Munmi Phukon | Vinod Kothari & Company
Ministry of Corporate Affairs (MCA) has recently come out with a Notification dated 18th November, 2019 amending the Companies (Meetings and Powers of Board) Rules, 2014. The same will be effective from the date of publication in the Official Gazette. This amendment, has the impact of removing the monetary thresholds for the various transactions listed in section 188 and keeping only the proportional thresholds related to turnover and net worth of the company. Notably, the rules under section 188 as originally framed in 2014 had put absolute thresholds, such as Rs 100/ 50 crores of transaction value etc. In case of companies of large size, these limits were obviously quite small and were very easily hit.
It is important to note that the question of shareholders’ approval under sec 188 (2) arises only in cases where the transaction does not adhere either of the two conditions – arms’ length, and ordinary course of business. While the cases of shareholders’ approval under sec. 188 are not very common, nevertheless the amendment will lead to easing out the provisions for RPT approvals.
It is also important to note that SEBI’s RPT approval requirements in terms of Regulation 23 of the Listing Regulations is even more liberal – it relates to 10% of the consolidated turnover of the entity.
Despite the amendment as above, gaps still remain between the requirements applicable to listed entities in terms of Regulation 23, and the requirements applicable under the Act u/s 188. The differences are wide-spread – from the meaning of “related party”, to the scope of “transactions”, to approval from shareholders, as also the clause disabling related parties from voting. Therefore, even with the amendments, RPT provisions remain enigmatic.
Here is a quick comparison-
|Respective clause of Rule 15(3)(a)||Existing Text||Revised Text||Remarks|
|(i)||sale, purchase or supply of any goods or materials, directly or through appointment of agent, amounting to ten per cent. or more of the turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188;||sale, purchase or supply of any goods or materials, directly or through appointment of agent, amounting to ten per cent. or more of the turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188;||Apart from the nature of transaction as provided in clause (ii) i.e. transaction pertaining to selling and disposing/ buying of property, the threshold for all other transactions shall be based on the turnover of the company. The threshold for clause (ii) shall be based on the net worth of the company.
Further to note, the revised limits are still different from the limits provided under SEBI Listing Regulations which is based on the consolidated turnover of the company.
|(ii)||selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to ten per cent. or more of net worth of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;||selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to ten per cent. or more of net worth of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;|
|(iii)||leasing of property of any kind amounting to ten per cent. or more of the net worth of the company or ten per cent. or more of turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (c) of sub-section (1) of section 188;||leasing of property of any kind amounting to ten per cent. or more of the net worth of the company or ten per cent. or more of turnover of the company or rupees one hundred crore, whichever is lower, [amounting to ten percent or more of the turnover of the company] as mentioned in clause (c) of sub-section (1) of section 188;|
|(iv)||availing or rendering of any services, directly or through appointment of agent, amounting to ten per cent. or more of turnover of the company or rupees fifty crore, whichever is lower, as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188:||availing or rendering of any services, directly or through appointment of agent, amounting to ten per cent. or more of turnover of the company or rupees fifty crore, whichever is lower, as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188:|
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-Sikha Bansal (firstname.lastname@example.org)
Note: This article is in continuation of/an addition to our earlier article wherein the author discussed various aspects pertaining to schemes of arrangement in liquidation under section 230 of the Companies Act, 2013 read with various provisions of the Insolvency and Bankruptcy Code, 2016. The author has described various factors and principles which the judiciary may consider while sanctioning a scheme of arrangement for companies in liquidation, how a scheme is different from a resolution plan or a going concern sale, what constitutes ‘class’ in the context, whether the waterfall under section 53 will apply to such schemes, etc. The author also pointed out the lack of clarity as to applicability or inapplicability of section 29A on such schemes. However, very recently, NCLAT has clarified that persons ineligible under section 29A are not qualified to propose a scheme during liquidation. This Part discusses this ruling and ponders upon some questions which still remain open-ended/unanswered.
The conundrum as to whether section 29A of the Insolvency and Bankruptcy Code, 2016 (‘Code’) will apply to schemes under section 230 of the Companies Act, 2013 (‘Companies Act’) has been put to rest, at least for the time being, by a recent ruling of the National Company Law Appellate Tribunal (‘NCLAT’). In Jindal Steel and Power Limited v. Arun Kumar Jagatramka & Gujarat NRE Coke Limited (Company Appeal (AT) No. 221 of 2018), vide order dated 24.10.2019, NCLAT held, while a scheme under section 230 is maintainable for companies in liquidation under the Code, the same is not maintainable at the instance of a person ineligible under section 29A of the Code. The NCLAT relied on the observation of the Hon’ble Supreme Court in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., WP No. 99 of 2018, that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation.
In India, the provisions for schemes of compromises/arrangements have formed a part of the Indian Companies Act, 1913 and then the successors – the Companies Act, 1956/2013 following the English law.
After Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’) was enacted, it was not possible to invoke the provisions relating to the schemes of compromise/arrangement for companies under BIFR. However, the Insolvency and Bankruptcy Code, 2016 (‘Code’) made amendments in section 230 of the Companies Act, 2013 so as to include a liquidator appointed under the Code as eligible to propose a scheme under that section. Later, the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (‘Regulations’) were amended to facilitate schemes under section 230 of the Companies Act, 2013. Given that the company gets a fair chance of resolution under the Code before being pushed to liquidation, the window for completion of scheme has been provided only for the initial duration of 90 days from the liquidation order. Read more
By Dibisha Mishra (email@example.com; firstname.lastname@example.org)
While directors are the brain and neural control center of companies, but it is evident that the day to day affairs of companies are not run by the board of directors , or even the executive directors of companies. Under circumstances can directors be prosecuted, merely because they hold board positions, for something as operational as the lack of safety measures in a smoking zone in a hotel? The SC in a recent ruling of Shiv Kumar Jatia vs. State of NCT of Delhi has taken forward its earlier rulings in the case of Maksud Saiyed vs. State of Gujarat & Ors and Sunil Bharti Mittal vs. CBI, and has held the doctrine of vicarious liability cannot be applied to offences under the IPC unless specifically provided for.
The concept of a corporate structure is based on the very premise of a business idea brought into by a group of persons [also known as promoters], backed up with funds from shareholders and creditors and set to implementation by directors who are elected by the shareholders. While shareholders continue to hold certain decision making powers, the directors are broadly responsible for the functioning and performance of the company. Having said so, it is also to be understood that a director of a company is not always in charge of everyday affairs. It depends upon the respective role assigned to different officers in a company.
Liability of officers for offences under Companies Act
The Companies Act, 2013 (‘the Act’), has explicitly identified officers who are in default for the purpose of the Act which includes directors and KMP.
Further, Section 149(12)(ii) of the Companies Act 2013 provides that liability of a NEDs arises only with respect to such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. Hence, obligation is on the ROC to verify relevant information and records before initiating prosecution against independent or nominee directors.
However, it is to be noted that the above provisions are to be considered only where there has been any contravention with the provisions of the Companies Act while in case of other statutes, respective provisions is to be seen.
Liability for criminal felonies
When a Corporate gets accused of a criminal offence, the individual to be prosecuted for the same remains a matter of consideration. The extent of liability of Non-Executive Directors in case of offences has been discussed in our earlier article. The present article discusses the Supreme Court’s judgment on the case of Shiv Kumar Jatia vs. State of NCT of Delhi which quashed the impugned order of the High Court and freed the Managing Director from the criminal liability imposed on the basis of doctrine of ‘vicarious liability’.
Facts of the case:
Shiv Kumar Jatia is the Managing Director of M/s. Asian Hotels which looks after Hyatt Regency Hotel. He had authorized Mr. PR. Subramanian to apply for lodging license of the hotel.
There was a contravention the condition of the lodging license which led to a hotel guest enter into a semi lit under-construction terrace for smoking. The guest fell from the terrace of 6th floor to the 4th floor and got injured. Case was brought before the High Court which ordered for prosecution the Managing director along with the other three accused by relying on the case of Sushil Ansal vs. State through CBI.
Shiv Kumar Jatia appealed before the Apex Court against such impugned order of the High Court where the case was decided in his favour vide judgment dated 23rd August, 2019.
Provisions of law considered:
Alleged offences under Section 336 and 338 of the Indian Penal Code
“Whoever does any act so rashly or negligently as to endanger human life or the personal safety of others, shall be punished with imprisonment of either description for a term which may extend to three months, or with fine which may extend to two hundred and fifty rupees, or with both.”
“Whoever causes grievous hurt to any person by doing any act so rashly or negligently as to endanger human life, or the personal safety of others, shall be punished with imprisonment of either description for a term which may extend to two years, or with fine which may extend to one thousand rupees, or with both.”
Apex court stated that the essential elements to prove an alleged offence under section 336 are:
- an act
- done rashly or negligently
- to endanger human life or personal safety
while for section 338, the condition of grievous hurt is to be met in additional to elements in section 336.
Doctrine of vicarious liability
Under the doctrine of vicarious liability, one person is held responsible for the wrong doing of the other. Such liability arises only when both persons are somehow connected to each other like employee-employer relationship or principal-agent relationship. In case of corporates, the applicability of the said doctrine is to be determined on the basis of provisions of statute dealt with.
There is no vicarious liability unless the statute specifically provides so.
- The court referred to the judgment of Maksud Saiyed vs. State of Gujarat & Ors, where the Court held that the Penal Code does not contain any provision of vicarious liability on the part of the Managing Director/ Director of the company where the accused is a company.
- Further, the case of Sunil Bharti Mittal vs. CBI was also referred to wherein it was held that:
“a corporate entity is an artificial person which acts through its officers, directors, managing director, chairman etc. If such a company commits an offence involving mens rea, it would normally be the intent and action of that individual who would act on behalf of the company. It would be more so, when the criminal act is that of conspiracy. However, at the same time, it is the cardinal principle of criminal jurisprudence that there is no vicarious liability unless the statute specifically provides so.”
This means where the statutory provision itself does not specifically attract the doctrine of vicarious liability, an individual cannot be implicated under the same.
Existence of Active Role and Criminal Intent
It was stressed that in the absence of any statutory provision incorporating vicarious liability, an individual cannot be made accused, unless there is a sufficient evidence of his ‘active role coupled with criminal intent’. Further such criminal intent must have direct nexus with the accused.
In the given case, the Managing Director was outside the country on the day of the accident. Moreover, mere authorizing an official for obtaining license cannot be construed to his active role with criminal intent. Hence, the same was also failed to be established before the Court.
The Apex Court held that there is no specific provision of applicability of doctrine of vicarious liability in the Indian Penal Code. Further, the allegations made on the Managing Director could not establish any active role coupled with criminal intent having direct nexus with the accused.
Concluding the same, the Court passed the judgment that the allegations made on the Managing Director was vague in nature and the criminal proceedings against Shiv Kumar Jatia as passed by the High Court were quashed.
Time and again the court have taken the view that merely because of holding the position as a director/managing director, a person cannot be vicariously held liable for offence committed by Companies. It has to be proved how he was responsible for, or in control of, or negligent in conducting the affairs of the company. In the absence of definite averments, a director cannot be deemed to be liable.