VHVK Law Bulletin October
December 2017
Volume I Issue 3
VHVK Law Bulletin
We are pleased to present to you the second issue of VHVK Law Bulletin, in our continuing effort to disseminate to clients and the wider community major developments in business law and regulation. The subjects covered in this issue include company law, income tax, securities law, and insolvency and bankruptcy.
Private agreements and companies’ register of members
Shareholders have several important rights in companies, mainly voting in director elections and benefiting from the growth of companies. Inclusion in the register of members is the first step for shareholders to exercise their rights. Recognizing the importance of the integrity of companies’ register of members, the law provides a summary remedy to deal with defects in corporate members’ registers. Companies Act, 2013, section 59 (earlier, Companies Act, 1956, section 111) enables the National Company Law Tribunal (earlier, Company Law Tribunal) to order rectification of the register of members in situations of wrongful inclusion in or deletion of persons from shareholder registers. The remedy, summary in nature, avoids the elaborate procedure of trial in courts – time-consuming and cumbersome – and seeks to promote accuracy and completeness of shareholder registers.
In IDBI v Parmeshwari Fabrics (2016),1 the Bombay High Court ruled that transfers of shares made in violation of private agreements could not be a ground for rectification of a company’s shareholder register. The decision affirms that the rectification remedy cannot be used to counter wrongful transfers of shares in violation of pre-emption rights available under contract.
A group of shareholders were under an obligation to offer their shares in the company first to United Western Bank, which later amalgamated with the Industrial Development Bank of India. These shareholders transferred their shares to third persons in violation of the pre-emption rights of United Western Bank and the names of the transferees were entered in the company’s register of members. To enforce the pre-emption rights, Industrial Development Bank of India relied on the summary remedy of rectification of shareholder register. The approach was adopted to deal with what was, in effect, a breach of contract by the shareholders,
The rectification remedy in the Companies Act is available in limited circumstances, including when a person’s name is entered in or omitted from the register “without sufficient cause.” The question was whether the “without sufficient cause” condition was wide enough to cover transfers made in violation of the pre-emption rights applicable to shares. The Company Law Board disagreed and this was upheld by the Bombay High Court.
The ruling in IDBI v Parmeshwari Fabrics clarifies that the summary remedy for rectification of shareholders register, now under section 59 of the Companies Act, 2013 would not extend to breach of contract situations. The restrictive approach complicates matters for victims of breach of contracts touching upon the underlying shares.
SEBI’s protective measures can extend to group companies
As the guardian of India’s capital markets, the Securities and Exchange Board of India (SEBI) has the jurisdiction to license mutual funds through a registration procedure. Among the applicable criteria for licensing, one is that the trustees of the asset management company must be “fit and proper persons.” This question arose with respect to Mr. Subrata Roy Sahara of the Sahara Group and one of its member-companies – Sahara Asset Management Company.
SEBI cancelled Sahara Asset Management Company’s license because of its links with Mr. Subrata Roy Sahara. In doing so, SEBI applied the lifting of corporate veil mechanism. The cancellation was linked to the powerful presence of Mr. Subrata Roy Sahara in the company – with 87 percent shareholding between him and his wife, and a seat on the board. SEBI’s determination about the “fit and proper person” issue arose from Mr. Subrata Roy Sahara’s transactions in Sahara Real Estate Corporation and Sahara Housing Investment Corporation. These dealings led to an order of refund of money to investors, which was upheld by the Supreme Court of India.
Challenging the cancellation of license in the SEBI Appellate Tribunal (SAT), Sahara Asset Management argued that Mr. Subrata Roy was only a non-executive director and had no active role in management. Rejecting the plea, SAT referred to the observation of the Supreme Court of India that Mr. Roy was in full control of all the group companies and nothing moved without his active involvement. Specifically, SAT affirmed SEBI’s power to lift the corporate veil in appropriate cases to discharge its function of protecting investors.2
SEBI’s decision to cancel Sahara Asset Management’s license and SAT’s dismissal of the challenge underscore the caution corporate groups must exercise. It is apparent that events in group companies can impact other members of a group in their capital market operations and regulatory compliance requirements.
Insolvency & Bankruptcy Act proceedings, Limitation Act does not apply
As the Insolvency & Bankruptcy Code, 2016 (I&B Code) unfolds, a major development is the ruling of the National Company Law Appellate Tribunal (NCLAT) in Neelkanth Township and Construction Pvt Ltd v Urban Infrastructure Trustees Limited.3 At issue was whether a debtor with time-barred claim could initiate proceedings under the I&B Code. Characterizing the action of the debtor as “initiation of Corporate Insolvency Resolution Process” and not a “recovery of money claim,” NCLAT ruled that limitation under the Limitation Act, 1963 would have no relevance in bringing an action under the I&B Code. In effect, even a debtor whose claim is beyond the statutory period of limitation – normally, 3 years – can initiate action against a corporate creditor under the Insolvency & Bankruptcy Code.
The ruling by the Appellate Tribunal departs from the earlier reasoning of the National Company Law Tribunal in Deem-Roll Tech Ltd v RL Steel & Energy Ltd 4 and Sanjay Bagrodia v Sathyam Green Power Pvt Ltd.5 In these cases, it was held that a time-barred debtor would not be competent to initiate proceedings under the I&B Code.
The latest ruling of the Appellate Tribunal adopts a different reasoning. It is, however, apparent that the last word is not yet said on the subject of limitation and I&B Code. To be fair, in Neelkanth Township, the Company Law Appellate Tribunal only dealt with the initiation of the insolvency resolution process. It permitted a time-barred debtor to initiate proceedings, but did not address the question whether time-barred claims can be included in any debt restructuring package that might be worked out under the I&B Code. When it is time to consider this question, claims barred by limitation will likely be held ineligible for inclusion in the restructuring package. Any other interpretation will render the Limitation Act, 1963 ineffective and complicate the working of the I&B Code.
Finance Act, 2017 introduces income tax on gifts
Finance Act, 2017, which implements the Central Government’s budget proposals, inserts a new provision in the Income Tax Act, 19616 for levy of tax on gifts. The levy, comprehensive in reach, applies when any person receives over ₹50,000, in cash or kind. There are limited exceptions – mainly, individuals who receive gifts from close family members and non-profit institutions registered with the Income Tax authorities for tax exemption.
Below is a summary of some important features of the new levy of income tax on gifts.
- The new tax is applicable to all categories of taxpayers – namely, individuals, companies, Hindu Undivided Families (HUF), etc.
- The threshold for the levy of tax is ₹50,000, whether in cash (including through bank channels) or property, movable/immovable.
- For immovable property, value will be determined with reference to applicable stamp duty guidelines and for movable property, it will be “fair market value.”
- Only two categories of gifts are exempt from the new tax – namely, individuals in specified circumstances and specified categories of non-profit institutions.
- In the case of individuals, gifts from close family members (as defined) and trusts established by close family members qualify for the exemption.
- Charitable, educational, and medical institutions exempt from income tax under section 10(23C) of the Income Tax Act will not be subject to the new levy on gifts of over ₹50,000.
Similar tread pattern on lorry tyres can amount of “passing off”
In Apollo Tyres Ltd v Pioneer Trading Corp,7 the Delhi High Court considered whether similarity in the tread pattern on tyres manufactured by different companies and display of the pattern on business documents (invoices, etc.) can amount to “passing off.” Apollo Tyres argued, successfully, that they would. It brought the action against a former dealer who resorted to importing the similar-looking products from China and selling them at lower prices. The court held that similar tread patterns can lead to confusion in the market about the manufacturer of the tyres and passed an order of injunction restraining the sale of the offending tyres by the defendant who imported them from China.
In finding in favour of Apollo Tyres, the Delhi High Court noted that the similar-looking tyres imported from China were less expensive. The tread patterns were displayed on invoices and other stationery, and could be misleading to people particularly when sold by a former dealer of the plaintiff (Apollo Tyres). The court discussed the likelihood of the people in the trucking industry being deceived by the appearance and allured by lower prices. The fact that the defendant had been a distributor of Apollo tyres in the past was probably instrumental for the court to grant interim orders against cheaper imports of similar-looking products from China.
Another factor that influenced the outcome was the consideration of public interest. The court held it a duty to “ensure that the public at large is protected against confusion, deceit and misrepresentation” (para. 118). Technical arguments about the Trade Marks Act, 1999 and the Designs Act, 2000 were presented and considered by the Delhi High Court. These could have a greater bearing on the final result in the lawsuit of Apollo Tyres when it unfolds in the future.
Arbitration & Conciliation Centre, Bengaluru
An initiative of the High Court of Karnataka, the Bangalore Arbitration and Conciliation Centre presents an attractive avenue for alternative dispute resolution. Given longstanding complaints about delays and complexities in court litigation, arbitration and similar methods have increased in popularity as alternative tools for resolving disputes. With significant advantages – namely, a panel of eminent former judges and jurists, stable cost structures, and modern facilities, the Bangalore Arbitration and Conciliation Centre enhances the appeal of alternative dispute resolution.
Over the last two plus decades, the emphasis on fast-paced economic growth and international trade and business as an important feature underscored the need to resolve business disputes in a timely and cost-efficient manner. Reflecting the need, a modern legislation – the Arbitration and Conciliation Act – was enacted in 1996 to promote alternative dispute resolution including international business disputes. However, the progress of arbitration and related methods such as mediation and conciliation have not realized their potential due to a number of factors. These include complexities and uncertain costs both in identifying arbitrators and in conducting the proceedings, and logistical challenges such as finding appropriate venues for the proceedings.
The recently-established Bangalore Arbitration and Conciliation Centre addresses many of the issues experienced with alternative remedies. Adopting a holistic approach, the Bangalore Centre comes with a complement of experts (judges and jurists) who can be effective in dispute resolution, and equally important, has set and reasonable costs for the parties, quality facilities for the proceedings, and secretarial/staff support. The infrastructure and the ecosystem are valuable and can be of great benefit in dispute resolution, including business disputes.
VHVK Law Bulletin is issued for information purposes only and does not constitute legal advice. For more information on any of the material covered here and/or their implications for your situation, please obtain competent legal advice.