Author name: CBCL

[By Anushka Juneja] The author is a student at the Gujarat National Law University.  The Indian economy has long been sitting on a ticking time bomb which is the mountain of bad loans held by its banks. The rapidly increasing non-performing assets pose a systematic risk to the banking system which consequently affects the economy as a whole. Several steps including the enforcement of the Insolvency And Bankruptcy Code, setting up of bad banks, amendments to the Banking Regulation Act 1949, have been taken to tackle this chronic crisis. It is believed that these steps need to be supplemented with the application of the doctrine namely reverse piercing of the corporate veil. The doctrine would enable the creditor to utilise the assets of the debtor’s corporation to discharge the liabilities of the individual defaulter. The broad aim of this article is to propose adoption of the doctrine as a solution to the plaguing bad loan problem. To that end, I will discuss the judicial approach undertaken in India and foreign jurisdictions. Further, the adoption of the doctrine for debt resolution in India would cause disruption in the priority of claims matrix which can be resolved as I would explain later in the article.  GROWING INCLINATION TOWARDS THE DOCTRINE IN INDIA The equitable doctrine of Reverse piercing is antithetical to the traditional doctrine of corporate veil piercing. Unlike the latter, where a shareholder is held liable for the default of the corporation, in the former, the liability of the shareholder is imposed upon the corporation. In India, a divergence of opinion has been observed by the judicial fora on the application of the doctrine. Initially the courts were reluctant in their approach, the appellate tribunal in NEPC India Ltd. v. SEBI termed the doctrine to be inconceivable and outlandish. However, with changing economic realities and commercial growth, a judicial inclination can be observed. In Punjab and Sind Bank v. Skippers Builders (P) Ltd. ,the “reverse piercing” jargon was not explicitly used, however, the facts of the case clearly point towards its application. The doctrine has been applied to fix criminal liability in numerous cases. It was held in Iridium India Telecom Ltd. v Motorola Incorporation and Others that guilty intent of a person should be attributed to the corporation in case it is found that they are the alter-ego of the corporation. Further, in Aneeta Hada v. Godfather Travels, the court confirmed that the criminal act of an individual can be attributed to his company. JUDICIAL STANCE OUTSIDE INDIA Globally, the doctrine is not yet well recognised, however, the nature of remedy that it offers has often compelled the courts to consider its applicability in appropriate situations. The High Court of Singapore in Koh Kim Teck v. Credit Suisse Ag held that the doctrine demands full consideration and cannot be dismissed straight away. Numerous courts worldwide have allowed the application of the doctrine in debt recovery cases. The Supreme court of Colorado, in the case of Re Phillips, held the claims of an outsider against the corporation for the default of the debtor to be legit. Under Pennsylvanian law, even an allegation of fraud or misconduct against the debtor-shareholders is not imperative for the sustainment of a reverse piercing claim. Analogously, in various tax recovery cases like Towe Antique Ford Foundation v. IRS, Zahra Spiritual Trust v. United States, Shades Ridge Holding Co. v. United States, the tax recovery agency was treated as the creditor, their claims were placed over the other creditor-stakeholders and outside reverse piercing claim was allowed for the satisfaction of the dues. ADOPTION OF THE DOCTRINE IN THE INDIAN JURISPRUDENCE FOR DEBT RESOLUTION Application of the doctrine in debt related cases would amount to giving more powers in the hands of the creditors. This is in consonance to what the legislature intended while enforcing the insolvency and bankruptcy code. However, it is quite understandable that this application would give rise to a clash of priority of claims between the corporation’s existing creditors and the ones having reverse piercing claims against it. In Alfred Booth v. Jeremiah Bunce, the controllers of an insolvent corporation transferred their assets to a new company to defraud the creditors of the former corporation. When a clash of priority of claims arose between the creditors of the former cooperation and the existing creditors, the court observed: “though the new corporation was a valid legal entity for its own creditors, the principle of qui prior est tempore, potiore est jure would enable the old creditors to make their claims against the new corporation, owing to the fact that the controllers of the corporation were same and that the transfers were fraudulent.” As has been noted above and considering the principle of “qui prior est tempore, potiore est jure” meaning “he who is earlier in time is stronger in law”, it is hence contended that the reverse piercing claims of the creditors ought to be placed either at the top in the hierarchy list which has been specified in Section 53 or 178 of the code or should at least be considered at par with the claims of the other highest ranked creditors and distribution of assets should hence be done accordingly. Further, in light of the principles of equity, justice and good conscience, the Adjudicating Authority might help in resolving the conflict. The application of judicial mind would warrant a rational decision rather than a mechanical one. CONCLUSION Undeniably, the courts are yet irresolute to adopt the doctrine. This is perhaps because of their tendency to adhere to the ancient principle of a separate legal entity. However, this approach needs to be altered because corporate veil is often used as a façade to escape liability and commit fraudulent acts. Several changes were made to the Companies Act in line with the Insolvency and Bankruptcy Code. The substantial shift made from the current priority of claims under the Act was solely done to promote the interests of the creditors. Empowering the creditors through the application

[By Tanish Arora] The author is a student at West Bengal National University of Juridical Sciences, Kolkata. Introduction The case is centred around the conversion of a Public Limited Company to a Private Limited Company and has been filed before the National Company Law Tribunal, Allahabad under Section 14(1) of the Companies Act, 2013.[1] The court has considered the question of what prerequisites must be present for such a company to convert to a private limited company and analyses the presence of such elements in the given case.[2] The court also concerns itself with the question of retrospective applicability of the altered articles to transfer of shared effected by the shareholder prior to the resolution amending the article.[3] This case comment provides an analysis of the court’s reasoning in this judgement and is divided into three parts. The first part provides brief facts and general background of the case. The second part provides an analysis of the reasoning of the court. The final part provides a concluding opinion of the writer. General Background The company was listed with Delhi and Bombay Stock Exchange when it was focused on manufacturing and distribution of edible oil during 2012, however, it later transferred this business and manufacturing undertaking and bought back all its shares from public shareholders. Following this, it became an unlisted public company after getting delisted from the stock exchange in 2013. Its offices also shifted to Noida. As required under Article 14 of the Companies Act, 2013, the Company filed a petition before the NCLT to seek its approval for the conversion from a public limited company to a private limited company. As per the Article, the Tribunal can grant such permission as it deems fit.[4]  Such application can be filed as per Rule 68 of the NCLT Rules, 2016,[5] for a conversion of a public company into a private company in the prescribed format and the manner accompanied by documents/information and requisite filing.[6] According to the explanatory statement attached with the EOGM the Company and its shareholders agreed to change its nature to private limited so as to improve its functioning under the Act, in addition to being more law compliant.[7] Key Analysis of the Court In order to decide the case on its merit the Tribunal called for a report from the Registrar of Companies (ROC) which stated the main objective of the company to be “Trading in commodities and holding an investment in the Group companies.”[8]; the company has been regular in filing its statutory return,[9] it has not violated Sections 383A/203 of the Companies Act,[10] and there is no pending proceeding against it under Sections 235/210 to 251/277 of the Act.[11]The court took note of the fact that no serious objection from the offices of the RD(NR) or ROC existed against the conversion and it will not be detrimental to Public Interest at large.[12] The Tribunal while giving its approval relied on: Section 18 r/w Section 13 of the Companies Act.[13] Subject to the approval of the Central Government. Members’ approval is obtained through a General Meeting of the Company, by way of a Special Resolution. The court also ordered the Company to adopt a new set of Articles of Association as applicable to the Private Company. Ramaiya’s commentary stated that a Public Company must be granted permission to convert to a Private Company if it is in its best interests and the shareholders agree to the same and if such a conversion is sought so that the company can function more efficiently and not merely to avoid restrictions imposed on public companies.[14] The court also relied on a judgement of the Kerala High Court stating that the “power is conferred on the company under the Act to alter the article by special resolution”[15] With regards to the retrospective applicability of the amended article the court opined in the negative. In the present case, the court stated that the shareholders will be subject to the altered articles and placed reliance on the reasoning of the Pepe’s case of 1893,[16] that when the articles are altered the shareholder has the option of withdrawing his shared but if he does not do so and continues to hold the shares he is agreeing to be bound by the altered articles. The Pape’s case held this in terms of a person’s position in the society which has the right to alter its rules and the person being in a contract with the society shall remain subject to the rules when duly altered.[17] Concluding Opinion While section 14 of the Companies Act, 2013 merely mentions that the conversion of a Public Company to a Private Company shall be granted by the Tribunal as it may deem fit. The court, in this case, has actually gone to the lengths of defining what criteria a company needs to fulfil for the Tribunal to permit its conversion to a Private Limited Company by taking into consideration various factors as pointed out in the analysis part of this case comment. The court has recognised the company’s autonomy in terms of making decisions about its operations by emphasising the need for member approval via Special Resolution at the Company’s General Meeting. By citing A Ramaiya, it has also identified the importance of such permission being granted to facilitate better company functioning rather than simply to avoid restrictions placed on public companies. The Court has also talked about the applicability of the Alteration of Articles in this case. The importance of altering articles is considered so important that a company by no manner can deprive itself of the power to alter its articles.[18] In the present case, the court has clarified the applicability of altered articles as well. The judgement also points out that the conversion of a Public Company to a Private Company must be such that it is not oppressive to the minority members by placing reliance Madhurabhami case.[19] Conversion of such a nature is regarded as illegal.[20] The judgement is highlighting and places

[By Shuchi Agrawal]  The author is a student at the Jindal Global Law School. Corporate governance refers to the mechanisms which are used to regulate and govern a corporation. The model of corporate governance adopted, determines the scope of powers that are wielded by different actors, in order to facilitate the smooth functioning of a company. The U.S. and U.K. follow an outsider model of corporate governance, which is based on the separation of control and ownership, as the shareholders have limited interest in the management of the company. Meanwhile, India follows the insider model, which is characterized by the presence of cohesive groups of ‘insiders’ who have a long term affiliation with the company. Usually, the controlling shareholders are a business family or the State. The presence of such controlling shareholders helps concentrate ownership and may lead to greater benefit for the dominant shareholder at the expense of the minority shareholders. Thus, this may result in an agency conflict between the controlling shareholders and the minority shareholders. However, despite the differences between the shareholding patterns in India and, the U.S. and U.K., legal transplants have been heavily employed in formulating the corporate governance policies in India. This has been done without considering the historic, cultural and economic differences between the concerned jurisdictions and has resulted in the establishment of a regime that is severely ill-equipped to prevent unethical or fraudulent activity within corporations, in India. Considerations while Introducing Legal Transplants ‘Legal transplants’ are legal models and regulations which are exported from an alien jurisdiction into a receiving one. Due to the historic imbalance of power between nations, legal transplants are often adopted by developing countries, from more developed nations. This allows developing countries to import legal wisdom from developed jurisdictions, which may have a rich historic background for a particular legal framework. However, it has been suggested that emerging markets should not copy codes implemented in mature markets. Moreover, there is a lack of universal consensus regarding the effectiveness of legal transplants. Nonetheless, in the context of corporate governance in India, legal transplants have not been very effective, as is evidenced by the fact that government companies were discovered to be major violators of Clause 49 of the Listing Agreement, which details the guidelines regarding corporate governance that listed companies in India must comply with. Additionally, the theory of path dependence states that an outcome is structured in specific ways based on the historical context and the prevalent socio-economic conditions. Consequently, differences in models of corporate governance, as well as historical and social background, play a role in the effectiveness of a legal transplant. Markets have always operated in relation with communities and social organizations, such as families and religion and governments and never in a vacuum. Thus, legal rules which have been shaped by particular political, historical and cultural elements cannot be transplanted in another jurisdiction, unless similar conditions prevail in the other State as well. Recently, there has been a marked shift from the transplant model to an entirely autochthonous model in the field of corporate governance in India. From the perspective of legal reform, it has been suggested that rules which can be enforced with the existing enforcement structure must be preferred over the creation of ideal rules which require the development of new structures for their implementation. The inefficiency of India’s Transplanted Model Further, the Satyam scam of 2009, worked to showcase the gaps that were present in the effective implementation of the legal transplants. The Satyam scam was one of India’s biggest corporate governance and financial accounting scandals. In this matter, the ambiguity regarding the duties of the independent directors and the promoters especially highlighted the failure of the corporate governance model. Moreover, it has been claimed that multiple measures borrowed from other jurisdictions, primarily the U.S. and U.K., have failed to improve corporate governance in India. For instance, S. 166 of The Companies Act, 2013, gives directors overarching discretionary powers, which may be utilized to further their own interest with little accountability. In addition to this, it was found that “more than 3,000 people who were on the boards of various companies on January 1, 2006, were re-designated as independent directors” in order to comply with the requirements under Clause 49 of the Listing Agreement. This defeats the very reasoning behind these reforms and demonstrates the ineffectiveness of legal transplants. Additionally, the transplanted corporate governance model is not perfect in its functioning even in its countries of origin, such as the U.S. and U.K. Some problems associated with the transplanted model include the dispersed nature of shareholding, combined with a lack of oversight, excessive interference by managers in determining their own remuneration, and the lack of a division between the roles of the CEO and Chairperson. Contrastingly, Indian laws have a comprehensive system with respect to these concerns. Controlling shareholders in India do play a role in the management of the company, and the management’s remuneration is limited by legal provisions and is subject to the shareholders’ approval. Additionally, despite the lack of a mandatory provision requiring a separation of the roles of the CEO and the Chairperson, Indian companies tend to follow the separation. However, in the context of Anglo-Saxon corporate governance models, it has been stated that strong managers and relatively unprotected minority shareholders have been at the centre of corporate governance failures. This was evidenced in the case of Parmalat, where the controlling shareholders had illegally used corporate resources at the expense of minority shareholders. Moreover, the CEO and chairperson positions were held by the same person despite the codes of practice recommending a separation. Further, on analyzing some corporate governance failures such as Enron, WorldCom, Satyam and Xerox, it was found that they had certain common features, including incompetence of management, the inefficiency of internal audit, and non-compliance with internal regulations. Conclusion While it has been acknowledged that there is no one successful model of corporate governance, several prescriptive ruleshave been laid down on the basis of research. A