Estates v. Chandmari Tea Co. (P) Ltd. , which continues to apply even after the amendment.

SMS Tea Estates has taken account of the mandatory provisions contained in the Indian Stamp Act and held them applicable to judicial authorities, which would include the Supreme Court and the High Court acting under Section 11.

A close look at Section 11(6A) would show that when the Supreme Court or the High Court considers an application under Section 11(4) to 11(6), and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Indian Stamp Act to first impound the agreement or conveyance and see that stamp duty is paid before the agreement, as a whole, can be acted upon.

Further, the Court held that the judgments contained in JMD Ltd. v. Celebrity Fitness India Pvt. Ltd., 2019 SCC OnLine Del 6483, B.D Sharma v. Swastik Infra Estate Pvt. Ltd., 2018 SCC OnLine Del 13279, Sandeep Soni v. Sanjay Roy, 2018 SCC OnLine Del 11169, and N.D Developers Pvt. Ltd. v. Bharathi, 2018 SCC OnLine Kar 2938  have not declared the law correctly, and are consequently, overruled.

Further, the Court also held that the recent Bombay High Court judgment (Full bench decided on 04.04.2019 ) in Gautam Landscapes Pvt. Ltd. v. Shailesh Shah and Ors by Full Bench, has incorrectly decided on unstamped instrument.

IBC, Newsletters

Supreme Court holds that the RBI Circular of 12 Feb 2018 not valid

Hon’ble Supreme Court, in Dharani Sugars and Chemicals Ltd v Union of India and Others, on 02 April 2019 held the constitutional validity of Ss. 35AA and 35AB of the Banking Regulations Act, 1949 (the Banking Regulation Act) and also held that the RBI circular of 12.02.2018 directing banking and non-banking companies to initiate action under the Insolvency and Bankruptcy Code 2016 (the Insolvency Code) as invalid being violative of Section 35AA of the said Act and hence action under the said circular shall fail. Here is the brief analysis of the said judgement.

The Banking Regulation (Amendment) Ordinance, 2017 introduced Sections 35AA and 35AB as amendments to the Banking Regulation Act on 04.05.2017. The same reads as under:

“35AA. The Central Government may by order authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016. 

Explanation. – For the purposes of this section, “default” has the same meaning assigned to it in clause (12) of section 3 of the Insolvency and Bankruptcy Code, 2016. 

35AB. (1) Without prejudice to the provisions of section 35A, the Reserve Bank may, from time to time, issue directions to the banking companies for resolution of stressed assets. 

(2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets.” 

Hon’ble Supreme Court has upheld the constitutional validity of Sections 35AA and 35AB of the Banking Regulation Act, 1949.

The constitutional validity is upheld by replying upon the following principles:

(i) economic legislation to be viewed with great latitude (referring to para 85 of Swiss Ribbons Pvt. Ltd. and Anr. v. Union of India and Ors., 2019 (2) SCALE 5).

(ii) Petitioners failed to point out how either of these provisions are manifestly arbitrary [referring to ‘manifestly arbitrariness’ as in Shayara Bano v. Union of India, (2017) 9 SCC 1]. And further observing that these provisions (Ss. 35AA and 35AB) are not different in quality from any of the sections which have already conferred such powers (Sections 14A, 17, 18, 20, 21, 22 – Sec.22(3) in particular, 25, 29, 30 and 31 of the Banking Regulation Act). Further, Hon’ble Court also found that the amendment does not suffer from adequate guidelines [referring to Harishankar Bagla v. State of M. P., (1955) 1 SCR 380 – para 9]; and Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. The Assistant Commissioner of Sales Tax and Ors. – paras 13, 15, 17 and 18].

Section 35AA makes it clear that the Central Government may, by order, authorise the RBI to issue directions to any banking company or banking companies when it comes to initiating the insolvency resolution process under the provisions of the Insolvency Code. The first thing to be noted is that without such authorisation, the RBI would have no such power. 

In exercise of power under section 35AA, the Central Government authorised the RBI vide its order dated 05.05.2017 to take defaulters to NCLT under the Insolvency and Bankruptcy Code, 2016 (‘the Insolvency Code’). Thereupon, the RBI issued circular dated 12.02.2018.

The salient features of the RBI circular dated 12.02.2018 are that restructuring in respect of borrower entities de hors the Insolvency and Bankruptcy Code, 2016 can only occur if the resolution plan that involves restructuring is agreed to by all lenders, i.e., 100 per cent concurrence. Secondly, what has been chosen to be the subject matter of the circular is debts with an aggregate exposure of INR 2000 crore and over on or after 01.03.2018. With respect to such debts, if default persists for 180 days from 01.03.2018, or if the date of first default is after 01.03.2018, then 180 days calculated with effect from that date, lenders shall file applications singly or jointly under the Insolvency Code within 15 days from the expiry of the aforesaid 180 days. In short, unless a restructuring process in respect of debts with an aggregate exposure of over INR 2000 crore is fully implemented on or before 195 days from the reference date or date of first default, the lenders will have to file applications as financial creditors under the Insolvency Code.

It was contended before Hon’ble Supreme Court that the RBI already had such power under Section 35A of the Banking Regulation Act, however it was countered by the Petitioners that when section 35A was introduced in the said Act, at that time the Code was not prevalent and hence RBI directing banks and NBFCs to take action under the Code u/s.35A cannot be accepted.

Held, all statutes are to be interpreted as “always speaking statutes”, unless they reveal a contrary intention. Meaning with change of time meaning in words in statute also gets changed. And thus, has section 35AA not been brought to the Statute book, RBI could have exercised its power u/s. 35A of the Banking Regulations Act, even for IBC.

“The corollary of this is that prior to the enactment of Section 35AA, it may have been possible to say that when it comes to the RBI issuing directions to a banking company to initiate insolvency resolution process under the Insolvency Code, it could have issued such directions under Sections 21 and 35A. But after Section 35AA, it may do so only within the four corners of Section 35AA. 

The matter can be looked at from a slightly different angle. If a statute confers power to do a particular act and has laid down the method in which that power has to be exercised, it necessarily prohibits the doing of the act in any manner other than that which has been prescribed.

The contention that though RBI had enough power u/s. 21 and u/s.35A, new section 35AA was introduced to the Banking Regulation Act as an abundant caution, was not accepted. Hon’ble Supreme Court held that it cannot be so accepted as (i) two conditions precedent introduced in section 35AA, without which, powers cannot be exercised by RBI; and (ii) it is well settled that Parliament does not legislate when no legislation is called for.

Further Hon’ble Supreme Court concluded that “Therefore, the scheme of Sections 35A, 35AA, and 35AB is as follows: 

  • (a)  When it comes to issuing directions to initiate the insolvency resolution process under the Insolvency Code, Section 35AA is the only source of power.
  • (b)  When it comes to issuing directions in respect of stressed assets, which directions are directions other than resolving this problem under the Insolvency Code, such power falls within Section 35A read with Section 35AB. This also becomes clear from the fact that Section 35AB(2) enables the RBI to specify one or more authorities or committees to advise any banking company on resolution of stressed assets. This advice is obviously de hors the Insolvency Code, as once an application is made under the Insolvency Code, such advice would be wholly redundant, as the Insolvency Code provisions would then take over and have to be followed. 
  • Further Hon’ble Supreme Court concluded that it is clear also from the Press Note dated 05.05.2017 of the Central Government (Ministry of Finance), which introduced the Ordinance and specifically referred to resolution of “specific” stressed assets which will empower the RBI to intervene in “specific” cases of resolution of NPAs. The Statement of Objects and Reasons for introducing Section 35AA also emphasises that directions are in respect of “a default”. Thus, it is clear that directions that can be issued under Section 35AA can only be in respect of specific defaults by specific debtors. This is also the understanding of the Central Government when it issued the notification dated 05.05.2017, which authorised the RBI to issue such directions only in respect of “a default” under the Code. Thus, any directions which are in respect of debtors generally, would be ultra vires Section 35AA. 

Then Section 13 of the General Clauses Act, 1897 [“General Clauses Act”] was relied upon to state that the singular would include the plural. To which Hon’ble Court noted that there is no doubt whatsoever that this would be so unless the context otherwise requires, as is provided by Section 13 of the General Clauses Act itself. In the present case, the context of Section 35AA makes it clear that the power to be exercised under the authorisation of the Central Government requires “due deliberation and care” to refer to specific defaults. 

Finally it is held that “Consequently, all actions taken under the said circular, including actions by which the Insolvency Code has been triggered must fall along with the said circular. As a result, all cases in which debtors have been proceeded against by financial creditors under Section 7 of the Insolvency Code, only because of the operation of the impugned circular will be proceedings which, being faulted at the very inception, are declared to be non-est.”

Our comments:
Consequently, proceedings taken by banks and /or NBFCs by virtue of the RBI Circular by taking corporate persons to NCLT under the Insolvency Code has become nullity and without support of law. However, that does not mean that banks / NBFCs are not entitled to recover their debts. Banks/ NBFCs may decide to restructure the debt of such cases outside the Insolvency Code, including under the Sashakt Project. And also equally possible that any one of the Banks / NBFCs may initiate fresh action under the Insolvency Code.

It is believed that the RBI may issue a fresh circular and thereby direct banks and/or NBFCs on steps to be taken due to strike down of its Circular dt. 12.02.2018 by Hon’ble Supreme Court.

Genesis of the RBI Circular 12.02.2018 and impact of the judgement in Dharani Sugars case: To better understand the situation, it is relevant to know the genesis in brief.

Asset Quality Review (AQR) for banks was implemented by RBI in the second half of 2015 and it revealed the true picture of NPA problem. The gross NPAs of Scheduled Commercial Banks (SCBs) rose to Rs.10.4 trillion in March 2018 from Rs.3.2 trillion in March 2015. The problem was more severe for the Public Sector Banks (PSBs) with gross NPAs reaching Rs.9 trillion from Rs.2.8 trillion during the same period.

RBI tried to resolve the NPA problem through several initiatives, including CDR, SDR, S4A, JLF etc.  Two major initiatives have been the Prompt Corrective Action (PCA) by RBI and the recapitalisation of the PSBs by the Government. In April 2017, RBI revised the PCA framework and in October 2017 the Government announced Rs.2.11 trillion recapitalisation package for ailing PSBs, of which Rs.1.53 trillion would be infusion by Government and balance to be raised from the market. 

As these experiments failed, and upon implementation of the IBC, the RBI scrapped all these initiatives and issued a revised guideline on 12 Feb. 2018 for early resolution of stressed assets.

Thereafter, in July 2018, the scheme, called ‘Sashakt’, was recommended by a bankers’ committee and accepted by the government. It is inter-lenders agreement. And it proposes to have a resolution plan for defaulting borrowers and the same to be implemented in a time bound manner. The nature of the resolution plans approved under the inter-creditor agreements would be similar to those under consideration as part of the Insolvency process. However, in this case promoters would continue to be in-charge.

Since this was not enough, particularly after remaining in ICU under PCA for over two years, merger of PSBs is also adopted, as has been done since bank nationalisation. A compulsory merger of banks under section 45 of the Banking Regulation Act, 1949. Amalgamation of Vijaya Bank and Dena Bank with Bank of Baroda has been notified on January 2, 2019. The notification has come into force on April 1, 2019.

And now comes the ruling of the Hon’ble Supreme Court of India, whereby it precludes the RBI from issuing any general directions to banks to initiate insolvency under the Insolvency and Bankruptcy Code, 2016. What is now left for the RBI and the Government is action under Section 35AA and 35AB of the Banking Regulations Act. The Central Government may now analyse specific cases of defaults and issue directions to the RBI in respect of those specific cases. 

Technically, the judgment revives the ability of borrowers to rely on CDR, SDR, S4A, JLF and other restructuring measures (“Traditional Measures”), which were repealed by the RBI Circular of 12 Feb. 2018. However, the market awaits clarity from the RBI on these Traditional Measures.

Given that these Traditional Measures have not achieved much success in resolving NPA issue, Banks are likely to exercise their rights to initiate insolvency proceedings on their own, being their statutory right under section 7 the Code as a financial creditor, probably after taking defaulting borrowers through the Sashakt framework. However, in deserving cases, Banks may take defaulting borrowers directly to NCLT under the Code instead of the Sashakt framework. The Code has given lenders ‘stick’ to deter enough the defaulting Corproate Borrowers to remain on edge.

Way forward: 

Upon request of RBI, from time to time, the Central Govt. to consider ‘specific’ cases for taking under the Insolvency Code and authorise RBI to issue direction to banks and NBFCs to take such specific defaulting borrowers to NCLT under the Insolvency Code. Obviously, such ‘specific’ cases could be where banks on their own are not taking companies to NCLT under the Code.

Alternatively, the Government (mostly after election) may either modify / scrap section 35AA of the Banking Regulations Act and thus enable RBI to bring back the general circular, based on observation of Hon’ble Supreme Court in Dharani Sugars case that RBI could have issued circular similar to circular dt. 12.2.2018 had section 35AA was not legislated. And before deciding on such actions, the Government need to take policy decision on whether to allow further time to specific sectors like power, cement etc. considering their contribution to employment and the economy.

While some of the defaulting corporate borrowers might be happy for now, it’s not going to last long.


Sec.138 of NI Act is not hit by Section 14 of I&B Code

This post is about the judgement of Hon’ble National Company Law Appellate Tribunal (NLCAT) in  Shah Brothers Ispat Pvt. Ltd v. P. Mohanraj & Ors. (Order dt.31.7.2018). The order is under challenge before Hon’ble Supreme Court.

It may be recalled that upon the admission of matter for corporate insolvency resolution process (u/Ss. 7 or 9 or 10) of the IBC, moratorium u/s.14 of the IBC is declared and it prevents the institution of suits or continuance of pending suits or proceedings against the Corporate Debtor (Company or LLP), including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority.

Shah Brothers Ispat Pvt. Ltd. preferred an appeal before the Hon’ble National Company Law Appellate Tribunal (NCLAT), challenging an order passed by the Chennai Bench of the National Company Law Tribunal dated 24th May 2018. In this case, the NCLAT held that no criminal proceeding is barred by Section 14 of  I&B Code. Thus, while there may be moratorium u/s.14 of IBC, existing and new criminal proceedings can survive.

The Hon’ble National Company Law Tribunal (NCLT), Chennai Bench, had directed the Shah Brothers Ispat Pvt. Ltd. to withdraw a complaint case filed under Section 138 of Negotiable Instrument Act treating it as a proceeding hit by sec.14 of IBC as it was filed post commencement of the Corporate Insolvency Resolution Process (as moratorium was declared vide order dated 6th June 2017). And, according to NCLT, proceeding u/s.138 of NI Act is prevented by sec. 14 of IBC.

The question for consideration in this appeal was whether the order of moratorium (u/s.14 of IBC) will cover a criminal proceeding initiated under Section 138 of NI Act. And if so, proceedings u/s.138 cannot be continued, if already commenced or cannot be instituted during the period of moratorium.

The NCLAT held that the Company cannot be imprisoned, therefore punishment under Section 138 of NI Act cannot be imposed against the company (Corporate Debtor). However, fine can be imposed by a court of competent jurisdiction on the Company (Corporate Debtor), if found guilty. Also, it was observed that as section 138 is a penal provision, which empowers the court of competent jurisdiction to pass an order of imprisonment or fine, which cannot be held to be proceeding or any judgment or decree of money claim. Hence, the criminal proceedings cannot fall within the purview of Section 14 of IBC. Accordingly, the appeal was allowed.


Since section 138 proceedings are excluded from the purview of the moratorium under  IBC, it shall have the following repercussions.

1. It prevents Corporate Debtors who approach the adjudicating authority under Section 10,  to take shelter of the moratorium to escape proceedings under Sec.138 of the N.I. Act.

2. The assets of the Corporate Debtor are maintained and in the custody of the Resolution Professional during the moratorium period. Therefore, the creditors are assured that the assets of the Corporate debtor are safe while they discuss the viability and possible resolution plan of the Corporate Debtor. As section 138 NI Act proceedings are held to be not included in the ambit of section 14 of the Code it threatens the Creditor that the complainant may recover his dues from the Corporate Debtor.

3. Any recovery by the Complainant pursuant to sec.138 of NI Act from the Corporate Debtor may lead to preferential treatment under section 43 of the IBC. The proviso to Sec.43(3) states “Any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor”. However, one need to wait for jurisprudence on this aspect.


From the above analysis, it is crystal clear that  moratorium will not be applicable to proceedings under section 138 of the Act and therefore, those cases which are pending before the admission of application under section 7, 9 or 10 of the Code i.e., before the initiation of insolvency process will not be affected by the moratorium. Further, an action under section 138 of the NI Act, 1881 can be initiated even after the commencement of the insolvency process. Albeit, section 14 of the Insolvency and Bankruptcy Code, 2016 does not specifically cover the proceedings under section 138 (dishonour of cheque), the intent of the provision is to cover all such proceedings which are in the nature of recovery of money and to ensure that during this period there is no additional stress on the assets of the Corporate Debtor.   

In a nutshell, exclusion of proceedings under Section 138 of the Negotiable Instrument Act, from the purview of the moratorium has been allowed by the Hon’ble Appellate Tribunal. However, we need to keep an eye on what the Hon’ble Supreme Court decides as the decision of NCLAT is appealed and pending before it.

Our Comments:

Whether proceedings under Section 138 of the Negotiable Instrument Act be considered as civil or criminal in nature. 

The nature of proceedings under N.I. Act is still under a grey patch and ambiguous owing to the different views of the Court. 

Hon’ble Delhi High Court in the matter of Bhajanpura Cooperative Urban Thrift and Credit Society Ltd. Vs. Sushil Kumar, MANU/DE/2084/2014 held that proceedings under section 138 of NI Act, 1881 primarily is of quasi-civil and criminal in nature.

In M/s Meters and Instruments Pvt. Ltd. & Anr. v. Kanchan Mehta, (2018) 1 SCC 560, the Supreme Court observed that the offence under section 138 is primarily a civil wrong and the purpose of the provision is predominantly compensatory. The penal element is mainly for the purposes of enforcing the compensatory element. 

The Hon’ble Supreme Court in Kaushalya Devi Massand v. Roopkishore Khore, (2011) 4 SCC 593 had held that the gravity of a complaint under the NI Act cannot be equated with an offence under the provisions of the Indian Penal Code, 1860 (“IPC”) or other criminal offences. As per the Hon’ble Supreme Court, “an offence under Section 138 NI act is almost in the nature of a civil wrong, which has been given criminal overtones.”

In Damodar S. Prabhu v. Sayed Babalal, it was held by the Apex Court that section 138 is actually in the nature of a civil wrong which has been given criminal implications. This is because the interest of the complainant is the recovery of the money and not sending the accused behind bars. 

Whether provisions of section 14 of IBC is akin to section 446 of the Companies Act 1956?

The division bench of Hon’ble Bombay High Court, in Indorama Synthetics (I.) Ltd. Vs. State of Maharashtra, 2016 (4) Mh.L.J. 249, while interpreting sub-section (1) of section 446 of the Companies Act, 1956 held that the words “suit or other proceedings” exclude criminal complaints filed under section 138 of the NI Act. However, it is relevant to note that in the judgement it was observed that ‘The provisions of section 446(1) of the Companies Act are to be invoked judiciously only when it has got any concern with either the winding-up proceedings or with the assets of the Company. The expression “suit or other proceedings”, therefore, as used in section 446(1) of the Companies Act, has to be construed accordingly and not to be interpreted so liberally and widely so as to include each and every proceeding of whatsoever nature initiated against the Company, including even the criminal proceedings like for the offence under section 138 of N.I. Act, which has got no bearing on the winding-up proceedings of the Company and are not concerned with, directly with the assets of the Company, but are mainly dealing with the penal and personal liability of the Directors of the Company.’. Prior to this, there was a conflicting view on the matter of two single benches of Bombay High Court. Comment: However, in our view, IBC is on a totally different plateau and cannot be compared with Sec.446 of the Companies Act 1956. 

Recently, Hon’ble Bombay High Court in Tayal Cotton P Ltd vs State of Maharashtra (2019) 1 Mah LJ 312 held “However, in my considered view, the aim and object behind providing the bar under Sub Section 1 of Section 446 of the Companies Act and that of Section 14 of the Code are similar and therefore, though not strictly as a precedent, the decision in the case of Indorama is not applicable to the matter in hand, the reasonings and the logic in interpreting the provision contained in Sub Section 1 of Section 446 of the Companies Act laid down therein can easily be pressed into service even in the matter in hand.” And further applying the principle of ejusdem generis held that “the word ‘proceedings’ used therein and even the words ‘order’ and ‘in Court of law’ will have to be interpreted as a proceeding arising in the nature of a suit and orders passed in such proceedings and suits. Apart from the fact that the Legislature has not conspicuously used the words ‘criminal’ as an adjective to the word ‘proceedings’ and as an adjective to the noun ‘Court of law’, it must be assumed that the Legislature in its wisdom has consciously omitted to use such adjectives since it must have intended to prohibit only the suits and execution of the judgments and decrees or a proceeding of the like nature. “

It seems that Hon’ble NCLAT has not been presented with the above rulings. Had attention of Hon’ble NCLAT been drawn to aforesaid rulings, perhaps judgement could have been different.

The order is under challenge before Hon’ble Supreme Court and it will be interesting to note how the Apex Court determines the issue.

Due Diligence


Commencement, scope and overriding effect:

The Ordinance called the Banning of Unregulated Deposit Schemes Ordinance, 2019 notified on 21st February 2019 came into force on the same date.

It extends to the whole of India except the State of Jammu and Kashmir. The Ordinance is in addition to provisions of other law Sec.35[/efn_not]. The Ordinance has overriding effect over other laws framed by the Central Govt or the State Governments. [Sec.34]. It amends the RBI Act, SEBI Act and the Multi-State Co-operative Societies Act. [Sec. 42, r/w the Second Schedule.].

It prohibits ‘deposit takers’ from accepting “unregulated deposits”. It provides for stringent penalties and most offences are made cognizable and non-bailable.

Though Chapter IIB of the Reserve Bank of India Act, 1934 prohibits acceptance and solicitation of deposits by unincorporated persons, it has not achieved its purpose as there is no mechanism to monitor the compliance of the same. The new Ordinance deals with the menace with fierce hands. It also provides for certain compliances to be done by the Companies and other entities.All money accepted falls under the definition of ‘deposit’ and hence deposit taker (other than Companies (NBNFCs) and NBFCs) need to check if it falls outside the exemption granted within the definition of the ‘deposit’ or not. If not, then one need to consider is it accepting and/or soliciting the deposit which is considered as ‘unregulated deposit’. If it is so, the same is banned/prohibited.

Deposit taker:

The Ordinance defines “deposit takers” as an individual, a group of individuals, or a company who asks for (solicits), or receives deposits.  Banks and entities incorporated under any other law are not included as deposit takers[efn_note]Sec.2(6)[/efn_note].

Every ‘deposit taker’ which carries on 21/2/2019 or commences business thereafter of accepting or soliciting deposits is required to intimate to the authority about its business. Even companies accepting deposits under Chapter V of the Companies Act 2013 need to intimate.[Sec.10].

‘Deposit taker’ of regulated deposits shall not make ‘fraudulent’ default in repayment or return or deposit on maturity or in rendering any specified services promised against such deposit [Sec.4]. And in case of any such fraudulent default by the deposit taker, punishment is of imprisonment up to 7 years or fine ranging from minimum Rs.  5 lakh to Rs.25 crore or 3 times the amount of profits made, whichever is higher or both [Sec.22].

Unregulated deposit:

The “unregulated deposit scheme” means a scheme or an arrangement under which deposits are accepted or solicited by any deposit taker by way of business and which is not a Regulated Deposit Scheme. [Sec.2(17)]

On and from the date of commencement of the Ordinance the “Unregulated Deposit Schemes” is banned and-

  1. No deposit taker should participate or enrol or accept deposits in pursuance of Unregulated Deposit Scheme.
  2. No Deposit taker should commit fraud in repaying or returning of deposit on maturity or in rendering any specified service promised against such deposit while accepting deposits pursuant to a Regulated Deposit Scheme.
  3. No person should knowingly make any statement, promise or forecast which is false, deceptive or misleading in material facts or deliberately conceal any material facts, to induce another person to invest or become a member or participant of Unregulated Deposit Scheme.
  4. A prize chit or money circulation scheme banned under the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 should be deemed to be an Unregulated Deposit Scheme.

Regulated Deposit:

Following are recognised as the “regulated deposits” under the Ordinance:

  1. Deposits accepted by companies as per Companies Act,  2013,
  2. Deposits by Nidhi or mutual benefit Society u/s.406 of the Companies Act, 2013,
  3. Deposits by Chit funds registered with State Govt. under the Chit Funds Act, 1982,
  4. Deposits by money lenders under the laws of States / Union Territories,
  5. Any scheme or an arrangement by a prize chit or money circulation scheme under section 11 of the Prize Chit and Money Circulation Schemes (Banning) Act, 1978, (However, other banned Prize Chits or Money Circulation schemes under the said Act are treated as Unregulated Deposits),
  6. Deposits accepted by registered NBFCs,
  7. Deposits accepted by SEBI registered entities as Portfolio Managers, Mutual Funds, Collective Investment Scheme, Alternate Investment Funds, Employee Benefits (ESPS/ESOP), any other scheme or arrangement registered under the SEBI Act, 1992,
  8. Deposits from voting members by a registered Multi-State Co=operative Society,
  9. Deposits under PF, ESIC, Pension under respective laws,
  10. Deposits under a scheme or arrangement as per the National Housing Board Act, 1987,
  11. deposits accepted under any scheme or an arrangement registered with any regulatory authority established under a Statue; and
  12. any other scheme as may be notified by the Central Government.

The Ordinance defines a “deposit” as an amount of money received through an advance, a loan, or in any other form, with a promise to be returned with or without interest. Such deposit may be returned either in cash or as a service, and the time of return may or may not be specified. Further, the Ordinance defines certain amounts which shall not be included in the definition of deposits. [efn_note]Sec.2(4)[/efn_note] For example, loan received by an individual or partnership firm from relatives (relative of partners), amount received by partnership / LLP as capital, self help groups receiving periodic payments from its members subject to ceiling to be specified, amount received in the course of or for business purpose and bearing a genuine connection to such business. The definition of ‘deposit’ under the BUDs Ordinance u/s.2(4) excludes many things. One important exemption is under clause (l) which says ‘an amount received in the course of or for the purpose of business and bearing a genuine connection to such business’ is permitted. Then it gives a list of items which are only illustrations and such illustrated items are permitted category of receipt of money. 

For Companies, the meaning of ‘deposit’ is the same as that under Companies Act 2013 and for NBFCs, the meaning of ‘deposit’ is the same as under the RBI Act, 1934. 

Depositors have priority except under SARFAESI and IBC:

Save as otherwise provided in the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or the Insolvency and Bankruptcy Code, 2016, any amount due from a deposit taker shall be paid in priority over all debts and all revenues, taxes, cesses and other rates payable to the Appropriate Government or the local authority. The Competent Authority shall open an account in a scheduled bank for crediting and dealing with money realized under this Ordinance. [efn_note]Sec.12[/efn_note]. Also, provisional attachment by the Competent Authority has priority, to the extent of the claims of the depositors, over any attachment any authority, except under SARFAESI or IBC, for repayment of any debt, revenue, taxes and cesses and other rates payable to State Govts. or local authorities.[Sec.13]


1. Authority for online database:

The Central Govt. to establish an authority (existing or new) to create an online central database for information on “deposit takers”. And such authority to seek information on ‘deposit takers’ operating in India from Competent Authority or any regulator. [Sec.9]. The Competent Authority will be required to share all information on unregulated deposits with the authority. All deposit takers will be required to inform the database authority about their business. 

2. Competent Authority with a power to attach property, search and seize documents etc.

It intends to appoint ‘competent authority’ who shall be a person designated by the State Government and can be of the rank of Secretary of the State or higher.[Sec.7]. State Govt may nominate more than one such person. And any officer can be notified by State Govt. as an assistant to the Competent Authority. Competent Authority or any officer assisting him (and as notified by State Govt), after recording in writing reasons, provisionally attach the deposits of ‘deposit taker’ who are accepting or soliciting Unregulated deposits. It can also attach money or any property of ‘deposit taker’[Sec.7(3)]. Further, officers may enter, search and seize any property believed to be connected with an offence under the Ordinance, with or without a warrant.  The Competent Authority may: (i) provisionally attach the property of the deposit taker, as well as all deposits received, (ii) summon and examine any person it considers necessary for the purpose of obtaining evidence, and (iii) order the production of records and evidence. He may impound and retain in his custody, the records produced (after recording reasons for such impounding) for such period as may be prescribed by the Rules. For retaining records beyond three months, officers require the prior approval of the Competent Authority. The Competent Authority will have powers similar to those vested in a civil court. And proceedings before him are judicial proceedings u/s.193 and 228 of IPC.

3. Sharing of information with investigating agency:

Banks, State Govts., any regulator, income tax authorities or any investigating agency if having any information in respect of offence investigated by the Police or the CBI, shall share the same to the Police or the CBI.[Sec.11(2) and (3)].

4. Designated Courts:

The Ordinance provides for Designated Courts.  This Court will be headed by a judge, not below the rank of a district and sessions judge, or additional district and sessions judge. After provisional attachment of the deposit takers’ assets, the Competent Authority will approach within 30 days (extendable to 60 days)[Sec.14] the Designated Court to: (i) make the provisional attachment absolute, and (ii) ask for permission to sell the assets. It will also open a bank account to realise and disburse money to depositors under the instructions of the Designated Court.

The Designated Court will have the power to: (i) make the provisional attachment absolute, (ii) vary or cancel the provisional attachment, (iii) finalise the list of depositors and their respective dues, and (iv) direct the Competent Authority to sell the property and equitably distribute the money realised among the depositors. The Court will seek to complete the process within 180 days of being approached by the Competent Authority.[Sec.15(6)]

The Designated Court may take cognizance of offences under the Ordinance without accused being committed to it for Trial.[Sec.32] Thus, it appears that upon the filing of charge sheet by police or the CBI, the Magistrate need to not take any cognizance and remit the matter to the Designated Court.

The Designated Court may also try the accused of an offence other than under the Ordinance, with which the accused may be charged under the Criminal Procedure Code, at the same trial as under the Ordinance. Designated Court is also given the power of disgorgement.[Sec.18(1)(f)]

Designated Court to take cognizance of an offence under the Ordinance only upon a complaint filed by the RBI, SEBI, IRDAI, NHB, PFRDA, EPFO, Central Registrar of Multi-State Co-op. Societies, MCA or any State Govt./Union Territories. However, where a company is accused, cognizance can be taken upon complaint of any person.[Sec.27]

The Competent Authority needs to file an application for making provisional attachment absolute and permission to sell the property. Upon receipt of an application, the Designated Court shall issue a notice to the deposit taker, any person whose property is attached to show cause notice., all other persons represented to it. The Designated Court shall then pass the necessary order.

Appeal from the order of the Designated Court shall be to High Court within 60 days.[Sec.19]

4. Rules

The Ordinance is intended to be implemented by State Governments. It authorises the Union and State Government to frame rules. The Rules are expected to provide for, inter alia, the following:

(i) manner in which and the period for which property may be impounded by the Competent Authority or his assistant officers,

(ii) particulars in the application to be made by the Competent Authority to the Designated Court,

(ii) procedure to be adopted by the Designated Court in dealing with provisionally attached property.

5. Offences and penalties

The Ordinance defines three types of offences, and penalties related to them.  These offences are: (i) running (advertising, promoting, operating or accepting money for) unregulated deposit schemes, (ii) fraudulently defaulting on regulated deposit schemes, and (iii) wrongfully inducing depositors to invest in unregulated deposit schemes by willingly falsifying facts.  For example, accepting unregulated deposits will be punishable with imprisonment between two and seven years, along with a fine ranging from three to 10 lakh rupees.  Defaulting in repayment of unregulated deposits will be punishable with imprisonment between three and 10 years, and a fine ranging from five lakh rupees to twice the amount collected from depositors.  Repeated offenders under the Ordinance will be punishable with imprisonment between five to 10 years, along with a fine ranging from Rs 10 lakh to five crore rupees.[Sec.24]


With the Ordinance in place, now the entire gamut of financial transactions are governed by the law. Unregulated deposits have been the last lag over which there were many legal points remained unanswered. Now the ordinance fills the gap and aggrieved parties, as well as regulators, get clarity on the matter.


The constitutional validity of the IBC upheld by the Apex Court

Sharing a summary of a landmark Judgement of Hon’ble Supreme Court (dated 25.1.2019) in Swiss Ribbons Pvt Ltd & Anr. vs. Union of India & Ors. The Constitutional validity of the Insolvency and Bankruptcy Code, 2016 (the Code or the IBC) was challenged by 10 writ petitions and an SLP. All these are disposed of off, holding that the IBC is constitutionally valid.;

The Judgement sets a wonderful background of the status of Lochner doctrine in the US before deciding on the Constitutional validity of IBC. 

It also in a way recognises observations of US Supreme Courts that 

(i) Legislative bodies have broad scope to experiment with economic problems. 
(ii) We refuse to sit as a super legislature to weigh the wisdom of legislation. 
(ii) we emphatically refuse to go back to the time when courts used the Due Process Clause ―to strike down state laws, regulatory of business and industrial conditions, because they may be unwise, improvident, or out of harmony with a particular school of thought. 

Some of the these and other observations are clearly drawing a line between Legislature and Judiciary and some of the Judgements of India holding that: 
(i) The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved 
(ii) laws, including executive action relating to economic activities, should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion, etc. 

Summary of the Decision:
1. Considering the composition of selection committee set-up in 2015 for appointment of members of National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) as well as amendment brought in 2018 to Section 412 of the Companies Act 2013, held appointment of members of NCLT and NCLAT to be valid.

2. Directs the Union of India to set up Circuit Benches of the NCLAT within a period of 6 months. 

3. Administration of IBC shall be transferred from MCA to the Ministry of Law and Justice. 

4. Classification between financial creditor and operational Creditor neither discriminatory, nor arbitrary, nor violative of article 14 of the Constitution Of India.

Financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code. 
The trigger for a financial creditor‘s application is non-payment of dues when they arise under loan agreements. It is for this reason that Section 433(e) of the Companies Act, 1956 has been repealed by the Code and a change in approach has been brought about. The legislative policy now is to move away from the concept of “inability to pay debts” to “determination of default”.

Four policy reasons have been stated by the learned Solicitor General for this shift in legislative policy. First is predictability and certainty. Secondly, the paramount interest to be safeguarded is that of the corporate debtor and admission into the insolvency resolution process does not prejudice such interest but, in fact, protects it. Thirdly, in a situation of financial stress, the cause of default is not relevant; protecting the economic interest of the corporate debtor is more relevant. Fourthly, the trigger that would lead to liquidation can only be upon failure of the resolution process. 

5. Section 12A passes the constitutional muster, for the reasons stated hereafter. Where before a committee of creditors is constituted (as per the timelines that are specified, a committee of creditors can be appointed at any time within 30 days from the date of appointment of the interim resolution professional. The Judgement makes it clear that at any stage where the committee of creditors is not yet constituted, a party can approach the NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the concerned parties and considering all relevant factors on the facts of each case. 

If the committee of creditors arbitrarily rejects a just settlement and/or withdrawal claim, the NCLT, and thereafter, the NCLAT can always set aside such decision under Section 60 of the Code. 

6. Evidence provided by private Information Utilities is only prima facie evidence of default, which is rebuttable by the corporate debtor.

7. Resolution Professional has no adjudicatory powers (He has administrative powers as opposed to quasi-judicial powers), whereas Liquidator has quasi-judicial powers in determining the claims filed with her/him against the Corporate Debtor in liquidation. 

8. Re-confirm its findings in ArcelorMittal’s case that a resolution applicant who applies under Section 29A(c) has no vested right to apply for being considered as a resolution applicant. The basis for one year under Section 29A(c) is the RBI Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated 01.07.2015. And after account becoming NPA, one more year is allowed before the account is to be treated as Doubtful Asset. And thus passes constitutional muster.

9. There is no vested right in an erstwhile promoter of a corporate debtor to bid for the immovable and movable property of the corporate debtor in liquidation, as section 29A is applicable to liquidation also – per the proviso to section 35(1)(f) of the Code. 

10. On Section 29A(j), held that the expression “related party” and “relative” contained in the definition Sections must be read noscitur a sociis with the categories of persons mentioned in Explanation I to Section 29A, and so read, would include only persons who are connected with the business activity of the resolution applicant. 

Also, an argument that the expression “connected person” in Explanation I, clause (ii) to Section 29A(j) cannot possibly refer to a person who may be in management or control of the business of the corporate debtor in future. This would be arbitrary as the explanation would then apply to an indeterminate person. This contention is also repelled by holding that the Explanation I seeks to make it clear that if a person is otherwise covered as a “connected person”, this provision would also cover a person who is in management or control of the business of the corporate debtor during the implementation of a resolution plan. Therefore, any such person is not indeterminate at all but is a person who is in the saddle of the business of the corporate debtor either at an anterior point of time or even during the implementation of the resolution plan.

11. Section 53 of the Code is valid. An argument has been made by the petitioners that in the event of liquidation, operational creditors will never get anything as they rank below all other creditors, including other unsecured creditors who happen to be financial creditors. And hence would render Section 53 and in particular, Section 53(1)(f) discriminatory and manifestly arbitrary and thus, violative of Article 14 of the Constitution of India. Held that differentiating between secured and unsecured debt is an Internationally accepted practice. Further, repayment of financial debts infuses capital into the economy inasmuch as banks and financial institutions are able, with the money that has been paid back, to further lend such money to other entrepreneurs for their businesses. This rationale creates an intelligible differentia between financial debts and operational debts which are unsecured, which is directly related to the object sought to be achieved by the Code. In any case, workmen‘s dues, which are also unsecured debts, have traditionally been placed above most other debts. Thus, it can be seen that unsecured debts are of various kinds, and so long as there is some legitimate interest sought to be protected, having relation to the object sought to be achieved by the statute in question, Article 14 does not get infracted. For these reasons, the challenge to Section 53 of the Code must also fail.


NCLAT triggers insolvency against an unincorporated Joint Venture IBC

On 30 Nov 2018, the NCLAT has held that insolvency can be triggered against an unincorporated joint venture between two companies. Effectively, insolvency will be triggered against both companies. It is a landmark judgement in several aspects.

The most important aspect is that it gives relief to property buyers, where under the grab of tri-patry agreement between a buyer and a developer and landowner, or such similar cases where due to infights of developer(s) and/or landowner(s), the property buyer suffers.

A single application against two Corporate Debtor is allowed. There is no provision under the Code where a petition for Insolvency Resolution Process can be initiated against two Corporate Debtors who have collaborated for a Joint Venture.

Applicant financial credit did not file the application in the required format and also did not name interim resolution professional.

The appeal was filed against the order dt 12 March 2018 of NCLT, New Delhi bench which disallowed initiating corporate insolvency resolution process against two corporate debtors under a single application of a financial creditor / property buyer.

Two companies, AMB Infrabuild Pvt. Ltd. and Earth Galleria Pvt. Ltd. entered into a collaboration agreement for developing a complex. The former being the owner of the land and the latter being the developer. The collaboration agreement between them established the rights of both parties for the purposes of this project i.e. sale of the property to the extent of their respective share. Thereafter, a tripartite MoU was entered into between the two companies and an allottee, Mrs. Mamatha for booking a property for a sum of Rs. 3 crore. Of which advance of Rs. 5 lakh was paid.

In the said Memorandum of Understanding, the ‘Developer’ and the ‘Land Owner’ has been jointly referred to as the “Company” and the Appellant has been shown as the “Allottee”.

While these companies formed a joint venture for developing this project, they did not register this joint venture as a separate company.

Both companies failed to allot the promised property to the purchaser. The failure to allot was on account of two entities, the relationship between both of which was based on a collaboration agreement.

NCLAT held "If the two ‘Corporate Debtors’ collaborate and form an independent corporate unit entity for developing the land and allotting the premises to its allottee, the application under Section 7 will be maintainable against both of them jointly and not individually against one or other. In such case, both the ‘Developer’ and the ‘Land Owner’, if they are corporate should be jointly treated to be one for the purpose of initiation of ‘Corporate Insolvency Resolution Process’ against them."

The NCLAT accordingly remitted the case back to NCLT for admission, after notice to the parties. And also stated that before admission of the case, it will be open to the Respondents to settle the matter and in such case, the Appellant may withdraw the case.

We need to watch – if the settlement reaches or the aggrieved Corporate appeals to the Supreme Court.