NCLT Knocks Out 137 Days from CIRP

NCLT Principal Bench in a recent order of NIIL Infrastructure Private Limited  directed exclusion of 137 days from CIRP period. The Bench was of the opinion that section 12(2) for extension of time as alternative prayer need not be invoked in the case. In this case, Resolution Professional (RP) was appointed by the Bench after a gap of 114 days after the tenure of Interim Resolution Professional (IRP) ended. Though the IRP organised few meetings of the committee of creditors (CoC) but no decision could be arrived at on the appointment of RP. It was only after the intervention of the Bench that CoC resolved to appoint RP. Earlier also 23 days were lost when inadvertently different IRP was appointed than the one proposed by the financial creditor. The Bench, thus, excluded 137 days from the CIRP period relying upon Quinn Logistics India Pvt Ltd judgement of the NCLAT. This order paves way for exclusion of time as an alternative to extension of time where there is delay in appointment of RP.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

Dear NCLT : Till Now We Believed Circulars Do Not Override Law?

 

While disposing off a Petition under Section 74(2) of the Companies Act, 2013 (the 2013 Act) of Darshan Jewel Tools Private Limited, Mumbai Bench of National Company Law Tribunal (NCLT) has ruled on 17th February, 2017 that in the light of a general circular issued by the Ministry of Corporate Affairs, the petition has become redundant, effectively reversing the settled legal position on the point whether circulars can override the provisions of law?

Darshan Jewels had sought extension of time in repayment of deposits accepted from the directors and shareholders for a period of 3 years until 31st March, 2018.While the petition of the company was pending, Ministry of Corporate Affairs issued a general circular on 30th March, 2015 that the deposits accepted by private companies prior to 1st April, 2014 from the members, directors or their relatives shall not be treated as deposits under the 2013 Act and the relevant rules provided appropriate disclosure is made in the financial statement by the company. On this basis, it sought withdrawal of the Petition.

Without examining the legal validity of the general circular issued by Ministry of Corporate Affairs, NCLT dismissed the Petition. The operative part of the order is reproduced here –

“In the light of the above discussion and the present legal position, the Company Petition, now under consideration, has become redundant. The General Circular (supra) issued by Ministry of Corporate Affairs dated 30th March, 2015 has clarified that the amounts received by a Private Limited Company from their members, Directors and relatives prior to 1* April, 20L4 shall not be treated as deposits under the Companies Ad, 2013. In the financial statements and in the Petition, the Company has duly recorded the figures of such amount along with relevant details. As a consequence of the said General Circular, this Petition has now become redundant. The same is, therefore, dismissed due to non-applicability of the relevant provisions of Companies Act, 2013. No order as to cost.”

Dear NCLT, the legal position on general circulars is otherwise and not what has been ruled in the order. The circulars lack statutory recognition. Not only the Principal Bench of erstwhile Company Law Board has reiterated the position that general circulars lack statutory recognition, Bombay High Court, relying on the judgment of Supreme Court in State Bank of Travancore v. CIT [1986 AIR 757]  held that ”such an order, instruction or direction cannot override the provisions of the Act; that would be destructive of all the known principles of law as the same would really amount to giving power to a delegated authority to even amend the provisions of law enacted by the parliament.” [Banque Nationale De Paris v. CIT [(1999) 237 ITR 518 Bom].

The legal position on the validity of the circulars vis-a-vis statutory provisions stands settled. NCLT, not only ignored to examine the legal position but accepted the general circular issued by Ministry of Corporate Affairs as the ‘new legal position’. The question that arises is – whether NCLT was not bound to examine the legal validity of the general circular, which stated a position in complete contrast to the statutory provisions? The cursory manner in which the ruling has been given makes a strong case against ‘tribunalisation’ in the country. Judicial examination of the provisions is lacking.

Unfortunately, this position is likely to continue as the circular favours the companies and the MCA, having issued the circular, is not going to challenge this ruling.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

Has NCLT interpreted provisions of Insolvency & Bankruptcy Code judicially? Analyzing Judgment of Principal Bench under section 7 of Insolvency & Bankruptcy Code, 2016 in AMR Infrastructures Limited

Legal interpretation of provisions of Insolvency & Bankruptcy Code, 2016 (IBC 2016 or IBC) commences with judgment of Principal Bench of National Company Law Tribunal rendered on 23rd January, 2017 in the matter of AMR Infrastructures Limited. IBC brings in new regime in insolvency of corporates. As opposed to provisions of the Companies Act, IBC 2016 provides for resolving the bankruptcy, staring at the companies. The provisions are now ‘corporate debtor friendly’ as against ‘creditor friendly’ under the earlier regime. IBC 2016 is premised on allowing a chance of fresh start to the companies in financial and business strain. In the AMR judgment, NCLT was called upon to interpret the definition of ‘financial creditor’ and ‘financial debt’ and the meaning of ‘time value of money’ appearing in financial debt definition.

Analyzing the judgment brings to the fore following questions: –

  1. Does IBC 2016 in any way comes to the aid of investors having paid substantial sums to the company in return of their promise to deliver flats or apartments or office premises?
  2. Was the NCLT correct in arriving at a conclusion that an agreement containing assured return does not satisfy the requirement of a financial debt?
  3. Was the NCLT competent to entertain the application under section 7 of IBC 2016 in view of fact that provisional liquidator stands appointed by orders of High Court, as noted by NCLT in its order?

These are early days under IBC and one judgment cannot be held to be conclusive in interpretation of the provisions of IBC. IBC 2016, for the uninformed, allows either a financial creditor or operational creditor to initiate corporate insolvency resolution process. IBC provides that a financial creditor or an operational creditor can apply to NCLT for initiating the corporate insolvency resolution process at the trigger point of default being committed by the company. ‘Default’ means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.

Commitment of default comprises one part; the other part being the eligibility criteria, that is, the applicant should either be a financial creditor or an operational creditor. Instead of using the generic term ‘creditor’, IBC has categorized them into financial and operational creditor with specific meaning attached to these two terms. Not all but only a financial creditor or operational creditor can initiate the resolution process. The only possible logic in segregating the creditors into financial and operational seems to be providing a preferential treatment to the financial creditor in as much as the occurrence of default by the company becomes the cause of action for a financial creditor whereas in the case of operational creditor, a secondary process of sending a notice of demand to the corporate debtor is to be fulfilled prior to initiating the resolution process. Instead of defining the operational creditor the way it has been done in IBC, the purpose of providing a preference to financial creditor would have served by only defining the financial creditor and treating the rest of the creditors as ‘non-financial creditors’ i.e. all creditors other than financial creditors. This would have simplified the interpretation process of the phrases ‘financial creditor’ and ‘operational creditor’ saving precious judicial time.

Let us examine the consequences of specific definitions of financial creditor and operational creditor. By implication, it seems reasonable to presume that the creditor should either be a financial creditor or operational creditor and in some circumstances may be both. Under IBC, a third possibility has emerged that the creditor is neither a financial creditor nor an operational creditor. Was this intended? By doing this, grave injustice has been done to several creditors who might have invested huge sums of money in a company engaged in constriction of real estate. The amount paid by customers would neither fall under the definition of financial debt nor operational debt. In these cases, the amount invested is generally substantial and in many cases the investors pay their life savings in the hope of getting their home or office. NCLT has come to a conclusion that amount paid under MOU for real estate, even though the MOU has ‘assured return’ clause after the expiry of period of promised delivery of property, is not a financial debt and hence the creditor does not fall under the category of ‘financial creditor’. NCLT has also concluded that ‘assured return’ clause would not satisfy the requirement of ‘time value of money’ appearing in the definition of ‘financial debt’. Looking at the definition of ‘operational debt’, the payment made for promised delivery of homes or offices will also not be treated as operational debt, there being no claim of ‘goods’ or ‘services’ against the corporate debtor. Immovable property cannot, by any stretch of imagination, be treated as ‘goods’. It is neither the ‘service’ to be rendered by the corporate debtor. Such investors having invested huge sums of money have been left to fend for themselves by invoking civil remedies. The anomaly seems unintentional but a clear cut case of drafting error. Under the existing regime of winding-up of companies under the company law, such creditors were being permitted to file petition for winding-up with the High Court against defaulting corporate debtors. Once the provisions of Companies Act, 2013 are repealed, the investors, like these, will only live in mirage of invoking the resolution process.

‘Assured return’ is a committed payment which the corporate debtor undertakes to pay in the event of failure on its part to make promised delivery. The ‘assured return’ partakes the character of compensation in terms of money, that is, it becomes the obligation of the corporate debtor to recompense the loss incurred by the investor for having remained invested longer than desired. With due respect, had the NCLT examined the assured return in this view, probably it would have come to a different conclusion. It tangled itself in mere technicalities of the phrases ‘time value of money’ and ‘financial debt’. The definition of ‘financial debt’ is an inclusive definition and should have been construed broadly rather than in a narrow spectrum.

Lastly, the NCLT has ignored the provisions of Section 446 read with Section 441 of the Companies Act, 1956 (these provisions are still effective). Having noted that provisional liquidator has been appointed in AMR, there was no occasion for the NCLT to entertain application under IBC in view of the clear cut bar provided in Section 446 of the 1956 Act. It should have saved its precious judicial time by dismissing the application in limine or should have kept it in abeyance till such time leave of the High Court was obtained by the applicant without entering the domain of interpreting the phrases ‘financial debt’, ‘financial creditor’ and ‘time value of money’ in a hurry.

This is just the beginning and it is expedient that NCLT should don the mantle of judicious interpreter to chart the path to be tread in times to come by the litigants. The interpretations will have far reaching impact and it is expected that provisions are examined deeply looking at Indian judicial precedents and cross-border jurisdictions as well.

Keep watching this space for more analysis of NCLT/NCLAT judgments.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

 

#Wake up CAs! Don’t Miss the Opportunity – Are YOU Ready for NCLT/NCLAT?

2013 Companies Act proposes to establish all powerful National Company Law Board (NCLT) and National Company Law Appellate Tribunal ((NCLAT) for dealing with all legal matters involving corporate world. The NCLT will enjoy powers to deal with matters hitherto dealt by CLB, High Courts and BIFR. The professionals like CAs are not entitled to appear before High Court dealing with appeals arising from CLB, mergers and amalgamations and winding-up cases. With the paradigm shift under 2013 Act, CA fraternity is all good for appearing before NCLT for such matters. They can also handle appeals before NCLAT.

NCLT & NCLAT are going to be a reality soon. But Are CAs Ready?

It is a big question with a possible answer – probably not. CA fraternity needs to change this. The change is possible with some effort – effort to learn how to draft petitions or appeals, effort to present arguments cogently and in a pursuasive manner, effort to improve research ability, effort to learn interpretation of statutes, effort to gain knowledge about legal principles; in short, effort to prepare themselves before these forums.

The competition CAs are going to face will be fierce – from lawyers and other professionals. But with excellent financial knowledge, CAs are bound to be a potent force provided they acquire the above mentioned skills. Only those CAs will succeed who are ready to learn, adapt and change and that too quickly.

Time to wake up is NOW. Surprisingly, neither the ICAI, Regional Councils, Branches and Study Circles have paid considerable attention to this. This area presents a huge opportunity and deserves better treatment by these bodies.

Hope is still not lost. The programs should be organized to prepare CAs for this abundant opportunity. Corporate Law is an interesting field BUT requires thorough knowledge of the subject.

Time, Effort and Will is what is required to change the status quo.

Wake up CAs!!

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

#Applicability of CARO for FY 2014-15 audits

Applicability of CARO 2003

Confusion exists amongst auditing fraternity as to applicability of CARO 2003 for audits for Financial Year 2014-15. The confusion arose because of notification of certain provisions of Companies Act 2013 effective 1st April 2014.

The confusion stems from the presumption that with Companies Act 2013 notified w.e.f 1.4.2014, the corresponding provisions of Companies Act 1956 and rules/orders made/issued thereunder stand repealed. Let us examine whether this premise is correct.

There is a specific section in Companies Act 2013 dealing with repeal of Companies Act 1956 – Section 465. The repeal section has not yet been notified by the Central Government. This means that the Companies Act 1956 and rules/orders made/issued under it continue to be valid. It is not correct to say that Companies Act 1956 is not effective from 1st April, 2014.

Legally, we would examine this in the light of ‘doctrine of implied repeal’. The doctrine of implied repeal suggests that with new enactment coming into effect on the same subject, the previous enactment stands repealed. The Courts are, however, slow in applying this doctrine. The first attempt of the courts is to apply both the provisions by applying the principles of harmonious construction unless the provisions are so repugnant to each other that both of them cannot be applied simultaneously. The repugnancy test assumes significance. We should also not lose sight of the fact that all the rulings in which doctrine of implied repeal was applied had a situation where there was no express provision of repeal in the new enactment/statute.

In the present case, the test of repugnancy fails, as the Central Government has not notified any Order similar to CARO 2003 under Companies Act 2013. There being no repugnancy, CARO 2003 continues to be applicable.

Even otherwise, there is express repeal provision in Companies Act 2013 and the same is yet to be notified. Under such circumstances, in my opinion, there is no question of considering or applying ‘Doctrine of Implied Repeal’.

It can thus be concluded that CARO 2003 continues to apply for audits for FY 2014-15 and beyond till such time the Central Government exercises its powers under Section 143(11) and issues any new Order.

The Central Government would do well to issue a clarificatory circular on these lines and not spend its precious time in issuing a hurried up Order at this stage. The new Companies Act contains various stringent provisions and unless they are taken into account carefully, any Order prepared or assimilated in a hurry will create more confusion.

Unless the Central Government notifies a new Order under section 143(11), CARO 2003 continues to apply for all audits conducted even under Companies Act, 2013.

Does this compounds the confusion already existing?

The last word is yet to be written on this.

 

Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

# CLSS 2014 – Can Strike Off Application (Form FTE) be filed without filing pending documents under CLSS-2014?

Fast Track Exit guidelines of 2011 are still applicable. The general circular 36/2011 has neither been withdrawn nor suspended. Interestingly,  Section 560 of the Companies Act, 1956 relating to strike-off continues to remain applicable as corresponding Section 441 of Companies Act, 2013 has not been notified.

Informatively, the Company Law Settlement Scheme 2014 (CLSS 2014) provides that any defaulting company after filing documents under the Scheme can opt for strike-off by paying only 25% of the applicable fee. It allows companies to file e-Form FTE for striking off its name. It follows that FTE guidelines remain applicable.

Prior to CLSS 2014, the defunct companies (defaulting companies) were permitted to file e-Form FTE without having to file pending forms. The RoC’s were allowing the application on this basis. Many corporates willing to get their name struck off wish to file e-Form FTE straightaway without doing any filing under CLSS 2014 as it gives them financial benefit.

A question has been raised whether e-Form FTE can be filed by the defaulting/defunct companies without opting for CLSS 2014. The answer is Yes as the guidelines for FTE are still applicable and the same modus operandi has to be adopted by RoC’s. Legally, it is possible unless FTE guidelines are either withdrawn or suspended for the time CLSS is in operation. Till the time it is done by MCA, the companies would do well to file for strike-off.

Read all this and much more in my latest publication – Handbook on Company Law Settlement Scheme 2014 available at http://www.amazon.in or at http://tranzission.com/book1.html.

Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

#Wake-up MCA – Who gets Immunity for filing 23 B under CLSS 2014?

A new amnesty scheme – CLSS 2014 has been introduced by MCA. It is open until 15th October 2014.

The Scheme offers lower additional fee and also immunity from prosecution to the company and officers in default. This scheme is valid for filing of 8 forms – Form 20B, 21A, 23AC, 23ACA, 23AC-XBRL, 23ACA-XBRL, 23B and 66. These documents can be filed under the Scheme provided their due date was upto 30th June, 2014. CLSS 2014 is attractive particularly considering the benefits. The most important benefit it offers to directors is non-applicability of disqualification under section 164(2) for past defaults provided the defaults are made good by filing the documents under the Scheme.

Who gets Immunity for filing Form 23B?

Form 23B was to be filed by an auditor under the previous regime – Companies Act, 1956. Under the Companies Act, 2013, the responsibility of filing intimation of appointment of auditor has now shifted to the company and this intimation is to be in Form ADT-1. Form 23B was accordingly withdrawn effective 1st April, 2014.

Inclusion of this Form in the Scheme forced MCA to bring back this form on MCA portal for filing. There is no quarrel till this point.

The uncertainty relates to its filing and consequential immunity. The Scheme applies only to ‘defaulting companies’ and not to auditor. This raises a pertinent question that if the Scheme is not extended to auditors, how this form could be included in the Scheme.

Secondly, the immunity has to be applied by filing eForm CLSS and this form can only be filed by a company. This cannot be filed by the auditor.

Who gets Immunity under such a case?

Wake-up MCA and clarify this aspect!

Ashish Makhija: ashish@ashishmakhija.com

 Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

 

 

 

# All You Need To Know About DPT-4

DPT-4 filing has become an enigma. With the extended last date approaching fast, the confusion around Form DPT-4 have sprang up again. I would say, few represent genuine concern, but majority of them are discernible upon serious reading of the law. All these concerns have been floating around since Sections 73 & 74 of the Companies Act, 2013 were notified. To rest all doubts, I am presenting here the interpretation.

First off, Ministry of Corporate Affairs (MCA) extended the date of filing DPT-4 till 31st August, 2014. It is a different matter that it was a case of Law Making Through Circulars (Read my Blog #Wake-up MCA – Act Amended Through Removal of Difficulties Power Under Section 470 at http://ashishmakhija.com/?p=71). No challenge to this power of MCA was presented, as it was a ‘please-all’ circular.

Now, let me address the concerns attached with DPT-4. The concerns are: –

  1. Whether private companies, who are likely to be exempt from the net of Section 74, need to file DPT-4 by 31st August, 2014?
  2. Whether the companies liable to file DPT-4 should state deposits as per Companies Act, 1956 or deposits as per Companies Act, 2013 in DPT-4?

Exemption to Private Companies

This is an easy one to answer. Yes, the MCA has proposed to exempt private companies from the applicability of section 74 and a draft notification was hosted on the MCA portal for public comments.

Four notifications relating to exemption to Section 8 companies, private companies, government companies and nidhi companies were laid in Rajya Sabha on 14th July, 2014 to fulfill requirement of Section 462 of the Companies Act, 2013. It is not clear whether these notifications were also laid in Lok Sabha. As per law, the MCA is liable to lay it before both Houses of Parliament, while it is in session, for a total period of 30 days which may be comprised in one session or in two or more successive sessions. If both Houses agree in disapproving the notification, then the notification shall not be issued or if they agree in making any modification, then the notification shall be issued with modification as agreed upon by both the Houses.

MCA can issue the notification provided all the formalities as stated above are completed. Till date, MCA has not issued the notification exempting any class of companies from the applicability of Section 74. Therefore, until such a notification sees the light of day, the compliance of Section 74 has to be made by all the companies.

Hope does not fade until 31st August, 2014 and the risk-taking companies can wait till the last day and if no such notification is issued, can file DPT-4 before the clock strikes 12 on the night of 31.08.2014.

Which definition of deposit to be applied for the purposes of Section 74?

This question assumes significance, as there is a marked difference between the definition of deposit as per CA 1956 and CA 2013. On careful analysis, it is logical to apply the definition of deposit as per CA 2013 and accordingly DPT-4 should be prepared showing all outstanding deposits. The reasons of this conclusion are enumerated below:

  1. The earlier definition of deposit as contained in Explanation to Section 58A of CA 1956 is no longer in force with notification of Sections 73, 74 and 76 of the CA 2013. Hence, it cannot be applied in the context of Section 74. It is nobody’s case that provisions of CA 1956 can still be enforced. It is a matter of different discussion altogether in view of the fact that section 465 is not yet notified and this Section deals with repeal of CA 1956 with some savings.
  1. A loan, which was not deposit, being exempt or otherwise, might have become deposit under CA 2013. Section 74 talks about ‘deposit’ and it does not talk about ‘deposit accepted under the CA 1956’. Here ‘deposit’ would mean deposit as per CA 2013, irrespective of the fact whether it was taken before the commencement of CA 2013.
  1. The auditor of such a company, while auditing for financial year 31.03.2015, will definitely consider the definition of deposit as per CA 2013 and all loans will be recategorised as deposits as per new Act.
  1. Let us consider the argument from other side. Whether any deposit of money, which was treated as deposit earlier, will it continued to be treated as deposit though it may be now exempt under Deposit Rules, 2014? Take an example of clause (v) of exempt deposits – “any amount received against the issue of commercial paper or any other instruments…”. It is now exempt under CA 2013 but was not exempt earlier. Since it is no longer a deposit, there is no need to show such items in DPT-4.
  1. The character of money received undergoes a change on 1.4.2014 from a ‘deposit’ to exempt deposit or vice versa due to change in law and DPT-4 requires status of deposit on the commencement of the Act.

MCA was expected to step in and clarify this aspect. They could have clarified otherwise. Unfortunately, this has not happened and hence DPT-4 be filed as per the above interpretation and particularly because it requires auditor’s certificate and the interpretation, which is stricter, must be deployed.

Last Date is not 31.08.2014 for all companies

It is generally presumed that last date for filing DPT-4 is 31.08.2014 in all cases. This is not so. DPT-4 is to be filed within 3 months from the commencement of the Act or from the date on which such payments are due. Due date is equally relevant and if the due date falls after 31.08.2014, then DPT-4 may be filed by 30.11.2014.

Ashish Makhija: ashish@ashishmakhija.com

 Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.