3 August, 2016
Messer Holdings: Supreme Court Judgement on Enforceability of Share Transfer Restrictions
In the case of Messer Holdings Ltd. v. Shyam Madanmohan Ruia1, an appeal had been preferred before the Supreme Court (‘SC’) from a decision of the division bench of the High Court of Mumbai (‘Mumbai HC’), which had held that share transfer restrictions as set out in an agreement between shareholders are not violative of the Companies Act, 1956 (‘CA 1956’). The issue of enforceability of share transfer restrictions has long been vexed. It was expected, therefore, that SC would provide some clarity on this issue.
However, in its judgment on April 19, 2016, SC effectively refused to answer the questions of law and further criticised the parties for unreasonably taking up the time of the court. While the Companies Act, 2013 (‘CA 13’) appears to clarify this issue under Section 58(2), there continue to remain some unanswered questions, including whether the Mumbai HC judgment would still be valid law.
Constitution of NCLT
On June 1, 2016, the Ministry of Corporate Affairs (‘MCA’) notified the constitution of the National Company Law Tribunal (‘NCLT’) and the National Company Law Appellate Tribunal (‘NCLAT’) with immediate effect. The rules in this regard are yet to be notified.
The NCLT will initially have 11 branches – two in New Delhi (one of which will be the principal bench) and one each in Mumbai, Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hy- derabad and Kolkata.
With the above notification, the erstwhile Company Law Board (‘CLB’) constituted under CA 1956 stands dissolved and all the cases pending before CLB, except for matters relating to winding up, compromise, amalgamation and capital reduction, stand immediately transferred to NCLT. The establishment of NCLT consolidates the corporate jurisdiction of the following authorities: (i) CLB; (ii) Board for Industrial and Financial Reconstruction (‘BIFR’); (iii) Ap- pellate Authority for Industrial and Financial Reconstruction; and (iv) jurisdiction and powers relating to winding up, restructuring and other such provisions, vested in High Courts (‘HCs’).
Matters relating to the investigation of a company’s accounts, freezing of assets, class ac- tion suits, oppression and mismanagement and conversion of a public company to a private company will now be governed by the NCLT, and appeal therefrom would be before the NCLAT instead of the HCs.
Amendment to the Companies (Corporate Social Responsibility Policy) Rules, 2014
MCA has, by way of a notification dated May 23, 2016 (‘May 23 Notification’), amended the Companies (Corporate Social Responsibility Policy) Rules, 2014 (‘CSR Rules’). The CSR Rules earlier permitted corporate social responsibility (‘CSR’) activities to be undertaken through a company established under Section 82 or a registered trust or a registered society (each a ‘Per- mitted Medium Entity’), which is established by the company either by itself or along with another company, and such entities were not required to show any minimum track record. In addition, the May 23 Notification now permits a company to undertake CSR activities through a Permitted Medium Entity established by the Central or State Government or by any entity established under an Act of Parliament or a State Legislature, without having to show any mini- mum track record. However, if CSR activities are carried out through any other permitted entity, then the existing requirements under CA 13 continue unaltered.
Amendment to the Companies (Acceptance of Deposit) Rules, 2014
On June 29, 2016, the MCA has notified the Companies (Acceptance of Deposits) Amend- ment Rules, 2016 (‘Amended Rules’), inter alia, expanding the scope of exemptions available for deposit of monies received by a company from being classified as a ‘deposit’ under the Com- panies (Acceptance of Deposit) Rules, 2014.
The Amended Rules permit companies to accept or renew deposits from members up to a maximum of 35% of the aggregate of their paid-up share capital, free reserves and securities premium account, as opposed to the earlier limit of 25%. Further, a private company can accept or renew deposits from its members up to 100% of the aggregate of its paid-up share capital, free reserves and securities premium account.
The Amended Rules have included a requirement for every eligible company to obtain a credit rating at least once every year for deposits accepted by it and disclose the deposits re- ceived from a director in its financial statements. The Amended Rules will come into force upon publication in the Official Gazette.
Companies (Removal of Difficulties) Third Order, 2016
Section 139 of CA 13, which deals with appointment of auditors, inter alia, provides that no listed company and companies falling within the prescribed class are allowed to appoint / re- appoint an individual / an audit firm, respectively, as an auditor for more than one term of five consecutive years in case of an individual and two terms of five consecutive years in any other case. As per the provisions of Section 139(1), companies are required to appoint / re-appoint au- ditors at annual general meetings only.
Pursuant to the Companies (Removal of Difficulties) Third Order, 2016, effective retrospec- tively from April 1, 2014, MCA has allowed compliance with the above requirements within a period ending no later than the date of the first annual general meeting held three years after the date of commencement of CA 13.
1 Messer Holdings Ltd. v. Shyam Madanmohan Ruia, SLP (Civil) Nos. 33429-33434 of 2010.
2 Company registered as a company with charitable objects, etc.
For further information, please contact:
Zia Mody, Partner, AZB & Partners