15 August, 2018
INTRODUCTION
This newsletter covers the developments with respect to the corporate and labour laws during the month of July 2018. With respect to corporate laws, we have covered the following:
(a)The decision of the National Company Law Tribunal (Chennai Bench) allowing the merger of an Indian Limited Liability Partnership with an Indian company;
(b)The decision of the National Company Law Tribunal (Mumbai Bench) relating to the petition filed by Cyrus Investments Private Limited against Tata Sons Limited alleging mismanagement and oppression in the removal of Cyrus Mistry as chairman of Tata Sons Limited;
(c)The commencement notification dated 5 July 2018 issued by the Ministry of Corporate Affairs relating to the commencement of certain provisions under the Companies (Amendment) Act, 2017which amend provisions under the Companies Act, 2013; and
(d)A reporting requirement for directors in Indian companies to be filed prior to 31 August 2018 and an amendment to the Companies (Authorized to Register) Rules, 2014.
In relation to labour laws we have covered judgments passed by the High Court of Bombay withrespect to:
(a) forfeitureofgratuitypayableunderthePaymentofGratuityAct,1972;and
(b)alterations of conditions of service during pendency of proceedings under the Industrial DisputesAct, 1947.
Scheme of Amalgamation between M/s Real Image LLP (Transferor) with M/s. Qube Cinema Technologies Private Limited (Transferee) and their respective Partner, Shareholders and Creditors
COMPANY LAW
Scheme of Amalgamation between M/s Real Image LLP (Transferor) with M/s. Qube Cinema Technologies Private Limited (Transferee) and their respective Partner, Shareholders and Creditors
National Company Law Tribunal Chennai Bench, 11 June 2018
A petition was filed before the National Company Law Tribunal, Chennai Bench (NCLT Chennai) pertaining to a proposed scheme of amalgamation wherein the transferor is a Limited Liability Partnership (LLP) incorporated under the LLPAct 2008 while the Transferee is a private limited company incorporated under the Companies Act, 2013 (Companies Act), both engaged in the business of establishing laboratories for video and radio productions. It was observed that all statutory obligations were also complied with under the respective legislations. However, the question that stood before NCLT Chennai in this case was whether there was any legal bar in allowing or sanctioning the merger of an Indian LLP with an Indian Company.
NCLT Chennai on observing that both the LLP Act, 2008 and the Companies Act provide provisions for a merger or amalgamation of two or more LLP's and companies; and also, that Parliament's intent permits a foreign LLP to merge with an Indian company, held that it would be wrong to presume that the Companies Act prohibits the merger of an Indian LLP with an Indian company and accordingly sanctioned the proposed scheme of amalgamation.
Cyrus Investments Private Limited & Anr. (Petitioner) Vs. Tata Sons Limited & Ors. (Respondent),
Cyrus Investments Private Limited & Anr. (Petitioner) Vs. Tata Sons Limited & Ors. (Respondent),
National Company Law Tribunal, Mumbai Bench, 12 July 2018
In October 2016, Cyrus Mistry was removed from the position of Tata Sons without being given any prior notice. As his family-run companies held an aggregate of 18% in Tata Sons, they filed a petition of oppression and mismanagement with the National Company Law Tribunal, Mumbai Bench (NCLT Mumbai), alleging oppression of minority shareholders and mismanagement by the board of Tata Sons.
NCLT Mumbai dismissed Cyrus Mistry's petition against Tata Sons and held that all the allegations made by the former chairman against Ratan Tata, Tata Sons and its group companies are devoid of merit. Instead, during his tenure as chairman of Tata Sons, and as a director on the board of Tata Sons, Mistry tried to gain "unbridled control over the group".
NCLTMumbai held the following:
- Whenever any proceedings are initiated under section 241 or section 242 of the Companies Act, it must be manifest enough for any bystander to feel that harm has been done to the economic interest of the aggrieved members;
- After going through documents of each transaction that was allegedly entered into by the Tata Group for personal benefit, NCLT Mumbai held that all allegations are without any point or material evidence and it is a futile exercise made by the Petitioners by putting the Bench throughvoluminous documentation;
- Reference to Mr. Tata as well as trustee director Mr. Soonawala as “Shadow Directors” was dismissed. It was held that the concept of “shadow directors” cannot be equated to the advices and suggestions given by Mr.Tata and Mr.Soonawala. Moreover, the word “shadow” itself indicates as something done lurking behind and the term is used only whenfoulplayhas taken place because of somebody's advice;
- By virtue of Tata Trusts holding 2/3 stake in Tata Sons and Mr. Tata heading the Tata Trusts, as per the rule of democracy and the provisions of governance in the Companies Act, these companies had to be run at the wish of the majority;
- Simple seeking of information will never amount to conducting and controlling the affairs of the company, as Mr. Tata, who was the chairman of Tata Trusts, was bound to get information of the group companies prior to bringing the same before the group of Tata Sons;
- On the Petitioner challenging conversion of Tata Sons from a public company to a private company, NCLT Mumbai stated that a company can alter its articles of association (“AoA”) by way of special resolution to convert from public to private. The tribunal held that an action against section 14 of the Companies Act, can in no way be construed as an act of oppression and mismanagement;
- On the question of whether article on restriction on transfer of shares in the AoAwas used as a tool of oppression and mismanagement, NCLT Mumbai held that the Petitioners have come into the company knowing fully well the clause on restriction on transfer of sharesand cannot at this stage, raise an objection against it;
- NCLT Mumbai stated that section 166 of the Companies Act, states that directors of a company shall act in accordance with the articles of the company and that the director should work for the benefit of its members as a whole, in the interest of the company. The fact that the independent directors voted for the removal of Mr. Mistry from the chairmanship of the company cannot amount to directors not discharging their duty under section 166 of the Companies Act;
- If at all Mr. Mistry felt his removal as executive chairman is in violation of the AoA or provisions of the Companies Act, the only recourse available to him is to proceed against Tata Sons before a civil court to declare such action as invalid in the eye of law. His removal cannot be construed as a grievance of minority shareholder falling within the ambit of section 241 of the Companies Act, solely on the ground that he incidentally happened to be holding 18.40% shareholding in the company;
- The Petitioner argued that the company is not following the principles of corporate governance and there is no accountability to any of the issues happening in the company. Therefore, it is to be treated as conduct falling within the ambit of section 247 of the Companies Act. The tribunal held that Corporate Governance is primarily to have transparency of operations of a corporate, accountability towards its shareholders and fairness in dealings of the affairs of the company. The Petitioner contended that transparency is lacking in respect to the accounts of the company. The tribunal held that if at all any of these things are lacking, according to the concept of corporate governance, the management is liable to be held for it. Since Mr. Cyrus headed this company as an Executive Chairman up to 24 October 2016, the argument of corporate governance is applicable against him as he was liable for looking over the affairs of the company;
- The company was incorporated in 1917 as a private company and by virtue of Section 43 (1A) was deemed to be a public company as it had a turnover of more than INR 1 crore. However, the company retained the characteristics of a private company and the articles of association continued to have provisions (including transfer restrictions) applicable to a private company. The company had not made any application to the registrar of companies for deletion of its status as a public company and have now filed a section 14 petition under the Companies Act. NCLT Mumbai was required to decide whether the application for the conversion of the status of the company and continuation of the transfer restrictions amounted to conducting the affairs of the company in a manner prejudicial to the interests of the Petitioner. NCLT Mumbai held that there is no provision in the Companies Act, which is incompatible to the conversion of a deemed public company to a private company. Further, the company had become a deemed public company only by operation of law and it cannot be held that mere non-applicability of section 43A would make it a public company. The company cannot be forced to remain a public company only because it failed to convert its status under section 43A (4). The bench further observed that the articles of the company have had the transfer restrictions since incorporation and the Petitioners cannot now argue that if the company is converted to a private company, the Respondents will invoke the transfer restriction under Article 75 against the Petitioners. The Petitioners cannot expect to gain more than what would accrue to them under the articles of the company.
Companies (Appointment and Qualification of Directors) Fourth Amendment Rules, 2018
The Ministry of Corporate Affairs has come out with form DIR-3 KYC, to be filled by directors of all companies. Every director, who has been allotted a director identification number (“DIN”), on or before 31 March 2018, shall furnish the form on or before 31 August 2018. In case of failure to file the form before the due date, such approved DINs would be deactivated and shall be reactivated on payment of a specialized fee of INR 5000.
Companies (Authorized to Register) Second Amendment Rules, 2018
The Ministry of Corporate Affairs vide Companies (Authorized to Register) Second Amendment Rules, 2018 amended the Companies (Authorized to Register) Rules, 2014 to include the definitions of 'society', 'trust', 'Registrar of Firms' and 'Registrar of Trusts'.
Six days before registering itself as a company limited by shares under section 366 of the Companies Act, the amendment requires a LLP to provide various details such as particulars of members and partners, copy of certificate of registration of the entity, etc. in Form URC-1. The amendment makes similar provisions in case of an application by an LLP for registration as a company limited by guarantee / an unlimited company and for a society / a trust seeking registration as a company limited by guarantee under section 8 of the Companies Act.
The amendment also provides that an undertaking from all members or partners or trustees for registration as a company shall be submitted to the registering authority with which the company was earlier registered, for its dissolution. However, no such undertaking shall be required to be submitted in case the application for registration has been made by an LLP.
Companies (Amendment) Act, 2017
On 05 July 2018, the Ministry of Corporate Affairs issued a commencement notification of the Companies (Amendment) Act, 2017 which has amended certain provisions of the Companies Act. The amended provisions are as follows:
- Section 82 of the Companies Act has been amended to provide that a company or charge holder shall apply to the Registrar to make an intimation of satisfaction of charge within a period of 300 days (contrary to the 30 days' time period prescribed under the former section 82 of the Companies Act) from such satisfaction, by paying additional fees as prescribed. Consequential changes have been made in the Companies (Registration of Charges) Rules, 2014.
- Section 74 of the Companies Act has been amended to provide that a company shall deposit, on or before the thirtieth day of April each year, a sum of not be less than 20 percent (contrary to the 15 percent requirement prescribed under the former section 74 of the Companies Act) of the amount of its deposits maturing during the following financial year in the deposit repayment reserve account. Additionally, this amendment also provided that a company that had committed a default in the repayment of deposits or its interest could accept deposits from the public if the company made good the default and a period of five years had lapsed since the date of making good the default. Consequential changes have been made in the Companies (Acceptance of Deposits) Rules, 2014 providing that a certificate from the statutory auditor of the company shall be attached to the reporting made by the company with respect to the deposits certifying that the company made good the default and that a period of five years had lapsed since the date of making good such default.
- Section 366 of the Companies Act was amended to provide that a company having 2 or more members (contrary to the 7 or more members requirement prescribed under the former section 366) may at any time register as an unlimited company, a company limited by shares or a company limited by guarantee. Additionally, the section also provides that any company with less than 7 members shall register as a private company. Consequential changes have been made in the Companies (Authorized to Register) Second Amendment Rules, 2018.
A proviso has been inserted under section 374 of the Companies Act, which states that upon being registered as a company a limited liability partnership incorporated under the LLP Act, 2008 shall be deemed to have been dissolved under that statute without any further act or deed.
Shri Laxman Balu Deualkar (Petitioner) vs. Kolhapur District Central Co-op Bank Ltd. (Respondent),
LABOUR LAW
Shri Laxman Balu Deualkar (Petitioner) vs. Kolhapur District Central Co-op Bank Ltd. (Respondent),
Bombay High Court, 14 June 2018
Petitioner was the manager of the Respondent Bank. The Petitioner, on many accounts, fraudulently opened a bogus account and withdrew a total sum of INR 33,000 from such account. Show-cause notice was issued to the Petitioner. Services of the Petitioner were therefore terminated. Petitioner filed an application in the Labour Court for payment of gratuity under section 4 of the Payment of Gratuity Act, 1972 (Gratuity Act). Respondent issued a second show-cause notice to the Petitioner for forfeiture of amount of gratuity. Respondent had forfeited the gratuity payable to the Petitioner under section 4 (6) (b) (ii) of the Gratuity Act which states that gratuity of an employee can be forfeited if the services of the employee have been terminated for any act which constitutes an offence involving moral turpitude, provided it is committed by the employee in the course of his employment.
The High Court of Bombay:
rejecting the contention of the Petitioner that actual conviction needs to take place in order to be able to forfeit gratuity, held that language used in section 4 (6) (b) (ii) of the GratuityAct does not contemplate actual conviction of the employee;
upheld the order passed in UP State Sugar Cooperation Ltd. vs. Kamal Swaroop Tondon, and quoted the Supreme Court by stating that benefits are not paid to the employee gratuitously but for her dedication / devotion to her work which should be free of misconduct;
if termination is justifiable through a domestic inquiry, there is no reason why a further proof in a court would be necessary for forfeiting gratuity;
stated that conviction by a criminal court is not required for the purpose of forfeiting gratuity undersection4(6)(b)(ii)oftheGratuityAct; and
rejected the contention of the Petitioner that there was a situation of double jeopardy as two show-cause notices were issued to the Petitioner. It was held that both the show- cause notices were for different reasons – one for termination of services and the other one for affording the Petitioner an opportunity to prove why gratuity should not be forfeited. Gratuity was therefore denied to the Petitioner under section 4(6) of the Gratuity Act.
IDBI Limited (Petitioner) vs. Bhartiya Kamgar Sena (Respondent)
Bombay High Court, 15 June 2018
03 August 2018Draft for internal discussion purpose onlyPetitioner had outsourced cleaning of various offices to contractors who in turn engaged around 270 workers. It is the Petitioner's contention that the contractors and workers share an employer-employee relationship. The services of 3 workers were terminated in 2005 and an industrial dispute arose. In 2017, the Respondent workers filed an application demanding status quo to be maintained in terms of their services. The Industrial Tribunal at Mumbai granted this application. Aggrieved, the Petitioner filed this petition.
Respondent relied on section 33 of the Industrial Disputes Act, 1947 (ID Act) and contended that during the pendency of the proceedings, the employer could not alter the conditions of the service. The High Court observed that before any industrial adjudicator makes any order under section 33 of the ID Act for maintenance of service conditions, it must be found that at least prima facie there exists an employer-employee relationship for section 33 of the ID Act to be attracted. The Bombay High Court overruled the order of the Industrial Tribunal as without even considering whether the workmen could be prima facie considered to be employees of the Petitioner bank, the Industrial Tribunal could not have given relief of status quo in respect of their conditions of service. Holding that the impugned order suffered from jurisdictional error, the Bombay High Court held that the same could not be sustained. Accordingly, the petition was allowed, and the impugned order was set aside.
For further information, please contact:
Souvik Ganguly, Partner, Acuity Law
al@acuitylaw.co.in
