27 April 2021
Case: Laxmi Pat Surana vs. Union Bank of India and Anr. Civil.Appeal. No. 2374 of 2020.
Brief Facts
The Respondent Bank extended a loan facility to M/s Mahaveer Construction, the proprietorship firm of the Appellant (the ‘Principal Borrower’). M/s. Surana Metals Limited (the ‘Corporate Debtor’) offered a guarantee to the Principal Borrower. The Appellant is also a Promoter/Director of the Corporate Debtor. When the Principal Borrower defaulted on the loan, the Respondent declared the account as NPA in 2010. The Respondent issued a recall notice to the defaulter and the Corporate Debtor. The Respondent then filed an application under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 for recovery of debt from the Principal Borrower. Subsequently, a notice was issued as prescribed under Section 4(1) of the Insolvency and Bankruptcy Code, 2016 (the ‘Code’). The Corporate Debtor replied to the notice stating that it was not the Principal Borrower and it had not committed any default. The Respondent then filed an application under Section 7 of the Code for initiation of Corporate Insolvency Resolution Process (‘CIRP’) before the Hon’ble NCLT, Kolkata. The application was resisted on the ground of delay and that the default being committed by the Principal Borrower who is not a corporate person. The Hon’ble NCLT held that since the Corporate Debtor was coextensively liable to repay the debt in case of a default, a proceeding could be initiated against the Corporate Debtor. Secondly, with respect to delay, it was held that since the Principal Borrower and the Corporate Debtor were both acknowledging the debt till December 2018, an application filed in February 2019 was well within the Three-Year limit prescribed under the Code. An appeal preferred before the Hon’ble NCLAT was dismissed and affirmed the order of NCLT.
(i) Whether an action under Section 7 of the Code, 2016 can be initiated by the financial creditor (Bank) against a corporate person (being a corporate debtor) concerning guarantee offered by it in respect of a loan account of the principal borrower, who had committed default and is not a “corporate person” within the meaning of the Code?
(ii) Whether an application under Section 7 of the Code filed after three years from the date of declaration of the loan account as NPA, being the date of default, is not barred by limitation?
Submissions and Findings
It was submitted by the Appellant that to file an application under Section 7 for initiation of CIRP against the defaulter and his guarantor, the defaulter must be a “Corporate Person”. Since in the instant case the Principal Borrower, who is the defaulter is a proprietorship firm, no action can be undertaken against him, as a result, no action can be initiated against the guarantor i.e. the Corporate Debtor. The Respondent submitted that Section 7 of the Code enables the financial creditor to initiate CIRP against the principal borrower if it is a corporate person, including against the corporate person being a guarantor in respect of loans obtained by an entity not being a corporate person. The Respondent placed reliance on Sections 3(8), 3(11), 5(7), 5(8) and 7 of the Code and upon conjoint reading of these provisions, it was submitted that a “financial debt” includes the amount of any liability in respect of any guarantee or indemnity for any money borrowed against interest. Therefore, the money borrowed by sole proprietorship of the Appellant against payment of interest for which the Corporate Debtor stood guarantee or indemnity, was also a “financial debt”.
With respect to the second issue, the Appellant stated that the date of default should be considered the day when the accounts were declared as NPA and not when the debt was last acknowledged. The Respondent submitted that the Debt was acknowledged by the Corporate Debtor till December 2018 and hence, the action was not barred by Limitation.
LEGAL UPDATE
With respect to issue no. (i), the Hon’ble Court accepted the submission of the Respondent and held that financial debt, by its plain reading also includes guarantees furnished for the satisfaction of the debt. By referring to Section 128 of the Contract Act, the Court held that the guarantor is liable for payment of debt in case of default by the Primary Defaulter. The Court referring to Section 3(37) of the Code which is a residue clause held that if the Principal Defaulter is unable to satisfy the debt, the Financial Creditor can proceed against the Guarantor as if the debt was payable by the Guarantor. With regards to issue no. (ii), the Court accepted the view taken by the NCLT and NCLAT, that the debt was acknowledged by the Corporate Debtor on behalf of the Principal Borrower. Therefore, a fresh period of limitation shall be computed from the time when the Corporate Debtor acknowledges the liability i.e. December 2018 in the present case.
CORPORATE REGULATORY UPDATES
Master Circular on Surveillance of Securities Market
On 1 March 2021, the Securities and Exchange Board of India (“SEBI”) issued a Master Circular on Surveillance of Securities Market. In order to enable the users to have an access to all the applicable circulars at one place, the Master Circular on Surveillance of Securities Market has been prepared. This
Master Circular is a compilation of the circulars issued by Integrated Surveillance Department, which are operational as on date of this circular.
Amongst others, the Master Circular contains the –
(a) Trading Rules and Shareholding in dematerialized mode, (b) Unauthenticated news circulated by SEBI Registered Market Intermediaries through various modes of communication,
(c) SEBI (Prohibition of Insider Trading) Regulations, 2015, (d) Disclosures under Regulation 6 and Regulation (Code of Fair Disclosure) and Regulation (Code of Conduct), (e) Allowing Offer for Sale (OFS) and Rights Entitlements
(RE) transactions during trading window closure period, (f) Reporting to Stock Exchanges regarding violations relating to the Code of Conduct,
(g) Automation of Continual Disclosures under Regulation 7(2) of SEBI (Prohibition of Insider Trading) Regulations, 2015 – System driven disclosures, and
(h) Annexures.
Government amends Insurance Ombudsman Rules for better resolution of policyholders’ complaints regarding insurance service deficiencies
On 2 March 2021, the Government of India notified comprehensive amendments to the Insurance Ombudsman Rules, 2017, with a view to improve the working of the Insurance Ombudsman mechanism to facilitate resolution of complaints regarding deficiencies in insurance services in a timely, cost-effective and impartial manner. The amended rules have enlarged the scope of complaints to Ombudsmen from only disputes earlier to deficiencies in service on the part of insurers, agents, brokers and other intermediaries. Further, insurance brokers have been brought within the ambit of the Ombudsman mechanism, by empowering the Ombudsmen to pass awards against insurance brokers as well.
Under the amended rules, the timeliness and cost effectiveness of the mechanism has been substantially strengthened. Policyholders will now be enabled for making complaints electronically to the Ombudsman and a complaints management system will be created to enable policyholders to track the status of their complaints online.
Further, the Ombudsman may use video-conferencing for hearings. To enable access to relief through the Ombudsman mechanism even when there is vacancy in the office of a particular Ombudsman, provision has been made for giving additional charge to another Ombudsman, pending the filling of the vacancy.
A number of amendments have been made for securing the independence and integrity of the Ombudsman selection process, while also building in safeguards to secure the independence and impartiality of the appointed persons while serving as Ombudsmen. Further, the selection committee will now include an individual with a track record of promoting consumer rights or advancing the cause of consumer protection in the insurance sector.
The Competition Commission of India (Meeting for Transaction of Business) Amendment Regulations, 2021
On 2 March 2021, the Competition Commission of India (CCI) issued the Competition Commission of India (Meeting for Transaction of Business) Amendment Regulations, 2021. These Regulations insert a fresh regulation, regulation 3A to the e Competition Commission of India (Meeting for Transaction of Business) Regulations, 2009. The newly inserted regulation 3A is as follows-
“Coram for meetings of Commission-
(1) Subject to the provisions of Section 22 of the Act, the Commission shall set down cases for final hearing after completion of pleadings and during such hearings, coram of the Commission would remain constant and such coram alone would continue to hear and participate in all subsequent proceedings on all hearing dates and would write the final orders.
(2) If it becomes impossible to continue the hearings with the same coram, for any reason whatsoever, the matter would be heard afresh with new coram.”
Code of Conduct & Institutional mechanism for prevention of Fraud or Market Abuse
On 3 March 2021, SEBI decided that the Code of Conduct and Institutional Mechanism for prevention of fraud or market abuse shall be applicable to Stock Exchanges, Clearing Corporations and Depositories (herein after collectively referred as ‘MIIs’) also, on the lines of Regulation 9(1) to 9(4) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (herein after referred as “PIT Regulations”).
CORPORATE REGULATORY UPDATES
Accordingly, MIIs shall do the following:
(a) Formulate a Code of Conduct to regulate, monitor and report trading by their designated persons and immediate relative of designated persons towards achieving compliance with the PIT Regulations, by adopting the minimum standards set out in Schedule C to the PIT Regulations.
(b) Managing Director (MD)/Chief Executive Officer (CEO) of the MII shall be obligated to frame the referred code of conduct. The Board of Directors may ensure the compliance by MD/CEO in this regard. Explanation – For the avoidance of doubt it is clarified that a MII, which is listed, is already required to adopt minimum standards set out in Schedule B of PIT Regulations. Further, such MII shall adopt minimum standards as set out in Schedule B of PIT regulations with respect to trading in its own securities and in Schedule C with respect to trading in other securities.
(c) MII shall identify and designate a compliance officer to administer the aforesaid code of conduct.
(d) The Board of Directors of MII, in consultation with the aforesaid compliance officer, shall specify the designated persons to be covered by the code of conduct on the
basis of their role and function in the organization and the access that such role and function would provide to unpublished price sensitive information in addition to seniority and professional designation and shall include the
position/designation as specified in the Regulation 9(4) of the PIT Regulations.
(e) MIIs shall put in place an Institutional Mechanism for prevention of fraud or market abuse covering certain aspects as provided in the circular.
Circular on Guidelines for votes cast by Mutual Funds
On 5 March 2021, SEBI, in order to further improve transparency as well as encourage Mutual Funds/AMCs to diligently exercise their voting rights in best interest of the unitholders and based on the deliberations in MFAC, prescribed the following additional guidelines:
(1) Mutual Funds including their passive investment schemes like Index Funds, Exchange Traded Funds etc. shall be required to cast votes compulsorily in respect of the following resolutions:
(i) Matters mentioned at Para no. 4(iii) of SEBI Circular dated 15 March 2010 i.e.
(a) Corporate governance matters, including changes in the state of incorporation, merger and other corporate restructuring, and anti-takeover provisions.
(b) Changes to capital structure, including increases and decreases of capital and preferred stock issuances.
(c) Stock option plans and other management compensation issues.
(d) Social and corporate responsibility issues.
(e) Appointment and Removal of Directors.
(f) Any other issue that may affect the interest of the shareholders in general and interest of the unit holders in particular.
(g) Related party transactions of the investee companies (excluding own group companies). For this purpose, “Related Party Transactions” shall have same meaning as assigned to them in clause (zc) of Sub-Regulation (1) of Regulation (2) of the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015.
(2) Further, for all remaining resolutions which are not covered above, Mutual Funds shall also compulsorily be required to cast their votes with effect from 1 April 2022.
(3) In case of the Mutual Funds having no economic interest on the day of voting, it may be exempted from compulsorily casting of votes.
(4) The vote shall be cast at Mutual Fund Level. However, in case Fund Manager(s) of any specific scheme has strong view against the views of Fund Manager(s) of the other schemes, the voting at scheme level shall be allowed subject to recording of detailed rationale for the same.
(5) Fund Managers/Decision makers shall submit a declaration on quarterly basis to the Trustees that the votes cast by them have not been influenced by any factor other than the best interest of the unit holders. Further, Trustees in their Half Yearly Trustee Report to SEBI, shall confirm the same.
(6) This circular shall be applicable with effect from 1 April 2021 except Para 2 which will be applicable from the mentioned date.
CORPORATE REGULATORY UPDATES
The Companies (Management and Administration) Amendment Rules, 2021
The MCA vide its notification dated March 5, 2021 issued the Companies (Management and Administration) Amendment Rules, 2021 thereby amending the Companies (Management and Administration) Rules, 2014. The Amendment Rules came into force from March 8, 2021 and a new Form No. MGT-7A for filing annual return by One Person Company and Small Company with effect from financial year 2020-2021 was introduced. Further, certain new definitions for terms such as agency, cut-off date, cyber security, secured system etc. were also added.
MCA notified commencement date for provisions of the Companies (Amendment) Act, 2017
The MCA vide its notification dated March 5, 2021 made effective clause (i) of section 23 of the Companies (Amendment) Act, 2017 introducing abridged form of annual return for One Person Company, small company and omission of few disclosures required to be made in the annual return under section 92 of the Companies Act, 2013.
Amendments on Unique Client Code (UCC) and mandatory requirement of Permanent Account Number (PAN)
On 8 March 2021, SEBI issued amendments to provisions in SEBI Circular dated 16 September 2016 on Unique Client Code (UCC) and mandatory requirement of Permanent Account Number (PAN).
SEBI had issued circular dated 16 September 2016 which, inter-alia, provided guidelines on use of Unique Client Code (UCC) and mandatory requirement of Permanent Account Number (PAN) for trading on commodity derivative exchanges (now referred as Exchanges having commodity derivatives segment).
In the Union Budget 2020, launch of instant PAN facility was announced and subsequently, Income Tax (IT) Department launched the facility of e-PAN which is generated instantly through Aadhaar based e-KYC. In order to rationalize the compliance requirement of collecting and maintaining copies of PAN of clients by their respective members and enhance the use of e-PAN, it has been decided to modify certain provisions of SEBI circular dated 16 September 2016 which are as follows:
(a) Clause 3 of the Circular is modified as under:
“It shall be mandatory for the members of the exchanges having commodity derivatives segment to use Unique Client Code (UCC) for all clients transacting on the commodity
derivative segment. The exchanges with commodity derivatives segment shall not allow execution of trades without uploading of the UCC details by the members of the exchange. For this purpose, members shall collect after verifying the authenticity and maintain in their back office the copies of Permanent Account Number (PAN) issued by the Income Tax (IT) Department, for all their clients. However, in case of e-PAN, members shall verify the authenticity of e PAN with the details on the website of IT Department and maintain the soft copy of PAN in their records.”
(b) Clause 5 of the Circular is modified as under:
"The exchanges having commodity derivatives segment shall ensure that the members of their exchanges shall:
(i) collect copies of PAN cards issued to their existing as well as new clients after verifying with the original.
(ii) cross-check the aforesaid details collected from their clients with the details on the website of the Income Tax (IT) Department. However, in case of e-PAN, verify the authenticity of e-PAN with the details on the website of IT Department and maintain the soft copy of PAN in their records.”
(iii) upload details of PAN or e-PAN so collected to the Exchanges as part of Unique Client code.
(iv) verify the documents with respect to the unique code and retain a copy of the document.
The provisions of this circular shall come into effect from 1 April 2021. All other provisions in the circular dated 16 September 2016 shall continue to remain in force.
Format for furnishing of credit information to Credit Information Companies and other regulatory measures
On 12 March 2021, RBI decided to modify the Uniform Credit Reporting Format for the purpose of reporting credit information to the Credit Information Companies (CICs) as under:
(i) Consumer Bureau: The label of the field ‘Written off and Settled status’ is modified as ‘Credit Facility Status’ and it will also have a new catalogue value, viz., ‘Restructured due to COVID-19’.
CORPORATE REGULATORY UPDATES
(ii) Commercial Bureau: The existing field ‘Major reasons for restructuring’ will have a new catalogue value, viz., ‘Restructured due to COVID-19’.
(iii) MFI Bureau: The existing field ‘Account status’ will have a new catalogue value, viz., ‘Restructured due to COVID-19’.
The modifications are being made to enable banks/AIFIs/ NBFCs to report the information relating to restructured loans to CICs as envisaged in circular dated 6 August 2020, on the Resolution Framework for COVID-19 related stress.
MCA establishes Central Scrutiny Centre (CSC)
The MCA vide its notification dated March 18, 2021, established a Central Scrutiny Centre (CSC) by virtue of its powers under sub-sections 1 and 2 of section 396 of the Companies Act. The CSC is set up to carry out scrutiny of Straight Through Process e-forms filed with the MCA and forward its findings to the concerned jurisdictional Registrar of Companies for necessary action. The notification came into force on March 23, 2021.
MCA notified commencement date for various provisions of the Companies (Amendment) Act, 2020
The MCA vide its notification dated March 18, 2021 made effective the provisions of section 32 and 40 of the Companies (Amendment) Act, 2020. Sections 32 and 40 of the Companies (Amendment) Act, 2020 primarily provides for provisions relating to payment of remuneration to independent directors/non-executive directors in case of inadequacy of profit.
MCA amends Schedule V of the Companies Act, 2013
The MCA vide its notification dated March 18, 2021, amended the provisions of Part II of Schedule V of the Companies Act, 2013 which relates to the remuneration to be paid to the directors of a company. Earlier the aforesaid provisions defined the limits for payment of remuneration to the managerial person in a company. However, the amended provisions now define the limits for payment of remuneration to managerial person as well as other directors, including non-executive and independent directors.
Review of FDI Policy on downstream investments made by Non-Resident Indians (NRIs)
On 19 March 2021, the Department for Promotion of Industry and Internal Trade issued Press Note 1 of 2021 series thereby reviewing the FDI Policy in relation to investments made by an Indian company owned and controlled by Non-Resident Indians (NRIs) on a non-repatriation basis in the Consolidated FDI Policy of 2020 effective from 15 October 2020 (as amended from time to time).
The new insertion regarding this aspect is as follows:
“Investments by NRI(s) on a non-repatriation basis as stipulated under Schedule IV of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 are deemed to be domestic investments at par with the investments made by residents. Accordingly, an investment made by an Indian entity which is owned and controlled by NRI(s) on a non-repatriation basis shall not be considered for calculation of indirect foreign investment.”
This decision shall take effect from the date of the FEMA notification.
Clarification on the valuation of bonds issued under Basel III framework
On 22 March 2021, SEBI decided that the deemed residual maturity for the purpose of valuation of existing as well as new bonds issued under Basel III framework shall be as below:
(1) Till 31 March 2022 – Deemed Residual Maturity of Basel III AT-1 Bonds is 10 Years – Deemed Residual Maturity of Basel III Tier 2 Bonds is 10 years or Contractual Maturity whichever is earlier.
(2) 1 April 2022 – 30 September 2022 – Deemed Residual Maturity of Basel III AT-1 Bonds is 20 Years – Deemed Residual Maturity of Basel III Tier 2 Bonds is Contractual Maturity.
(3) 1 October 2022 – 31 March 2023 – Deemed Residual Maturity of Basel III AT-1 Bonds is 30 Years – Deemed Residual Maturity of Basel III Tier 2 Bonds is Contractual Maturity.
(4) 1 April 2023 onwards – Deemed Residual Maturity of Basel III AT-1 Bonds is 100* Years – Deemed Residual Maturity of Basel III Tier 2 Bonds is Contractual Maturity. *100 years from the date of issuance of the bond.
Macaulay Duration for bonds issued under Basel III framework shall be calculated based on the deemed residual maturity as mentioned in the above table. Macaulay Duration is the weighted average term to maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price. Further, if the issuer does not exercise call option for any International Securities Identification Number (ISIN) then the valuation and calculation of Macaulay Duration shall be done considering maturity of 100 years from the date of issuance for AT-1 Bonds and Contractual Maturity for Tier 2 bonds, for all ISINs of the issuer.
CORPORATE REGULATORY UPDATES
In addition to the above, if the non-exercise of call option is due to the financial stress of the issuer or if there is any adverse news, the same shall be reflected in the valuation. Further, SEBI advised AMFI to issue detailed guidelines with respect to valuation of bonds issued under Basel III framework, which shall be implemented by 1 April 2021.
The Companies (Audit and Auditors) Amendment Rules, 2021
The MCA vide its notification dated March 24, 2021 released Companies (Audit and Auditors) Amendment Rules, 2021 to further amend the Companies (Audit and Auditors) Rules, 2014 which shall be effective from April 1, 2021.
The Companies (Accounts) Amendment Rules, 2021
The MCA vide its notification dated March 24, 2021 released the Companies (Accounts) Amendment Rules, 2021 (Rules) to further amend the Companies (Accounts) Rules, 2014, which shall come into force with effect from the April 1, 2021. The Rules provide for the following:
(i) Insertion of a new proviso in sub-rule (1) of rule 3 of the Companies (Accounts) Rules, 2014 which outlines that for the financial year commencing on or after April 1, 2021, every company shall use only such accounting software which has a feature of recording audit trail of each and every transaction, creating an edit log of each change made in books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled.
(ii) Insertion of new clause (xi) and (xii) in sub-rule 5 of rule 8 of the Companies (Accounts) Rules, 2014 which states that board’s report should contain details regarding application made or any proceeding pending under the Insolvency and Bankruptcy Code, 2016 during the year along with their status as at the end of the financial year and the details of the difference between the amount of the valuation done at the time of one-time settlement and the valuation done while taking a loan from the banks or financial institutions along with the reasons thereof.
MCA amends Schedule III of the Companies Act, 2013
TThe MCA vide its notification dated March 24, 2021 has made amendments in Schedule III of the Companies Act, 2013 which shall come into effect from April 1, 2021. The amendments inter-alia provide for manner of preparation of balance sheet and statement of profit and loss of a company in alignment with recent changes, disclosure of promoters shareholding, maturity of long term borrowings.
Disclosure for loans or advances in the nature of loans granted to promoters, directors, KMPs and related parties, disclosure of any proceedings initiated or pending against the company for holding any Benami property under the Benami Transactions (Prohibition) Act, 1988.
MCA notified commencement date for various provisions of the Companies (Amendment) Act, 2020 (CAA, 2020)
The MCA vide its notification dated March 24, 2021 made effective section 23 and section 45 of the CAA, 2020 providing for reduction in penalties under section 124(7) and 247(3) of Companies Act, 2013, for failure in complying with the provisions under section 124 and contravention of the provisions of section 247 or the rules made thereunder, respectively.
Insurance (Amendment) Act, 2021
On 25 March 2021, the Ministry of Law and Justice published in the Official Gazette and notified the Insurance (Amendment) Act, 2021. The primary amendment has been in relation to Section 2, clause (7A), sub-clause (b) of the Insurance Act, 1938 which related to the definition of “Indian insurance company”. In place of sub-clause (b) of clause (7A) under Section 2 of the Insurance Act, 1938, the following sub-clause shall be substituted, namely:—
"(b) in which the aggregate holdings of equity shares by foreign investors including portfolio investors, do not exceed seventy-four per cent of the paid-up equity capital of such Indian insurance company, and the foreign investment in which shall be subject to such conditions and manner, as may be prescribed;".
Transfer of business by SEBI registered intermediaries to other legal entity
On 26 March 2021, SEBI, in relation to transfer of business (SEBI regulated business activity) from one legal entity which is a SEBI registered Intermediary (transferor) to other legal entity (transferee) clarified that:
(a) The transferee shall obtain fresh registration from SEBI in the same capacity before the transfer of business if it is not registered with SEBI in the same capacity. SEBI shall issue new registration number to transferee different from transferor’s registration number in the following scenario:
CORPORATE REGULATORY UPDATES
“Business is transferred through regulatory process (pursuant to merger/amalgamation/corporate restructuring by way of order of primary regulator/Government/NCLT, etc) or non regulatory process (as per private agreement/MOU pursuant to commercial dealing/private arrangement) irrespective of transferor continues to exist or ceases to exist after the said transfer.”
(b) In case of change in control pursuant to both regulatory process and non-regulatory process, prior approval and fresh registration shall be obtained. While granting fresh registration to same legal entity pursuant to change in control, same registration number shall be retained.
(c) If the transferor ceases to exist, its certificate of registration shall be surrendered.
(d) In case of complete transfer of business by transferor, it shall surrender its certificate of registration.
(e) In case of partial transfer of business by transferor, it can continue to hold certificate of registration.
National Commission for Allied and Healthcare Professions Act, 2021
On 28 March 2021, the Ministry of Law and Justice published the National Commission for Allied and Healthcare Professions Act, 2021 in the Official Gazette. It shall come into force on such date as the Central Government may, by notification, appoint; and different dates may be appointed for different provisions of this Act. This legislation provides for regulation and maintenance of standards of education and services by allied and healthcare professionals, assessment of institutions, maintenance of a Central Register and State Register and creation of a system to improve access, research and development and adoption of latest scientific advancement and for matters connected therewith or incidental thereto.
For further information, please contact:
Vineet Aneja, Partner, Clasis Law
vineet.aneja@clasislaw.com
