Company Law

[By Saket Agarwal] The author is a student of National Law University, Jodhpur Abstract Oppression and mismanagement has been provided under Section 241 of the Companies Act, 2013.[1] Oppression is an act which lacks probity and fair dealing to a member and is burdensome, harsh and wrongful.[2] Mismanagement comes into play when there is a mismanagement or apprehension of mismanagement of the affairs of the company.[3] The section itself makes it clear that only the members are entitle to file a petition for oppression and mismanagement. But when it comes to the directors of a quasi-partnership company the situation somewhat changes. Throughout the study, we will see as to how this actually works. Case: Vikram Bakshi & Ors. v. Connaught Plaza Restaurants Ltd. & Ors.[4] Facts: The petitioner; Vikram Bakshi along with the ‘Bakshi Holding’ were the holders of 50% of total shares in the Connaught Plaza Restaurants Ltd.; the respondent company. The rest 50% of the shares were held by the McDonald’s India Pvt. Ltd. The arrangement was entered into through a joint venture agreement between the parties. The petitioner was initially appointed as the managing director of the partnership. He had the right to get appointed for successive years unless there being some exception like incompetency etc. It was agreed that there shall be four directors in the board, two from each side. Further, in case of his exit from the joint venture, he was obliged to sell all his shareholding to the respondent at a fair price. During the course of business, some disputes arose between the parties. Ultimately, the petitioner was removed from his post of managing director and was asked to sell his shares in the partnership. Hence, the petitioner approached the NCLT for his re-appointment as the managing director. Judgment: The NCLT pronounced the order in favour of the petitioner. The NCLT ordered for the re-instatement of the petitioner as the managing director. Reasoning applied by the NCLT: The NCLT opined that the petitioner had the right to remain as the managing director of the joint venture. It was also observed that the joint venture, in essence was a partnership between the parties. This is corroborated by the fact that they were holding equal number of equity shares in the joint venture. Additionally, both the parties had the right to appoint equal number of directors. Moreover, in case of ousting of the petitioner, he was under an obligation to sell his shares. These facts show that the like a partnership firm this arrangement was being operated where the partners had the equality in shareholding, participation in the management etc. Hence, the removal of the petitioner from the post of managing director was unjustified. Analysis: It is generally understood that company and partnership are two different concepts having their own peculiar advantages and disadvantages. But there is also something like a ‘quasi-partnership’, which although is a partnership but not in the true sense. It has the features of both a company and a partnership firm. A quasi-partnership may have its articles of association, board of directors, shares etc. like that of a company. But it differs from a company when it comes to the rights of its promoter-director. Generally, in a company a person cannot claim that he has a right to remain as the director of the company. Therefore, he can be easily removed from his position. But in a quasi-partnership company, the promoter-director has a legitimate expectation to continue as the director of the company.[5] This legitimate expectation can validly raise his rights under oppression. The reason being that partners in a partnership firm; have equal rights in terms of profit sharing, participation in the management etc. On the similar lines, partners in a quasi-partnership exercise equal rights. Under oppression and mismanagement, directorial complaints are not entertained as the section is specifically for the protection of the members of the company. Filing a petition in any other capacity such as a lessee of the company is not maintainable.[6] But when it comes to the family companies and companies functioning as quasi-partnership companies, a petition filed by a director is justified.[7] The reason being that in case of such companies it is very difficult to distinguish between the rights of the person as a member and a director due to the complex structure involved in such kind of companies. Qualifications for a Quasi-Partnership Whether there is an existence of quasi-partnership or not, depends upon several factors. This includes: (1) approximate equality in shareholding, (2) approximate equality in participation in the management and (3) restriction on the transferability of shares.[8] As mentioned above, the partners in a quasi-partnership company have equal shares and involvement in the operation of the management. With respect to the third criteria i.e. restriction on the transferability of the shares; it has a much wider implication. This condition is inserted in order to dissuade the parties from leaving the company. Even if that person wants to leave the company, he is bound to liquidate his shareholding in the company in favour of other partners. Further, this third condition is so inherently linked with the employment that in case the founder-director has not made an exit from the organization but merely has changed his position within the company, then also this condition becomes operative. In the Vikram Bakshi case, Vikram Bakshi was not elected as the managing director by the respondents themselves but still he was asked to sell his stakes in the company as per the articles of the company. Tussle of Contract Law and Company Law A quasi-partnership company arises just like any other form of partnership through a contract. A quasi-partnership company usually arises through a joint venture agreement. If the terms of the joint venture agreement have been validly entered into the articles of the company, then they are enforceable under section 241. But problem arises when this joint venture has not been incorporated in the articles. In the Vikram Bakshi case also, the respondent raised this

[By Suvam Kumar & Harsha Menon ] The authors are Second and First-year students respectively, of NLU Jodhpur. Introduction: With the advent of globalization and boom in India’s economy, as ease of doing business has escalated to a great rank, it is very much imperative to have an efficient regime governing the corporate affairs. Keeping the abovementioned view in mind, the Companies Act, 2013 [“Act”] was enacted to ensure reliability and confidence in the corporate world. One such important concept which requires more importance is related party transactions. In the previous Act of 1956, this concept was not dealt specifically. However, with the increasing challenges in the field of corporate affairs, related party has been specifically dealt under Section 188 of the Act. However, the concept of related party transactions is still shrouded under ambiguity and nebulousness. The authors have tried to highlight the existing paradox and vagueness in the law related to related party transaction with the help of various judicial precedents. What is related party transactions: Before understanding related party transactions, we must know who is a related party. A related party means any person who is relative of the director or the key managerial personnel in a company.[i]Section 188 of the Act bars the related party transactions except when such transaction is made after taking consent from the Board of Directors or when the transaction is an arm’s length transaction.[ii]Section 188(1) of the Act specifies seven types of transactions which require prior approval of the Board of Directors.[iii]Among these, the transactions related to the appointment of related party to an office of profit has been always the most contentious and has raised several legal and practical issues with regard to the transparency in the company. Rationale: The director of a company has a fiduciary relationship with the company. Hence, it is important to examine whether there exists a conflict between the personal interests and the duty of a director. Hence, it is very much clear that the rationale behind having a provision like Section 188 is to prevent any conflict of interest in the functioning of the company. More often than not, the related party transactions are considered to be influenced by ulterior motives of profiting the persons who are involved in such transactions. Such transactions diminish the transparency and disclosures norms in the company and are against the spirit and objectives of the Companies Act. Exceptions to the related party transactions: It is pertinent to note that not all related party transactions are prohibited per se. There are two exceptions to it. Firstly, transactions where prior consent from the Board of Directors have been taken and the procedural requirement has been fulfilled.[iv]Secondly, transactions which are entered on an arm’s length basis.[v] Arm’s Length Transaction: An Unsolved Ambiguous Concept. Arm’s length transactions are those which are conducted between two related parties as if they were unrelated, so that there is no conflict of interest.[vi]A very little effort has been put to provide clarity as to what exactly arm’s length transactions mean. There is a serious dearth of the interpretation to the meaning of arm’s length transactions and there seems to be a contradiction in the provisions when they use related party and lack of conflict of interest at the same time. Such casus omissusopens the space for different interpretations.[vii]It can be interpreted as one forming strict procedural requirement given under Section 188. On the other hand, it can also be construed in a more liberal sense, by looking at the intent of the transaction and comparing it with the market conditions rather than stressing on the procedural requirement. However, there is no consistent application of any of abovementioned interpretation. Hence, there is a need of clarity regarding the criterion when a transaction despite being related does not cause conflict of interest. The Courts had met with several occasions to deal with the existing ambiguity but no satisfactory results have come out. Cases dealing with Arm’s Length Transactions: One of the very few cases which have tried to give some clarity regarding arm’s length transaction is Madhu Ashok Kapur v. Rana Kapoor.[viii]The Court was dealing with the issue of whether the reappointment of the Managing Director was a related party transaction or whether it was protected under arm’s length transaction. The Court was penchant for liberal interpretation of the arm’s length transaction and emphasized on the fairness of such transactions by comparing them with the market        value of such transaction. The Court held that the appointment was made at an arm’s length basis where it looked at the nature of prerequisites which the Managing Directors are ordinarily entitled to rather than emphasizing on the procedural requirements.[ix]Similar interpretation have been observed by the Apex Court in case of A.K. Roy v. Voltas Ltd.[x]However, there is still some unsettled dust surrounding the interpretations of arm’s length transactions which needs serious review and clarity. Conclusion: Considering the serious nature of the related party transactions and its exceptions, any kind of vagueness in its interpretation would lead to serious consequences in the regime of corporate affairs. It is the transparency which gives credibility to any company and boosts the client’s confidence in corporate world. Hence, an objective interpretation of the related party transactions is imperative. At the same time, the Courts have to be very cautious while interpreting the concept of related party transactions and abstain from the mechanical application of the same. As pointed out above, the Courts should be more inclined towards applying arm’s length transaction as a substantive rule rather than looking it as a procedural necessity. The Courts ought to look at the intent of the transactions rather than focusing on the procedural requirement of the transaction. A related party transaction can be related yet protected. For instance, appointment of a person on the basis of related party transaction can be termed as valid if such appointment is fair and objective as per the requirement of the market value of such transactions. Therefore, a transaction should not be declared

[Jayesh Karnawat] The author is a 3rd year student of NLU, Jodhpur. Introduction The doctrine of piercing of corporate veil, whether forward or reverse, is an exception brought about to achieve the ends of justice and fairness. Corporates were given their status of separate entities to serve the ends of justice and not subvert them. However, the courts have time and again adopted the alter ego doctrine to prevent corporations from misusing this protection for deceptive practices. The separate legal existence of a corporation has to be protected for economic growth and when that form is abused by individuals to escape the existing liabilities, the court may resort to traditional or reverse piercing of the veil. Overview of the doctrine In the traditional piercing of corporate veil, a creditor of the corporation tries to hold the shareholder personally liable for the debts of the corporation whereas, in reverse piercing of corporate veil, the creditor of the shareholder of a corporation attempts to hold the corporation liable for the debts of the shareholders.[i]The doctrine of reverse piercing the corporate veil is very less established. Also, it has been rejected by several states at several instances.Reverse piercing has been widely used by the governments, most commonly to obtain payment of taxes owed by individuals. A classic example is G. M. Leasing Corporation v. US.[ii] As discussed in the case of Shamrock Oil & Gas v. Ethridge,[iii]the doctrine of reverse piercing of the corporate veil is based on the principle, “the mereabstraction of the corporate entity should never be allowed to bar out and pervert the real and obvious truth.” One of the classic examples is the case of W.G Platts Inc. v Platts,[iv]wherein the court allowed the plaintiff to reverse pierce the corporate veil by imposing the liability on the corporation to satisfy her debts as per the divorce decree. Requirements for the application of the doctrine For applying reverse piercing of corporate veil, generally four elements are considered, called the hybrid test, firstly the degree of identity between the shareholders and the corporation by considering alter ego doctrine, secondly, public policy being whether piercing will harm any other parties or not by using cost-benefit analysis and thirdly whether there was any fraudulent intention or not and lastly whether any other remedy can be sought if not, then the equitable doctrine can be invoked to promote justice. However the application of the doctrine is very subjective and depends upon facts and evidence of the case, no strait jacket formula can be used. Satisfying the Alter Ego doctrine The distinct legal entity of the corporation is ignored when it so dominated by an individual that it mainly transacts the dominator’s business rather than its own. In such case, the corporation will be called alter-ego of the individual. For maintaining an alter ego claim, it is not necessary to establish complete ownership and the test of “control” can be applied. Reverse piercing is appropriate in those limited instances where there is the existence of an alter ego relationship so that justice may be promoted. Injury to other innocent shareholders Equitable results mean that neither the innocent shareholders nor the corporate creditors should be prejudiced by allowing reverse piercing. The court in the case of Trossman v. Philipsborn,[v]held that to permit reverse piercing an insider must own all, or substantially all, of the stock. In Floyd v. Internal Revenue Service,[vi] the court refused to accept the theory of reverse veil-piercing for the reasons that there is the possibility of unfair prejudice to third parties, such as third-party shareholders. The problems associated with a reverse pierce are less serious where there is only a single shareholder because no other shareholders would be unfairly prejudiced. Courts have at times rejected the theory of reverse piercing of veil taking into consideration the interests of non-culpable shareholders as done in the case of Kingston Dry Dock Co. v. Lake Champlain Transportation Co.[vii] This is because creditors who extended credit to the corporation in reliance on its assets would be left unprotected if those assets were sold off to satisfy a judgment un-related to the corporation. Fraudulent Purpose In the case of Select Creations, Inc. v. Paliafito America, Inc,[viii] the court declared that to apply the alter ego doctrine in ‘reverse’ it is necessary that the controlling party uses the controlled entity to hide assets or secretly runs a business in order to evade his/her pre-existing liability. Nevertheless, the application of this doctrine should not be the norm but only be used in certain specialized situations, wherein individuals take advantage of a corporation’s separate legal existence in order to carry out fraudulent activities. In the case of State v. Easton,[ix]the court opined that promotion of fraud is one of the major requirement of the doctrine of reverse piercing. It must be shown that the plaintiff used the corporation to evade a personal obligation, to perpetrate fraud or a crime. Non Applicability of the doctrine to voluntary creditors Several courts have criticized this doctrine as it allows or permits voluntary creditors of an individual, or corporation, to recover from another corporation. One classic example is the case of Cascade Energy & Metals Corp. v. Banks[x]. Courts have added disdain for reverse piercing when the plaintiff is a voluntary, contractual creditor as opposed to an involuntary, tort creditor. The underlying principle is that voluntary creditors choose the parties with whom they deal, they can take precautions necessary to protect their interests and to permit reverse piercing would un-necessarily favour the creditor’s failure to take such precautions, at the expense of other creditors.[xi] Indian Scenario The doctrine of ‘reverse’ piercing is less prevalent in India, unlike the UK. The Indian courts demonstrated inordinate reluctance in bluntly accepting this jurisprudence. Slowly, the courts started to recognize the principle of alter-ego for the purpose of this doctrine. In the case of Iridium India Telecom Ltd. v. Motorola Incorporation and Others[xii], while applying the doctrine of alter ego the court observed that the criminal intent/ mens rea of the individuals or group of persons who are the alter-ego of the

[ Priya Udita & Kumar Akshay ]   Priya and Akshay are 3rd year students from SLS Pune and ILS Law College respectively. Introduction Companies Act, 2013 is an important legislation for regulating the corporate world. It includes the provisions from regulating the incorporation of company till the dissolution or strike off of the company. In the wake of scams, the provisions were made burdensome which hampered with the ease of doing business in India. With the increase in the transaction involving mergers, acquisitions and insolvency, there were volumes of pending cases with NCLT. Thus, the need was felt to amend the prevailing provisions in the act.  The ordinance was introduced on 2ndNovember 2018 with the intention to ease the reporting and compliance needed by the companies act, 2013 and promote the ease of doing business in India. The commentary encompasses the changes brought forward by the ordinance under the four headings – (a) Re-categorisation of offences (b) De-clogging of NCLT (c) Tackling shell companies and lastly, (d) In-house adjudication.  The authors discuss the amendments at length and compare it with earlier provision. The intent of the authors is to make ordinance easily understandable. Further, the authors discuss the impact of the ordinance and its inherent benefit. The Companies (Amendment) Ordinance, 2018 received the President’s assent on 2ndNovember, 2018[i]and it came into force at once. The ordinance is in consonance with the Government’s approach to ease the business regulation in India and at the same time tighten the regulations for serious offences. The twin objective of the ordinance is Ease of doing business and better corporate compliance. But firstly, we need to understand why this ordinance was needed. Several committees have observed that the Companies Act, 1956 was very lenient with the offences committed by the companies. The penalties were nominal and offences were easily compoundable. Therefore, in the wake of scams, the legislators came up with Companies Act, 2013 which deliberately made the serious offences non-compoundable. However, due to the overprotective intent, the act introduced cumbersome compliances and onerous reporting which made the business in India a hectic job. It was observed by the committees that there was need to re-categorize the offences in order to de-burden the NCLT, and introduction of online platform for e-adjudication or e-proceedings, thus this ordinance. The Ordinance The aims of the ordinance are (a) Re-categorisation of offences (b) De-clogging of NCLT (c) Tackling shell companies and lastly, (d) In-house adjudication. We need to understand the changes according to these four aims. Firstly, re-categorisation of offences was much needed as the NCLT was burdened with cases. Here, the recommendation laid down in Report of Committee on Review of Offences under Companies Act, 2013 was taken into consideration. The committee analysed the heterogeneous nature of offences and recommended that there should be civil penalty framework for procedural or technical defaults. Therefore, the ordinance makes number of changes in the penal provisions. In some of the cases, the imprisonment part has been omitted such as under Section 53 (Prohibition on issue of shares on discount). In civil penalty framework, the adjudicating officer will levy the penalty and the case will be closed. Secondly, with the introduction of Insolvency and Bankruptcy Code, 2016, the NCLT is now burdened with lots of pending cases relating to insolvency along with company law and merger and acquisition cases. Therefore, the ordinance makes certain changes to remove the load from NCLT. The change has been brought under section 2(41) in which the power to change the financial year of the company has now been vested with Central Government. Under section 14 (Alteration of Article), the power to approve the conversion of private company to public company or vice versa has been vested with Central Government. However, any application pending before the commencement of the ordinance will be done by NCLT according to earlier provision. Last but not the least the pecuniary jurisdiction of Regional Director has been increased from 5 Lakhs to 25 Lakhs. Also the provision in relation to permission of Special Court regarding compounding of offences has been omitted (Section 441 (6)). Thirdly, in order to tackle the Shell Companies and to make better compliance, the ordinance makes following changes. A new section 10A has been inserted. Here, the director needs to file an application to Registrar of Companies (‘RoC’) stating that subscribers of the memorandum of association have paid the value of shares taken by them and the application for registered office has been filed with RoC as required under section 12. This application should be filed within 180 days from incorporation of the company. Also, in case of contravention of the provision, the company will be liable to pay Rs. 50,000 and every defaulting officer will pay Rs. 1000 per day till contravention to the maximum amount of One Lakhs. In the case where the director does not file an application within 180 days and where the Registrar has reasons to believe that the company is not carrying the business, he/she can strike off the name of the company from RoC. Another major change is that now the Registrar under Section 12(9) has the power to physically verify the registered office. The ordinance also makes changes under section 77 (Register of charges) of Companies Act, 2013. Earlier, 300 days were given to the companies for creation and modification of charges; however now the time limit of 60 days (30 days normal + 30 days with additional fees) is given. Additional 60 days can be given after the additional ad-valorem fees. However after 120 days, there cannot be any creation or modification of charges. Also the punishment has been enhanced for contravention of this provision. The ordinance adds another ground of disqualification for the Independent Director wherein if the Independent Director accepts more than permissible directorship, he/she can be disqualified. Fourthly, the changes have been done under section 454 regarding the additional power given to the adjudicating officer. Now the adjudication officer can direct rectification of the default in addition to

[ Surbhi Jaju & Hansaja Pandya ]   Surbhi Jaju is an Associate at Lakshmikumaran & Sridharan and Hansaja Pandya is a 3rd year B.A LLB student at Gujarat National Law University. Introduction Mergers and acquisitions are manifestations of momentous growth and are critical tool of business strategy.[i] They are used as instruments to access the market through an established brand, to get market share, to eliminate competition, to reduce tax liabilities, to acquire competence or to set off accumulated losses of one entity against the profits of the other entity.[ii] Every scheme of restructuring a company requires approval from the National Company Law Tribunal (NCLT). Many states in India levy Stamp Duty on orders of the tribunal approving the merger scheme. This has made the cumbersome and court centric process of merger and acquisition more expensive. This article analysis the inconsistency in Stamp Duty Laws and reasons as to why the recent imposition of Stamp Duty laws on consent orders of the NCLT approving mergers scheme, imposed by Tamil Nadu is based on unsound premise and hence invalid. Stamp Duty is the subject matter jurisdiction of both the Centre and the State falling under Entry 91 of Union List and Entry 63 of State List in the Schedule VII respectively. As a result some of the States in India have enacted their own Stamp Acts whereas others have adopted the Indian Stamp Act, 1899 with their respective state amendments. This has resulted in inconsistency in stamp duty regimes of different states inhibiting the process of mergers and acquisitions. The lack of uniformity is largely seen in the definition of the term ‘conveyance’ which entails charge of Stamp Duty. The Indian Stamp Act defines conveyance as – “every instrument by which property, whether moveable or immovable, is transferred inter vivos and which is not otherwise specifically provided for by Schedule I.” Points of Contention The primary point of contention in this regard is whether the scheme of merger sanctioned by NCLT is an ‘instrument’ within the meaning of section 2(14) read with section 2(10) and Article 23, Schedule I of the Indian Stamp Act, 1899. While several states such as Rajasthan, Maharashtra, Gujarat and Haryana etc. have specifically included a court order approving a scheme of merger and amalgamation under the definition of “conveyance”, imposition of Stamp Duty on orders of NCLT approving the scheme of merger of companies vide Circular No. 49282 P1 2018 dated November 20, 2018 (‘Circular’)[iii] by state of Tamil Nadu lies in a grey area as the Stamp Act for the state of Tamil Nadu is yet to receive the assent of the President. Unless the definition of the term ‘conveyance’ in the Tamil Nadu Stamp Act in not amended by the legislature, a Circular cannot by circumventing the act subject consent orders of NCLT approving schemes of mergers to levy of Stamp Duty. Hence the grounds on which the Circular has been introduced are invalid and do not hold any value as on today. The foundation of the levy of Stamp Duty in the Circular is based on the Supreme Court judgement of Hindustan Lever & Anr. v. State of Maharashtra, (2004) 9 SCC 438[iv] the court held that – “the order passed under Section 394 is founded on consent and this order is an instrument as defined under Section 2(1) of the Bombay Stamp Act. The State Legislature would have the jurisdiction to levy stamp duty under Entry 44 List III of the Seventh Schedule of the Constitution and prescribe rate of stamp duty under Entry 63 List II.” The same was reiterated in the case of Li Taka Pharmaceuticals v. State of Maharashtra, (1996) 2 Mah LJ 156[v] and in Hero Motors Limited v. State of U.P. and Ors, AIR 2009 All 93[vi]. The meaning of the term ‘instrument’ was ambiguous and discussed in various judgments. The Bombay High Court in Chief Controlling Revenue Authority and Anr. v. M/s Reliance Industries Limited Mumbai and Anr, AIR 2016 Bom 108[vii], clarified that the term ‘instrument’ includes only the order of the approving authority and not the scheme itself. The court reasoned that a merger is only operative once the approval of the court has been granted without which the scheme would have no effect. Stamp Duty can thus be levied only on the instrument that gives effect to the transfer of assests. Similar reasoning was provided in the decision of Gemini Silk Mills Ltd. v. Gemini Overseas Ltd., (2003) 53 CLA 328[viii] to support the levy of stamp duty on High Court orders approving scheme of merger. However, in 2004, the Division Bench of the Calcutta High Court overruled the above judgment in the case of Madhu Intra Ltd. v. Registrar of Companies, (2004) 3 CHN 607[ix]. The Court held that the transfer of assets and liabilities of a transferor company to the transferee company takes place on an order being made under section 394(1) of the Companies Act without any further act or deed and hence the order of the court sanctioning the ‘scheme’ would not qualify to be an ‘instrument’ as the transfer is purely through operation of law. Madras High Court has also in the cases of, T.T.Krishnamachari & Co v. The Joint Sub-Registrar, (2009) 88 CLA 131[x] and Srinidhi Industries Ltd. v. Sub-Registrar, (2015) 1 CTC 530[xi] categorically held that order of mergers and amalgamations will not be liable to stamp duty. State of Tamil Nadu ought to respect and weigh in the reasoning of the Court while affecting the Stamp Duty laws of the state. Further, the orders of the High Court are binding on all the authorities of the state in absence of any legislative Act and no state authority can act contrary to it.[xii] The Circular effecting stamp duty issued in the state of Tamil Nadu defers with the Madras High Court decisions. The Director General of Registration is bound by High Court order until the Tamil Nadu Stamp Act of 2013, receives presidential assent. The Circular has also