Tag: National Company Law Tribunal

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.

Provident fund, Pension fund and Gratuity to have priority over waterfall u/s.53 of IBC

NCLT, Mumbai in the matter of Precision Fasteners Ltd vs. Employees Provident Fund Organisation, Thane, Vapi and Vashi
Decision dated 12 Sept. 2018
M.A. 576 & 752 of 2018 in C.P. (IB) 1339 (MB) of 2017

Hon’ble NCLT holds that workmen’s due under the provident fund, pension fund and gratuity fund, even though remained unpaid for several years prior to liquidation commencement date of Corporate Debtor, shall not form part of liquidation estate. And hence such PF etc. dues to have priority over waterfall mechanism u/s.53 of the Insolvency and Bankruptcy Code 2016.

Facts:

Corporate Debtor failed to pay dues under EPF Act for 15 years to EPFO. And EPFO despite it proceeding against Corporate Debtor, could not realise the dues owing one or the other legal implications. However, EPFO could attach the assets of the Corporate Debtor. And that attachment is now challenged under IBC by the Liquidator.

Liquidator filed M.A. u/s. 60(5) of Insolvency and Bankruptcy Code, 2016 (‘IBC’) against EPFO seeking reliefs for declaring attachment of movable and immovable properties (‘Properties’) of the Corporate Debtor’s units at Kalwa, Silvassa and Mahad by EPFO as null and void, so as to enable the liquidator to dispose of the properties under IBC.

Properties of the Corporate Debtor were attached by EPFO for not depositing PF dues of workers/employees since long. Dues of workers/employees were determined u/s.7A of EPF Act.

Liquidator, while acting as Resolution Professional, had intimated EPF (APFC and Recovery officer) about his appointment under IBC and had requested for release of Properties.

EPFO filed its claim before the Liquidator of approx. Rs. 16.06 crores and refused to release the attachment of Properties stating that there is no provision to vacate attachment without receipt of the dues due to it.

The contention of the Liquidator before Hon’ble NCLT:
1. He requires Properties to form Liquidation Estate
2. Dues of EPF does not fall within the meaning of ’secured debt’ under IBC and hence cannot be considered as secured creditor on par with other secured creditors.
3. Properties attached by EPFO have been charged / mortgaged to various creditors (secured creditors) prior to attachment by EPFO. And hence attachment by EPFO cannot lie against the secured creditors. Thus, attachment by EPFO impairs the right of secured creditors.
4. Liquidator u/s.35(b) and (d) is required to take into his custody and control all the assets of the Corporate Debtor and take necessary measures to protect and preserve them.
5. U/s.36 Liquidator is entitled to include encumbered assets in the liquidation estate and hence EPFO be directed to release the attachment over Properties.
6. Section 36(4)(a)(iii) of IBC, dues of PF, Pension fund and gratuity fund fo any workmen or employees already credited to those accounts cannot be included in liquidation estate. But the funds that remained as arrears to be deposited with EPFO, is not required to be considered by the Liquidator and hence attachment over Properties by EPFO for arrears of dues of PF shall be released.
7. IBC overrides other laws including EPF Act 1952 per section 238 of the Code. Also IBC enacted later than EPF Act and hence shall override EPF Act 1952. And hence Liquidator in exercise of power conferred u/s.35 and u/s.36 of IBC can comprise the Properties already attached by EPF in liquidation estate.
8. Liquidator relied upon following judgements:
* Ananta Mills Ltd vs. City Dy. Collector (1972 Comp Cas 476), to say that attachment over an asset is only to prevent alienation of the asset but by mere such attachment of the assets, that creditor will not be conferred with any interest in the said asset. In view of this scenario, the attachment over the secured assets upon which already interest has been created in favour of some other creditors will not alter or nullify the rights of the secured creditors and therefore the attachments shall be declared illegal.
* Leo Edibles & Fats Ltd vs. Tax Recovery Officer & Ors. (WP no. 8560 of 2018, order dated 26.07.2018 passed by Hon’ble High Court of Hyderabad) to say that evenif attachments constitute an encumbrance on the property, still it will not have the effect of taking it out of the purview of section 36(3)(b) of IBC.
* Innoventive Industries Ltd vs. ICICI Bank and Ors. (2017 SCC OnLIne SC 1025) to say that one of the important objectives of the Code is to bring Insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process.
* To say that the Code has overriding effect over other enactments – relied upon (i) Raman Ispat Pvt Ltd vs Executive Engineer, Paschimanchal Vidyut Vitran Nigam Ltd & District Collector, Muzaffarpur Nagar, U.P. & Tahisildar, Office of Tahsildar Sadar, Muzaffarnagar, U.P. [Comp. Application. No. 88/ALD/2018 in C.P. (IB) 23/ALD/2017] and (ii) Surendra Kumar Joshi vs. REI Agro Limited and Mr. Anil Goel, Liquidator vs. Deputy Director, Directorate Enforcement, Delhi [CA (IB) No.453/KB/2018 in CP (IB) No.73/KB/2017] – but states that those cases not being related to PF issue, they are not applicable to present case.

The contention of the EPFO before Hon’ble NCLT:
1. EPFO is a statutory body established under EPF Act 1952
2. EPF Act is a social legislation with an endeavour to protect the weaker sections of the society i.e. workers employed in Factory and other establishments.

From the Judgement, it is not clear whether EPFO contended that dues of workmen, being their savings – which along with the contribution of employer i.e. the Corporate Debtor was not paid and hence there is unjust enrichment to the Corporate Debtor and which will be used to pay off other secured creditors.

Hon’ble NCLT framed the issue for the determination as under:
Whether or not the PF, Pension Fund due and payable to workers or employees of the Corporate Debtor will become part of Liquidation Estate in the light of section 36 of IBC?

Corporate Debtor failed to pay dues under EPF Act for 15 years to EPFO. And EPFO despite it proceeding against Corporate Debtor, could not realise the dues owing one or the other legal implications. However, EPFO could attach the assets of the Corporate Debtor. And that attachment is now challenged under IBC by the Liquidator.

Hon’ble NCLT analysed Section 36(4) of the IBC. It noted that legislature has enumerated five types of assets under clauses a, b, c, d and e of sub-section (4) of section 36 which shall not form part of liquidation estate to avoid ambiguity.
And under clause (a) of Sec.36(4), there are further five kinds of assets owned by a third party but in the possession of the Corporate Debtor. To know implications of these clauses and understand commonality in bringing in these clauses under one head of assets possessed by Corporate Debtor without title over it, Hon’ble NCLT analysed it as under:
1. Sec.36(4)(a)(i) – any asset lying in trust with the corporate debtor for the benefit of the third party, that asset shall be excluded from the liquidation estate.
2. Sec.36(4)(a)(ii) – in bailment contracts, if goods have been in possession of corporate debtor for a specific purpose, corporate debtor being bailee not having title over such asset, that asset shall not be included in liquidation estate.
3. Sec.36(4)(a)(iii) – sums due to any workmen or employees from the provident fund, pension fund and the gratuity fund shall not be included in the liquidation estate.
4. Sec.36(4)(a)(iv) – contractual arrangements or transferring title to Corporate Debtor except for use of the assets will not form part of liquidation estate.
5. Sec.36(4)(a)(v) – any assets notified but the Central Government in consultation with financial sector regulator, shall not be included in the liquidation estate.

Sec.36(4)(a) of IBC is an inclusive definition of assets which are in possession of Corporate Debtor without title over it and which shall not form part of liquidation estate. Since it is inclusive, its meaning cannot be restricted – as held in Oswal Fats and Oils Ltd vs. Additional Commissioner (administration), Bareilly Division, Bareilly and Others [MANU/SC/0216/2010 – para 25].
While Sec.36(4)(a)(i), (ii) and (iv) of IBC deals with the assets in possession of the Corporate Debtor without any title over such assets, Sec.36(4)(a)(iii) and (v) of IBC, need not be seen as to whether title is vested with the Corporate Debtor or not, it is by operation of law that says when provident fund is payable to the workmen or employees, such payment dues have to be deemed as an asset of worker or employees, it makes no difference whether it has been maintained in a separate account or not. In view of this deeming fiction, the workmen/employees need not prove that whether any sum (interest) has been explicitly vested with them or not. So is the case when an asset of the Corporate Debtor is notified by the Central Government in consultation with any financial sector regulator. By including sub-clauses (iii) and (v) along with sub-clauses (i), (ii) and (iv) of clause (a) of sub-section (4), an overreaching interest and title has been created in favour of the workmen in respect to provident fund, etc. and in favour of Government in respect of the asset notified treating these two assets under sub-clauses (iii) and (v) as not included in the liquidation estate.[para 25]

Hon’ble NCLT noted historical background of the legislation of interplay between Sec.529A of the Companies Act 1956 and Section 11 of EPF Act as held in Employees Provident Fund Commissioner vs. O.L. of Esskay Pharmaceuticals Ltd. (2011) 10 SCC 727, wherein it was held that Section 11(2) of EPF Act will have the first charge on the assets of the establishment (here in case of Corporate Debtor) and will become payable in priority to all other debts. In particular paras 15, 16 and 17 of the said judgement was relied upon. Further Hon’ble NCLT considered that from the said Judgement it is clear that EPF Act is a social legislation and in furtherance of the directive principles of State.

Further, Hon’ble NCLT considered Section 529 of Companies Act 1956 and noted that similar provision is retained u/Ss.326 and 327 of the Companies Act 2013. It concludes that by excluding asset of PF etc. dues of workmen/employees from liquidation estate, the rights of workmen/employees are further strengthened as it is left open to the workmen or the PF authority to realise their PF/Pension/Gratuity dues without standing in line of waterfall mechanism.
In view of above, Hon’ble NCLT held that if we go by the provisions of law and the judge made law, it is evident that duty is conferred upon the liquidator and the Tribunal to ensure that PF dues are excluded from liquidation estate so as to enable the workmen realise their savings, as well as the matching contribution, comes from the employer giving priority even above the costs of liquidator because the liquidator is also entitled to realise the costs from the liquidation estate only, whereas the workmen for PF dues need not remain in line to realise their PF dues from the liquidation estate. This right in fact emanated from the fundamental right of Right to life. [Para 29]

Further, Hon’ble NCLT referred to Bandhua Mukti Morcha vs. Union of India (1984 AIR 802), where Hon’ble Justice Bhagwati hold the right to live with dignity under Article 21 derives its right from the Directive Principles of State Policy, particularly from Article 39(e) and (f) and Articles 41 and 42 of the Constitution of India.

Then Hon’ble NCLT expressed the view that right of workmen to savings during working life for later part of life must not be diluted as it is right to life. And hence dues of workmen by way of PF dues are treated under IBC as assets lying with Corporate Debtor and not to be treated as par with other creditors. [Para 30]

When PF contribution from the workmen is deducted from the wages by the Corporate Debtor, it has to be deemed that matching contribution has been allocated by the Corporate Debtor. It makes no difference whether it has been released from the Corporate Debtor or not. Once deduction has been made from the wages of the workmen, it is to be deemed as the asset of the workmen and not as an asset of the Corporate Debtor or the company as the case may be. Hence argument of liquidator that per section 36(4)(a)(iii) of IBC only PF amount already released and lying with EPFO needs to be considered. [Para 31]

Hon’ble NCLT referred to the overriding effect of EPF Act per sections 8 and 11 thereof whereby dues of PF, Pension and Gratuity fund has to be paid in priority to all other debts in the distribution of the property to the insolvent or the assets of the company being wound up, as the case may be. [para 32]. And since the dues of PF, Pension and Gratuity are not forming part of the liquidation estate per section 36(4)(a)(iii) of IBC, the provisions of IBC will not be applicable for realisation of such dues from the assets of the Corporate Debtor. The intriguing aspect lying in thus scenario is that though it is a due payable by the Corporate Debtor, as to PF, Pension, Gratuity Fund dues are considered, the Code has treated it as an asset of the workmen lying with the Corporate Debtor. [para 33].

And hence the overriding effect of Section 238 will not have any bearing over assets of the Corporate Debtor because that asset is not considered as part of the liquidation estate. Further, there is no inconsistency between IBC and PF Act as section 36(4)(a)(iii) excludes PF dues lying with the Corporate Debtor from the liquidation estate and section 53 is not applicable to dues not forming part of liquidation estate. [para 34]

And the PF Act is having overriding effect over and is later in time of Presidency Insolvency Act, Provincial Insolvency Act and the Companies Act 1956. Further, in view of section 36(4)(a)(iii) of IBC, the dues under PF Act are assets of workmen/employees with the Corporate Debtor and hence IBC does not come in the way. [para 35]

It does not matter whether assets are secured or not for realisation of PF dues from the Corporate Debtor because charge created over the assets of the Corporate Debtor by operation of law (EPF Act) will have first charge over any asset of the Corporate Debtor notwithstanding whether it is secured or unsecured. And hence argument of Liquidator that since the charges is created over the assets of CD in favour of other creditors, EPFO is not at par with secured creditors, is rejected. The charge in relation to PF dues will be the first charge in priority to all other debts, including Liquidation cost because the PF dues have been excluded from the liquidation estate. [para 36]

And workmen dues has been assigned u/s.53(1)(b)(i) of IBC the same meaning as under section 326 of the Companies Act 2013 will not have any bearing over section 36(4)(a)(iii) of IBC. The term used in section 53(1)(b)(i) of IBC shall not be construed as PF dues become part of the distribution of assets pari passu basis along with secured creditors, as distribution u/s. 53 will be of assets comprised u/s.36 of IBC i.e. liquidation estate. [para 37]

In the facts of the case, it is held that by virtue of EPF Act and section 36(4)(a)(i) of IBC, the charge will remain in force against the assets of the Corporate Debtor until it has been paid off by Liquidator before making payment to any entity fall under waterfall mechanism devised u/s.53 of the Code. [para 38]

And since caveat is included in sec.36(3) that the same is subject to sec.36(4) of IBC and hence ratio decided in Leo Edibles & Fats Ltd vs. Tax recovery Officer & Ors. By Hon’ble High Court of Hyderabad will not have the effect of removing the charge over assets under PF Act. [para 39]

Since dues under PF Act is not forming part of liquidation estate per section 36 of IBC itself, ratio of Innoventive Industries Ltd vs. ICICI Bank Ltd is not applicable. [para 40]

It makes no difference whether attachments have been made prior to or subsequent to the admission of Company Petition under IBC, the statutory first charge having remained in force against the Corporate Debtor. [para 41]

Accordingly, liquidator was directed to pay the PF dues to EPFO from the liquidation estate before distributing the same to the claimants, as the liquidator has to sale the assets of the Corporate Debtor and pay off the PF dues in priority to all other claims.[para 42]

Comments:

In my view, considering that under section 53(1)(b)workmen’s due for the period of twenty-four months preceding the liquidation commencement date ranks equally with debts due to a secured creditor if such creditor relinquishes security u/s.52 and hence the liquidator is required to distribute the same equally – the conclusion of Hon’ble NCLT in para 37 is not totally correct. What the liquidator is required to do, in such a situation, as in the present case, is to sale liquidation estate, pay off dues of workmen under PF Act for a period prior to twenty-four months preceding the liquidation commencement date. And thereafter, whatever remains shall be paid as per section 53 of the IBC. This is so, as PF dues form part of workmen’s due under section 326 of Companies Act 2013 and hence also under section 53 of the IBC (in view of explanation (ii) to section 53 of IBC).

Proceedings pending u/s.34 of Arbitration Act whether constitute ‘dispute’ u/s.5(6) of IBC?

Facts in brief:
M/s Vijay Nirman Company Private Limited, being an operational creditor, had initiated the Corporate Insolvency Resolution Process against corporate debtor viz. M/s Ksheeraabad Constructions Private Limited by way of an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code”).

The National Company Law Tribunal (NCLT) vide its order dated 29 August 2017 admitted the application (holding that application u/s.34 of Arbitration and Conciliation Act 1996 (hereafter referred to as “Arbitration Act”) before Court is not ‘dispute’ u/s.5(6) of the Code.

In an appeal before National Company Law Appellate Tribunal (NCLAT), made by M/s Ksheeraabad Constructions Private Limited (Appellant) against the said order of NCLT, the NCLAT agreed with views of NCLT.

Aggrieved thereby, the matter came before the Hon’ble Supreme Court, on an important question of law as to whether the Code 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.

Rulings of Hon’ble Supreme Court:

A bench of Justice Rohinton Fali Nariman and Justice Indu Malhotra (in K Kishan vs. Vijay Nirman Company Pvt Ltd) in a Judgement dated 14.08.2018 observed that filing of Section 34 (Arbitration) petition against an arbitral award shows 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 and 37 of the Arbitration Act has taken place.

Hon’ble Supreme Court also dealt with different situation under which an appeal u/s.34 of Arbitration Act may be and its consequence under the Code as under:

(i) 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. It is only in such clear cases that the insolvency process under the Code may then be put into operation.

(ii) In 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, the insolvency process under the Code cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act.

Further, the bench disagreed with the view of NCLAT that Section 238 of the Code overrides Arbitration Act. It said Section 238 of the Code would apply in case there is an inconsistency between the Code and the Arbitration Act. In the present case, no such inconsistency is observed. On the contrary, the Award passed under the Arbitration Act together with the steps taken for its challenge would only make it clear that the operational debt, in the present case, happens to be a disputed one.

Transition from High Court to NCLT, compromise, arrangement, winding-up and other matters

The Insolvency and Bankruptcy Code, 2016 (31 of 2016)

 

Key words of Preamble to the Insolvency and Bankruptcy Code, 2016 (IBC):-

  • reorganization and insolvency resolution of- corporate person, partnership firms and individuals

– in a time bound manner

  • for maximization of value of assets
  • to promote entrepreneurship

  • availability of credit

  • balance the interest of all the stakeholders (including alteration in the order of priority of payment of Government dues)

  • to establish an Insolvency and Bankruptcy Board of India (IBB or IBBI)

 

What happened and when:

 

Date What
28/5/2016 IBC notified
05/08/2016 IBB related provisions notified
19/08/2016 Provisions empowering CG notified
29/08/2016 Salary Rules notified
01/10/2016 IBB established with office at New Delhi

Mr. M. S. Sahoo Chairperson

Ex-officio of Ministry of Finance, Ministry of Corporate Affairs, Ministry of Law and Justice and the Reserve Bank of India notified

01/11/2016 Provisions empowering IBB notified.

Also, Schedules to IBC notified – change in Central Excise, Service Tax, SICA

15/11/2016 Regulations for IPA and IP notified

Also, Schedules to IBC notified – change in SARFAESI, LLP Act 2008, Companies Act 2013, Payment and Settlement Systems Act, 2007

21/11/2016 IBBI (IPA) Regulations 2016 notified w.e.f. 21/11/2016
23/11/2016 IBBI (IP) Regulations 2016 notified w.e.f. 29/11/2016
30/11/2016 Ss. 4 to 32 – Provisions relating to Insolvency Resolution Process for Corporate Persons notified w.e.f. 01/12/2016

S. 236 Offences under IBC, triable by Special Court under CA 2013 – notified w.e.f. 01/12/2016

S.237 IBC overrides all other laws – notified w.e.f. 01/12/2016

S.231 No injunction notified w.e.f. 01/12/2016

S.239(2)(a) to (f) – CG to make Rules for application to NCLT

IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 notified w.e.f. 01/12/2016

01/12/2016 Ss. 4 to 32 of IBC notified (except for individuals, partnership firm and voluntary liquidation)

S. 60 transitory – for Court to NCLT for Personal Guarantor

01/12/2016 IB (Application to Adjudicating Authorities) Rules, 2016 notified

For filing applications u/s.7,8,9 of IBC

   

 

 

The Insolvency and Bankruptcy Code, 2016 (the ‘IBC’).

 

As you might be aware that the Government of India has notified the substantive provisions of the IBC with effect from 01 December 2016. The Government has also issued notifications for repeal of the Sick Industrial Companies (Special Provisions) Act, 1985 (the ‘SICA’). Thus, SICA is repealed with effect from 01st December 2016 and all proceedings, reference, inquiry or appeal before BIFR and AAIFR stands abated with effect from 01st December 2016.

 

Further with effect from 01st December, 2016, all matters relating to winding-up (except voluntary winding-up) of Companies and Limited Liability Partnerships (LLPs) are dealt with by the NCLT. Thus, High Courts (and in some part of the Country District Courts) do not have jurisdiction for dealing with new cases of winding-up on and after 01 December 2016. Cases of Voluntary winding-up to be dealt with by the NCLT on and after 01 April 2017.

 

Further, with effect from 15th December, 2016, cases relating to compromise, arrangement and reconstruction (including merger, amalgamation and demerger), reduction of share capital, variation of shareholder’s rights, recovery of property of company in wrongful possession of employees or ex-employees of Company etc. would be dealt with exclusively by the NCLT.

 

To have birds eye view of the transitory provisions for transfer of cases from High Courts to the NCLT, a tabular presentation is given below:

 

TRANSITORY PROVISIONS

 

The Insolvency and Bankruptcy Code, 2016 (the ‘IBC’).

National Company Law Tribunal (NCLT).

 

Section 434 (1) (c) of the Companies Act 2013 – as amended by Eleventh Schedule of IBC and further amendment by Order S.O. 3676(E) dated 7th December 2016.

 

Subject Matter Transferred to NCLT Retained with High Court
Winding-up under supervision of Court No. Yes.
Voluntary winding-up (Sec.484 of CA 1956)

(Rule 4)

No.

New cases to be filed with NCLT w.e.f. 01 April, 2017 as per the IBC.

Note that provisions relating to voluntary winding-up under the Companies Act, 2013 are omitted by the IBC.

 

Yes, for cases filed upto 31st March 2017.
Winding-up for inability to pay (Sec. 433(e) of CA 1956)

(Rule 5)

Yes, where petition has not been served on the Respondent.

Such petition to be treated as application u/Ss. 7, 8 or 9 of IBC.

Petitioner to submit additional information, including proposed insolvency professional, within 60 days from date of notification of the Rules on 07 December 2016. Thus, by 05 February, 2017. Failing which petition shall abate.

Yes, where petition has been served on the Respondent
Winding-up by Court

[Sec. 433(a) and (f)]

(Rule 6)

Only those cases where the petition has not been served on the respondent. Yes, where the petition has been served on the respondent.
BIFR u/s.20 of SICA

[S. 434(1)(d) of CA 2013 r/w Rule 5(2)]

w.e.f. 01/12/2016 Sick Industrial Companies (Special Provisions) Repeal Act, 2003 brought to force, including section 4(b) thereof.

No.

 

Proceedings before BIFR and AAIFR abates.

However, reference within 180 days can be made to NCLT as per Companies Act 2013.

Yes, where opinion has been forwarded by BIFR and no appeal is pending and winding up is initiated u/s. 20 of SICA.
Arbitration, Compromise, arrangement and reconstruction

(Second proviso to Section 434(1)(c) of CA 2013 read with Rule 3)

Yes, except those cases reserved for orders for allowing or otherwise, i.e. final disposal (cases heard but orders reserved) w.e.f. 15th December, 2016 Those cases reserved for orders for allowing or otherwise (Cases heard and pronouncement of order is pending or reserved) w.e.f. 15th December, 2016
Reduction of Capital (Sec. 100 of CA 1956 – corresponding Sec. 66 of CA 2013) As above As above
Cancellation or variation of rights of shareholders (Sec. 106 of CA 1956  –corresponding sec. 48(1) of CA 2013) As above As above
To restrain fraudulent persons from managing companies (Sec. 203 of CA 1956) As above As above
For order that affairs of a Company ought to be investigated (Sec. 237 of CA 1956 – corresponding sec. 213 of CA 2013) As above As above
Applications under section 439 for the winding-up of a company, or under section 583 for the winding up of an unregistered company, or under section 584 for the winding-up of a foreign company

(Corresponding Sec.376 of CA 2013)

As above As above
Applications for a declaration under section 542 (XI Schedule) in the course of proceedings under section 397 or 398 that a person who was knowingly a party to carrying on business in a fraudulent manner shall be personally liable for all or any of the debts or other liabilities of the company

(Corresponding Sec.339 of CA 2013)

As above As above
Applications by a creditor or member under section 543 (XI Schedule) in the course of proceedings under section 397 or 398, to enquire into the conduct of any of the persons mentioned in section 543 (XI Schedule) and compel him to repay or restore any money or property to the company or pay compensation.

(Corresponding Sec.340 of CA 2013)

As above As above
Applications under section 633(2) by an officer of a company for relief.

(Corresponding Sec.463 of CA 2013)

As above As above
Applications under section 560(6) to restore a company’s name to the Register of Companies

(Corresponding Sec.248 of CA 2013 – does not contain similar provision)

As above As above
Applications under section 579 to confirm the alteration in the form of the constitution of a company by substituting a memorandum and articles for a deed of settlement.

(No corresponding provision under CA 2013)

As above As above

 

All proceedings transferred from High Court to NCLT, to be dealt with as per the Companies Act, 1956 and the Company (Court) Rules, 1959. [Third proviso to Section 434(1)(c) of the Companies Act 2013].

All proceedings transferred from High Court to NCLT, to be dealt with from the same stage as were before their transfer. [Section 434(1)(c) of the Companies Act 2013].

Section 74: Repayment of deposits, etc., accepted before commencement of this Act.

Provisions on repayment of deposits, etc., accepted before commencement of Companies Act, 2013 is reproduced below:

74. (1) Where in respect of any deposit accepted by a company before the commencement of this Act, the amount of such deposit or part thereof or any interest due thereon remains unpaid on such commencement or becomes due at any time thereafter, the company shall—
(a) file, within a period of three months from such commencement or from the date on which such payments, are due, with the Registrar a statement of all the deposits accepted by the company and sums remaining unpaid on such amount with the interest payable thereon along with the arrangements made for such repayment, notwithstanding anything contained in any other law for the time being in force or under the terms and conditions subject to which the deposit was accepted or any scheme framed under any law; and
(b) repay within one year from such commencement or from the date on which such payments are due, whichever is earlier.
(2) The Tribunal may on an application made by the company, after considering the financial condition of the company, the amount of deposit or part thereof and the interest payable thereon and such other matters, allow further time as considered reasonable to the company to repay the deposit.
(3) If a company fails to repay the deposit or part thereof or any interest thereon within the time specified in sub-section (1) or such further time as may be allowed by the Tribunal under sub-section (2), the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees and every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees, or with both.

[highlight]Section 74 (1) is brought to force from April 01, 2014. Sub-sections (2) and (3) of Section 74 is not yet brought to force.[/highlight]

This provision is covered by Chapter V ACCEPTANCE OF DEPOSITS BY COMPANIES [Sections 73 to 76].

For this chapter, the Companies (Acceptance of Deposit) Rules, 2014 (‘the Rules’) are notified with effect from April 01, 2014.

Corresponding provisions of the Companies Act, 1956:
No such provision.

Corresponding provisions of the English Companies Act, 2006:
No such provision.

Applicability:
[highlight] Section 74 is applicable to all companies. [/highlight]

What is the difference from the Companies Act, 1956:
Only private companies were prohibited under the Companies Act, 1956 from accepting public deposits. Private companies were permitted to accept deposits from shareholders / members, directors and their relatives. All public companies were permitted to accept deposits from public, subject to the Companies (Acceptance of Deposits) Rules, 1975.
Under the Companies Act, 2013, entire landscape of ‘deposits’ is changed. Accordingly it mandates all companies to repay deposits within 1 year. All companies can accept deposits from its members / shareholders, subject to compliance of stricter norms under section 73. Only public companies can invite or accept deposits from public, subject to strict procedure under the Rules and section 76. All companies can accept money, which does not fall within the definition of ‘deposit’ under the Rules.

The term “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India ((Section 2(31), not yet brought to force)).

However, for the purpose of sub-section (1) of section 74, term ‘deposit’ has to be read as ‘deposit’ within the meaning of the Companies Act, 1956. This is so because (a) definition of ‘deposit’ under the Companies Act, 2013 is subject to context in which it is used; and (b) sub-section (1) refers to ‘deposit accepted by a company before the commencement of this Act’.
Where any deposit is accepted by a company, before the commencement of the Act, and any amount thereof or interest due thereon has remained unpaid (though due) then such companies shall, after the commencement of the Act:

(a) notwithstanding anything contained in any other law for the time being in force or under the terms and conditions subject to which the deposit was accepted or any scheme framed under any law, [highlight]file with the Registrar of Companies,

(i) within three months of commencement of the Act (in respect of deposit and interest thereon which became due but remained unpaid) ((date extended by MCA till 31st August 2014)) or

(ii) within three months of due date for repayment of deposits and interest thereon (where they are not due fore repayment at the time of commencement of the Act),

a statement ((in Form DPT-4)) [/highlight] of all the deposits accepted by the company and sums remaining unpaid with interest payable thereon. Such statement shall also give details of arrangements made by the Company for its repayment.

AND

Where any deposit is accepted by a company, before the commencement of the Act, and any amount thereof or interest due thereon has remained unpaid (though due) then such companies shall, after the commencement of the Act,

(b)

(i) repay the amount of deposit and interest thereon which became due but remained unpaid, within one year of commencement of the Act, or

(ii) the amount of deposit and interest thereon which has not yet became due for repayment, repay the same on their due date(s),

whichever is earlier.

Where a company comprehends its inability to repay as per (b) above, it may approach National Company Law Tribunal (‘NCLT’) ((power delegated by MCA to Company Law Board)), for seeking more time to repay deposit.

NCLT may allow reasonable more time to repay the deposits with interest after considering, inter alia, its financial position, amount of deposits and interest thereon. ((Section 74(2) )). [highlight]This provision is brought to force from 06 June 2014. [/highlight]

It is clarified by way of an explanation under the Rules ((Explanation to Rule 19 of the Rules)), that in case of a company which had accepted or invited public deposits under the relevant provisions of the Companies Act, 1956 and rules made under that Act (hereinafter known as “Earlier Deposits”) and has been repaying such deposits and interest thereon in accordance with such provisions, and if the following conditions are fulfilled by the company then it need not repay deposits within a year:
(i) the Company complies with requirements under the Act and the rules and
(ii) the Company continues to repay such deposits and interest due thereon on due dates for the remaining period of such deposit in accordance with the terms and conditions and period of such Earlier Deposits and in compliance with the requirements under the Act and the rules.

Both above conditions requires compliance with the requirements under the Act and the rules. It means if a company is a public company and is also a ‘eligible company’ within the meaning of the Rules and complies with other requirements of acceptance of deposits from public, then only it need not comply with section 74(1)(b).

Penalty:
The provision relating to penalty under section 74(3) is brought to force from 06 June 2014. It provides as under:

Where a company fails to repay deposits and interest thereon or part thereof within aforesaid time, or within extension of time given by NCLT:
(a) the company is liable to minimum fine of Rs.1,00,00,000/- (Rupees one crore) and which may extend upto Rs.10,00,00,000/- (Rupees ten crore). Despite payment of fine, the company continues to be liable to repay deposits with interest.

(b) Besides the company, every officer of the company who is in default is liable to minimum fine of Rs.25,00,000/- (Rupees twenty five lakh) and which may extend upto Rs.2,00,00,000/- (Rupees two crore) or with imprisonment upto seven years or with both (fine and imprisonment). ((Section 74(3) )).

(c) Any suit, proceedings or other action may be taken by any person, group of persons or any association of persons who had incurred any loss as a result of failure of the company to repay deposits and interest thereon or part thereof. ((Section 75(2) ))

(d) Where it is proved that the [highlight]deposits have been accepted with intent to defraud the depositors or for any fraudulent purpose[/[highlight] every officer of the company [highlight]who was responsible for the acceptance of such deposit shall be personally responsible, without limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors. In addition, action under section 447 may be taken (which provides punishment for fraud by way of minimum imprisonment of 6 months and upto 10 years as also minimum fine equivalent to amount involved in the fraud and upto three times thereof. ((Section 75(1) ))

[pullquote-right]Damages are generally an award of money, to be paid as compensation for loss or injury.[/pullquote-right]
The term ‘compensation’ as stated in the Oxford Dictionary, signifies that which is given in recompense, an equivalent rendered. ‘Damages’ on the other hand constitute the sum of money claimed or adjudged to be paid in compensation for loss or injury sustained, the value estimated in money, of something lost or withheld. ((The Divisional Controller, KSRTC vs Mahadeva Shetty And Anr. AIR 2003 SC 4172: (2003) 7 SCC 197))

Nature of offence:
Since officers of company may be punished with imprisonment, it is necessary to decide nature of offence.

Since offence is punishable with imprisonment for a term exceeding two years, it is treated as warrant case under section 2(x) of the Code of Criminal Procedure Code, 1973.

Adjudication:
Under Section 454, the officer appointed by the Central Government, not below the rank of Registrar of Companies, may adjudicate and impose monetary penalty for violation of this section, where it decides that no prosecution be launched. However, before imposing penalty, an opportunity of hearing shall be given to the Company and its officers.Compounding:
The offence is not compoundable under section 441 of the Act.
Summary of forms and records:
Statement regarding deposits existing as on April 01, 2014 shall be in form DPT-4.

Section 73. Prohibition on acceptance of deposits from public.

Prohibition on acceptance of deposits from public – as contained under section 73 of the Companies Act, 2013 is reproduced below:

73. (1) On and after the commencement of this Act, no company shall invite, accept or renew deposits under this Act from the public except in a manner provided under this Chapter:

Provided that nothing in this sub-section shall apply to a banking company and non-banking financial company as defined in the Reserve Bank of India Act, 1934 (2 of 1934) and to such other company as the Central Government may, after consultation with the Reserve Bank of India, specify in this behalf.

(2) A company may, subject to the passing of a resolution in general meeting and subject to such rules as may be prescribed in consultation with the Reserve Bank of India, accept deposits from its members on such terms and conditions, including the provision of security, if any, or for the repayment of such deposits with interest, as may be agreed upon between the company and its members, subject to the fulfillment of the following conditions, namely:-

(a) issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and such other particulars in such form and in such manner as may be prescribed;

(b) filing a copy of the circular along with such statement with the Registrar within thirty days before the date of issue of the circular;

(c) depositing such sum which shall not be less than fifteen per cent. of the amount of its deposits maturing during a financial year and the financial year next following, and kept in a scheduled bank in a separate bank account to be called as deposit repayment reserve account;

(d) providing such deposit insurance in such manner and to such extent as may be prescribed;

(e) certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits; and

(f) providing security, if any for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company:

Provided that in case where a company does not secure the deposits or secures such deposits partially, then, the deposits shall be termed as “unsecured deposits” and shall be so quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits.

(3) Every deposit accepted by a company under sub-section (2) shall be repaid with interest in accordance with the terms and conditions of the agreement referred to in that sub-section.

(4) Where a company fails to repay the deposit or part thereof or any interest thereon under sub-section (3), the depositor concerned may apply to the Tribunal for an order directing the company to pay the sum due or for any loss or damage incurred by him as a result of such non-payment and for such other orders as the Tribunal may deem fit.

(5) The deposit repayment reserve account referred to in clause (c) of sub-section (2) shall not be used by the company for any purpose other than repayment of deposits.

This provision is covered by Chapter V on ACCEPTANCE OF DEPOSITS BY COMPANIES [Sections 73 to 76].

For this chapter, the Companies (Acceptance of Deposit) Rules, 2014 (‘the Rules’) are notified with effect from April 01, 2014.

Section 73 is applicable to all companies. [Section 73 is brought to force w.e.f. 01 April 2014].
For this provision, rules called the Companies (Acceptance of Deposit) Rules, 2013 are notified.

Corresponding provisions of the Companies Act, 1956:
Section 58A.
The Companies (Acceptance of Deposit) Rules, 1975.

Corresponding provisions of the English Companies Act, 2006:
No such provision.

Applicability:

This provision applies to all companies, except the following:

(a) banking company,

(b) a non-banking finance company, as defined in the Reserve Bank of India Act, 1934 and registered with the Reserve Bank of India,

(c) a housing finance company registered with the National Housing Finance Bank established under the National Housing Finance Bank Act, 1987; and

(d) such companies as may be specified by the Central Government.

What is the difference from the Companies Act, 1956:

Major difference is as under:

Companies Act 2013

Companies Act 1956

Private company cannot accept deposit from public. Private company cannot accept deposit from public.
Only eligible companies can accept deposit from public. All public companies could accept deposits from public.
Private companies can accept deposit only from its directors, relatives of directors (( relatives of directors w.e.f.15 September 2015 )) and members. However, acceptance of deposit by a private company as well as public company from its members is subject to provisions of section 73 and the Rules.

 

Private companies could accept deposit only from its members, directors and their relatives without any limit or restrictions, except that declaration by a Director was required that the Director has not borrowed funds for giving as deposit to the Company.

Public companies could accept deposits from its members, subject to the Companies (Acceptance of Deposit) Rules, 1975.

Private companies and ineligible public companies can accept deposit from its members upto 25% of its aggregate paid-up share capital, free reserves and securities premium account (( w.e.f. 15 September 2015 )), in compliance of the prescribed procedure.
Eligible companies can accept deposit from its members upto 10% of its aggregate paid-up share capital, free reserves and securities premium account (( w.e.f. 15 September 2015 )), in compliance of the prescribed procedure.
Private companies could accept deposits from its members without any limit. Public companies could accept deposit from its members upto 10% of its aggregate paid-up share capital and free reserves, in compliance of the prescribed procedure.

Comments:
The Chapter V prohibits acceptance of deposits from public by companies, mandates repayment of already accepted public deposits and also provides that only ‘eligible companies’ can accept public deposits. Briefly,
Section 73 prohibits acceptance of deposits from public by companies (except banking companies, NBFCs and other companies to be specified by the Government). It also provides for acceptance of deposits from members.
Section 76 permits acceptance of deposits by public companies with specified net worth, turnover etc.
Section 74 mandates repayment of deposits accepted before commencement of the Act of 2013.
Section 75 provides for damages payable if the deposits accepted with intent to defraud the depositors or for any fraudulent purpose.

Section 73 provides for acceptance of deposits from members and prohibits acceptance of deposits from public. However, certain eligible public companies are permitted to accept deposits from public as per provisions of section 76.

The term “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India ((Section 2(31), brought to force from April 01, 2014. Also Rule 2(1)(c) of the Rules)).

Acceptance of deposits from public:
Companies are generally prohibited from accepting (including inviting and renewing) deposits from public. Only public companies, meeting eligible criteria and subject to compliance of several conditions as specified in section 76, are permitted to invite, accept or renew deposits from public.

[mks_highlight color=”#eeee22″]The Rules defines “eligible company” means a public company having a networth of Rs.100 crore (INR 1 billion) or turnover of Rs.500 crore (INR 5 billion) and which has obtained the prior consent of its members by way of special resolution at general meeting and has files the said resolution with the Registrar of Companies before making invitation to the public for acceptance of deposits. However, where such public company accepts deposits within the limits specified under section 180(1)(c) (aggregate of paid-up share capital and free reserves) then consent of members by ordinary resolution suffices. ((Rule 2(1)(e) )) [/mks_highlight]
However, the general prohibition is not applicable to Banking Companies, non-banking financial companies, housing finance companies and other companies, which the Government may specify in consultation with the Reserve Bank of India.

Acceptance of deposits from members:
A company may accept deposits from its members by fulfilling requirements specified in the Act and the rules, which the Central Government has framed in consultation with the Reserve Bank of India.

A company may accept deposits from its members, subject to terms and conditions, including the provision of security, if any, or for the repayment of such deposits with interest, as may be [mks_highlight color=”#eeee22″] agreed upon between the company and its members [/mks_highlight].
Following requirement shall be fulfilled by a company to accept deposits from its members ((Section 73(2) )).

  1. Obtaining consent of members by ordinary resolution. However, where borrowing of a company has exceeded limit specified in clause (c) of section 180(1) of the Act, consent of members by way of special resolution is required.
  2. filing a circular with the Registrar of Companies (before issuing it to members). Such circular to state financial position of the company, credit rating (if any) obtained, total number of depositors from which the company has already accepted deposits, deposit amount due for repayment and other details as the Government may prescribe. Circular shall be approved by the Board of Directors and signed by majority of directors of the Company (majority of directors as were on the date of approval of Circular by the Board). ((Rule 3(5) ))
  3. issuing aforesaid circular to members of the company [mks_highlight color=”#eeee22″]within 30 days of filing with the Registrar [/mks_highlight]. The Rules states that the Circular shall be issued [mks_highlight color=”#eeee22″] after 30 days of filing the same with the Registrar [/mks_highlight]. ((Rule 4(5) )) Circular shall be sent to all members of the company either by registered post acknowledgement due or speed post or by electronic mode in Form DPT-1. ((Rule 4(1) )) Such circular [mks_highlight color=”#eeee22″] may be advertised [/mks_highlight] in an English newspaper and in Vernacular language in a vernacular newspaper having wide circulation in the State in which the registered office of the company is situated. ((proviso to Rule 4(1) )) Copy of circular shall be uploaded on website of the Company, if any. ((Rule 4(3) ))
  4. maintaining liquid asset by depositing minimum of 15% of the amount of deposits maturing during the current and next financial year (i.e. two financial years). Such liquid asset shall be kept in a separate bank account with any of the scheduled commercial banks. Such bank account shall be called [mks_highlight color=”#eeee22″]deposit repayment reserve account [/mks_highlight]. For example, if name of company is XYZ Private Limited, then it shall have a bank account called ‘XYZ Pvt Ltd – deposit repayment reserve account’. The deposit repayment reserve account shall not be used by the company for any purpose other than repayment of deposits. ((Section 73(5) ))
  5. provide deposit insurance upto such extent and in a prescribed manner.
  6. certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of the Act of 2013 or payment of interest on such deposit.
  7. optionally providing security, including creation of charge on assets of the company, for due repayment of the deposit amount or interest thereon. And where no security is provided for the repayment, such deposits shall be termed as “unsecured deposits”. And words “unsecured deposits” shall be quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits.

Where a company fails to repay the deposit or part thereof or any interest thereon in accordance with the terms and conditions of the agreement between the company and its members, the depositor concerned may apply to the National Company Law Tribunal for an order directing the company to pay the sum due or for any loss or damage incurred by him as a result of such non-payment and for such other orders as the Tribunal may deem fit ((Section 73(3) and (4) )).

Some of the terms and conditions for acceptance of deposits as mandated by the Rules:
(a) A private company and ineligible public companies can accept or renew deposits from its members upto 25% of aggregate of its paid-up share capital and free reserves. ((Rule 3(3) of the Rules.))

(b) Period of deposit for acceptance or renewal:
Companies cannot accept deposits repayable on demand.
Minimum period of deposit shall be of 6 months.
Maximum period of deposit shall be of 36 months. ((Rule 3(1)(a) of the Rules.))
For meeting short-term requirements of funds, companies may accept deposits upto 10% of the aggregate paid-up share capital and free reserves and period for such short-term deposit
Minimum period of 3 months and maximum period of 6 months. ((Proviso to rule 3(1)(a) of the Rules.))

(c) Rate of interest and brokerage:  Companies can pay interest on deposits to depositors and brokerage to agent not above the rates prescribed by the Reserve Bank of India for acceptance of deposit by a non-banking finance company. Agent means a person who is authorised by a company in writing to solicit deposits in its behalf and through whom deposits are actually procured. ((Rule 3(6) ))

(d) Prohibition on unilateral right to modify terms: Companies cannot reserve right to alter terms and conditions of deposit, deposit trust deed and deposit insurance contract which are to the prejudice or disadvantage of the depositor. ((Rule 3(7) ))

Section 7: Incorporation of a Company

Chapter II
INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO

Provisions of the Companies Act, 2013:
Section 7: Incorporation of a Company
Rule 2.9 to 2.15 of the Companies Rules, 2013
[Section 7 is not yet brought to force and the Companies Rules, 2013 is not yet brought to force]

Corresponding provisions of the Companies Act, 1956:
Sections 33, 34, 35

Corresponding provisions of the English Companies Act, 2006:
Sections 9 to 15

Applicability:
This provision is applicable to all companies.

Filing documents for incorporation of company [Section 7(1)]:
For registration of a company, following documents and information shall be filed with the Registrar of Companies within whose jurisdiction the registered office of the company is proposed to be situated. Rule 2.9 requires such documents to be filed in Form no. 2.9:

(i) Memorandum and Articles of association of the Company [Section 7(1)(a)]

A. Subscribers:
Memorandum of Association (‘MOA’) and Articles of Association (‘AOA’) shall be duly signed by all its subscribers. Rule 2.10 states that ‘each subscriber’ shall add his name, address, description, occupation, if any, in the presence of at least one witness.

Where the subscriber is a Limited Liability Partnership, the memorandum and articles of association shall be signed by a partner of the Limited Liability Partnership, duly authorized by a resolution approved by all the partners of the Limited Liability Partnership. The partner so authorized shall not, at the same time, be a subscriber to the memorandum and articles of Association in his individual capacity or any other capacity.

Where the subscriber is a body corporate, the memorandum and articles of association shall be signed by director, officer or employee of the body corporate duly authorized in this behalf by a resolution of the board of directors of the body corporate. However such director, officer or employee so authorized shall not, at the same time, be a subscriber to the memorandum and articles of Association in his individual capacity or any other capacity.

Also, the following particulars shall be filed with the Registrar:-
(a) CIN of the Company / Registration No of the body corporate, if any
(b) GLN, if any
(c) Name of the body corporate
(d) Registered office address/ principal place of business
(e) E-mail Id
(f) In case of company, certified true copy of the board resolution specifying inter alia the authorization to subscribe to the memorandum of association of the proposed company and to make investment in the proposed company, the number of shares proposed to be subscribed by the body corporate, and the name, address and designation of the person authorized to subscribe to the Memorandum.
(g) In case of LLP, certified true copy of the resolution agreed to by all the partners specifying inter alia the authorization to subscribe to the memorandum of association of the proposed company and to make investment in the proposed company, the number of shares proposed to be subscribed in the body corporate, and the name of the partner authorized to subscribe to the Memorandum.
(h) In case of foreign bodies corporate, following additional details to be submitted:-

  • copy of certificate of incorporation of the foreign body corporate; and
  • registered office address along with proof.

Where the subscriber is a foreign national residing outside India:
(a) If, a foreign national is on a visit in India and intend to incorporate a company (while in India), in such case the incorporation shall be allowed if, he/she is having a valid Business Visa.
However, in case of a foreign national visited in India is a Person is of Indian Origin or Overseas Citizen of India, requirement of business Visa will not be applicable.

(b) Where the subscriber is a foreign national residing outside India in a country in any part of the Commonwealth, his signatures and address on the memorandum and articles of association and proof of identity shall be notarized by a Notary (Public) in that part of the Commonwealth.

The Commonwealth is a voluntary association of 53 independent countries. More about it can be accessed from http://thecommonwealth.org/about-us.

(c) Where the subscriber is a foreign national residing outside India in a country which is a party to the Hague Apostille Convention, 1961, his signatures and address on the memorandum and articles of association and proof of identity shall be notarized before the Notary (Public) of the country of his origin and be duly apostillised in accordance with the said Hague Convention. More details can be accessed from http://www.hcch.net/index_en.php.

(d) Where the subscriber is a foreign national in a country outside the Commonwealth and which is not a party to the Hague Apostille Convention, 1961, his signatures and address on the memorandum and articles of association and proof of identity, shall be notarized before the Notary (Public) of such country and the certificate of the Notary (Public) shall be authenticated by a Diplomatic or Consular Officer empowered in this behalf under section 3 of the Diplomatic and Consular Officers (Oaths and Fees) Act, 1948 (40 of 1948) or, where there is no such officer by any of the officials mentioned in section 6 of the Commissioners of Oaths Act, 1889 (52 and 53 Vic.C.10), or in any Act amending the same.

(i) Where subscriber is an illiterate person, he can affix his thumb impression or mark.

In such case, the person writing for him shall
(a) read and explain the contents of the memorandum and articles of association to the subscriber and make an endorsement to that effect on the memorandum and articles of association;
(b) also write against the name of the subscriber, the number of shares taken by him;
(c) place the name of the subscriber against or below the thumb impression or mark; and
(d) authenticate it by his own signature.

B. Witness:
The witness shall attest the signatures of subscribers and shall likewise sign and add his name, address, description and occupation, if any.

The witness shall also state (rather confirm) that subscriber/s has/have subscribed and signed in his presence and also state the date and place.

Thus, witness can be only such person in whose presence subscriber has subscribed and signed Memorandum.

Witness is also required, under Rule 2.10 to verify ID of subscriber and satisfy himself that identification particulars filled by subscribers in Memorandum matches with their particulars as stated in Identity Proof of subscribers.

Can witness be a minor?
Section 118 of the Evidence Act, 1872 envisages that all persons shall be competent to testify, unless the Court considers that they are prevented from understanding the questions put to them or from giving rational answers to these questions, because of tender years, extreme old age, disease- whether of mind, or any other cause of the same kind. A child of tender age can be allowed to testify if he has intellectual capacity to understand questions and give rational answers thereto. [Ratansinh Dalsukhbhai Nayak vs State Of Gujarat AIR 2004 SC 23 ].

(ii) Declaration by professionals [Section 7(1)(b)]

Declaration in form no. 2.10 is required from:
(a) by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of the company; and
(b) by a person named in the articles as a director, manager or secretary of the company.

It may be noted that a declaration attracts stamp duty. Rate of stamp duty varies from State to State within India.

(iii) Affidavit from subscribers and first directors [Section 7(1)(c)]

Rule 2.12 states that an affidavit from each of the subscribers to the memorandum and from persons named as the first directors, if any, in the articles that he is not convicted of any offence in connection with the promotion, formation or management of any company, or that he has not been found guilty of any fraud or misfeasance or of any breach of duty to any company under this Act or any previous company law during the preceding five years and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete.

It may be noted that an affidavit attracts stamp duty. Rate of stamp duty varies from State to State within India.

(iv) The address for correspondence till its registered office is established [Section 7(1)(d)]

Every company is required to have a registered office. However, for convenience it is provided that at time of incorporation of a company, temporarily it may have a place as a correspondence office.
Section 12 of the Companies Act, 2013 requires every company to have a registered office within 15 days of its incorporation and its particulars shall be filed with the Registrar of Companies within 30 days of its incorporation.

(v) Particulars of every subscriber to be filed with the Registrar at the time of incorporation. [Section 7(1)(e)].

Rule 2.13 states that the particulars of name, including surname or family name, residential address, nationality and other particulars such as father name or spouse name, date and place of birth, occupation, Email id, phone, fax and mobile number of every subscriber to the memorandum along with proof of identity is required to be submitted.
Each subscriber (including first directors of a company) to the MOA and AOA shall furnish the specimen signature in Form no. 2.32 duly verified by their respective banker at the time of incorporation.

(vi) Particulars of first directors of the company and their consent to act as such. [Section 7(1)(f) and (g)]

Rule 2.14 states that the particulars of the persons mentioned in the articles as the first directors of the company, their names, including surnames or family names, the Director Identification Number, residential address, nationality and such other particulars including proof of identity and his interest in other firms or bodies corporate along with his consent to act as director of the company is required to be filed.

Certificate of Incorporation – Section 7(2):
The Registrar of Companies shall register all the above mentioned documents and information and issue a certificate of incorporation stating that the proposed company is incorporated under this Act. Rule 2.15 prescribes format of Certificate of Incorporation to be in Form no. 2.13.

Corporate Identity Number (CIN) – Section 7(3):
The Registrar of Companies shall allot a Corporate Identity Number (CIN) to the company and which shall be also included in the certificate of incorporation.

Preserving incorporation documents till company is dissolved – Section 7(4)
It is the responsibility of the company to maintain and preserve at its registered office copies of all the documents originally filed (at the time of incorporation) until the dissolution of the company.

Penalty – Section 7(5), (6) and (7):
In any document filed with the Registrar of Companies for incorporation of a company, if any information or representation is false or incorrect or material fact or information is suppressed by any person and he is aware of such information, he shall be liable under section 447. [Section 7(5)].

In addition to above, if after incorporation of a company it is proved that the company got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information, in any document or declaration or by any fraudulent action then promoters, first directors and persons making declaration [under section 7(1)(b)] shall be liable under section 447. [Section 7(6)].

The offence under sub-sections (5) and (6) of section 7 is made cognizable offence and person accused of such offence shall not be released on bail or on his own bond without giving opportunity to Public Prosecutor to oppose the application to release the person on bail or personal bond. [Section 212(6)].

Where a company got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information, in any document or declaration or by any fraudulent action then, in addition to action under sub-section (6) of section 7, the Tribunal may, on application made to it under sub-section (7) of section 7, on being satisfied that the situation so warrants:

  1. pass such orders, as it may think, for regulation of the management of the Company including changes, if any, in its memorandum and articles, in public interest or in the interest of the company and its members and creditors; or
  2. direct that liability of the members shall be unlimited; or
  3. direct removal of the name of the company from the register of companies; or
  4. pass an order for the winding up of the company; or
  5. pass such orders as it may deem fit.

Summary of forms and records:
Form No. 2.9 – An Application for incorporation of companies.
Form No. 2.10 for a declaration to be given by an advocate, a Chartered Accountant, Cost accountant or Company Secretary in practice.
Form 2.11 for an affidavit shall be submitted by each subscribers and first directors.
Form No. 2.12 for the particulars of each person mentioned in the articles as first director of the company and his interest in other firms or bodies corporate along with his consent to act as director of the company shall be filed in Form No. 2.13 for Certificate of Incorporation.

Section 59 Rectification of register of members

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SHARE CAPITAL AND DEBENTURES

[Section 59 is brought to force with effect from September 12, 2013.]

Rectification of register of members

Section 59. (1) If the name of any person is, without sufficient cause, entered in the register of members of a company, or after having been entered in the register, is, without sufficient cause, omitted therefrom, or if a default is made, or unnecessary delay takes place in entering in the register, the fact of any person having become or ceased to be a member, the person aggrieved, or any member of the company, or the company may appeal in such form as may be prescribed, to the Tribunal, or to a competent court outside India, specified by the Central Government by notification, in respect of foreign members or debenture holders residing outside India, for rectification of the register.

(2) The Tribunal may, after hearing the parties to the appeal under sub-section (1) by order, either dismiss the appeal or direct that the transfer or transmission shall be registered by the company within a period of ten days of the receipt of the order or direct rectification of the records of the depository or the register and in the latter case, direct the company to pay damages, if any, sustained by the party aggrieved.

(3) The provisions of this section shall not restrict the right of a holder of securities, to transfer such securities and any person acquiring such securities shall be entitled to voting rights unless the voting rights have been suspended by an order of the Tribunal.

(4) Where the transfer of securities is in contravention of any of the provisions of the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992 or this Act or any other law for the time being in force, the Tribunal may, on an application made by the depository, company, depository participant, the holder of the securities or the Securities and Exchange Board, direct any company or a depository to set right the contravention and rectify its register or records concerned.

(5) If any default is made in complying with the order of the Tribunal under this section, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.

Section 58 Refusal of registration and appeal against refusal.

Refusal of registration and appeal against refusal.

58. (1) If a private company limited by shares refuses, whether in pursuance of any power of the company under its articles or otherwise, to register the transfer of, or the transmission by operation of law of the right to, any securities or interest of a member in the company, it shall within a period of thirty days from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the transferor and the transferee or to the person giving intimation of such transmission, as the case may be, giving reasons for such refusal.

(2) Without prejudice to sub-section (1), the securities or other interest of any member in a public company shall be freely transferable:

Provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract.

(3) The transferee may appeal to the Tribunal against the refusal within a period of thirty days from the date of receipt of the notice or in case no notice has been sent by the company, within a period of sixty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, was delivered to the company.

(4) If a public company without sufficient cause refuses to register the transfer of securities within a period of thirty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, is delivered to the company, the transferee may, within a period of sixty days of such refusal or where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal.

(5) The Tribunal, while dealing with an appeal made under sub-section (3) or sub- section (4), may, after hearing the parties, either dismiss the appeal, or by order—

(a) direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within a period of ten days of the receipt of the order; or

(b) direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved.

(6) If a person contravenes the order of the Tribunal under this section, he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

CHAPTER IV
SHARE CAPITAL AND DEBENTURES

Section 58 is brought to force with effect from September 12, 2013. It provides remedy in case of refusal by company to transfer securities.

Corresponding provision is Section 111 under the Companies Act, 1956, which ceased to be effective from September 12, 2103.

Whereas the constitution of the National Company Law Tribunal (‘Tribunal’) is likely to take some time, the Ministry of Corporate Affairs in exercise of the powers conferred by sub-section (1) of section 470 of the Companies Act, 2013 made the Companies (Removal of Difficulties) Order, 2013 and clarified that until a date is notified by the Central Government under sub-section (1) of
section 434 for transfer of all matters, proceedings or cases to the Tribunal, the Board of Company Law Administration (ie. Company Law Board) shall exercise the powers of the Tribunal under sections 24, 58 and section 59 in pursuance of the second proviso to sub-section (1) of section 465 of the said Act.