AMENDMENT OF ARTICLES OF SECTION 8 COMPANIES

Posted on July 7, 2023 | Leave a comment

Memorandum of Association and Articles of Association are constitutional documents for companies.  No company can amend these constitutional documents except the procedure in Section 13 and Section 14 of the Companies Act 2013.

Section 8 companies, popularly known as Not-for-profit companies, require additional compliance for amending their constitutional documents. Subsection 4(i) of Section 8 mandates prior approval for the alteration of constitutional documents of Section 8 companies.

“A company registered under this section shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government”.

The term “alter” or “alteration” includes making additions, omissions and substitutions in the documents.

The Central Government by its Notification S.O. 1353 (E) dated 21 May 2014, delegated its power and functions under Section 8(4)(i) to the Registrar of Companies.

For making such an application before the Registrar of Companies, the board shall pass a resolution proposing the alteration, consent to filing the application, and authorise one or more directors to apply with the Registrar of Companies.

The application shall be filed in Form GNL – 1.

For alteration of Articles of Association, after receiving approval from the Registrar of Companies, the board shall call a general meeting for approval of the alteration. Members may approve the alteration by way of special resolution only.

Every alteration of the articles and a copy of the order of the Government approving the alteration shall be filed with the Registrar, together with a printed copy of the altered articles, within fifteen days who shall register the same. After the approval by shareholders, the company shall file Form MGT-14 with the Registrar of Companies under Section 117 of the Act within fourteen days.

Every alteration made in a company’s articles shall be noted in every copy of the articles. Suppose a Section 8 company amends its articles without prior approval of the Registrar of Companies. In that case, the company shall be punishable with a fine which shall not be less than ten lakh rupees which may be up to one crore rupees. Every Director and every officer of the company who is in default shall be punishable with a fine which shall not be less than twenty-five thousand rupees but may extend to twenty-five lakh rupees.

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Reporting Procedure for Reporting Entities under PMLA

Posted on June 23, 2023 | Leave a comment

For reporting under the PMLA, every reporting entity shall appoint a “Designate Director.” According to Rule 2(1)(ba) of the PML (Maintenance of Record) Rules, 2005 (The Rules), a Designate Director is a person designated to ensure overall compliance under this law. Such Designate Director includes:

  • Managing Director or Whole – time director duly authorised by the Board of Directors in case of a company;
  • Managing Partner in case of the partnership;
  • The proprietor in case of proprietorship concern;
  • Managing Trustee in case of Trust;
  • The individual who controls or manages the affairs in the case of an unincorporated entity; or
  • Other person in case of other reporting entities.

As mentioned earlier, Official Valid Documents as per Rule 2(1)(d) are the passport, Driving Licence, Voter Identity Card, Job Card of NREGA, and Letter issued by the National Population Register. Some other documents are also listed where simplified measures are applied. For Address Verification, documents are utility bills not more than two months old, Property or Municipal tax receipts, Bank Account statements, pension or family pension payment orders or letters of allotment of accommodation issued by certain bodies, or leave or license agreements with these bodies.

One important person in the reporting process is the Regulator. For the person of these two notifications, Rule 2(1)(fa)(i) shall apply. Accordingly, a person or authority or government vested with the power to licence, authorise, register, regulate or supervise the activity of the reporting entity or the director as may be notified by the Government is the Regulator.

In our case, it may be the ICSI, ICAI, ICAI (Cost) or BCI may be the regulator for the respective profession or a person authorised by a notification.

Maintenance of the Record of Transactions

Now, there is another catch. Rule 3 is worded in such a manner as if it is designed for banks, financial institutions and market intermediaries. This required a record of transactions or series of transactions within a month of the value of more than ten lakh Rupees or its equivalent in foreign currency. Cross border transaction with a value of more than five lakh Rupees or its equivalent in foreign currency. Sale and purchase of immovable property valued at fifty lakh Rupees are also covered. All cash transactions with forged or counterfeit currency notes and other suspicious transactions are covered, irrespective of the value.

According to Rule 4, the record shall contain all necessary information specified by the Regulator to permit the reconstruction of individual transactions, including the following information:

  • Nature of the transaction;
  • Amount of the transaction and the currency in which it was denominated;
  • Date on which the transaction was concluded; and
  • The parties to the transaction.

The procedure and manner of maintaining the information are given in Rules 5. According to this Rule, the Regulator shall specify the procedure and manner of maintaining the information. Further, every reporting entity shall evolve an internal mechanism for maintaining the record.

Procedure and manner of furnishing information:

  1. Every reporting entity shall communicate to the Director (under PMLA) the name, designation, and address of the Designated Director and the Principal Officer.
  2. The Principal Officer shall report information under Rule 3 to the Director on the basis of the information available with the reporting entity and the copy of the information shall be retained by the principal officer for official record.

Furnishing information to the Director:

  1. The Principal Officer shall furnish the information every month to the director by the 15th day of the succeeding month.
  2. In case of suspicious transactions, the Principal Officer shall furnish the information to the director within seven working days.

Client Due Diligence

Every Reporting entity shall, at the time of commencement of an account-based relationship, shall –

In all other cases, the reporting entity shall verify identity while carrying out transactions equal to or exceeding fifty thousand rupees or any international money transfer operation.

Every Reporting entity shall, within three days, furnish an electronic copy of the KYC record to CKYC Record and shall maintain a physical copy with itself. In these Rules, Aadhar and PAN are the main KYC Documents, with an option of other officially valid documents and photographs.

Where the client is a company, the documents required are a Certificate of Incorporation, MoA, AoA, Board Resolution and power of attorney granted to managers, officers or employees with KYC Documents of these individuals. A similar provision exists for Partnership firms, trusts, and unincorporated entities.

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THE REPORTING FRAMEWORK UNDER THE PMLA

Posted on June 16, 2023 | Leave a comment

Under the reporting framework, a “reporting entity” has the following duties:

  1. Verification of Identity by Reporting Entity;
  2. maintain a record of all transactions;
  3. Furnish information to the director; and
  4. Due Diligence.

Verification of Identity by the Reporting Entity [Section 11]

Every Reporting Entity shall verify the identity of its clients and the beneficial owner by—

  • if the reporting entity is a banking company;

It may be noted that under the PML (Maintenance of Record) Rules 2005, a Passport, Driving Licence, Voter card, Job Card under NREGA, and Letter under the National Population Register are valid documents.

This may be noted that using modes of identification shall be a voluntary choice of every client or beneficial owner sought to be identified. No client or beneficial owner shall be denied services for not having an Aadhaar number.

Reporting entity to maintain records [Section 12]

Every reporting entity shall—

(a) maintain a record of all transactions, including information relating to transactions covered in such manner as to enable it to reconstruct individual transactions;

(b) furnish to the Director within such time as may be prescribed, information relating to such transactions, whether attempted or executed, the nature and value of which may be prescribed;

(c) maintain record of documents evidencing identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.

Every information maintained, furnished or verified shall be kept confidential.

Such record of transactions shall be maintained for five years from the date of transaction between the client and the reporting entity. The record evidencing identity shall be maintained for five years after the business relationship between a client and the reporting entity has ended.

Every reporting entity shall furnish to the Director such information as may be required by him. (Section 13)

Enhanced due diligence prior to specified transactions [Section 12AA]

Every reporting entity shall, prior to the commencement of each specified transaction:

  • verify the identity of the clients undertaking such specified transaction using Aadhar;
  • take additional steps to examine the ownership and financial position, including sources of funds of the client, and
  • take additional steps as may be prescribed to record the purpose behind conducting the specified transaction and the intended nature of the relationship between the transaction parties.

Where the client fails to fulfil these conditions, the reporting entity shall not allow the specified transaction to be carried out.

For the purpose of the section “specified transaction” means prescribed transactions involving —

(a) any withdrawal or deposit in cash, exceeding such amount;

(b) any transaction in foreign exchange, exceeding such amount;

(c) any transaction in any high value imports or remittances; and

(d) such other transaction or class of transactions, in the interest of revenue or where there is a high risk or money-laundering or terrorist financing.

Procedure and manner of furnishing information by reporting entities [Section 15]

The Central Government may, in consultation with the Reserve Bank of India, prescribe the procedure and the manner of maintaining and furnishing information by a reporting entity.

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Newly Notified Reporting Entities under the PMLA

Posted on June 9, 2023 | Leave a comment

During the last one month, there was a heated debate among accounting and legal professionals on two notifications issued by the Indian Ministry of Finance in May 2023. These two notifications first time bring these professionals within the reporting framework of the Prevention of Money – Laundering Act, 2002 (The Act/the PMLA).

With these two notifications, professionals like Company Secretaries, Chartered Accountants, Cost Accounts and Advocates come under the definition of “Reporting Entities.” Presently, banks, financial institutions and other intermediaries come into the definition of the Reporting Entities.

The Reporting Entities is defined under the Act in Section 2(1)(wa) as inserted with effect from 15 February 2013. It says the “reporting entity” means a banking company, financial institution, intermediary or a person carrying on a designated business or profession.

The terms banking company defined in Section 2(1)(e), financial institutions in Section 2(1)(l), and intermediary in Section 2(1)(n) of the PMLA. For our analysis, the meaning of “a person carrying on a designated business or profession” is important.

Section 2(1)(sa) defines a person carrying on a designated business or profession in the following exhaustive terms:

“person carrying on designated business or profession” means,—
(i) a person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casino; 

(ii) Inspector-General of Registration appointed under section 3 of the Registration Act, 1908 (16 of 1908) as may be notified by the Central Government;

(iii) real estate agent, as may be notified by the Central Government;

(iv) dealer in precious metals, precious stones and other high-value goods, as may be notified by the Central Government;

(v) person engaged in safekeeping and administration of cash and liquid securities on behalf of other persons, as may be notified by the Central Government; or

(vi) person carrying on such other activities as the Central Government may, by notification, so designate, from time to time.

For the present discussion, sub-clause (vi) hereinabove is important.

Both notifications, dated 3 May 2023 and 9 May 2023, used this sub-clause for bringing legal and accounting professionals into the reporting framework of the PMLA.

The Notification S.O. 2036(E) dated 3 June 2023 brings certain activities carried out by the “relevant persons” including legal and accounting professionals, into the reporting framework. The Notification S.O. 2135(E) dated 9 May 2023 brings certain other activities carried out by any person into the reporting framework but excludes these activities when carried out by legal and accounting professionals.

So, prima facie, certain activities are included irrespective of the person carrying out these activities. For this discussion, Company Secretaries, Chartered Accountants, Cost Accounts and Advocates are the “Relevant Persons” as also mentioned in these notifications.

The 9 May 2023 Notification clarified that any activity that is carried out by an advocate, a chartered accountant, cost accountant or company secretary in practice who is engaged in the formation of a company to the extent of filing a declaration under Section 7(1)(b) of Companies Act, 2013 (18 of 2013) shall not be regarded as an activity for the purposes of Section 2(1)(sa)(vi) of the PMLA. So, the signing this declaration on the company incorporation form does not require reporting, but all other activities associated with incorporation may.

All other activities listed under these two notifications shall make the “relevant person” a “reporting entity.” These activities are:

  • buying and selling of any immovable property;
  • managing of client money, securities or other assets;
  • management of bank, savings or securities accounts;
  • organisation of contributions for the creation, operation or management of companies;
  • creation, operation or management of companies, limited liability partnerships or trusts, buying and selling of business entities;
  • acting as a formation agent of companies and limited liability partnerships;
  • acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a firm or a similar position in relation to other companies and limited liability partnerships;
  • providing a registered office, business address or accommodation, correspondence or administrative address for a company or a limited liability partnership or a trust;
  • acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another type of trust; and
  • acting as (or arranging for another person to act as) a nominee shareholder for another person.

The impact of these two notifications on the “relevant persons”- an advocate, a chartered accountant, cost accountant or company secretary in practice- becomes “reporting entities” under the PMLA for these activities so notified. The Reporting entities shall comply with the Reporting framework given under Chapter IV of the PMAL. We will discuss the Reporting Framework under the PMLA in the subsequent discussion.

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Failure in Physical Verification – Removal of Name

Posted on August 31, 2022 | Leave a comment

In the last post here, we discussed the Companies (Incorporation) Third Amendment Rules, 2022, which inserted Rule 25B with effect from 20 August 2022 (issued on 18 August 2022).

Failure in Physical Verification

In terms of Rule 25B sub-rule (5), based on the physical verification report, the Registrar shall form an opinion on whether the office is capable of receiving and acknowledging all communications and notices. If the Registrar finds the office incapable of receiving and acknowledging all communications and notices, it will send a notice to the company and all the directors:

  • of his intention to remove the name of the company from the register of companies; and
  • requesting them to send their representations along with copies of relevant documents, if any, within thirty days from the date of the notice.

The Registrar may take action under Section 248 of the Act based on the physical verification report and the representations made by the company and its directors.

Notice for Removal of Name

The Ministry of Corporate Affairs, on 26 August 2022, published the Companies (Removal of Names of Companies from the Register of Companies) Second Amendment Rules, 2022 by Notification GSR 658(E) dated 24 August 2022.

This amendment effectively amends the notice for Notice by Registrar for removal of the name of a company from the register of companies in Form STK – 1.

Additional ground for removal of the name of a company from the register of the companies maintained by the Registrar of Companies. Till the amendment following three grounds were there:

  • The company has failed to commence its business within one year of its incorporation;
  • The company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455; and
  • The subscribers to the memorandum have not paid the subscription which they had undertaken to pay at the time of incorporation of a company, and a declaration to this effect has not been filed within one hundred and eighty days of its incorporation under sub-section (1) of section 10A.

Now, a fourth ground is added to the list: “the company is not carrying on any business or operations, as revealed after the physical verification carried out under sub-section (9) of section 12”.

Public Notice of proposed removal of the name of the company from the register of companies under Section 248(1) and 248(2), namely Form STK – 5A and Form STK – 5 are also amended to similar effect.

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Physical verification of the Registered Office of a Company

Posted on August 27, 2022 | 1 comment

“Inspector Raj”, in its whatsoever name and whichever form, is a necessary evil in India.

The Companies (Amendment) Ordinance, 2018, with its 2019 version and final avatar, the Companies (Amendment) Act, 2019, inserted Section 12(9) with effect from 2 November 2018, sown the seed of Physical verification of the Registered Office of a Company.

Despite the Legislative Powers, the Ministry of Corporate Affairs thankfully restrained itself for a long time and tried a self-certification mode. Ministry of Corporate Affairs (MCA) initially notified Rule 25A by way of the Company (Incorporation) Amendment Rules 2019 with effect from 25 February 2019. Surprisingly, this was a one-time exercise in Form INC-22A (Active). The Form Active captured two-dimensional data of the registered office with documents and a photo of one of the directors showing Latitude and Longitude. However, the form might not satisfy the intended purpose of the government. No day-to-day technology presently captures the third dimension of the office – the floor of the building or vertical location of the office from sea level.

While writing on Rule 25A and Form INC-22A (Active) here, I hoped and still wish Form INC-22A (Active) to be an annual exercise as it solves other issues like a failure on the part of management to update the Registered Office Address on Record.

“Fun Fact: Distance between two latitudes is about 111 KM. Distance between two Longitude at the equator is 111 KM while at Poles it is Zero.”

Now, the Ministry of Corporate Affairs, with effect from 20 August 2022 (issued on 18 August 2022) notified the Companies (Incorporation) Third Amendment Rules, 2022 and inserted Rule 25B. (Notification at the official site here)

Photo by Ahmet Polat on Pexels.com

For physical verification, under Section 12(9), the Registrar of Companies should have reasonable cause to believe that the company is not carrying on any business or operations; he may cause a physical verification of the registered office of the company. The belief that the company is not carrying on any business or operation from the Registered office does not form a cause for physical verification. This belief should base upon the information or documents made available on MCA 21. His opinion shall not be based on any complaint, media report or other information.

The newly inserted Rule has a vital reference to Section 248, “Power of Registrar to Remove Name of Company from Register of Companies”. We expect notification of a supplementary rule in the Companies (Removal of Name of Companies from the Register of Companies) Rules, 2016. [Note: it is notified and published on 26 August 2022].

Process of Verification

  1. The Registrar shall form a reasoned opinion that the company is not carrying on any business or operations;
  2. The Registrar shall issue an authorisation letter for physical verification;
  3. The Registrar shall visit at the address of the registered office of the company;
  4. The Registrar shall ensure the presence of two witnesses of the locality in which the registered office is situated;
  5. If required, the Registrar may also seek the assistance of the local police for the verification;
  6. The Registrar shall carry the documents filed in support of the address of the registered office of the company;
  7. The Registrar shall collect supporting documents of the address duly authenticated from the occupant of the property (self-attested);
  8. The Registrar shall check the authenticity of the documents filed on MCA21 by cross verification with documents so collected;
  9. The Registrar shall take a photograph of the Registered office while causing the verification (it is not clear if he will collect geo-coordinates also);
  10. The Registrar shall note the date and time of the visit and collect self-attested identity proof of the person available at the property; and
  11. The Registrar shall prepare a physical verification report in the given format.

The consequence of the Physical Verification Report

On the basis of the report of the physical verification, the Registrar shall form an opinion on whether the office is capable of receiving and acknowledging all communications and notices. If the Registrar finds the office incapable of receiving and acknowledging all communications and notices, it will send a notice to the company and all the directors:

  • of his intention to remove the name of the company from the register of companies; and
  • requesting them to send their representations along with copies of relevant documents, if any, within thirty days from the date of the notice.

The Registrar may take action under Section 248 of the Act based on the physical verification report and the representations made by the company and its directors.

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DISCUSSION (PAPER) ON THE LIQUIDATION PROCESS

Posted on June 25, 2022 | Leave a comment

The Discussion Paper on Streamlining the Liquidation Process, dated 14 June 2022, issued by the Insolvency and Bankruptcy Board of India, is a well-intended step with some corrective measures.

Stakeholders’ Consultation Committee

Section 53 of the Insolvency and Bankruptcy Code, 2016, empowers the Liquidator to consult any stakeholder entitled to a distribution of proceeds. The Liquidation Regulations have already converted the Liquidator’s power to consult any stakeholders into a duty. Increasingly such consultation is binding on the Liquidator unless a contrary decision is well explained and reported. I welcome a consultation committee meeting to increase transparency and democratic decision-making.

The present discussion paper intends to facilitate the consultation at an early stage and remove discrepancies.

Proposal 1: In this regard, it is proposed that the CoC as constituted during CIRP on the basis of admitted claims shall function as SCC during liquidation process with the voting share of members of SCC being same as that in the CoC. The stakeholders who are part of CoC without voting rights will be part of SCC without voting rights. The Liquidator shall convene first meeting of SCC within seven days of liquidation commencement date.

Draft Regulation: “(1A) The committee of creditors under section 21 shall function as the consultation committee with same voting rights till its constitution under sub-regulation (1).

Provided the directors, partners and one representative of operational creditors, as referred in sub-section (3) of section 24, may attend the meetings, but shall not have any right to vote in such meetings”

“(2) The voting share of members of the consultation committee under sub-regulation (1) shall be proportionate to the share of payments they will receive in terms of Section 53 against their admitted claim during liquidation if the liquidation value is taken as the proceeds for sale.

Provided a secured creditor who has not relinquished their security interests under section 52 shall not be part of the consultation committee under regulation (1) or (1A), as the case may be.

Provided further, the representatives of stakeholders not having voting share in the consultation committee may attend the meetings, but shall not have any right to vote in such meetings”

I have one suggestion: the composition of this “Interim Stakeholders’ Consultation Committee” should be constituted by adjusting the composition per entitlement to a distribution of proceeds under Section 53. In addition, the voting powers of the Interim Stakeholders’ Consultation Committee and regular Stakeholders’ Consultation Committee should be aligned.

I suggest amendments in draft sub-regulations (1A) and (2) as under:

“(1A) The committee of creditors under section 21 shall function as the consultation committee with same voting rights till its constitution under sub-regulation (1).

“(2) The voting share of members of the consultation committee under sub-regulation (1) or (1A) shall be proportionate to the share of payments they will receive in terms of Section 53 against their admitted claim during liquidation if the liquidation value is taken as the proceeds for sale.

Proposal 2: The Liquidator shall record the reason of his decision contrary to the advice of the Stakeholders’ Consultation Committee in writing and forward the same to the Adjudicating Authority and the Board within five days.

This will increase the cost in the form of one more application before the Adjudicating Authority takes such a report on record. Further, it will reduce decisions based on the Liquidator’s commercial wisdom.

Proposal 3: A secured creditors shall intimate its decision regarding realisation or relinquishment of its security interest under section 52 of the Code, in the first meeting of the SCC (practically Interim SCC).

Draft Regulation: “(1) A secured creditor shall inform the Liquidator of its decision to relinquish its security interest to the liquidation estate or realise its security interest within seven days from the liquidation commencement date or in the first meeting of the consultation committee, whichever is later:

Provided that, where a secured creditor does not intimate its decision within seven days from the liquidation commencement date or in the first meeting of the consultation committee, whichever is later, the assets covered under the security interest shall be presumed to be part of the liquidation estate.”

This is a welcome step assuming the secured creditors have filed a claim in the CIRP and part of the Interim SCC). Such secured creditors have enough time to decide after the liquidation resolution and before the Liquidation order. I suggest the status quo in case of secured creditors who, for any reason, have not filed a claim in CIRP.

A second proviso may be added:

Provided also that a secured creditor, who have not filed its claim in the CIRP, shall inform the Liquidator of its decision to relinquish its security interest to the liquidation estate or realise its security interest, as the case may be, in Form C or Form D of Schedule II.”

Proposal 4: The Stakeholders’ Consultation Committee shall now empower to propose replacement of the Liquidator.

This will not be an appropriate step; First it is not in line with the Code; Second the SCC is only a consultative body and thirdly the SCC may replace a hard-working liquidator facilitating the incumbent Liquidator to have the fruit of the Liquidation.

The Code may be amended for the replacement of the Liquidator by the Adjudicating Authority when the Stakeholders’ Consultation Committee applies for such replacement with specific and justified reasons. The Liquidator should have a right to be heard before the SCC and the AA.

Proposal 5: SCC will fix/review the fee of the Liquidator in its first meeting.

I do not see a good reason for this proposal as present regulations adequately cover the fee aspect. In addition, this proposal will open endless negotiations between Liquidator and the stakeholders.

Compromise or Arrangement

Proposal 6: reduction of time period for the Compromise and Arrangement from 90 days to 30 days.

The discussion paper mentions that as of 31 May 2022, only eight liquidation processes have been closed by way of compromise or arrangement under section 230 of the Act, which took an average of 466 days for completion, and the Liquidator has realised only 87% of the liquidation value in these eight cases.

These eight cases are enough to say the reduction of this period may not change the situation as compromise and arrangement is otherwise a time-consuming process. Therefore, such a decrease in time shall promote the auction of the company as a going concern.

Valuation

Proposal 7: Where the Liquidator is of the opinion that fresh valuation is required, he shall seek advice of SCC for the same and such valuation may be considered for subsequent auctions.

This amendment is a welcome step.

Submission of Progress Reports and SCC Minutes

Proposal 8: The Liquidation Regulations may be amended to provide that the Liquidator shall submit the copy of progress reports, along with the minutes of the SCC, with the Board as and when the same is filed with AA. Further, the format of the Progress report, along with its contents, may be provided in detail by way of a Circular.

This proposal is just a procedural addition and may become an example of over governance.

Events-based timelines of Auction

Proposal 9 and 10: Frist auction notice within 45 days of the Liquidation Commencement Date, Auction on 35th day from the public notice and successive auction notice within 15 days of the failed auction.

These proposals may bring procedural uniformity and predictability to the process. However, the gap between successive auction notice and the auction may be reduced to 15-20 days from the proposed 35 days each time. Most of the participants in successive auctions usually working on their proposal/bids from the first or earlier auctions.

Same time, IBBI may also give more power to SCC to consider proposals for private sales provided such private sales should not hamper transparency in the process. Many potential buyers prefer private sale over auction purchases.

Designating Auction Portal

Proposal 11: The Liquidation Regulations may provide that the auction platforms of PDAs as empanelled from time to time may be exclusively designated for offering auction services.

I restrain myself from making any comment on this proposal.

Preparation of Asset Memorandum

Proposal 12: The Liquidator shall use the information provided in IM and valuation conducted during CIRP for preparation of Asset Memorandum and submit the same to AA within 30 days. Further, the Liquidator shall share the asset memorandum with the SCC after receiving confidentiality undertaking from the members of the SCC.

This proposal is good for transparency and proper advisory by the Stakeholders’ Consultation Committee.

Interim Finance availed during CIRP

Proposal 13: The liquidation cost shall include the interest on interim finance till the same is repaid.

This proposal is welcome.

Treatment of Avoidance Applications

Proposal 14: Before filing of an application of dissolution or closure of the process by Liquidator, SCC shall decide the manner in which proceedings in respect of avoidance transactions or fraudulent or wrongful trading, if any, will be pursued after closure of liquidation proceedings and the manner in which the proceeds, if any, from such proceedings shall be distributed. This decision shall be part of the final report filed before the AA.

I am not sure about the effectiveness of the proposal, but hopeful.

Claims

Proposal 15: The Liquidator shall consider the claims collated during the CIRP in respect of claimant who have not submitted their claim during liquidation.

This proposal is a welcome step, but it is always advisable for claimants to file fresh claims.

Disclaimer: The writer is an Insolvency Professional, and his interest may impact the outcome of this discussion.

I am publishing this on the blog for discussion purposes. I will submit my final thought with IBBI one or two days before the last date.  

Aishwarya Mohan Gahrana, Company Secretary and Insolvency Professional

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Entities as Insolvency Professional!!

Posted on June 20, 2022 | Leave a comment

Can a hospital be registered as a doctor? Can a court be called a judge?

We respect collective and coordinated efforts. However, no Human Collective can replace the prime and primary element – Human.

The Insolvency Resolution Process is a collective effort under the leadership of the Insolvency Professional. He led his team from a tight rope wearing a crown of thorns.

There is no doubt. Insolvency Professionals need services and help. After getting a declaration of independence, he hires independent professionals like advocates, chartered accountants, company secretaries, and valuers. These professionals, as per Regulations, should not be related to significant stakeholders, including the Resolution Professional. While managing a stressed company as going concern, he hires CFO, CEO and other professionals and try not to continue with the old team which led that company into stress.

The Insolvency Professional also hire his own team like any other professional like doctors, Advocate or company Secretaries hire their qualified, semi-qualified, skilled and unskilled staff. Similar to any other professional, all payments to his team and staff members are made from the professional fee of Insolvency Professional.

My emphasis is the Insolvency Professional need a good team in which he has long-term faith and confidence. No doubt, the Insolvency Professional is as independent as his team is. But every Insolvency Professional, at least in his initial years, do not have the resources to build his team.

Presently, an Insolvency Professional (IP) may have services of the Insolvency Professional Entities (IPE) in which he holds a leading position. Still, these services should be on an arm’s length basis. This is on an Insolvency Professional whether he wants to join an Insolvency Professional Entities or not. Despite the growth, the concept of Insolvency Professional Entities is not much popular among Insolvency Professionals. Out of 140 Insolvency Professional Entities total of 44 have shut their shop. Their closure does not impact the insolvency resolution but the finance of the Regulators – 3 IPAs, the front-line regulator, and the IBBI, the principal regulator.

Unfortunately, most of the failed Insolvency Professional Entities failed as the team usually reports to the protagonist promotor of the Insolvency Professional Entities and fails to get the confidence of the other Insolvency Professionals in the entity.

With this background discussion, now I come to the Discussion Paper on enabling entities to become insolvency professionals dated 14 June 2022, issued by the Insolvency and Bankruptcy Board of India.

The Statement of Problem in this discussion paper has two noteworthy observations:

  1. Ensuring continued business operations of a stressed company is an onerous job, and it may not be possible for a single professional to take on the multi-task activities of the board of directors, along with other important insolvency resolution process functions, that too in a time-bound manner;
  2. To fulfil their duties under section 25 of the Code, the resolution professional tends to outsource his functions to other persons such as Insolvency Professional Entities, Process advisors etc. The supporting entities are often not under any strong regulatory framework. Accordingly, it is not possible to fix accountability on unregulated entities.

There is no possibility of disputing the first observation. Ensuring continued business operations of a stressed company and conducting insolvency resolution of a stressed company without any business operation is not possible for a single professional. They need a team.

Regarding second observation hereinabove mentioned, I have the following questions:

  1. Will the whole board of directors of the Insolvency Professional Entity replace the board of the stressed company?
  2. Will every person employed by the Insolvency Professional Entity comes under a strong regulatory framework?

My general reply is negative. However, if it is affirmative, it is affirmative also for the team of all persons hired or employed by any individual Insolvency Professional.

Permitting a company, limited liability partnership or registered partnership firm (hereinafter called Entities) as an Insolvency Professional does not facilitate the Insolvency Process beyond the existing possibilities. We assume economy of scale and joint efforts in the case of Entities as Insolvency professionals. Any legal entity is as good as the individuals behind it. These entities will manage by their promoter or Principal officers.

So, why not an Individual Insolvency Professional can have a proper setup? There should be no reason except for a lack of initial capital and regulatory support. Therefore, whatever facility regulators are willing to provide to these Entities should also be provided to Individual Insolvency Professionals. Further, Regulators should also facilitate the One Person Companies (OPC) of Insolvency Professionals.

I am publishing this on the blog for discussion purposes. I will submit my final thought with IBBI one or two days before the last date.  

Disclaimer: The writer is an Insolvency Professional, and his interest may impact the outcome of this discussion.

Aishwarya Mohan Gahrana, Company Secretary and Insolvency Professional

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Proposed Fee and Expenses Mechanism for Resolution Professionals

Posted on June 18, 2022 | Leave a comment

The Discussion Paper on Remuneration of an Insolvency Professional, dated 9 June 2022, issued by the Insolvency and Bankruptcy Board of India, is a welcome step.

Remuneration and expenditure consume a significant chunk of time during meetings of the Committee of Creditors. After that, Resolution Professionals need to follow up for payment and reimbursement. Every Resolution Professional spent a good portion out of his pocket without a chance for interest payment. Higher the number of members in the Committee of Creditors, there are lesser chances of timely payment or reimbursement. The Discussion Paper rightly mentions litigations for professional fee payment and recovery of expense amount.

Since the first direction issued by the Hon’ble Adjudicating Authority in March 2018 for framing necessary regulations or guidelines regarding fixation of fees and resolution cost, the IBBI waited long for market maturity to settle this issue. Sadly, we lost the well-intentioned time due to the immaturity of the market.

The most unfortunate situation for Resolution Professional is a frequent request for postponement of the resolution for Professional fee at every meeting until the Resolution Professional exhausts most of his available (ideally less than 2500) working hours in the resolution process and loses negotiation power.

Now, we will discuss the proposed amendment.

[Proposed Regulation 34A(1)]: “The applicant, the Adjudicating Authority and the committee shall fix the fee to be paid to interim resolution professional or the resolution professional, as the case may be, under regulation 33 and 34, respectively, in accordance with the Schedule II.”

The reference of the Committee of Creditors is not required here. The Committee shall ratify and/or fix the remuneration under Proposed Regulation 34A(2).

I propose:

“The the applicant or the Adjudicating Authority shall fix or where the applicant or the Adjudicating Authority did not fix a fee, the minimum fee to be paid to the interim resolution professional or the resolution professional, as the case may be, under regulation 33, shall be in accordance with the Schedule II.”

[Proposed Regulation 34A(2)]: “The committee may ratify an amount higher than the amount fixed under clause (1) of Schedule II, as may be necessary.”

The Committee has two options. It may either ratify the fee fixed by the applicant or the Adjudicating Authority or itself fix the professional fee. The term “ratify” in the proposed draft does not convey the meaning “to fix a fee”. Here, the Committee should have the power to ratify or fix a fee.

I propose:

“The committee may ratify the fee fixed under sub-regulation (1) or may fix a fee to be paid to the interim resolution professional or the resolution professional, as the case may be, under regulation 34, , in accordance with the Schedule II.”

[Proposed Regulation 34A(3)]: An insolvency professional shall submit a statement towards estimate of his fee and fee of the resolution professional in the following manner:
(a) to the applicant immediately on his appointment as an interim resolution professional;
(b) to the Committee at its first meeting and thereafter till the appointment of the resolution professional; or
(c) to the Committee in the first meeting conducted immediately after his appointment as resolution professional.”

I understand this regulation firstly with plain reading and secondly reading with the discussion paper.

How can an Interim Resolution Professional submit a statement towards an estimate of the fee of yet to be appointed the Resolution Professional? At most, he can submit a statement of assuming his own appointment. The reasoning for this proposal is not clear. Usually, Insolvency Professionals give a well-drafted proposal estimating fee and other major expenses with their consent to act IRP or RP. There is no point in having it a recurring exercise.

If I understand it correctly, I propose:

“An insolvency professional shall submit a statement towards estimate of his fee in the following manner:
(a) to the applicant immediately on his appointment as an interim resolution professional;
(b) to the Committee at its first meeting after his appointment as an interim resolution professional; or
(c) to the Committee in the first meeting conducted immediately after his appointment as resolution professional.”

If I refer to the discussion paper again on this point, it talks about an estimate of fees and expenditure on the hiring of other professional and support providers. In such a case, I propose:

“An insolvency professional shall submit a statement towards an estimate of expenditure including his fee in the following manner:
(a) to the applicant immediately on his appointment as an interim resolution professional;
(b) to the Committee at its first meeting after his appointment as an interim resolution professional;
(c) to the Committee in the first meeting conducted immediately after his appointment as resolution professional; and
(d) to the Committee in the next meeting, where there is an upward change in the estimate of expenditure.”

Schedule II

The Discussion Paper proposed a three-tier structure:

  1. The fee of IP in CIRP –Fixed Fee (Minimum) Per Month;
  2. Performance Linked fee structure for timely completion of CIRP; and
  3. Performance-linked fee structure relating to Value Maximization

I have no view on the Minimum fee structure and welcome it as a good start.

The discussion paper suggests performance-linked fee structure for timely completion is a mandatory feature. However, Clause (2) of the Draft Schedule II makes this incentive optional by using the term “may”. I suggest the replacement term “may” with “shall”. This incentive is quite hard to earn but a good morale booster.

The discussion paper suggests an optional performance-linked fee structure relating to Value Maximization. I fear Insolvency Professionals will look for big value corporate debtors with good realization chances. However, best efforts should be incentivized and welcomed. I understand the Committee of Creditors may be the best judge on this.

The amount payable under clauses (2) and (3) is proposed to be capped at ₹ 5 Crore. I could not visualize much difference with or without this cap except for a few high-stake cases.  

Proposed Regulation 34B(1): An insolvency professional shall create an escrow account in the name of corporate debtor, in respect of his fee, and fee for the resolution professional, immediately on his appointment as an interim resolution professional.

I welcome the intention. However, there is a practical difficulty in complying with the Draft Regulation. If the Insolvency Professional opens an escrow account in the name of the Corporate Debtor, Banks asks PAN, Address Proof and Incorporation Documents of the Corporate Debtor. Most of the time, one or more of these documents are not readily available due to non-cooperation. IBBI and RBI should discuss waiver of these documentary requirements, and the order of initiation of corporate insolvency may suffice to open this account. Alternatively, the escrow account may be in the name of Interim Resolution Professional. On the appointment of any other person as Resolution Professional, the balance amount should be transferred to the escrow account of the Resolution Professional so appointed.

Secondly, the escrow account is not only for a fee but for expenses also.  

I am not suggesting any change in the draft regarding the name of the account due to a lack of my knowledge and will leave it for future developments. Except for this, I propose the following changes:

An insolvency professional shall create an escrow account, in respect of the estimate of expenditure, including Interim Resolution Professional and Resolution Professional, immediately on his appointment as an interim resolution professional.

Proposed Regulation 34B(2): The applicant or the Committee, as the case may be, shall deposit in the escrow account, or in alternate arrange for interim finance for depositing in the escrow account, the amount fixed under regulation 34A within 72 hours of submission of the statement by the insolvency professional.

I have nothing to discuss or suggest on this point.

Proposed Regulation 34B(3): The interim resolution professional or the resolution professional shall be eligible to withdraw the amount deposited in the escrow account towards his fee and shall provide the details of withdrawals to the Committee in the statement prepared under regulation 34A.

I again submit the escrow account is not only for a fee but for expenses also.

I propose:

The interim resolution professional or the resolution professional shall be eligible to withdraw the amount deposited in the escrow account towards his monthly fee approved by the Committee of Creditors and payment of other expenditures may be made as and when ratified by the Committee of Creditors.

Proposed Regulation 34B(4): The remaining amount, if any, in the escrow account shall be released upon approval of resolution plan under section 31 or passing of an order for liquidation of corporate debtor under section 33.”

I have nothing to discuss or suggest on this point.

I am publishing this on the blog for discussion purposes. I will submit my final thought with IBBI one or two days before the last date.  

Disclaimer: The writer is an Insolvency Professional, and his interest may impact the outcome of this discussion.

Aishwarya Mohan Gahrana, Company Secretary and Insolvency Professional

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E-Auction Notice: VGA Developers Pvt Ltd in Liquidation

Posted on June 6, 2022 | Leave a comment

E-AUCTION SALE NOTICE
[Regulation 32 and 33 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016]
Sale of Assets and Properties owned by and forming part of Liquidation Estate of VGA DEVELOPERS PRIVATE LIMITED IN LIQUIDATION presently in the possession of the Liquidator, appointed by the Hon’ble National Company Law Tribunal, New Delhi vide order dated 1 September 2021. The sale of properties will be done by the undersigned through the e-auction platform:
<<https://ncltauction.auctiontiger.net>>

VGA DEVELOPERS PRIVATE LIMITED IN LIQUIDATION
CIN: U45400DL2010PTC197841
Last Date to apply and submission of Documents: 17 June 2022, 5.00 PM
Date and Time of E-Auction: 20 June 2022, 10.30 AM to 4.30 PM
(With unlimited extension of 5 minutes each)

Assets detailsReserve PriceEMDIncremental Value
Residential plot under sub-lease with an area of 20,071 Square Meters (approximately 4.95 Acres) along with a partially built Building GH-P4, Sector 25, Jaypee Greens Sports City, SDZ, Yamuna Expressway Industrial Development Authority Area, District Gautam Budh Nagar, Uttar Pradesh (as it is)₹ 34,63,00,000
(Thirty-Four Crore Sixty-Three Lakh Only)  		₹ 3,46,30,000
(Three Crore Forty-Six Lakh Thirty Thousand Rupees Only)		₹10,00,000
(Ten Lakh Rupees Only)

Terms and Condition of the E-auction are as under:

  1. https://ncltauction.auctiontiger.net.
    Contact Person on behalf of Auction Service Provider:

Mr. Praveenkumar Thevar at +91-9722778828/6351896834/ 079 6813 6855/854 E-mail: praveen.thevar@auctiontiger.net, nclt@auctiontiger.net  /support@auctiontiger.net

Contact Person on behalf of liquidator:

Mr Dharmveer Kumar at +91 95556 66268
Email: cirp.vgadevelopers@gmail.com

 
Date: 6 June 2022
Place: New Delhi		  Mr. Aishwarya Mohan Gahrana
Liquidator IBBI/IPA-002/IP-N00135/2017-18/10351
Auction Notice of Land and Building of VGA Developers Private Limited under Liquidation, Auction Date 20 June 2022
Business Standard, Delhi, English 6 June 2022 Page 17
Auction Notice of Land and Building of VGA Developers Private Limited under Liquidation, Auction Date 20 June 2022
बिज़नस स्टैंडर्ड हिन्दी, दिल्ली पृष्ठ 10

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CBIC IBC Instruction needs to supplement

Posted on May 29, 2022 | Leave a comment

The Instruction No. 1083/04/2022-CX9 dated 23.05.2022 is a welcome step to the extent it came at least though it came late. This instruction and annexed Standard Operating Procedures (SOP) for the NCLT cases regarding filing claims by authorities under CBIC required to be filed under the Insolvency and Bankruptcy Code (IBC) took almost six years.

The Insolvency and Bankruptcy jurisprudence and environment are still in a nascent stage. This instruction is a minor step to remove one of the main hurdles. Insolvency Professionals feel duty-bound to inform the Government Authorities about the Tribunal order for insolvency resolution and their appointment, moratorium, invitation of claims and public announcement. The information of insolvency was usually taken as lightly as a waste paper by authorities armed with the power to attach any property and assets of assesses and accused.

These Government Authorities faced several legal and ego issues:

  1. How could Government Authorities, a legal and sovereign superpower, fall in the category of operational creditors? NOIDA is still facing the same dilemma and running post to pillar to satisfy its legal soul and ego. After losing on judicial fronts, they are pleading to Parliament for an amendment to the Code.
  2. How could a private person, the Insolvency Professional, ask a government authority to file the claim before himself? How could such a person claim the status of a court officer or legal jurisdiction over government authority?
  3. How could a government authority with the power to issue notice, summon someone, and assess tax liabilities suddenly run to the office of a private person, the Insolvency Professional, for approval of their claims? It hurts when an Insolvency Professional declines to receive claim paper (post ninety days), accepts claims, seeks bulky clarification or counters the claim based on his own wisdom.

This particular instruction dated 23.05.2022 is not without discrepancies and practical difficulties. The instruction correctly claims:

“3. One of the reasons for such delay in filing the claims is that concerned zonal offices have not received information regarding initiation of the process in a timely manner. Accordingly, it has not been proposed that IBBI would share the details of the public announcement on a regular basis to an identified office/office or a centralised system and hence it has been requested that such office/officer/system I CBIC need to be identified and intimated to the IBBI for implementing the system for sharing of information.”

This assertion indicates a pathetic situation.

Government Authorities and other persons may receive first-hand information on the insolvency or liquidation or bankruptcy orders directly from National Company Law Tribunal. Theses Instructions rely upon communication from the IBBI. The IBBI itself got this information with a 3-5 days delay.

There is a little time gap in IBBI Communication, which is required to be plugged.

In a practical scenario, within three days of appointment as an Interim Resolution Professional or Liquidator, the Insolvency Professionals issue public notices in newspapers and then send a copy to upload on the IBBI website. In addition, all insolvency professionals send information about the commencement of the insolvency resolution process by email and, if possible, by speed post to all potential claimants, including government authorities, tax authorities, suppliers, and bankers, subject to information received from the corporate debtor or gathered from secondary sources.

There may be a centralised nodal email address of authorities under CBIC. Insolvency Professionals could send an email about the commencement of the insolvency resolution process. Such email may have a standard subject line like <CIRP/Liquidation> <Company Name> <Company CIN> <Company PAN> <State> <Last date of filing Claim> for easy understanding and communication.

These Instructions issued by CBIC do not facilitate Insolvency professionals to communicate with powerful tax authorities directly. If CBIC does not enable Insolvency Professionals, it does not help CBIC authorities to file claims timely.

IBBI has a proper mechanism of email communication of daily development on the public announcement, invitation of claims, invitation of resolution plans and auction notices. Anyone can subscribe to the same. Point No. iv of SOPs annexed with this instruction must have mentioned it more clearly.

However, there is a little time gap in such IBBI Communication, which is required to be plugged. The copy of the public notice does not upload automatically on the IBBI website without their internal approval. Therefore, public notices may display on the IBBI website and communicate with a delay. IBBI may permit such public notices to be uploaded automatically with a copy of the NCLT order as soon as the concerned IRP/Liquidator drafts and upload the same on the IBBI website. This way, it may appear on the website and in newspapers on the same day.

Concerned officials of Government authority and Insolvency Professionals lack clarity on the filing of government claims. Such as; which officer has the authority to sign the claims, make declarations and affidavits, what supporting documents are required in claims by tax authorities and correspondence addresses like email and postal address, the release of properties and assets attached by tax authorities, and vacation of lien on bank accounts and other assets. All these issues and challenges lead to delays in the claim verification and the insolvency resolution process. Therefore, I suggest the next set of instructions and Standard Operating Procedures should have appropriate advisories on these matters. This will certainly assist in reducing litigation.

I have an additional suggestion for CBIC, which affects the microeconomic environment and MSMEs in particular. Unless the management of the corporate debtor under insolvency resolution is cooperating, Insolvency Professionals have no mechanism to have details of suppliers and service providers. All these suppliers and service providers are fellow operational creditors of these tax authorities under Insolvency and Bankruptcy Jurisprudence. CBIC has nation wise data of these suppliers and service providers, including their official email and postal addresses. In case of authorities under CBIC may, please provide such data of the last three years concerning the corporate debtor to concern insolvency professional; it may help better invitation of claims and verification thereof. Authorities under CBIC may also flash a message of public notice to these fellow operational creditors in an automated system.

Aishwarya Mohan Gahrana

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Private Placement to National Land Neighbours

Posted on May 9, 2022 | Leave a comment

Ministry of Corporate Affairs, with effect from 5 May 2022, amended the Companies (Prospectus and Allotment of Securities) Rules, 2014.

The newly inserted Fifth Proviso to Rule 14(1) states:

“No offer or invitation of any securities under this rule shall be made to a body corporate incorporated in, or a national of, a country which shares a land border with India, unless such body corporate or the national, as the case may be, have obtained Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attached the same with the private placement offer cum application letter.”

According to Rule 6 of The Foreign Exchange Management (Non-debt Instruments) Rules, 2019, an entity of a country which shares a land border with India or a beneficial owner of an investment into India who is situated in or is a citizen of any such country, shall only with the Government Approval. A person who is a citizen of Pakistan or is an entity incorporated in Pakistan shall invest only with prior government approval. In a few sectors, there is an explicit prohibition.

India shares land borders with Bangladesh, Bhutan, China, Myanmar, Nepal, and Pakistan. However, these rules do not apply to Indonesia, Thailand, Maldives and Sri Lanka, as these are Maritime Neighbours not sharing a land border with India.

For this Purpose, A tick declaration is inserted into the Form PAS – 4, which is the private placement offer cum application letter.

Form PAS – 4, Part – B, serial Number (viii):

“Tick whichever is applicable

  • The transferee is not required to obtain the Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to the transfer of shares; or
  • The transferee is required to obtain the Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to the transfer of shares, and the same has been obtained and is enclosed herewith.”.

This will help the company to ascertain prior compliance with the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

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Posted in Chapter IV - CA2013, Companies Act 2013

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Declaration on Securities Transfer Form

Posted on May 9, 2022 | Leave a comment

Transfer of shares or other securities under the Companies Law is a pretty simple affair.

In the case of listed securities, you can click the sell button on the online platform of your service provider without interacting with the buyer. When the sell and purchase orders are linked, the system will affect the transfer without your further action. Even concerned companies are not required to take any further action to accept time to time supervision and audit. In the case of other dematerialised securities, the security transfer transaction went smoothly, except the seller took steps to find a buyer, and the company will confirm the sale. For dematerialised transactions, there are strict KYC Norms for Depositories Participants.

In the case of the unlisted securities, securities transfer occurs with specific paperwork. Where a non-resident or foreign person is involved,  the paperwork increases manifold. There is a reporting procedure with the Reserve Bank of India in such cases. In certain cases, the transferee requires prior approval from the Government of India.

According to Rule 9 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, a person resident outside India not being a non-resident Indian, or an overseas citizen of India or erstwhile overseas corporate body may transfer by way of sale or gift the equity instruments of an Indian company or units held by him to in any person resident outside India. However, for companies in specific sectors, prior government approval is required.

According to Rule 6, an entity of a country which shares a land border with India or a beneficial owner of an investment into India who is situated in or is a citizen of any such country shall invest only with the Government Approval. A person who is a citizen of Pakistan or is an entity incorporated in Pakistan shall invest only with prior government approval. In a few sectors, there is an explicit prohibition.

India shares land borders with Bangladesh, Bhutan, China, Myanmar, Nepal, and Pakistan. However, this rule does not apply to Indonesia, Thailand, Maldives, and Sri Lanka, as these are Maritime Neighbours and do not share a land border with India.

To give effect these rules, the Ministry of Corporate Affairs amended the Form SH-4 of the Companies (Share Capital and Debentures) Rules, 2014, to enable the companies to have prior information.

The Companies (Share Capital and Debentures) Amendment Rules, 2022, with effect from 4 May 2022, inserted the following declaration in the Form:

“Declaration:

  • The transferee is not required to obtain the Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to the transfer of shares; or
  • The transferee is required to obtain the Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to the transfer of shares, and the same has been obtained and is enclosed herewith.”.

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2nd Edition-National Corporate Restructuring Competition

Posted on March 30, 2022 | Leave a comment

The Centre for Corporate and Competition Law at Symbiosis Law School, Hyderabad is glad to announce that we are conducting the 2nd Edition of the one-of-a-kind National Corporate Restructuring Competition. 

Through this event, CCCL aims to highlight the importance of corporate restructuring by providing students with an opportunity to expand their knowledge by way of analysis of business situations, in order to build strategies for restructuring. 

About the 2nd National Corporate Restructuring Competition 

With the complexities of the business world and the rapid change that we see around us, it is often necessary to fine-tune learning to address the specific needs of law students.  Almost every Law student in today’s era aims to join the corporate side. The streams in Corporate Law are complex and very recurring. To make the learning of corporate law more interesting and effective through practical exposure, Symbiosis Law School, Hyderabad & Centre for Corporate and Competition Law is coming up with its 2nd National Corporate Restructuring Competition.  

Date: 14th and 15th May 2022

Platform: Zoom

Last day to register: 21st April 2022 before 11.59 p.m.

N.C.R.C. 2.0 Brochure: https://drive.google.com/file/d/1sf0y9JWmyq5K_qKBzrcJHzIBhe5-JfLN/view?usp=sharing

Rules and Procedure: https://drive.google.com/file/d/1TWH6YPb0Z_0z8xW_8wqoFtLLxxPFfHKe/view?usp=sharing

Case Vehicle: https://drive.google.com/file/d/1GJUsU-o5HINleUQWBt_fUZ6nXp-zDT1G/view?usp=sharing

Registration Link: https://forms.gle/soi5FKGS3j9pEmJs9

Who can register?

Students duly enrolled and are pursuing 3-year or 5-year undergraduate law courses from any university recognised by the Bar Council of India. 

E-certificates will be provided to all the participants.

Indicative laws to be reviewed
1. Companies Act, 2013, and where applicable, Companies Act, 1956 (minor correction by Aishwarya Mohan Gahrana);
2. Securities and Exchange Board of India Act, 1992; and any other relevant Acts
(inputs added by Aishwarya Mohan Gahrana: Insolvency and Bankruptcy Code, 2016 has good scope for corporate restructuring; all rules and regulations under these Acts; Order of Hon’ble NCLT and above judicial authorities, )

About the Centre for Corporate and Competition Law:

Established in 2018, the Centre for Corporate and Competition Law (CCCL) is a student-run centre aiming to provide a platform for students of the institute to explore and learn more about the nuances of Corporate and Competition Law, and to prepare them for the corporate world. To advance our agenda, CCCL has been successful in conducting multiple landmark events including the first-ever National Corporate Restructuring Competition in 2019. 

Furthermore, CCCL have successfully organised several national webinars, discussions, capsule courses and a National Conference in competition law with over 30 research paper submissions from across the country, of which many of our events were in association with the Competition Commission of India. CCCL have also spread our roots in banking law by conducting a three-day value-added course on the Insolvency and Bankruptcy Code. Over the past two years, CCCL has invited eminent personalities like Mr Dhanendra Kumar, the first Chairperson of the CCI and Dr K. D. Singh, Joint Secretary for Law at CCI to conduct webinars on relevant topics.

Our very recent event was SLSH’s first-ever corporate consultancy competition conducted last month. 

C.C.C.L. Brochure:https://drive.google.com/file/d/14NyJG3C98YPOEkPcxv8fD2Hu_Q2Bd5nv/view?usp=sharing

About Symbiosis International University:

The concept of ‘Symbiosis’ is nurtured by Dr S. B. Mujumdar (Chancellor, Symbiosis International (Deemed University)) on the principles of Vedic thought ‘Vasudhaiva Kutumbakam’ which means ‘World as One Family’.
Symbiosis Law School (SLS) Hyderabad was established in 2014 inheriting splendid novelty, dynamism and excellence under the aegis of Symbiosis International (Deemed University), Pune.

Email us at cccl@slsh.edu.in to clear your queries.
For more details on our activities, you may follow our LinkedIn and Instagram (@cccl_slsh) Pages.

A post was published on request from organizers CCCL.

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REPORT ON CORPORATE SOCIAL RESPONSIBILITY

Posted on February 19, 2022 | Leave a comment

Form CSR – 2, notified vide GSR 107(E) on 11 February 2022, is on our desk to fill and file. If you have missed the information overflow, the last date for filing the same for the financial year ended on 31 March 2021 is 31 March 2022. I am not sure of the mechanism, but it may be an attachment of Form GNL – 2.

It seems next year onward; this will be an addendum, not the attachment, to Form AOC – 4/ AoC – 4 XBRL/ AoC – 4 NBFC (Ind AS).

Notification GSR 107(E) on 11 February 2022

We cannot wait but to prepare the data to fill for all of our valuable clients – every company covered under the provisions of sub-section (1) to section 135. Please refer to the newly inserted Rule 12(1B) of the Companies (Accounts) Rules, 2014.

List of Documents for support:

  • Copies of Audited Balance Sheet of last three financial years;
  • Form AOC – 4/ AoC – 4 XBRL/ AoC – 4 NBFC (Ind AS) filed for the financial year [referred hereinafter as AOC-4];
  • Form MGT – 7 filed for the financial year;
  • Paid Challan for Form AOC – 4/ AoC – 4 XBRL/ AoC – 4 NBFC (Ind AS) filed for the financial year [referred hereinafter as Challan];
  • Latest Board Resolution constituting CSR Committee;
  • Constitution of CSR Committee;
  • Minutes of CSR Committee Meetings held during the financial year [FY 2020-21;
  • Company Website with Compliance menu and CSR Tab thereunder;
  • Impact Assessment Report of each CSR Project;
  • CSR Ledger and CSR Bank Account Statement for the financial year;
  • Bank Statement of Unspent CSR Account for previous three financial years;
  • Annual Action Plan CSR for the last financial year; and
  • The Implementation Reports for each of the CSR Projects as on 31 March of the financial year with minutes of the CSR Committee meeting considering the same [For all projects completed during the last financial year or ongoing as on 31 March of the financial year].

Information to Fill:

The net worth, turnover, and net profit data should be the same as Form AOC – 4 filed for the financial year.

Meeting details of the CSR Committee should confirm the details from the latest Board Resolution constituting the CSR Committee and Minutes of the meeting of CSR Committee held during last Financial Year.

The Impact assessment report should be on your desk for confirmation and on the company’s website at least before you fill out the Form. The weblink should be in working condition. I am not sure if the link’s implication got broken in the future. Therefore, it is advisable to attach the report with the Form.

The set-off amount should be taken from the balance sheet or confirmed by your auditor.

The company should confirm CSR obligation with audited balance sheets of the last three financial years.

Details of each (A) Ongoing project started in previous years completed in Financial year, (B) Ongoing project started in previous years still not completed in Financial year and (C) project initiated and completed during the Financial Year:

  • Project ID;
  • Item number from Schedule VII – CSR Schedule;
  • Name of Project;
  • Local Area – Yes/No;
  • Location of the Project – State and district
  • Project duration in months;
  • Amount spent during the financial year;
  • Mode of implementation – direct or indirect;
  • Name and CSR Registration Number of the Implementation Agency;
  • Amount paid on administrative overhead
  • Amount spent on impact assessment
  • Total amount spent during the year
  • Amount spent more than the obligation;
  • Amount unspent; and
  • Amount transferred to the Scheduled Fund.

Details of Unspent Fund for the financial year:

  • Details of the amount transferred to Unspent CSR Account; and
  • Details of the amount transferred to Scheduled Funds.

Details of the amount spent in the financial year from the unspent fund of previous three financial years

  • Year-wise amount transferred to Unspent CSR Fund;
  • Year-wise balance of the amount transferred to Unspent CSR Fund;
  • Amount spent in the financial year;
  • Amount transferred to Scheduled Fund; and
  • Year-wise Remaining amount for the year.

Initial Impact assessment of CSR-2

The Form is my hate of first sight due to the complication of data required. Please get the filled Form vatted by a qualified professional, including auditors. In addition, the Form is so demanding it will be easier to transfer your social responsibility amount to the Government pet funds listed in Schedule VII.

The government is pretending to promote and protect the MSME Sector. A Company with a turnover of less than 100 Crore and investment in plant and machinery of less than 20 is an MSME company. Good numbers of MSME companies are CSR companies. These companies do not have an efficient mechanism to undertake and implement CSR projects. With the present detailed Form, we are opening gates for tax assessment like monitoring social contribution. With the implementation of burdensome Form, we are forcing MSMEs to transfer funds to certain government-sponsored funds. These funds have doubtful answerability towards constitutional auditors (CAG) and constitutional stakeholders (the parliament).

Tax terrorism must be an ancient term by now. Social services are not voluntary anymore but increasingly subject to regulatory control and reporting.

In continuation of my earlier appeals, I beg ease of doing CSR. Please believe in your people and corporate citizens. But unfortunately, the compliance, reporting, monitoring and prosecution cost will be higher than possible leakage. Therefore, society will not get benefits from being overburdened.

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Posted in Chapter IX - CA2013, Companies Act 2013

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Legitimacy vs Taxation

Posted on February 5, 2022 | 1 comment

Whether trading of dead roots of paddy harvest is legal or not? Please mention a law supporting or opposing the legal status of the trade of these dead roots. Nothing is there. You can find burning stubble is punishable under pollution law. Now, whether burning such stubble in your village kitchen after removal from the farm is legal. Please check.

Anything not (expressly) prohibited is permitted unless it is a dictatorial regime. The Virtual Digital Asset (VDA) has the same status. It is allowed as not banned. Regulators issued warnings against trade and investment, but these are just precautionary notes. The Virtual Digital Asset may not always be a financial asset or cryptocurrency.

According to the definition inserted in the Income Tax Act, it may be a code, number, token, non-fungible token, any other token of similar nature, any other digital asset. It may include cryptocurrency, but in my opinion, it does not central bank digital currency. Central Bank Digital Currency (CBDC), like Digital Rupee, should be defined as currency by their respective issuer countries. It may attract impact later from the Reserve Bank of India under the Foreign Exchange Management Act.
In the budget 2022, the Government announced a tax on the profit earned from trading the virtual digital asset. Is it a progressive step towards the legality of cryptocurrency? No, it is not. Taxation does not determine the legitimacy of a transaction or trade. We have many examples.

Liquor trade attracts tax in India. Is liquor trade legal? There is no perfect yes. In Gujarat and Bihar, it is not legal to trade at all. In Maharastra, no one can purchase it without a licence (even though most of us do not care to have such a licence). So, a sale to a person who does not have a licence may not be good in law. In the rest of India, you cannot purchase beyond a specific limit without an additional license for the party etc. The sale of liquor is not legal if made to a person below a certain age. But, in all cases income of such trade attract tax.

Presently, the lottery is legal to trade in only a few states in India. But, the income from the lottery is lawful all over India and attract a handsome income tax.

Can a person purchase a property in the name of his father or mother? Is it legal? Please read the provision of Benami prohibition law.

These examples show that taxation, the colour of income, and the legality of a transaction are an exciting interplay of transactions and rules – regulations.

It is also premature to say if this crypto tax will attract handsome tax revenue for the Government. The legal status of the transaction is not clear. Otherwise, the lottery tax should have been a jackpot for the Government. After initial cheers, the market interpreted the actual intention to discourage crypto-currency trade.

One reason to announce the tax is an expectation of the ministry to determine the legality of the cryptocurrency trade during the current financial year. The second reason is to track and check these transactions through tax deductions at the source.

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Posted in Legal Neighbourhood

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PREPARE TO BE A SUBSCRIBER/ FOUNDER OF A COMPANY

Posted on January 29, 2022 | Leave a comment

To be a good founder, promoter or subscriber of a company to be incorporated, one should at least have a well-documented identity and good financial health. I always suggest an excellent biodata with all supporting documents. There is a functional requirement for well-prepared bio-data. Your list of documents should include:

ParticularSupporting Document
NamePAN Card – Permanent Account Number of Income Tax Department
Father/ Mother NamePAN Card – Permanent Account Number of Income Tax Department
Date of BirthPAN Card – Permanent Account Number of Income Tax Department
Place of BirthPassport or Birth Certificate
PAN Card – Permanent Account NumberPAN Card – Permanent Account Number of Income Tax Department
UID – Unique Identification Number, if anyAadhar Number
DIN – Director Identification Number, if anyDIR Allotment Letter issued by Ministry of Corporate Affairs
Other Identity NumbersAny one of Passport, Driving Licence, Voter Identity Card,
Present AddressElectricity Bill/Telephone Bill/Mobile Bill/Bank Passbook (not more than two months earlier)
Permanent AddressUID/Passport/or other address proof as applicable for present address
Educational QualificationA document showing the highest education obtained
Email Address
(personal not provided by employer)		To be verified by One Time Password (OTP)
Mobile Number
(personal not provided by employer)		To be verified by One Time Password (OTP)
Passport size PhotographNot more than two months earlier
Digital Signature CertificateDSC is an algorithm issued by a certificating authority (CA) licenced by the controller of certifying authorities (CCA) under the Ministry of Information Technology. DSC is based on your documentary proof and issued in pen drive like signature tokens.
Bank BalanceThe subscriber undertakes to have a certain number of shares. If a subscriber could not pay for these subscription shares of the company so incorporated, the company may not commence its business.
List of companies in which you are directorMCA website may be helpful
List of companies in which you have more than 2% shareholdersOne should always have a detail of investments made. Otherwise, Income Tax Annual Information System may have some details

Every person should ensure all these documents have updated address and marital status information.

One common issue in these documents is spelling differences and style differences on different documents. To avoid inconvenience, always check your documents carefully and update them regularly.

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Posted in Chapter II - CA2013, Companies Act 2013

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No Extension but Facilitation for Late AGM

Posted on December 11, 2021 | Leave a comment

The General Circular 19/2021 dated 8 December 2021 caused a little confusion among the public. The circular says it is decided to allow the companies whose AGMs are due in the year 2021 to conduct their AGMs on or before 30 June 2022 following the requirements laid in General Circular 20/2020 dated 5 May 2020 that is by video conference or other audio-visual means.

The Circular permits companies to have their AGM for the year 2021 until 30 June 2022 without extending the period. All Registrar of Companies has granted a General Extension for holding Annual General Meeting until 30 November 2021, which date already expired. All Registrar of Companies after that granted case-to-case basis extensions to most companies that applied for additional extensions. Registrar of Companies has no power to extend this period beyond three months ending on 31 December 2021. So, this circular does not extend the period to hold Annual General Meeting.

We have a clear understanding Annual General Meeting of a company is an essential requirement. The law provides a specific period to have an Annual General Meeting and consider the default of the compliance as an offence. But it does not mean that it is impossible or legally unwarranted to have an annual general meeting after the statutory specific period. Not holding Annual General Meeting for three or more years may result in the ending of corporate life. Otherwise, not holding Annual General Meetings or delaying holding Annual general meetings beyond a statutory specific period are offences punishable with a fine. The delay is a compoundable offence.

Present circular facilitates companies that may not hold their annual general meeting within a permitted or extended period. These companies may have their annual general meeting till 30 June 2022 by video conference or other audio-visual means. Where these companies hold their annual general meeting after 30 June 2022, they shall have their annual general meeting in physical mode (unless this period is further extended).

The circular itself clarify this circular shall not be construed as conferring any extension of time for holding annual general meetings by the companies under the Companies Act, 2013. The companies which have not adhered to the relevant timelines shall be liable to legal action.

Thus, companies holding their annual general meetings after 31 December 2021 for the year ended on 31 March 2021, these companies should apply for compounding of offence. Please note, there is one precondition of compounding of offence; a similar offence should not have happened in the last three years.

Many companies hold their annual general meetings for the year ended on 31 March 2020 after extended time expired on 31 December 2020. The Ministry or Registrar of companies has yet not initiated any legal action. It seems the Government is taking a lenient view against these companies. However, by this general circular government signalling companies to have their annual general meeting within time failing which opt for compounding of offence, if possible. Otherwise, the Registrar will take appropriate legal action under the law.

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Posted in Chapter VII – CA2013, Companies Act 2013

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WHERE MEMBER COMPANY REMOVED FROM THE REGISTER OF REGISTRAR

Posted on December 4, 2021 | 3 comments

One of the fundamental principles of corporate law is that a company independent existence than the existence of its shareholders. Therefore, all members of a company may die, the company will not.

When I read this principle, admittedly, I had limited vision. I presumed members either as natural persons with life and death or bodies corporate as members, their merger, amalgamation, winding up and liquidation. The removal of the name of the member company from the registrar was not an example suggested then.

There would be no direct impact on the existence of the company if the Registrar of Companies removed the name of a member company under Section 248 of the Companies Act, 2013 from the register of companies. However, for companies with small numbers of members, this is not an ideal situation.

The removal of the name of one or more member companies:

  • quorum in general meetings;
  • holding of company meetings on shorter notice;
  • holder of beneficial interest in a share if in favour of such a member company; and
  • Significant beneficial ownership (SBO) may have interest impacts.

This list is not an exhaustive one.

No, paying dividends to these companies does not bother. On the contrary, it may help to a limited extent. The right issue of shares may also have an exciting twist.

Quorum in general meeting is not a big deal if managed by other members properly. They may calculate the required number of transfers to satisfy the legal number.

Even without such an odd situation, a company may face a hurdle to convene a general meeting on shorter notice. The company may not call an extraordinary public meeting on a shorter period notice, where a member company holds more than 5% shares. Similarly, where the company has less than 20 members, there will not be an annual general meeting on a shorter notice period. In the first case, only a fresh issue of shares may help. In the second case, some well-calculated share transfers by an existing member may help.

In all earlier situations, these shares shall always remain in the hand of companies whose name is not in the register of companies.

I see no direct impact on the holder of the beneficial interests except to comply with an earlier direction given by the actual owner or beneficial owner.

The law related to significant beneficial ownership comes into the picture if the member company has a shareholding of more than the threshold limit of the applicability of these rules. Unlike previous situations here, these shares may land in the hand of the Investor Education and Protection Fund Authority. The company will have to transfer these shares held by such a member company will also be transferred to the Investor Education and Protection Fund Authority in case of declaration of dividend, but with a wait of seven years.

As the name of the member company remains there in the register of members despite its removal from the register of companies in the office of the Registrar of Companies, it requires some regulatory step to be taken. I suggest a law to transfer shares belonging to these member companies in favour of the Investor Education and Protection Fund Authority.

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Posted in Chapter XVIII - CA2013, Companies Act 2013

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Activation of DIN Post Completion of Disqualification Period

Posted on November 27, 2021 | Leave a comment

On 26 November 2016, the Ministry of Corporate Affairs came out with its first list of directors disqualified under Section 164(2)(a). The Registrar of Companies, Tamil Nādu, Coimbatore, issued a list with a total of 2042 names with disqualification from 1 November 2017 till 31 October 2022.

From September 2017 onwards, various offices of the Registrar of Companies issued different lists of disqualified directors for period 1 November 2014 to 31 October 2019, 1 November 2015 to 31 October 2020 and 1 November 2016 to 31 October 2021, 1 November 2017 to 31 October 2022. All sets of these lists of directors so disqualified may be found here.

Immediately after that, few directors so disqualified approached High Courts under writ jurisdiction. High Court found disqualifications from 1 November 2014 to 31 October 2019 and from 1 November 2015 to 31 October 2020 invalid as the provision under Section 164(2)(a), introduced in the year 2014, and it has prospective effect only.

MCA deactivated the DIN of directors, so disqualified to implement their disqualification. These DIN so deactivated could not be used for any filing purpose on MCA for the period of disqualification.

There is a lengthy debate on the manner of implementation of this law. I was surprised with the way of quick acceptance of disqualification and wrote this long post here. But, these people know how to bow and run the show.

So, the first effective batch of persons disqualified to be a director completed their disqualification period on 31 October 2021. Now, our mighty directors once again keep mum. There is no automatic removal of disqualification on the practical side. The Government, while deactivating the DIN, forgot to place the automatic activation command in the system. Due to technological and bureaucratic excuses, MCA activated deactivated DIN after delays of 20 more days.

Those who support a violation of the human rights of others do not fight for their own human and legal rights (unless huge money involved). This incident is another fine example.

Now, these directors may again enjoy the tag of director on their business cards. However, they need to check their KYC Compliance status. Directors are clients of MCA. Therefore, MCA needs to know who they are. For this, they should check whether they have complied with the annual KYC requirement. (Un)fortunately, due to ignorance of the law, alienation, or professional advice, most people did not file their KYC documents with MCA. Anyway, such KYC non-compliance secure you from unwanted directorship in a company by fraud on you.

Now, these people, if willing to be directors, should file their KYC Documents with MCA.

This compliance may cost:

  1. Digital Signature Certificates;
  2. Filing Fee; and
  3. Professional Charges.

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Posted in Chapter XII - CA2013, Companies Act 2013

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