VHVK E Newsletter November 2022

Mere status as partner insufficient to punish partner for cheque dishonour

Status as partner, by itself, is insufficient to convict a person for the offence of dishonour of cheques issued by partnership firms. It is also necessary to show that a partner actively managed the firm. With this reasoning, the Supreme Court in Dilip Hiraramani v Bank of Baroda₁ acquitted the appellant as it had not been proved he was in charge of the management of the partnership business.

To promote accountability in issue of cheques, the Negotiable Instruments Act, 1881 (NI Act) provides that every person who was in charge of and was responsible to a company or partnership firm for the conduct of business would be liable for cheque dishonour (section 141). It is, therefore, common practice to make companies’ directors and partners in firms also accused in cheque dishonour cases brought under the NI Act. In Dilip Hiraramani, the appellant was not managing the firm and there was no evidence from the bank that he was in charge of the partnership firm’s business. As such, the Supreme Court quashed the conviction of the non-active partner for the offence of cheque dishonour.

Supreme Court’s ruling is a reminder to be cautious in including directors of companies and partners in firms as accused persons in cheque dishonour cases. To the extent they are arraigned, there must be evidence against each of them to establish that they were involved in the business.

Legislative process begins for Competition (Amendment) Bill, 2022

Government of India recently introduced the Competition (Amendment) Bill, 2022 in the Lok Sabha. This initiates the legislative process for new competition law rules. The proposed amendments, mainly, aim to strengthen the rules against anti-competitive practices, expand the classes of mergers and acquisitions that require regulatory approval and reduce the time available for the Competition Commission of India to make decisions against proposed transactions.

Major amendments proposed in the Competition (Amendment) Bill, 2022 are summarized below.

• Transaction value as the metric to monitor combinations: Traditionally, assets and sales values are applied as measures to determine the size of enterprises, for determining the applicability the rules on mergers and acquisition, termed “combinations,” and placing them under the regulator’s monitor. The new Competition Bill expands the definition of combinations to include “transactions” with a value above Rs 2,000 crore. This would rope in deals that involve the specified amount of money, even if the “transactions” do not result in formal amalgamation or sale of companies. This reflects the trend for companies, especially in the digital space, to enter into new transactions that offer combined synergy, but without formal merger.
• Time limit for approval of combinations: For the Competition Commission of India to take decisions on applications submitted for approval of combinations, the time limit will be reduced from 210 days to 150 days.
• “Control” to determine combinations: “Control” of enterprise is a criterion to determine the applicability of rules regulating combinations. The definition of control is expanded to include the ability to exercise material influence over the management, affairs, or strategic commercial decisions, even without a formal position or title.
• Anti-competitive agreements: To check collusive practices that undermine competition, competition laws bar companies in identical or similar business agreeing to manipulate production, supply, storage, or control of goods or services. Aiming to check indirect manipulative efforts, the Amendment Bill seeks to also rope in any enterprise actively participating in manipulative practices, regardless of whether they are engaged in similar or identical business. This anti-avoidance rule aims to broaden the ban on collusive agreements by interposing enterprises from other lines of business.
• Resolution through settlement and commitment: To promote timely resolution and end anti-competitive practices, a new rule will offer opportunities for companies under investigation or other regulatory proceeding to (a) make a settlement upon payment, or (b) offer commitments to end to the offending practice.
• Some offences decriminalised: Penalty by the regulators will be applicable for some offences under the Competition Act instead of fine levied by criminal courts. This would cover non-compliance with Competition Commission’s orders and Director General’s directions with regard to anti-competitive practices. With the proposed amendment, proceedings in criminal courts will be eliminated; the issues will be dealt with by the regulators.

Deficiency in stamp duty not necessarily relevant in insolvency proceedings

In Praful Satra v Vistra ITCL Limited, ₂ the National Company Law Appellate Tribunal (Principal Bench, Delhi) ruled that deficit in stamp duty payment on debenture documents is not a bar on proceedings against the corporate debtor filed by the debenture holders. For the purpose of the Insolvency & Bankruptcy Code, 2016 (IBC), it is sufficient if the debt and default in repayment are established through relevant evidence.

The corporate debtor, Satra Properties (India) Ltd, had borrowed money under debentures. For the loan transaction, a debenture subscription agreement as well as a debenture trust deed had been executed. When the debtor failed to redeem the debentures, the lenders initiated insolvency proceedings under IBC. Resisting the proceeding, the debtor raised the plea the two documents – subscription agreement and trust deed – were not duly stamped under the Maharashtra Stamp Act, 1958. As such, they could not be admitted in evidence nor relied on by the lenders in the insolvency proceeding.

Rejecting the argument, NCLAT ruled stamp duty deficit was not material because the loan transaction underlying the debentures and default by the debtor were evident from other documents. In upholding the insolvency proceedings on this ground, NCLAT relied on Innoventive Industries Ltd v ICICI Bank ₃ in which the Supreme Court granted adjudicating authorities flexibility in relying on documents to satisfy themselves that there was a debt and a default had occurred in relation to it.

No assets seizure when insolvency resolution pending

When insolvency resolution process is underway and a debtor is granted moratorium under the Insolvency & Bankruptcy Code (IBC), the debtor’s assets cannot be seized under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The bar applies both to properties owned by corporate debtors as well as guarantors.

In Indian Overseas Bank v RCM Infrastructure Ltd,₄ the Supreme Court held that moratorium under IBC (section 14) overrides the SARFAESI Act and there can be no seizure and sale of the assets of debtors under the SARFAESI Act. In reaching the conclusion, the Supreme Court pointed out the specific reference to SARFAESI Act in the rules governing moratorium under IBC. Significantly, the court held the benefit of moratorium would cover properties owned by corporate debtors as well as their sureties.

The ruling in Indian Overseas Bank is welcome relief for corporate debtors and sureties. But the resulting position is in tension with the other stream of decisions from the Supreme Court that open the door for proceedings against sureties even when insolvency resolution process is in progress for principal debtors. The situation with sureties is now unclear.

Registration as micro/small enterprise on relevant date critical to avail special remedy

The special remedy for small and medium enterprises – the Micro, Small and Medium Enterprises (MSME) Council – has jurisdiction to entertain cases only if an enterprise was registered under the Micro, Small and Medium Enterprises Act, 2006 (MSME Act) on the date of the agreement under which the sales were made. With this restrictive interpretation, the Supreme Court held in Vaishno Enterprises v. Hamilton Medical AG₅ that MSME Council cannot deal with sales under the agreement, even though the seller had completed registration before the sales were made.

To assist small enterprises speedily recover payments from defaulting customers, the MSME Act offers a special remedy, through the MSME Council. Summary proceedings in the MSME Council can help small enterprises recover outstanding payments from customers without delay and lengthy legal process. To avail the remedy, an enterprise must be registered under the MSME Act.

In Vaishno Devi, the small enterprise had an agreement with a Swiss-based medical equipment supplier, to provide services for the Swiss company’s products in India. Following differences, the agreement was terminated and Vaishno Devi Enterprises, being a small enterprise, approached MSME Council to recover money due to it from the Swiss principal.

Interpreting the “Governing Law” provision in the agreement, the Supreme Court noted it referred to Indian laws on the date of the agreement. The supplier was not registered on the date of the agreement; its registration occurred a few days later. Applying a strict interpretation of the “Governing Law” provision, the Supreme Court held MSME Council lacked jurisdiction to inquire into the payment issue even though the services were provided after the supplier completed registration under the MSME Act. The restrictive interpretation undermines the goal of the MSME Act to provide an efficient dispute resolution mechanism for small and medium enterprises.

Company’s affairs to be investigated on the basis of preliminary evidence of fraud

In Lakshmi Satish Kumar v Unique Training Corporation India Pvt Ltd,₆ the National Company Law Tribunal (NCLT), Bengaluru Bench, directed the government of India to investigate the affairs of a company. The order was passed on the strength of the material produced by the petitioner who had paid a large amount of money towards a real estate project proposed by the company.

Under an agreement of sale with Unique Training Corporation Pvt Ltd, the petitioner (Lakshmi) paid ₹ 1.16 crores in late 2015. The stated plan was to launch a real estate project near Bangalore and the petitioner was promised she would receive twice the amount of her investment in 3 years. Not surprisingly, there was little progress with project development work and the company’s directors, a married couple, stopped communicating with the petitioner. The cheques issued by the company were dishonoured and the petitioner launched multiple legal proceedings, including the petition to NCLT for an investigation of the company’s affairs. NCLT granted her request and directed the government of India to investigate the company.

The case can be a test for the efficacy of the government’s investigation powers in dealing with fraudulent companies and their promoters. Checking corporate fraud is an important goal of company law and it remains to be seen how far this goal can be realized in practice. In any case, there seems to be no dearth of dubious companies offering spurious investment schemes and tantalizing returns to gullible investors.