VHVK E Newsletter December 2019
December 2019
Volume III Issue 6
VHVK Law Bulletin
This sixth and final issue of VHVK Law Bulletin for 2019 brings you recent developments in law, with focus on business and corporate law. The subjects covered in this issue are (a) Supreme Court rules against specific performance in Power Purchase Agreements (PPA) when contract provides for liquidated damages, (b) workers’ dues under Insolvency & Bankruptcy Code include arrears of pension, provident fund and gratuity, (c) criminal proceedings not maintainable against company directors in the absence of direct involvement, (d) guidelines issued for consumer protection e-commerce, (e) rules on shares with differential voting rights relaxed and (f) Karnataka High Court stays strike by HAL employees.
Liquidated damages remedy upheld in Power Purchase Agreement
In dealing with the failure of an independent power producer in Gujarat (Adani Power (Mundra) Ltd) to supply electricity as per the terms of Power Purchase Agreement (PPA) it had with the public sector power supplier, the Supreme Court of India upheld the liquidated damages remedy included in the agreement. The court quashed the specific performance of the power supply agreement directed by the Gujarat Electricity Regulatory Commission (GERC).
In Adani Power (Mundra) Limited v. Gujarat Electricity Regulatory Commission,1 Adani Power (Mundra) Ltd was unable to supply power as per the agreement it had with Gujarat Urja Vikas Nigam Ltd, a public sector power supplier. Adani’s failure to supply power resulted from its inability to procure coal from Gujarat Mineral Development Corporation. The coal supplier, also owned by the state government, did not conclude the Fuel Supply Agreement with Adani Power and this deprived Adani of assured supply of fuel needed for generating power.
On Adani’s failure to supply power in terms of the Power Purchase Agreement (PPA), the power supplier approached the Gujarat Electricity Regulatory Commission seeking specific performance of the contract. The contract also provided for liquidated damages for breach, which Adani Power was ready to pay for non-supply of power as provided in the PPA. Gujarat Electricity Regulatory Commission, however, directed specific performance. This meant Adani Power had to supply electricity as required under the PPA when it had no assured supply of fuel.
Allowing the appeal against the order of the Regulatory Commission, the Supreme Court held that the situation was governed by the liquidated damages provided in the PPA. In upholding the remedy of liquidated damages provided in the contract, the ruling recognized the impossibility of Adani supplying power when it did not have a secure supply of fuel. In effect, the order of specific performance passed by the Gujarat Electricity Regulatory Commission would have been ineffective.
Workers’ dues under Insolvency & Bankruptcy Code include PF arrears & gratuity
In dealing with the assets of companies in liquidation, the Insolvency & Bankruptcy Code (IBC) treats workers’ dues second in rank after the costs related to insolvency proceedings but on par with secured creditors that have agreed to realize their dues through the insolvency proceedings (section 54). This preferential treatment for workers, as defined in the Industrial Disputes Act, 1947, strengthens their position in recovering their dues from companies in liquidation. In-State Bank of India v Moser Baer Karamchari Union,2 National Company Law Appellate Tribunal affirmed that workers’ dues for the purpose would include arrears of employers’ contribution towards provident fund, pension, and gratuity.
Among its several goals, IBC endeavours to promote recovery for workers. In this effort, it places workers’ dues on par with secured creditors that do not independently enforce their security rights. Workers’ dues for this purpose are limited to 24 months prior to commencement of liquidation proceedings. These rules greatly strengthen vulnerable workers’ position in liquidation situations. Other employees, excluding “workmen” as defined in the Industrial Disputes Act, rank next after secured creditors and workers, but above all other debts and liabilities of companies in liquidation.
In defining workers’ dues for the purpose, IBC links it to the Companies Act, 2013 (section 326). The Companies Act is clear that dues include arrears of social security benefit – namely, pension, provident fund and gratuity. State Bank of India, as a secured creditor, attempted to exclude social security benefits from preferential treatment in liquidation and this was rejected by the National Company Law Appellate Tribunal. The ruling affirms the unambiguous position under the Companies Act as well as IBC.
No criminal proceedings against directors in the absence of complaint about direct involvement
Following an accident on the terrace of a star hotel in New Delhi, the guest who suffered a fall filed a criminal complaint against the hotel and its managing director. The allegation was there was no light on the terrace, and this made the guest fall and sustain injuries. The alleged offences were endangering life or personal safety, and causing grievous hurt by endangering life or personal safety (sections 336 and 338, respectively, of the Indian Penal Code). The Supreme Court quashed the criminal proceeding against the managing director.
In Shiv Kumar Jatia v Delhi,3 the managing director of the hotel approached the Supreme Court on his failure to persuade the Delhi High Court to reject the criminal complaint against him. He submitted that he had no direct involvement in the alleged offence, nor any criminal intent. Applying the principle of Sunil Bharti Mittal v CBI,4 Supreme Court struck down the criminal proceeding against the managing director. The court reiterated the settled principles that to involve individuals in offences involving companies, the essential conditions are direct participation in the offence and guilty intent. These must be stated in complaints in sufficient detail, to justify criminal proceedings against company directors and executives.
In the case on hand, there were no allegations either about the managing director’s direct involvement in the alleged offences or any guilty intention on his part. As such, the court quashed the criminal proceeding initiated against him. The ruling is welcome from the perspective of abusive legal threats of law and company directors/executives being subjected to needless, cumbersome legal proceedings.
Rules relaxed for issue of shares with differential voting rights
Following the consultation paper Securities & Exchange Board of India (SEBI) released earlier this year on easing the norms for issue of shares with different voting rights, the Government introduced new rules that provide greater flexibility for companies in designing the structure of share capital.6 The changes and their implications are summarized below.
- For shares with inferior voting rights, limit of 26 percent of paid-up capital is raised to 74 percent. This would enable promoters/controlling group to issue larger number of shares with inferior voting rights, depending on investor appetite for such shares and the confidence the controlling group commands.
- The precondition that companies must have distributable profits for 3 years to issue shares with differential voting rights discontinued. It is now left to the investors to decide if they wish to purchase inferior voting rights, regardless of the financial track record of companies.
- Another important change introduced by the amendment rules expands and clarifies the exemption for start-ups to issue Employee Stock Options (ESOP). A general prohibition applies to issue of ESOP to restricted persons, having significant interest in companies. Being a promoter, director, or holding more than 10 percent equity would attract the prohibition on grant of ESOP (Companies (Share Capital & Debentures) Rules, 2014, Rule 12).
Since 2017, the rule has been progressively relaxed in its application to start-ups. The latest amendments expressly permit start-ups to grant ESOP to restricted category persons. They also expand the definition of start-ups. To qualify as a start-up, a company must be less than 10 years old (earlier, 5 years) and annual sales turnover must not be more than Rs. 100 crores (earlier, Rs 50 crores).
The recent tweak of rules on company shares is in keeping with the trend of liberalization started in the 1990s. The goal has been to make it easier for companies to issue shares and raise capital. The latest rule changes continue with the theme.
Karnataka High Court restrains workers’ strike in Hindustan Aeronautics Ltd (HAL)
In a first-of-its kind for the state, Karnataka High Court granted interim relief to Hindustan Aeronautics Ltd (HAL), a public sector company, and directed its workers’ union not to go on strike. In Hindustan Aeronautics Ltd v Hindustan Aeronautics Employees Association,7 the court accepted HAL’s plea that its operations were vital for the country’s defence, and strike by employees affected the public interest. The court also applied the principle that labour unions are subject to the writ jurisdiction of high courts.
The factual background in the HAL case, currently pending in the Karnataka High Court, are straight forward. The collective agreement between the company and its workers’ union ended in 2016. Since then, there has been stalemate in arriving at a new agreement despite successive rounds of discussions. Conciliation talks held under the Industrial Disputes Act, 1947 (sections 11, 12) since August 2018 have not been productive either.
After HAL employees’ union issued a notice on 30 September 2019 for indefinite strike, there were two further conciliation meetings in October 2019. Following their failure, HAL approached the High Court to restrain its workers union from going on strike and included an interim prayer to prevent the strike. HAL argued, mainly, that the strike had negative public interest consequences considering its function as a service provider for defence establishments.
Accepting the public interest argument and following the Bombay and Madras High Courts’8 decision in the case of Bharat Petroleum Corporation Ltd (BPCL), the Karnataka High Court affirmed its jurisdiction to pass orders against labour unions in writ petitions. The court also granted the interim prayer of HAL to restrain its employees’ union from going ahead with the proposed strike, and directed the union to participate in further discussions with HAL.
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.
Guideline E-Commerce (accessed 18 Nov 2019)
E-commerce guidelines for consumer protection – draft for comments
Given the explosion in e-commerce in recent years and the arrival of overseas sellers, including the international giants (Amazon and Walmart), the Government of India has been proactive in safeguarding the interests of consumers and promote the integrity of e-commerce business. The Government recently published draft Consumer Protection (E-Commerce) Guidelines and invited public comments on the proposed norms.5 The draft norms are summarized below.
Mandatory Conditions for doing E-commerce Business
Ban on unfair trade practices
Third Party Sellers
In transactions where e-commerce enterprises are only intermediaries and do not directly make sales to consumers, third party sellers of products/services to be governed by following conditions.
Consumer Grievance & Redressal Procedure