Legal Nature of Bitcoins: the encrypted digital currency by Vallari Dubey

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Team financial services division, (finserv@vinodkothari.com)

What is a bitcoin?

A bitcoin is a virtual currency first introduced in the year 2008 by an untraceable group called Satoshi Nakamoto. It’s an open source peer-to-peer crypto-graphical system (direct connections without an intermediary) where transactions happen through a public ledger called blockchain, handling users’ data anonymously. The term is a combination of bit and coin where bit is the basic unit of computing and coin represents currency, combining to mean virtual currency.

Eight years since its introduction, bitcoin has gone through a lot. From receiving little support in the beginning in our country to now being the most widely used and accepted digital currency, we analyze its legal nature, its implications, and possible future scenarios.

Bitcoin is a refreshing concept in the traditional world of economy, bringing in a lot of debates, discussions and differences of opinions. For any issue to be handled legally, it becomes a prerequisite to first define it, see where it fits and then start working on it.

Defining bitcoin is tricky, especially in India where the legal and regulatory set up is rather a lot complex. Further, given no clarity as to its regulation yet, it becomes a more composite task.

Given its meaning and all the attributes it holds, bitcoin could be considered to be goods, currency, an instrument, consideration, money, value for money, property, etc.

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Impact of winding up petitions on insolvency filings by Nitu Poddar

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Can an Application for resolution process of a company be filed under IBC, 2016 in case a winding up Petition is pending before a High Court?

MCA Notification on transition for pending proceedings

MCA notification for Companies (Transfer of Pending Proceedings) Rules, 2016[1]  only provides for the transition of the litigation process from High Court to the NCLT.  This Rule lays down the criteria for deciding whether the matter will be filed with and adjudged by NCLT or by High Court.

As per the Rule 5 of the said Rules, where the Petition for winding up has been served on the Respondent Company and is pending before the respective High Court, such Petition shall be adjudged by the High Court.

When a matter is being adjudged by the High Court under Act, 1956, the same will be governed by the provisions of the erstwhile Act, 1956.

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Get Set Go…. to transfer shares to IEPF! by Pammy Jaiswal

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Introduction

MCA vide its notification dated 28th February, 2017 had tried to simplify the modus operandi for transferring shares to the IEPF Authority. In doing so, it had left various questions unanswered. For instance, Rule 6 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Amendment Rules, 2017 (‘IEPF Amendment Rules’) stated that companies would be required to transfer the shares to the IEPF demat account. However, the same did not mentioned anything regarding the expected time frame by which such accounts would open or what would be the modalities of transfer at the depository level. As a result of which corporates kept wondering on the ways to effect the transfer of shares to the IEPF account.

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A DISPUTE AS TO “DISPUTE” by Sikha Bansal- (Under the aegis of Vinod Kothari & Company)

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The Insolvency and Bankruptcy Code, 2016 (“the Code”) enables a financial creditor and an operational creditor to initiate insolvency proceedings against a corporate debtor. While in case of a financial creditor, the creditor may initiate a case without serving “demand notice” on the corporate debtor; an operational creditor, before taking action under section 9, shall first serve a demand notice on the corporate debtor. If in response, the corporate debtor intimates existence of a “dispute”, the operational creditor cannot proceed under section 9. Therefore, “dispute” becomes a crucial word as it decides whether an operational creditor has a “cause of action” against the corporate debtor.

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RECTIFICATION OR RESTRUCTURING OR RECOVERY: JUDICIARY CLEARS THE AIR OF CONFUSION, by Sneha Bhawnani

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In the recent past, the financial sector has witnessed an alarming rise in the number of stressed assets. Undoubtedly, the ability of the lender to deal with stressed assets has been time and again tested. Nevertheless, there is existence of informal as well as formal framework to deal with default on the part of the borrower company. For instance, the informal regulatory framework of the country provides various avenues to the lenders for the purpose of revitalising Read more →

Companies Act now permits cross border mergers by Meenakshi Lakshmanan

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Cross border merger is not a novel concept in the corporate arena. This concept has taken shape stage by stage. The origin of the cross border merger started with the foreign trade which extended to branch establishments in the foreign territory and later merging with entities of the foreign country. When it comes it Indian scenario, the initial step towards cross border mergers was taken in 2005 by the JJ Irani committee. The need for widening the scope of business internationally and the necessity of ensuring compliance with law is a mammoth task for all the jurisdictions to balance.

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Three Lakh Companies may soon vanish from Register of Companies ROCs Go On Mass Clean (Non–Operative Companies) India Drive, by Dheeraj Kr. Sharma

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Introduction

The discussion on the existence of non-operative companies or say fake companies, are making huge rounds all over in the corporate industry with special emphasis from the wings of the government on curing the same. The Finance Minister had clearly indicated through his bold statement that actions will be initiated against the companies which have been strictly made for the purpose of circulating black money and are not carrying any business activity. It now seems that the Registrar of Companies (RoCs), all over the country have given the non-operative companies an ultimatum to either make the compliances and start doing the business activity for which they were formed or else be ready to pack up for ever.

As per the long list of companies which have been issued Show Cause Notices[1] (SCNs) u/s 248 (1) of the Companies Act, 2013 (the “Act”); it is evident that every RoC has published a list of Non-Operative Companies (‘NOCs’), under their jurisdiction, which have failed to comply with the provisions of the Act. These NOCs have to either submit their reasons for such failure or to get struck down from the Register of Companies being maintained by the RoCs.

Provisions of law

  1. (1) Where the Registrar has reasonable cause to believe that—

(a) a company has failed to commence its business within one year of its incorporation[2];

(b) [Omitted][3].

(c) a 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,*

he shall send a notice to the company and all the directors of the company, 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 the relevant documents, if any, within a period of thirty days from the date of the notice.

XXX

(6) The Registrar, before passing an order under sub-section (5), shall satisfy himself that sufficient provision has been made for the realisation of all amount due to the company and for the payment or discharge of its liabilities and obligations by the company within a reasonable time and, if necessary, obtain necessary undertakings from the managing director, director or other persons in charge of the management of the company:

Provided that notwithstanding the undertakings referred to in this sub-section, the assets of the company shall be made available for the payment or discharge of all its liabilities and obligations even after the date of the order removing the name of the company from the register of companies.

(7) The liability, if any, of every director, manager or other officer who was exercising any power of management, and of every member of the company dissolved under sub-section (5), shall continue and may be enforced as if the company had not been dissolved.

XXX

Bold step taken by the RoCs

Pursuant to the power given under this section, the RoCs have taken a bold step to send out notices to such companies at a large scale. Overall the number is crossing 2,53,752 (Two Lakh Fifty Three Thousand Seven Hundred and Fifty Two) as per the list available in which the list of ROCs such as Kanpur, Uttarakhand, Kashmir, etc. are not available yet on the website. From the data provided, it appears that Mumbai has the highest number of NOCs with 71,530 (Seventy One Five Hundred and Thirty) being trailed by Delhi with 53,312 (Fifty Three Three Hundred and Twelve) and followed by Hyderabad with 40,200 (Forty Thousand and Two Hundred) NOCs. Bangalore, Chennai, Kolkata and Chandigarh also contribute to a massive number of NOCs with 15-20k in each of them. It is surprising that till now all the big RoCs are having the highest number of NOCs registered with them.

All of this collectively shows that out of the total 9-10 lacs (approx.) of companies registered in India, 30% approx. are NOCs. The action initiated will drastically bring down the number of companies registered in India but will however raise concerns over the sudden step of the RoCs. While the step, brought in so late, is still a commendable one, the moot question is why were these companies allowed to be kept in Register of Companies for such a long time? Isn’t there a system in place to detect companies which fail to comply with provisions of the Act at an early stage without having the RoC to wait till so late?

This step has sent out an alarming message to those promoter/subscribers who incorporated companies for mere circulation of funds by creating layers of companies and making it difficult to track and trace the actual promoters/beneficial owners. With these SCNs coming, companies are rushing to professionals to seek advisory on the response to be submitted but the state is such that a clear way-out is not available still. If the companies accept their default and agree for being struck down then the directors shall be held liable for the non-compliances made so far and on the other side if someone wants to revive the company then the burden of making the defaults good shall be nothing less than incurring giant expenses without being able to assess the feasibility of the prospects of the company.

A critical question mark on the fate of creditors and stakeholders

With the SCNs flowing in, most of the NOCs will be going for a strike off, either willingly or unwillingly at the hands of the RoCs, but the question posed before us leaves us with an important aspect to consider in this flooded situation which commands everybody’s attention which is the fate of the creditors, stakeholders and other people holding any interest in such NOCs.

The SCNs issued do not only command the attention of the companies to whom it has been issued but also of the creditors and other workmen of such NOCs. SCNs being significant for the interest of such creditors and workmen is also broadcasted through newspapers and website of MCA for the concerned stakeholders to take a pro-active step in this direction as there might be a huge sum of money due to them by such NOCs or there might be some contractual obligations with the such companies, which if, once the RoC strikes down the company, shall turn into a long battle of recovery or settlement. Therefore it is advisable for all the stakeholders to check these lists uploaded by the MCA on its website for initiating necessary actions.

However, if somehow the concerned crowd misses out on the opportunity to recover their dues and such NOCs are struck down without repaying the dues to creditors, employees, labour, etc. then the only way thereafter to claim money from such NOCs will be by way of revival of the company u/s 252 (3) of the Act which reads as follows:

252 (3) If a company, or any member or creditor or workman thereof feels aggrieved by the company having its name struck off from the register of companies, the Tribunal on an application made by the company, member, creditor or workman before the expiry of twenty years from the publication in the Official Gazette of the notice under sub-section (5) of section 248 may, if satisfied that the company was, at the time of its name being struck off, carrying on business or in operation or otherwise it is just that the name of the company be restored to the register of companies, order the name of the company to be restored to the register of companies, and the Tribunal may, by the order, give such other directions and make such provisions as deemed just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off from the register of companies.

This means that such aggrieved people shall have a time limit of 20 years in their hands to initiate action for recovery of their outstanding dues against the companies before the Tribunal. The said period is undoubtedly a quite long time for the concerned people to make moves to revive the company but its needless to say, our country is already burdened with pending litigation matters which range into lakhs, and hoping to revive company in such scenario will be nothing less than a mountain climbing job. However, the RoCs under sub-section (6) and (7) of Section 248 are entrusted with a responsibility of satisfying themselves that the companies being struck down are making proper arrangements for realization of all amount due to the them and for the payment or discharge of their liabilities and obligations for which if deemed necessary and just, the RoCs shall obtain undertakings from the Managing Directors or from the other person in-charge of the management. This may provide assurances upto a reasonable extent to the creditors, stakeholders, government authorities, etc. but will always carry the dark clouds of uncertainty.  Hence, it is advisable for all the concerned stakeholders to be vigilant and aware of the current operations of such NOCs and take prudent steps at the earliest.

Conclusion

With the wide spread epidemic of non-operative and bogus companies infiltrated in the Indian corporate environment, the ROCs have come up with a well devised diagnosis to cure the same from its root. At this moment, we await to see what shall be the next step of the ROCs against the response being submitted by the companies which more or less shall be over by the end of this month as all of the companies are given just 15 days’ time to respond to the SCNs. To sum up, ROCs have turned the tables in the game, better late than never.

[1] http://www.mca.gov.in/MinistryV2/roc.html

[2] Inserted by Companies (Amendment) Act,2015 and is effective from 29th May, 2015

[3] Omitted by Companies (Amendment) Act,2015 and is effective from 29th May, 2015

Original omitted content prior to amendment in sub-section (1), clause (b),

“the subscribers to the memorandum have not paid the subscription which they had undertaken to pay within a period of one hundred and eighty days from the date of incorporation of a company and a declaration under sub-section (1) of section 11 to this effect has not been filed within one hundred and eighty days of its incorporation; or”

by Dheeraj Kr. Sharma (dheeraj@vinodkothari.com)

Comparison of definition of Related Party as per AS -18 and IND -AS 24 by CS Vinita Nair

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Several entities will be required to comply with Indian Accounting Standards (IND-AS) w.e.f. 1st April, 2017 with the comparatives for the periods ending on 31st March, 2017, or thereafter.

Accordingly, the related party transactions will also be governed by IND-AS 24. Therefore, it is extremely essential to update the list of related parties in terms of the expansive definition under IND- AS 24 as well as take stock of transactions undertaken with each of these entities in the immediately preceding financial year to get a sense of the nature of transactions in terms of frequency, volume, value and terms of such transactions. Listing of related party transactions as per the expanded ambit of the term will be relevant, for comparison purposes, even for last financial year, that is, 2016-17 as the comparative for the previous period will also be provided. The disclosures from directors and KMP will have to provide list of relatives considering the definition under Act, 2013 as well as definition of close members of the family of such director/ KMP and accordingly details of enterprises where such close members exercise control or significant influence.

In view of Regulation 23 of Listing Regulations, prior approval of Audit Committee is required for every related party transaction. This is required to be affirmed in the corporate governance report every quarter.  Several companies must have taken omnibus approval already in the last meeting of the Audit Committee held in February or March, 2017. Therefore, it is advisable to obtain omnibus approval in the ensuing Audit Committee scheduled to be held in April, May, 2017 for the transactions with the new related parties during FY 2017-18.

In case of unlisted companies or debt listed companies, those are also required to comply with the requirement of Audit Committee approval for all RPTs in terms of Section 177 (4). However, there is a difference as the definition of related party will be as per Act, 2013 but the transactions will not be limited to those covered under Section 188. In that case, IND-AS 24 RPTs will be only for the purpose of disclosure in financial statements as the Standard requires disclosure of related party relationships, transactions and outstanding balances, including commitments, in the consolidated and separate financial statements of a parent or investors with joint control of, or significant influence over, an investee presented in accordance with IND AS 110, Consolidated Financial Statements, or IND AS 27, Separate Financial Statements.

 

A brief comparison of definition of related party under AS-18 and IND-AS 24 is mentioned hereunder:

Particulars AS-18 IND-AS 24[1] Remarks
Relevant Definitions
Relative/ Close member of a person’s family Relative – in relation to an individual, means the spouse, son, daughter, brother, sister, father and mother who may be expected to influence, or be influenced by, that individual in his/her dealings
with the reporting enterprise.		 Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity including:

(a) that person’s children, spouse or domestic partner, brother, sister, father and mother;

(b) children of that person’s spouse or domestic partner; and

(c) dependants of that person or that person’s spouse or domestic partner.

 Domestic partner is not defined. Further, children and dependants of person’s spouse or domestic partner are an addition to the list.
Key Management Personnel are those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity.

 

 Key managerial personnel ‘KMP’ referred in IND-AS 24 is in plural so as to mean a body of individuals which is the Board of directors of the company. It is different from the term ‘Key Managerial Personnel’ referred in Companies Act, 2013.

This is evident from the definition of related party which inter-alia includes a person who is a member of the key management personnel of the entity (or of a parent of the entity).

Hence, every director of the company including the independent directors, would be covered under the definition and their names are required to be disclosed in the financial statements.
Control[2] (a) ownership, directly or indirectly, of more than one

half of the voting power of an enterprise, or

(b) control of the composition of the board of directors in thecase of a company or of the composition of the corresponding governing body in case of any other enterprise, or

(c) a substantial interest in voting power and the power to direct, by statute or agreement, the financial and/or operating policies of the enterprise

 IND-AS 110 provides for control as under:

6. An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

7. Thus, an investor controls an investee if and only if the investor has all the following:

(a) power over the investee;

(b) exposure, or rights, to variable returns from its involvement with the investee; and

(c) the ability to use its power over the investee to affect the amount of the investor’s returns.
Joint Control The contractually agreed sharing of power to govern the financial and operating policies of an economic activity so as to obtain benefits from it. IND-AS 111 provides for Joint control as under:

Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

 Power to govern has been substituted with control thereby widening the scope.

 

However, the joint control is not merely to govern to obtain benefits but unanimous consent for relevant activities.
Significant Influence Participation in the financial and/or operating policy decisions of an enterprise, but not control of those policies. IND-AS 28 defines significant influence as under:

Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies.

 Significant influence is neither control nor joint control.
Person as a related party
Person as a related party (c) individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them control or significant influence over the enterprise, and relatives of any such individual; (a) A person or a close member of that person’s family is related to a reporting entity if that person:

(i) has control or joint control of the reporting entity;

(ii) has significant influence over the reporting entity; or

 There is not much change except that close member of that person’s family may result in some inclusion.
Person as a related party (d) key management personnel and relatives of such personnel (a) A person or a close member of that person’s family is related to a reporting entity if that person:

(iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.

 KMP of parent entity and close member of that person’s family included under IND-AS 24 (similar to provision under Act, 2013 which includes KMPs of holding company and their relative).

However, definition of KMP under IND-AS includes all the directors of the company (executive or otherwise including IDs).
Entity as a related party
Enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise (this includes holding companies, subsidiaries and fellow subsidiaries); The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others). Group companies are an addition.
Associates and joint ventures of the reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture; One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member). Associate or JV of member of a group.
Enterprises over which any person described in (c) or (d) [refer (c) or (d) under persons] is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a member of key management in common with the reporting enterprise. The entity is controlled or jointly controlled by a person identified in (a); or

A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

 Similar provision.
No such provision Both entities are joint ventures of the same third party. If A ltd has JV1 (formed by A & B) and JV2 (formed by A & C) then JV 1 and JV2 are related parties.
No such provision One entity is a joint venture of a third entity and the other entity is an associate of the third entity. If A ltd has JV1 (formed by A & B) and A ltd holds 25% in Z Ltd then JV1 and Z Ltd are related parties.
No such provision The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity.

If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.
No such provision The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity.
Exclusions from the definition of related party
(a) two companies simply because they have a director in common, notwithstanding paragraph 3(d) or (e) above (unless the director is
able to affect the policies of both companies in their mutual
dealings);		 (a) two entities simply because they have a director or other member of key management personnel in common or because a member of key management personnel of one entity has significant influence over the other entity. Exclusion has been expanded to include directors and KMPs.
(b) a single customer, supplier, franchiser, distributor, or general agent with whom an enterprise transacts a significant volume of business
merely by virtue of the resulting economic dependence;		 (d) a customer, supplier, franchisor, distributor or general agent with whom an entity transacts a significant volume of business, simply by virtue of the resulting economic dependence. Similar exclusion.
(c) the parties listed below, in the course of their normal dealings with an enterprise by virtue only of those dealings (although they may
circumscribe the freedom of action of the enterprise or participate in its decision-making process):
(i) providers of finance;
(ii) trade unions;
(iii) public utilities;
(iv) government departments and government agencies including government sponsored bodies.		 (c) (i) providers of finance,

(ii) trade unions,

(iii) public utilities, and

(iv) departments and agencies of a government that does not control, jointly control or significantly influence the reporting entity simply by virtue of their normal dealings with an entity (even though they may affect the freedom of action of an entity or participate in its decision making process).

 Similar exclusion.
No such exclusion. (b) two joint venturers simply because they share joint control of a joint venture. While co-venturers are not expressly covered under the definition, it has been expressly excluded.

This is much needed exclusion as the venturers inter se should not be regarded as related party unless they fall meet any other parameter specified above.

[1] In considering each possible related party relationship, attention is directed to the substance of the relationship and not merely the legal form

[2] The terms ‘control’ and ‘investment entity’, ‘joint control’ and ‘significant influence’ are defined in IND AS 110, IND AS 111, Joint Arrangements, and IND AS 28, Investments in Associates and Joint Ventures, respectively and are used in this Standard with the meanings specified in those IND ASs.

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By: CS Vinita Nair:vinita@vinodkothari.com