Author name: CBCL

Restricting the Scope of “Suit or Other Proceedings” under Section 446 of the Companies Act, 1956 vis-`a-vis Section 138 of the Negotiable Instruments Act, 1881. [Jasvinder Singh] Jasvinder Singh is a third-year student of National Law Institute University, Bhopal. Introduction It is manifest from a bare reading of section 446(1) of the Companies Act, 1956 [“Companies Act”], that when a winding-up order has been passed against a company or where a provisional liquidator has been appointed, then, except by the leave of the tribunal, neither a suit can be initiated against such company nor any other legal proceedings be commenced or proceeded therewith.[1] The purpose behind this provision is to safeguard the company, which is wound-up, against wasteful and expensive litigation by bringing all the matters against that company before a single adjudicating authority. Moreover, in cases of winding-up, as the assets of the company get distributed to all of its creditors and contributories, the proceedings are stayed in order to avoid situations of chaos among the creditors regarding the distribution of the assets. Similar provisions exist under the Insolvency and Bankruptcy Code, 2016 [“IB Code”], which states that after the admission of the application of insolvency, the adjudicating authority can by order, declare moratorium, prohibiting the institution of suits or the continuation of pending suits or legal proceedings against the corporate debtor.[2] However, presently, we are only concerned with the application, the scope as well as the ambit of section 446 of the Companies Act. The aim of this post is to discuss the effect of section 446 of the Companies Act on the proceedings under Section 138 of the Negotiable Instruments Act, 1881 [“N.I Act”], which provision creates a statutory offence in case of dishonour of a cheque on account of insufficiency of funds, among other things. The Problem There have been certain disagreements with respect to the scope of the expression “suit or other legal proceedings” under section 446(1) of the Companies Act. Various high courts in several of their judgments have time and again delved into the provisions of the Companies Act so as clarify and demarcate the ambit of the said section. The High Court of Bombay took divergent views on the application of section 446(1) of the Companies Act to the proceedings under section 138 of the N.I Act. In the case of Firth (India) v. Steel Co. Ltd. (In Liqn.),[3] the issue before the court was whether the expression ‘suit or other legal proceedings’ in section 446(1) of the Companies Act includes criminal complaints filed under section 138 of the N.I Act?  It was held by the Single Judge Bench that section 446(1) has no application to the proceedings under section 138 and hence leave of the Court is not necessary for continuing proceedings under the N.I Act. Further in an unreported decision of Suresh K. Jasani v. Mrinal Dyeing and Manufacturing Company Limited & Ors.,[4] in order to decide on the relevance of section 446 of the Companies Act to the proceedings under section 138 of the N.I Act, the Single Judge Bench has taken diametrically opposite view altogether, and held that by virtue of the former provision, the matter under the latter could not be proceeded any further after the passing of the winding-up order as the proceeding under section 138 of the N.I Act arose out of civil liability of the company, which brings it under the purview of section 446(1). It was further held by the Court that the words “other legal proceedings” have a wider connotation and meaning and thus they include even the criminal proceedings which have some relevance with the functioning of the company. Because of such disagreements in relation to the issue, the Single Judge Bench of the Bombay High Court decided to refer the matter to a larger bench. Decision of the Division Bench of the Bombay High Court The Division Bench of the Bombay High Court on May 06, 2016, in the case of M/S Indorama Synthetics (India) Limited v. State of Maharashtra and Ors.,[5] tried to reconcile and resolve the conflicting views taken in the above-mentioned judgments. The Division Bench discussed the scheme and object of section 446 of the Companies Act. The court held that when the proceedings of winding-up against a company have been filed, the tribunal has to see that the assets of the company are not imprudently given away or frittered. It is the fundamental duty of the tribunal to oversee the affairs of the company and to meet the debts of its creditors as well as contributories. With regard to section 138 of the N.I Act, the court stated that the main object of the provision is to assure the credibility of commercial transactions by making the drawer of the cheque personally liable in case of dishonour of cheques. The Bench cited the case of S.V. Kondaskar, Official Liquidator and Liquidator of the Colaba Land and Mills Co. Ltd. (In Liquidation) v. V.M. Deshpande, Income Tax Officer, Companies Circle I (8), Bombay & Anr.,[6] wherein the Hon’ble Supreme Court considered the provisions of  section 446 of the Companies Act vis-à-vis those of section 147 of the Income Tax Act, 1961 dealing with the initiation of the reassessment proceedings against a company which is undergoing liquidation process, and held that “[t]he Liquidation Court cannot perform the functions of the Income Tax Officials while assessing the amount of tax payable, even if the assessee be the company which is undergoing a winding up process. The language of section 446 of the Companies Act must be so interpreted so as to eliminate any startling consequences.” The Court observed that the expression “other legal proceedings” under section 446 of the Companies Act, should be read ejusdem generis with the expression “suit” and could only mean civil proceedings. Further, the expression “legal proceedings” under section 446 does not mean each and every civil or criminal proceeding; rather, it signifies only “those proceedings which have a direct bearing on the assets of a company in winding-up or have some relation to

Derivative Action Suits in Corporate Litigation in India. [Virali Nagda] The author is a fourth-year student of NALSAR University of Law. A derivative action, also called the shareholder derivative suit, comes from two causes of action, actually: it is an action to compel the corporation to sue and it is also an action brought forth by the shareholder on behalf of the corporation for redressal against harm to the corporation.[1] Such an action allows the shareholders monitoring and redressal of any harm caused to the corporation by the management within, in a case where it is unlikely that the management itself would take measures to redress the harm caused. Thus, the action is ‘derivative’ in nature when it is brought by a shareholder on behalf of the corporation for harm suffered by all the shareholders in common. This happens when the defendant is someone close to the management, like a director or corporate officer or the controller. If the suit is successful, the proceeds are forwarded not to the shareholder who brought the suit but to the corporation on behalf of which the cause of action was established. If the American literature on this subject is to be believed, then the historical foundations of the derivative suit lay in the corporate purpose. This debate over the purpose raged in the first half of the 20th century with the proliferation of major conglomerates as public corporation where investors could buy stock in the corporation on the public stock exchange but had close to no control or active role in the management of the corporation.[2] Even before the early 20th century when most corporations were privately owned by the small groups of shareholders who managed the corporations,[3] there was a judicial struggle to understand the corporate purpose when shareholders sought to challenge the directors running the management of the corporations. This American literature roots different from the Indian base of derivative action, which comes not from a principled provision of the company law rules and legislation in the country but simply from the willingness of the courts here to rely on principles from the English common law. The provision that the law has provided with is redressal against oppression and mismanagement of the company where the Companies Act, 2013, has allowed for a provision of class action suits[4] to be filed by shareholders against directors or other officers of the company in cases of mismanagement. In the event of this section being now notified, this paper is an attempt to look at literature around derivative suits in India and the supplement of class action suits to understand where the interpretation and applicability of derivative suits in India stands at, presently. Historical and Normative Foundation of Derivative Suits Commentators have often claimed that the United States had imported the principle of shareholder derivative action from England.[5] The representative litigation in early cases of the English Court of Chancery showed semblance to the class action suits of today.[6] This was developed gradually from the communal harms within the thriving feudal societies of the 12th-15th century England. The American Revolution gave way from the precedent method of England for matters of corporate litigation to permitted exception to the necessary parties’ rule, a form of representative party law suits quite different from the contours of the actions in England.[7] The classification began when for the first fifty years post-independence the United States permitted shareholders to bring suits on behalf of themselves and all other shareholders,[8] but then near the later part of 1940, courts began to often describe such lawsuits as those being brought on behalf of the corporation itself. The seminal case on shareholder derivative action is the English case of Foss v. Harbottle,[9] where the court had to consider the question of whether it was acceptable to depart from the rule of corporation suing in its own name and character as against that in the name of someone whom law appointed as its representative. Relying on the words of its predecessor Wallworth v. Holt[10] which allowed the consensus of all shareholders of a joint stock company to be represented by its shareholder in a suit against mismanagement, the court in Foss recognized the involvement of a true corporation and consequently recognized the right of its shareholders to bring a lawsuit to court on behalf of all the shareholders in some situations. The US courts in bringing this interpretation, understood homogeneity of interests of persons involved in a corporation or an organisation as with the interest of the corporation or organisation itself and thus allowed the shareholder’s cause of action to be derivative to the corporation’s interest in the cause of action.[11] Clear recognition to the shareholders’ derivative suits came when American courts restricted shareholders to filing suits only in circumstances where corporation was incapable of seeking redressal.[12] Percy v. Millaudon[13] was the first case decided in the Louisiana Supreme Court which appears to have accepted derivative action suit. The English cases that percolated in the following of the class action of the Chancery court slowly allowed the exception rule to allow corporation representation for the interest of the shareholders. Derivative Suit as an Exception to the Principle of Corporate Law  The voting rules in company law ensure that the shareholders who won the largest stake in the corporation are allowed the greatest impact on the venture policy, simply because these shareholders will gain most from the good performance and lost most from the bad performance of the venture giving them the largest incentive to maximize welfare interests of the corporation.[14] The minority share-holders then have no power to act on behalf of the venture or limit the will of the majority. This relative lack of power for the latter does not otherwise disadvantage them since the benefit of this decision-making mechanism is accrued to the minority as well. In this fundamental principle of corporate law, the derivative suit is a striking exception as shareholders with the tiniest of investment in the corporation can also bring the derivative suit on behalf of the corporation.[15] The litigation costs of such suit are then accrued by the corporation itself. This then

Time To Revisit Legislations? An Analysis Of The Tata Docomo Case. [Priya Gupta] The author is a third year student of Gujarat National Law University. On the 28th of April, 2017, an important arbitration dispute was settled by the Delhi High Court in the case of NTT Docomo Inc. v. Tata Sons Limited,[1] wherein the court upheld the sanctity of a private contract in a foreign-seated arbitration by denying the Reserve Bank of India the right to intervene. A currently unsettled concern was raised by RBI in the enforcement of an arbitral award between NTT Docomo Inc. (‘Docomo’) and Tata Sons Ltd. (‘Tata’) whereby it contended that the award was against public policy of India as foreigners in matters of equity investments cannot add clauses that assure them a return below the sovereign yield. Facts of the Case Docomo and Tata entered into a Shareholder Agreement on the 25th of March, 2009, clause 5.7 of which stated that if Tata failed to satisfy certain ‘Second Key Performance Indicators’ stipulated in the agreement, it would be obligated to find a buyer or buyers for Docomo’s shares at the Sale Price i.e., the higher of (a) the fair value of those shares as of 31st March 2014, or (b) 50% of the price at which Docomo purchased its shares. Tata breached the agreement and so was called upon by Docomo to find a buyer or buyers for acquisition of sale shares. Another option later deemed unacceptable to Docomo was that Tata would acquire shares at the fair market price of INR 23.44 (USD 0.36). Finally, the dispute between the two parties was referred for arbitration when Tata failed to honor its obligations due to RBI’s objection before the London Court of International Arbitration. Arbitral Award and its Enforcement The tribunal rejected the contentions of Tata including which was the claim that an award of damages would result in contravention of the laws of India, especially the FEMA regulations. It stated that as Tata was under a strict obligation to perform, a special permission from RBI was not required. The methods of performance were deemed to be covered by other general permissions. It noted that- “Tata is liable for its failure to perform obligations which were the subject of general permissions under FEMA 20. The FEMA Regulations do not therefore excuse Tata from liability. The Tribunal expresses no view, however, on the question whether or not special permission of RBI is required before Tata can perform its obligation to pay Docomo damages in satisfaction of this Award.” On the other issue of non-acceptance of Tata’s offer to buy the shares at fair market price, the tribunal said that Docomo acted in good faith by insisting on performance as it had the reasonableness to not accept the amount on the offer. Therefore, the tribunal ruled out in favor of Docomo by making Tata liable for an amount of US$ 1,172,137,717 payable within 21 days. The real problem arose when Docomo sought to enforce the award in India. RBI filed an intervening petition where its counsel contended that the agreement was in violation of regulation 9 of the FEMA 20 which provided that the transfer should be at a price determined on internationally accepted pricing methodology. Further, the settlement was also in violation of section 6(3) of FEMA as valuation, transfer and issue of shares had to be conducted on the basis of the RBI guidelines which were not followed in the present case and hence the award was contrary to the public policy of India. Judgment of the Delhi High Court The Court first took up the question as to whether an intervention petition by the RBI could be entertained and, if yes, on what grounds. To answer this, it referred to section 2(h) of the Arbitration and Conciliation Act, 1996, which defines ‘party’ to mean a party to an arbitration agreement. Sections 48 and 34 work on the same lines by making sure that only a party to an arbitration agreement could file an application for setting aside the arbitral award. Since RBI was not a party to the agreement under section 48(1), its application was liable to be set aside. On the issue of violation of provisions of FEMA, it was stated that the agreement between Docomo and Tata was based on contractual promise which could always have been performed using general permissions of RBI under FEMA 20. It was held that the promise was valid and enforceable because sub-regulation 9(2) (i) of FEMA 20 permitted a transfer of shares from one non-resident to another non-resident at any price. Moreover, the issue at hand dealt with damages for breach and not for purchase or sale of shares overseas which is why a special permission would not be required. Therefore, the contentions of RBI were set aside and the court ordered for the enforcement of the arbitral award. Analysis It has generally been a recurring tendency of Indian courts to intervene in enforcement of awards by drawing approaches contradictory to the intent of the Act. This has been one of the major reasons for India for not being able to place itself on the global map of arbitration. The Delhi High Court has shown a pro arbitration approach in the current case by appreciating the negative impact on the goodwill of the country if a foreign award is not recognized. The award is said to be positive step as it reduces the ability of Indian companies to violate agreements with foreign entities and provides a wider interpretation to what can and can’t be opposite to public policy. However appreciable the approach of the court may be, the one issue that cannot be ignored here relates to the pending rules on capital account transactions with respect to debt instruments. Traditionally, the government does not have any prescribed limits as to equity investments from foreigners but have capped debt investments since over-indebted countries often see a run on their currency.[2] Since then, an investor putting a percentage on his investments when