VHVK E-Newsletter August 2019
August 2019
Volume III Issue 4
VHVK Law Bulletin
We are pleased to bring you this first issue of VHVK Law Bulletin as we enter our third year in providing reports on current developments in business and corporate law. This bulletin covers:
- Introduction of simplified compliance for new companies with one-step process for incorporation, GST, Provident Fund and ESI
- Signs of rethinking in SEBI on unequal voting shares
- Stressing the revival/turnaround function of Insolvency & Bankruptcy Code (IBC), NCLAT adds flexibility to liquidation order
- On similar principle, NCLAT holds that IBC prevails over the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act)
- Rule on pre-deposit of 25 percent of cheque amount for filing appeals retrospective, rules the Supreme Court
- Karnataka High Court issues important directives on management of lakes in Bangalore
One-step process for start-ups
As part of the ongoing campaign to improve “ease of doing business,” government recently introduced a simplified procedure for initial compliance by start-up ventures. For some time now, the facility for online incorporation has been available and this includes allotment of Permanent Account Number (PAN) for the new company, for income tax purposes. A facility is now created for linking online incorporation with simultaneous registration for Goods and Services Tax (GST), Employees Provident Fund (EPF) and Employees State Insurance (ESI).1
The prescribed e-document for online incorporation, SPICE (Simplified Proforma Incorporating Company Electronically), enables both incorporation and grant of income tax PAN. A new form, AGILE (Application for GSTIN, ESIC registration Plus EPFO registration), is introduced for simultaneous registration for GST, EPF and ESI. The two forms are interlinked. With AGILE, applicants choose one or more of the three registrations, as applicable.
With globalization, the measure of ease in doing business emerged as a key metric. To maintain competitive advantage, governments the world over make concerted efforts to facilitate business and thereby economic growth. The Internet catalyzed the process, enabling a large part of the paperwork related to business to be done online. Simplifying procedures has been another major effort. In keeping with the trends, India has also taken a series of steps including online incorporation. The latest is linking online incorporation and income tax with other registrations (GST, EPF & ESI), to further streamline the initial compliance procedure for companies.
SEBI rethinking ban on unequal voting shares
It is now 10 years since the Securities and Exchange Board of India (SEBI) effectively banned the listing of shares with superior voting rights (more than 1 vote/share). This happened in 2009. In a sign of policy review, SEBI recently issued a consultation paper on permitting listing of differential voting shares and proposes a new set of rules to govern such shares.2 The proposed rules indicate SEBI’s effort at balancing flexibility for companies in issuing shares with varying voting rights and preserving the principle of corporate democracy understood as equal voting rights for all shares.
Shares with varying voting rights, a US-inspired device, were permitted in India in 2000 through an amendment to the Companies Act, 1956, which was then in force. The move was a part of the globalization of Indian company law. Shares with unequal voting rights are subject to additional regulation, indicating government’s unease with unequal voting. Under SEBI (Share Capital and Debentures) Rules, 2014, only companies with profit/dividend record for 3 years can issue unequal voting shares and such shares cannot be more than 26 percent of the total number of shares issued by the companies.
SEBI’s latest exercise on unequal voting shares is equally a product of US influence, as evident from the Consultation Paper. Referring to recent investor representations and regulatory initiatives in US on unequal voting rights and their implications, SEBI proposes two categories of unequal votes – one superior (more than 1 vote/share) and the other inferior (less than 1 vote/share, termed fractional). The proposal continues with the culture of caution that has informed the subject of differential voting shares from inception. This is apparent from the proposed rules that include the following:
- Only promoters can hold superior voting shares
- Superior voting shares are subject to automatic conversion to normal voting after 5 years
- Higher voting rights will not apply for major decisions such as amendment of memorandum/ articles of association and change of control (in effect, their exercise is confined to director elections)
- Dividends must be equal for both superior voting and ordinary shares
- Fractional voting shares cannot have less than 0.1 vote per share
- Companies may pay additional dividend on fractional voting shares, to compensate for inferior voting rights
Unequal voting shares have not been popular among companies in India, with very few issuing them since they were permitted in 2000. Considering this record, it remains to be seen how (a) SEBI moves ahead with its current proposal to permit unequal voting shares and (b) companies make use of the facility to issue shares with varying voting rights and make use of it.
Stressing turnaround function of IBC, NCLAT makes liquidation order more flexible
In S.C. Sekaran v Amit Gupta,3 the National Company Law Appellate Tribunal (NCLAT) emphasized the rehabilitative function of the Insolvency & Bankruptcy Code (IBC), and modified the liquidation order passed by the National Company Law Tribunal (NCLT), Mumbai Bench. In doing so, NCLAT relied on similar approach the Supreme Court of India applied in interpreting IBC – as a beneficial legislation. The stress in IBC is both on the revival or rehab of corporate debtors and recovery of money by creditors.
S.C. Sekaran v Amit Gupta involved two companies – Hindustan Dorr Oliver Ltd and HDO Technologies Ltd. The insolvency resolution plans submitted by third parties were found to be inadequate and NCLT ordered liquidation of the companies. The third parties that had presented the insolvency resolution plans preferred appeals against the liquidation order, but did not press the appeals. The management of the debtor companies intervened and requested that both debtor companies should be kept as “going concerns” even during liquidation proceedings. Their effort was to keep the debtor companies operational as the sale of their assets was in process – either piecemeal or full units (going concerns). Merit in the plea of the managements is obvious. It is a standard outcome that better value is realized when operating units are sold as going concerns than closed down plants and piecemeal sale of assets – namely, land and buildings, machinery, tools and so on.
Accepting the plea made by the debtor companies’ managements and relying on repeated observations of the Supreme Court on the beneficial aspect of IBC (e.g. Swiss Ribbons v Union of India 2019),4 NCLAT directed that the debtor companies continue in operation during the liquidation process. NCLAT’s task was simplified by the consent of the liquidator to keep the units running in the interim period. At the same time recognizing that there could be challenges in finding buyers for the units as “going concerns,” NCLAT left open the possibility of piecemeal sale of assets if warranted.
IBC prevails over SARFAESI, holds NCLAT
With similar bias favouring turnaround of debtor companies, NCLAT upheld an order for return of property seized by a secured creditor. In Encore Asset Reconstruction Company v Charu Sandeep Desai,5 the secured creditor unsuccessfully challenged the Company Law Tribunal’s order to return the debtor company’s property, which was under mortgage and had been seized by the creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act). The ruling recognizes the continuing ownership rights of debtor companies during the pendency of insolvency resolution proceedings and the importance of preserving the integrity of debtors’ assets, for attempting meaningful revival.
Courts, as noted, generally focuse on the beneficial character of IBC and endeavour to facilitate business revival or turnaround wherever possible. However, efforts for turnaround can be seriously undermined if distressed assets are seized by creditors and debtor companies would suffer if they are deprived of a part of their resources (which could be land, buildings or plant). This is a potential impact SARFAESI can have when creditors exercise their rights and take control of the assets of debtors.
Recognizing the negative outcomes from seizure of assets, NCLAT upheld an order directing the secured creditor to return the seized property to the Insolvency Resolution Professional (IRP) appointed for the debtor under IBC. NCLAT affirmed the interpretation of SARFAESI by the NCLT that it does not vest complete ownership of mortgaged properties in creditors. Ownership of properties continued with debtor companies and in appropriate cases, they can seek restoration of possession from creditors acting under SARFAESI.
Pre-deposit rule in cheque dishonour cases retrospective, rules The Supreme Court
Persons appealing against conviction for dishonour of cheques must pre-deposit of 25 percent of the cheque amount, even if the original proceedings started prior to the amendment made in 2018. This has been clarified by the Supreme Court of India in S S Deswal v Virender Gandhi.6 The ruling affirms Punjab and Haryana High Court’s retrospective application of section 148 in the Negotiable Instruments Act, 1881.
For a long time now, dishonour of cheques has been a criminal offence under the Negotiable Instruments Act (NI Act). Criminalization of cheque dishonour aims to improve integrity in bank account operations and facilitate efficient recovery by recipients of cheques. To further strengthen the remedy, NI Act was amended in 2018 requiring pre-deposit of 25 percent of the cheque amount to file appeals against conviction for the offence of cheque dishonour.
In Deswal v Gandhi, the criminal proceedings for dishonour of cheque had begun before the amendment on pre-deposit was introduced last year. The drawer of the cheque contended that, for this reason, the condition on pre-deposit would not apply. The plea was rejected by the Punjab and Haryana High Court, which ruled that the provision was retrospective in effect and covered pending cases as well. The drawer of the cheque carried the issue in further appeal to the Supreme Court of India, but lost. The Supreme Court concurred with the Punjab and Haryana High Court that the condition on pre-deposit applied to all proceedings, including those commenced before the new rule came into effect in 2018.
Karnataka High Court active in oversight of lake and storm water drain management
In keeping with the tradition of judicial activism in environmental issues, the High Court of Karnataka recently issued a series of instructions to government authorities on managing the lakes and storm water drains in the Bangalore metropolitan area. In Citizens Action Group v Karnataka acting on two petitions, filed in 2014 and 2018 respectively, the High Court mapped out an action plan for implementation by government and local authorities. The plan includes an expert agency to study pollution in lakes, removal of encroachments in storm water drain areas and creation of grievance redressal mechanisms.
With the Supreme Court of India in the lead, High Courts across India actively intervene in environmental issues, usually raised through public interest litigation. Cases are filed by individual environmental activists or, more often, by civil society organizations. Courts usually issue directions to authorities and also monitor implementation. The Karnataka High Court recently considered the concerns urged by Citizens Action Group and a residents’ association in J P Nagar, with regards to lakes and storm water drains in Bangalore, and their preservation. Key directions issued by the court include the following.
- National Environmental Engineering Research Institute (NEERI), a Government of India agency, to be engaged for carrying out a study of the lake areas, including those lost in the recent past, and identify the causes of pollution and disappearance of lakes.
- Government of Karnataka to report on progress achieved since 2012 when court passed orders in earlier cases on the subject, including the setting up of high level committees in 2013
- State government to provide interim protection to lakes when study by NEERI is in progress
- State government to complete survey of storm water drains and remove encroachments
- State government and Bangalore Bruhat Mahanagara Palike (BBMP) to establish separate Grievance Redressal Mechanisms, with the following features:
- Facility to submit complaints, including online, and pictures showing illegal actions
- Complainants can request reports on action taken on their complaints, and timeframes to be specified for the purpose
- Complainants’ identity can be kept confidential, if requested
To monitor progress on the directions issued on 18 June 2019, the High Court will take up the matter again in early August 2019.
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.