Index
Case Law Briefs
• Corporate Laws – Insolvency & Bankruptcy, 2016 and Arbitration & Conciliation Act, 1996.
1) Housing Development Finance Corporation Ltd versus RHC Holding Private Ltd.
2) Brahmani River Pellets Limited versus Kamachi Industries Limited.
• Labour Law – Provident Fund and Misc. Provisions Act, 1952.
1) The Officer InCharge, SubRegional Provident Fund Office & Anr. Versus M/s Godavari Garments Limited.
• Criminal Law – Bail matter
1) Harendra Singh @ HarendraBahadur Versus The State of Uttar Pradesh.
Article
Analysis of Land Mark Judgement on PBPT Act, 1988 (as amended in 2016).
Corporate Legal Updates: Companies Act, 2013 and MSME Act, 2006
1) CSR provisions under Companies (Amendment) Act 2019) made Mandatory.
2) MSME ISO 9000/ISO 14001 Certification reimbursement scheme.
From the Pen of the Partner – Nivedita R. Sarda.
• Liquidity crisis – Action and effects.
A) Case Law Briefs
Insolvency & Bankruptcy, 2016
- Housing Development Finance Corporation Ltd versus RHC Holding Private Ltd. Company Appeal (At)(Insolvency) No.26 Of 2019| Decided by NCLAT, New Delhi – Dated 10th July 2019
Held: Non-banking financial institution is carrying on business of financial institution and thereby, it being financial service provider do not come within the meaning of Corporate Person/Corporate Debtor.
NCLT cannot adjudicate on the issue of accepting deposits by the Non-Banking Finance Company in violation of the conditions imposed by the RBI. Therefore, petition u/s 7 of the I&B not maintainable.
Facts: The application filed u/s 7 of IBC by the Appellant against the Respondent was rejected by the NCLT, New Delhi vide its order dated 06.12.2018 on the ground that the Respondent Company being a non-banking financial institution rendering ‘financial service’ is out of the purview of the Code. Aggrieved with the impugned order, the present appeal was filed by the Appellant.
Before the NCLAT, it was the submission of the Appellant that the Respondent is not a ‘financial service provider providing financial services’ as envisaged u/s 3(17) r/w Section 3(16) of the Code. It was argued that the provisions of IBC are applicable on all other entities except for the one providing such financial services as envisaged u/s 3(7) of the Code and the exclusion cannot be beyond what has been contemplated by the I&B Code. Whereas, the Respondent while relying upon the judgement rendered by the Appellate Tribunal in the case of Randhiraj Thakur Vs M/s Jindal Saxena Financial Services, stated that Section 7 of IBC is not applicable on the Company which has been granted a certificate of Registration under the Reserve Bank of India Act, 1934 giving status of a “Non-Banking Financial Institution.” The Tribunal noticed that certificate of registration has been granted to the Respondent by RBI in accordance with Section 45IA of the RBI Act, 1934 to commence/carry on business of “non-banking financial services and therefore, uphold the order passed by the NCLT.
Arbitration & Conciliation Act, 1996.
- Brahmani River Pellets Limited versus Kamachi Industries Limited (CIVIL APPEAL NO. 5850 of 2019)|Supreme Court – decided on 25th July 2019.
Held: When the parties have agreed to have the “venue” of arbitration at a particular place, only the High Court which has jurisdiction over the said place can entertain the petition seeking appointment of Arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996.
Facts: The appellant entered into an agreement with the Respondent for sale of 40,000 WMT (Wet Metric Tonne) of Iron Ore Pellets on FOB terms and payment was to be made by Letter of Credit in Bhubaneswar, the loading port was in Orissa whereas, the destination for the goods was in Tamil Nadu. Dispute arose between the parties regarding the price and payment terms. Later the appellant did not deliver the goods to the respondent. Further, the respondent claimed for damages alleging that it had to procure the Iron Ore Pellets from other sources at higher rates. The Appellant denied any liability to pay damages and stated that it was the respondent who breached the contract.
Further, the respondent filed a petition under section 11(6) of the Arbitration & Conciliation Act, 1996 before the Madras High court for appointment of sole arbitrator. The High Court appointed the arbitrator stating that in absence of any jurisdiction clause both the Orissa and Madras High Court would have the jurisdiction over the proceedings. Hence, an appeal was preferred by the appellant challenging this instant impugned order.
The Issue in the instant matter was whether the Madras High Court could exercise jurisdiction under section 11(6) of the Arbitration and Conciliation act, 1996 despite the fact that the agreement contains the clause that the venue of arbitration shall be Bhubaneswar?
Labour Law – Provident Fund and Misc. Provisions Act, 1952.
- The Officer In-Charge, Sub-Regional Provident Fund Office & Anr. Versus M/s Godavari Garments Limited Civil Appeal No. 5821 OF 2019| Decided by Hon’ble Supreme Court of India dated 24th July 2019.
Held: Merely because the workers were permitted to do the work off site, it would not take away their status as employees for the purpose of Employee Provident Fund and Misc. Provisions Act, 1952.
EPF: Act is a beneficial social welfare legislation which was enacted by the Legislature for the benefit of the workmen hence it has to be interpreted in a manner which is beneficial to the workmen
Facts: As per the objectives of the Respondent company, it is required to encourage, promote, develop, setup or cause to be setup a readymade garments industry in the Marathwada Region, with a view to provide gainful employment to people possessing skills in stitching, tailoring, and allied activities, especially to women from the economically weaker sections of the Society.
The Respondent Company engaged women workers who were provided with cut fabric, thread, buttons, etc. to be made intogarments at their own homes. The Respondent who made a false statement that the company had only 41 employees were later summoned by the Officer in charge for not paying the Provident Fund to the women workers. Later the officer in charge (Appellant) issued summons as per section 7-A of the EPF act and passed an order against the Respondent stating that they must pay the required amount to the women workers.
A writ Petition No. 1615 of 1993 was filed before the Bombay High Court against the order wherein, the Respondent contended that the women workers, who were fabricating garments for the Respondent Company, were not their employees and hence not covered by Section 2(f) of the EPF Act. Therefore, even though wages were paid to those women workers, the Respondent Company was not liable to pay Provident Fund contribution in respect to them.
The High Court ruled in favour of the Respondent which was challenged by the Appellant by way of SLP. The Hon’ble Supreme Court set aside the Judgement passed by the High Court and upheld the order passed by the Officer- In- Charge, Sub-Regional.
Criminal Law – Bail matter.
- Harendra Singh @ HarendraBahadur Versus The State of Uttar Pradesh. Criminal Misc. Application NO.6478 Of 2019 (BAIL) | Decided by Allahabad High Court Decided On 8th July 2019.
Held: The bail application filed under Section 438 of Cr.P.C. is not maintainable before the High Court without exhausting remedy before the Court of Sessions, which has got concurrent jurisdiction. However, for extraneous or special reasons, the High Court can also exercise such power for grant of the remedy under the said provision.”
There must exists extraneous or special reason to approach High Court u/s 438 of Cr.P.C without extinguishing remedies at lower court i.e the Sessions Court.
Facts: An application was filed by the Applicant seeking anticipatory bail under Section 438 of Cr.P.C., against an FIR filed under Sections 419, 420, 467, 468, 471 of IPC, lodged at P.S Kotwali Nagar, Dist. Raebareli. The allegation was that the police inspectors received the information through an informant that a Bolero vehicle is on the way in which 7-8 persons are seated and they are in possession of Ganja. Then the Bolero was stopped and five persons were arrested. The Applicant in the bail application averred that on account of the personal grudges between him and gram panchayat, he has been falsely implicated in the matter. The Hon’ble High Court framed the question of law that ” Whether the application filed under Section 438 of Cr.P.C. is maintainable before the High Court without exhausting remedy under the said provision before the Court of Sessions which has concurrent jurisdiction with that of the High Court?
B. Article:
Analysis of the landmark judgement passed by Hon’ble High Court Judicature of Rajasthan, Jaipur Bench under Prohibition of Benami Properties Transaction Act, 1988 as amended in 2016, holding the amendment act not to apply retrospectively.
The Hon’ble High of Judicature for Rajasthan at Jaipur Bench, Jaipur vide Order dated 12th July, 2019 passed in Niharika Jain versus Union of India SB Civil Writ Petition No. 2915 of 2019, decided retrospectively of the Prohibition of Benami Property Transaction Act, 1988 as amended vide Benami Transactions (Prohibition) Amendment Act, 2016 [hereinafter referred to as “Benami Act”]. Various petitions were filed challenging the Show Cause Notices issued by the Income Tax Department (Benami Transaction) under section 24(1) of, to show cause as to Why actions under section 24 (4) of the Benami Act should not be taken against the Petitioners? The Hon’ble Court, by way of a Common Order, decided the legal preposition, Being the retrospective application of the Act, without touching the merits of each case.
The High Court admitted the petitions only after observing that no Authority, much less a quasi-judicial authority, can confer jurisdiction on itself by deciding a jurisdictional fact wrongly; is a question that is always open for scrutiny by High Court in an application under Article 226/227 of Constitution of India.
During the course of arguments, the main contentions that were put forth by the counsel for petitioners were impugned transactions which were alleged to be Benami Transactions by The Authority were before the date, on which the Amendment Act came into force, i.e. 1st November, 2016.
Under such circumstances, the Benami Act, being penal in nature, could not have been applied retrospectively. It was also contended by the petitioners that no rules could have been framed in exercise of powers under section 68 of the Benami Amendment Act, 2016 before 1st November, 2016, being the date of commencement, whereas the Authority framed the rules with effect from 25th October, 2016. Hence, the Rules framed under the Benami Amendment Act of 2016, had no consequence.
On the other hand, it was submitted by Respondent, that the petitioners have admitted the fact that the matters are still pending before the Adjudicating Authority. Thus, the petitioners have instituted the present writ applications, contrary to the Scheme of the Benami Act of 1988, as amended in the year 2016, which provides a complete self-contained procedure for resolution of the matters arising therein; hence, the instant batch of writ applications is premature and is not maintainable, and therefore, deserve to be dismissed on that ground alone. Further, the respondents also emphasized that the provisions introduced by way of Benami Amendment Act of 2016, would have retrospective application and cannot be considered to be prospective keeping in view of the underlying object and intendment in introduction of amended Benami Act of 1988 as the main object behind introduction of the Benami Act of 1988, on 19 May 1988, was to make benami transactions an offence and to acquire such benami properties through acquisition without compensation as per the procedure prescribed therein, so that the unjust gains and benefits of evasion of taxes could be avoided. Hence, keeping in view the intendment and object in introduction of amended Benami Act of 1988; incorporating necessary amendments introduced through Benami Amendment Act of 2016, only clarified and amplified the intention of legislature in order to effectively cure and curb the mischief of ever increasing corruption, which was the also intended under the Principal Act i.e. Benami Act of 1988; enacted on 19 May 1988. It was also contended that confiscation of the benami property, a replacement, by way of amendment, is not a new introduction in totality to the Benami Act of 1988. Acquisition without compensation is nothing but confiscation only; therefore, substitution of the term acquisition by another term i.e. confiscation, cannot be termed as penal, in the backdrop of the object sought to be achieved through the Benami Amendment Act of 2016.
The High Court vide Order dated 12th July, 2019 authored by Hon’ble Mr. Justice Veerendr Singh Siradhnaheld that it is well settled law that unless a contrary intention is reflected, a legislation is presumed and intended to be prospective. For in the normal course of human behaviour, one is entitled to arrange his affairs keeping in view the laws for the time being in force and such arrangement of affairs should not be dislodged by retrospective application of law. The principle of law known as lex prospicit non prospicit (law looks forward not backward), is well-known and accepted principle. The retrospective legislation is contrary to general principle for legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried out in the faith of the then existing law. Thus, the principle against retrospectivity is the principle of ‘fairplay’ and unless there is a clear and unambiguous intendment for retrospective effect to the legislation which affects accrued rights or imposes obligations or casts new duties or attaches a new disability is to be treated as prospective.
It is trite law that an explanatory or declaratory Act is intended to supply an obvious omission or is enacted to clear doubts as to the meaning of the previous Act. While retrospective operation is generally intended as to declaratory or curative provisions, which is supplied with the ‘language’ “shall be deemed always to have meant”. Therefore, in absence of clarity amendment being declaratory or curative in the face of unambiguous or confusion in the pre-amended provisions; the same is not required to be treated as curative or declaratory amendment. Viewed in the light of the settled legal proposition, as aforesaid, Benami Amendment Act, 2016, neither appears to be clarificatory nor curative. Moreover, by way of amendment penal consequences have been introduced providing for confiscation of the benami property and enhanced punishment. It was further held that Article 20 of the Constitution of India is fundamental right guaranteed under Part-III of the Constitution and the penal consequences emanating from the Benami Amendment Act, 2016, in infraction to the mandate of fundamental rights guaranteed under Article 20 of the Constitution; cannot be given retrospective effect in absence of a clear stipulation by the Parliament on retrospectivity.
The High Court finally held that the Benami Amendment Act, 2016, amending the Principal Benami Act, 1988, enacted w.e.f. 1st November, 2016, i.e. the date determined by the Central Government in its wisdom for its enforcement; cannot have retrospective effect.
Our office represented two of the petitioners and was successful in securing this landmark judgement in their favour wherein it is held that the provisions of Benami Amendment Act, being penal in nature, cannot have retrospective operation. However, High Court has not commented upon merits of each case at this stage.
C) Corporate Legal Updates
Legal Update On Companies Act, 2013:
a) CSR provisions under Companies (Amendment) Act 2019 made Mandatory
The Companies (Amendment) Act 2019 (Amendment) received assent of the President of India on July 31, 2019. Under the new provisions regarding CSR it is now no longer “comply or explain” but has become “comply or imprisonment”
Section 135 under the erstwhile framework:
Under the earlier framework, all companies having net worth of INR 500 crores or more, or turnover of INR 100 crores or more, or net profit of INR 5 crores or more during any financial year, are required to constitute a CSR committee. Such companies were required to develop a dedicated CSR policy (giving preference to local areas where the company operates) and establish a CSR fund equivalent to 2 percent of the average net profits made by the company in 3 (three) immediately preceding financial years. Under the Companies Act 2013 (Companies Act), if the company failed to meet its CSR obligations, the reasons for not spending the CSR amounts were required to be disclosed in the directors’ report.
Highlights of the Amendments relevant to CSR:
1) CSR Fund in case of New Companies: Where a company falls in the criteria for applicability of CSR provisions and it has not completed 3 years from the date of its incorporation, the Amendment Act provides that such company shall calculate the 2% of the profits of its ’previous year’ instead of ‘Average of net profits of last 3 years’.
2) Special Account to be maintained for keeping unspent CSR funds: Now, if a company has any amounts which are unspent at the year-end as per the Company’s CSR policy, such fund shall be kept in a special bank account to be maintained with a scheduled bank. The nomenclature of such account shall be ‘Unspent Corporate Social Responsibility Account (Unspent CSR Account)’. After transfer of funds to this account the relevant company shall spend such amount towards CSR activities within 3 years from the date of such transfer.
3) Transfer of unspent amount maintained in Special account to Schedule VII Fund Account: Where a company fails to spend the amount transferred to Special Account maintained for CSR spend within the time prescribed i.e. within 3 years from the date of transfer of such fund to Special Account, such amount shall be transferred to the Fund setup by Central Government under Schedule VII to Companies Act, 2013 for socio-economic development and relief and welfare of the scheduled castes / tribes, other backward classes, minorities and women.
Further, if there are unspent CSR funds in a company at the end of financial year and there are no on-going CSR projects with the company, such amounts shall be directly transferred to the Fund set up by Central Government under Schedule VII within 6 months from the end of Financial Year to which it relates.
4) Penal provisions: Where a company fails to fulfil the obligations towards CSR cast upon it under the provisions of Companies Act, penalties may be imposed on such companies which shall not be less than Rs 50,000 but which may extend upto Rs 25 lakhs. Further, the officers-in-default may be held liable for imprisonment upto 3 years and also with fine which shall not be less than Rs 50,000 and which may extend upto Rs 5 lakhs. Further penalties are also prescribed for continuing offences
Conclusion:
After introducing the CSR provisions in the Companies Act 2013 as a voluntary spend for companies coming under its regime, it could not bring out the impact it could have brought in if it were religiously complied with by the companies. But since the notion of application of these provisions was ‘comply or explain’ most companies found it easier to give explanations for not spending the CSR amount than to identify the requisite projects and to spend the required amounts to those projects. These changes in Section 135 are yet to be notified. The overall impact of this change shall be more visible upon publication of changes in CSR Policy Rules corresponding to these changes in the Companies Act
Legal Update On Micro Small And Medium Enterprises Act, 2006:
MSME ISO 9000/ISO 14001 Certification reimbursement scheme.
As Small scale industries develop and grow, they contribute towards the growth of the economy considerably. Moreover, as MSME’s grow, the geographical boundaries of trade diminish as organisations look for international collaborations and international trade. Expanding to international markets help MSME’s increase their scale of production, and consequently, their revenue.
In this volatile and competitive market scenario, it is of prime importance to meet international quality standards and seeking and ISO certification for standardising the product goes a long way in building an image and marketing the product.
What is ISO certification?
ISO (International standardisation organisation) certification is an international certification which can be obtained by organisations that observe a set standard of quality as the ISO conducts various quality tests before issuing a certification to an enterprise.
ISO standards have five documents which are ISO 9000, ISO 9001, ISO 9002, ISO 9003 and guidelines to quality management and quality system elements. The ISO 9000 deals with quality management and quality assurance. ISO 14000, on the other hand, deals with environment management. It measures what is being done by the enterprise to minimise environmental damages due to its activities, to meet the prescribed environmental regulations.
Availing this certification involves considerable funds and so the DC-MSME offers a funding scheme for MSMEs to apply for this certification. The scheme is called the ISO 9000/ISO 14001 certification reimbursement scheme.
What is the ISO 9000/ISO 14001 certification reimbursement scheme?
This scheme helps MSMEs to acquire ISO certification by providing them with a financial aid and the key elements of the scheme are as follows:
• The charges incurred in availing ISO -9000/ISO 14001/HACCP certification are reimbursed under the scheme.
• The limit of reimbursement is upto 75% of the expenditure incurred in availing the certification subject to a maximum of Rs 75000.
• The reimbursement is done only one time when the organisation provides an entrepreneurship memorandum number.
• Eligible organisations that can apply for the scheme include – MSEs/ancillary/SSSB units that have already acquired ISO-9000/ISO-14001/ HACCP certification.
• More details regarding the scheme, how to apply and response to any other queries are available at www.dcmsme.gov.in and msme.gov.in
D) From the Pen of the Founder Partner:
Expert view: Adv Nivedita R. Sarda, B.Com, CTM, PGDBA, FCA, LL.B.
Liquidity Crisis – Action and effects
I have been continuously listening from past few months that Real Estate industry is going Bankrupt and market liquidity is shrinking. The developers are committing suicide and business don’t have money and banking policies do not support the Real Estate industry or for that matter MSME sector.
However, in my view, this process has not begun with Demonetisation but has only accelerated with its application along with RERA.
There has been clear diversion of funds from the productive use to unproductive consumptions. The increase in prices of real estate lured many productive hands and money to this sector which created the increase in its value however, the value chain which kick started the increase in prices in 2000 received a major setback in following years when the prices soared high and instead of completing their projects, the developers hoarded and waited to make profits on undersold, unconstructed units; accumulating more land banks and launching new projects to get money in the old projects. This provoked and was looked as an envious situation by the hard working persons in the industry both in manufacturing and service sector and the funds which was to be used for business i.e. manufacturing/ service sector started being diverted towards real estate.
Now the present situation is that real estate by its very nature being a long term/non-liquid asset is giving fears and desperation among people who were assuming it to be so.
If we are talking about slowing down of economy, in my view, there are two factors:
1. The amount required and need to invested as own fund by the entrepreneur had been diverted for its personal gains and also some additional funds already invested in the business taken away from the business which as on date is not liquid enough (because diverted to real estate) to plough back into the business to make it survive or repay the overdue of debt.
2. The concept of spending in India was more channelized and prevalent of non-taxable income hence with all amount being deposited in bank and disclosed, this amount or income earned thereon stands reduced by the amount of tax paid. Thus, killing the actual productivity or value of money.
Hence, to cry foul on spilled milk which is created by our own hands is also one of the reasons why we are seeing recessions all around.
The paradigm shift of attitude of Indians towards spending and earning through actual productivity, is the need of the hour. And I’m not sure how long it will take, but yes, next six months don’t go anywhere.
Quote of the month:
“As we look into the future, leader will be those who empower others” ~ Bill Gates
This newsletter is authored collectively by:-
1) Mrs. Nivedita R. Sarda, Partner.
2) Mrs. Leena Jain, Senior Associate.
3) Mrs. Priyanshi Roongta, Senior Associate.
4) Mr. Nitesh Shrivastava, Associate.
5) Mr. Aditya Bohra, Associate.
6) Ms. Ishita Rawat. Associate.