Recovery of Taxes on undisclosed Income - valid ground for restoration

In the matter of the Income Tax Officer (Appellant) V/s Registrar of Companies (Respondent) & Ors.

The name of the Company was struck off from the Register of the Registrar of Companies on account of non- compliance with respect to filing of annual returns and financial statements¹

There were also instances of unreported income which escaped tax assessment within the meaning of Section 147 and 148 of the Income Tax Act by the respondent Company

The Appellant prayed that there was a need to restore the name of the Company in order to avoid any great ` prejudice to the revenue’. Further, without restoration of the name of the Company no proceedings could be initiated or continued against a company that has been stuck off.

The Income Tax Department was hence believed to be the ‘aggrieved party’ ² and was eligible to file an appeal before NCLT for restoration of the name ‘M/s Zamindar Agrotech Private Limited.’

NCLT after considering all of the above facts   directed “Registrar of Companies” to restore the name of the Respondents Company in their Register and also proceed to take such other and further penal action against the respondents in accordance with the statutory provisions”.

¹Sec 248(1) of the Companies Act, 2013 read with Rules 7 & 9 of (Removal of Names of Companies from the Registrar of Companies) Rules 2016.

²As prescribed under section 252(1) of the Companies Act.

Online proficiency test for Independent Directors is now reality!

The Ministry of Corporate Affairs (MCA) has introduced new set of rules viz.The Companies (Creation and Maintenance of Databank of Independent Directors) Rules, 2019 for the existing Independent Director (ID) as well as for the persons who intends to get appointed as the ID. Further, MCA has also amended others rules viz., the Companies (Accounts) Amendments Rules and the Companies (Appointment and Qualification of Directors) Rules to give the effect of the aforesaid new rules.

Also, MCA has notified that the Indian Institute of Corporate Affairs at Manesar, Haryana (hereinafter referred as Institute) as an institute to create and maintain databank for IDs.

The Key highlights of the amendments are as follows

• Compliances on the part of existing Independent Director (ID) as well as for the persons who intends to get appointed as the ID:
• Existing ID shall within 3 months from 1 December, 2019 (i.e. 29 February, 2020) apply online to institute for inclusion of their name in data bank  and renew as applicable  
• Individual who intends to get appointed as ID (irrespective of having DIN or not) before such appointment is required to apply online to institute for inclusion of name in data bank renew as applicable
• Every ID is required to submit declaration that his/her name is included in databank and renewed as applicable alongwith the declaration required to be given u/s 149(7) of the Companies Act.
• Every individual whose name is included in databank is required to pass (obtained score of not less than 60% in aggregate in test) online proficiency self-assessment test within one year from the date of inclusion of his name in data bank, failing which his name shall stand removed from the databank of the institute.
• Exemption is given from online proficiency test to individuals who have served for a period of 10 years or more as director or KMP in Listed public company or in an unlisted public Company having paid up share capital of Rs. 10 crore or more. (For calculating experience – individual who is acting as a director or KMP in 2 or more companies at the same time shall be counted only once)
• In case of any changes in particulars of individual in data bank, the changes can be made through web based framework of institute within 30 days of such change.
•  Additional Information to be disclose in Board Report:
• A statement regarding opinion of the board with regard to integrity, expertise and experience (including the proficiency) of the ID appointed during the year is required to be provided in the Board Report.
• In this case “Proficiency” means the proficiency of the independent director as ascertained from the online proficiency self-assessment test conducted by the institute notified under sub-section (1) of Section 150
• Duties of Institute:
• An institute is required to create and maintain online databank for persons who are eligible and willing to act as independent director
• Information available in the data bank shall be provided to the companies which are required to appoint ID on payment of fees
• Prepare a basic study material, online lessons, including audio visual for easy reference of individuals taking  online proficiency self-assessment test  by charging reasonable fees
• Conduct an online proficiency self-assessment test and advance tests covering companies law, securities law, basic accountancy and such other areas relevant to the functioning of an individual acting as an independent director by charging reasonable fees
• Share on daily basis with Central Govt. cumulative list of all individuals included/removed from data bank or list of individuals whose application have been rejected with reason
• Charge reasonable fee with prior approval of Central Govt,  to be charged for inclusion of name in data bank and providing information on independent directors to company.

A lot of speculations had been going on since long that the Independent directors will soon have to clear exams before appointment. Now, MCA has made it a reality and also exempts experienced Directors from exam rigour!

Resignation of Auditors from listed entites and their material subsidiaries

SEBI vide its circular dt: 18^th October 2019 has provided for resignation of statutory auditors from listed entities and their material subsidiaries

1) Critical actionables

Practicing Company Secretary shall certify compliance with the provisions of this circular, as and when applicable, in their annual secretarial compliance report to listed entity under February 8, 2019 circular.

Conditions mentioned in this circular need to be incorporated in terms of appointment of auditors with immediate effect.  If any company is not required to form audit committee then all the above mentioned compliances are to be done by Board of Directors of respective company.   Circular has come into existence with immediate effect

2) When can a statutory auditor resign?

Auditor can resign during any of the first three quarters (April – June, July – September and October – December) by giving resignation within 45 days from the end of quarter. If he resigns within 45 days then he has to issue limited review or audit report for that quarter.

Auditor can resign during any of the first three quarters (April – June, July – September and October – December) by giving resignation after completion of 45 days after the end of quarter. If he resigns after 45 days then he has to issue limited review or audit report for that quarter plus that of next quarter before resigning.  E.g. If auditor resigns on 17^th August 2019 then he will have to issue limited review/audit report for June quarter and September quarter also.

For the last quarter if he resigns within 45 days from end of quarter or after 45 days from end of quarter then he cannot resign unless he issues and signs audit report for the entire financial year.  Effectively if an auditor resigns post November during any financial year then he will have to do audit for the entire year.

3) Disclosures by the company

Listed entity/its material subsidiary shall upon resignation of auditor obtain information from him in ‘annexure A’ format as given in this circular. Also listed entity shall disclose same as Reg 30(2) of SEBI (LODR) Regulations.

Upon resignation of auditor audit committee shall deliberate upon all concerns raised by the auditor with respect to resignation as soon as possible but not later than date of next audit committee meeting. Audit committee shall also communicate its views to management.  Listed entity shall disclose audit committees views to stock exchange within twenty four hours after the date of such audit committee meeting.   

4) Role of Chairman of Audit Committee

If the auditor has any concerns which may hamper audit process then the auditor shall approach the Chairman of Audit committee of the listed entity/its material subsidiary who shall further call for audit committee without waiting for quarterly audit committee meetings where it shall receive such concerns directly and immediately.

5) Role of Audit Committee

In case an auditor proposes to resign then all concerns with respect to such resignation shall be brought to the notice of audit committee. Auditor shall inform audit committee of details of information sought or explanation demanded and not given by management. Audit committee shall deliberate on auditor’s proposal to resign and communicate its views to management and auditors.

6) Auditors right to disclaim its report

In case the listed entity/its material subsidiary does not provide information then auditor shall provide an appropriate disclaimer in audit report.

Copy of circular is attached herewith for reference

https://www.sebi.gov.in/legal/circulars/oct-2019/resignation-of-statutory-auditors-from-listed-entities-and-their-material-subsidiaries_44703.html

Camouflaged Existence - a tool for recovery after strike off

Question for Consideration

Whether an application under Section 7 or 9 for initiating ‘Corporate Insolvency Resolution Process’ is maintainable against a Company/ ‘Corporate Debtor’, if the name of the Company/ ‘Corporate Debtor’ is struck-off from the Register of the Companies?

• First, we need to consider the relevant provisions of the Companies Act 2013 and as also the reasons and manner in which the name of a Company is struck-off.
• The Registrar of Companies is empowered under Section 248 of Companies Act to remove the name of the Company from the Register of the Companies. Before striking off the name of the Company the Registrar has to satisfy himself that ‘sufficient provision has been made for realization of all amount due to the company and for the payment or discharge of its liabilities and obligations 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.’
• As per proviso (6) to section 248 states “the assets of the Company are to be made available for payment or discharge of its liabilities and obligations even after the date of the order removing the name of the Company from the Register of Companies.” Further even when the Company is dissolved u/s 248(5) the liability, if any, of every director, manager or other officer who was exercising any power of management, and of every member of the said company shall continue and can be enforced as if the Company had not been dissolved.
• Another provision for reference which is relevant is u/s 250 of the Companies Act, 2013 relates to effect of Company notified as dissolved. The Registrar of Companies even after the removal of the name of the Company can enforce the Company for payment or discharge its liabilities and obligations.
• The Tribunal u/s 252 of the Companies Act 2013 has the power to restore the name of the Company (as if it had not been struck off) before the expiry of 20 years from the publication in the Official Gazette of the Notice of the strike off of a Company on an application made by a creditor or workman.
• A Company, whose name has been removed from the Register of the Companies can be liquidated under I&B Code as per amended definition of “winding up” Clause (94-A) of Section 2.
• The name of the ‘Corporate Debtor’ (Company) may be struck-off, but the assets may continue. In the case of reference (Hemang Phophalia ( Appellant/ Corporate Debtor)  vs The Greater Bombay Co-operative Bank Limited( Respondent / Financial Creditor ). There was a default in repayment of debt.
• Whether,  there are assets of the ‘Corporate Debtor’ or not can be looked into only by the ‘Interim Resolution Professional’/ ‘Resolution Professional. ’Since the Company is struck off the Corporate Person cannot file an application under Section 59 for Voluntary Liquidation. Hence, the application under section 7 and 9 will be maintainable against Corporate Debtor, even if the name of the Corporate Debtor has been struck off from ROC .

Have you reconciled Quarterly Shareholding Pattern vis-à-vis new definition of Encumbrance?

A. Quarterly Shareholding Pattern

The SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”) prescribe various periodic filings by listed companies with the stock exchanges where they are listed. One such periodic filing is the Shareholding Pattern of the Company which listed companies file on a quarterly basis under Regulation 31 of SEBI LODR Regulations. 

The format of this disclosure has been specified by SEBI vide its Circular dated 30th November 2015 read with SEBI Circular dated 7th December 2018. As per this format, listed companies are also required to disclose the “number of shares pledged or otherwise encumbered” by the Promoter and Promoter Group entities. Further in this format, a note has been mentioned stating that “The term ‘Encumbrance’ has the same meaning as assigned under regulation 28(3) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.” (“SEBI SAST Regulations”)

B. Amendment in Definition of Encumbrance 

Now, SEBI has, vide an amendment in Regulation 28(3) of SEBI SAST Regulations dated 29th July 2019, enlarged the definition of “encumbrance”. This amendment is effective from 1st October 2019. 

The earlier definition of “encumbrance” included only pledge, lien or any such transaction, by whatever name called. Now, the amended definition includes the following:- 

• any restriction on the free and marketable title to shares, by whatever name called, whether executed directly or indirectly;
• pledge, lien, negative lien, non-disposal undertaking;
• any covenant, transaction, condition or arrangement in the nature of encumbrance, by whatever name called, whether executed directly or indirectly.

So, the amended definition of encumbrance is wide enough to cover any restriction on free and marketable title to shares, even cases where shares are locked-in pursuant to any statutory obligation under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“SEBI ICDR Regulations”), etc. 

C. Disclosure of Encumbrance as on 30th September 2019

SEBI had vide another Circular dated 7th August 2019 asked all promoters of listed companies to disclose specifically detailed reasons for encumbrance if the combined encumbrance by the promoter along with persons acting in concert (“PAC”) with him equals or exceeds 50% of their shareholding in the company or 20% of the total share capital of the company.

In this Circular, SEBI had prescribed that if existing combined encumbrance of promoters of listed companies along with their PAC exceeded the above mentioned thresholds on 30th September 2019, then the disclosure of reasons was to be submitted to stock exchanges by 4th October 2019.

However, such promoters who had locked-in shares, entered into any Non-Disposal Undertaking (NDU) etc., with regard to their shares (which were not covered under the earlier definition of Encumbrance, but now covered under the new enlarged definition of Encumbrance), but their encumbered shares were lesser that the above mentioned thresholds, were not mandated to give any disclosure.

D. Disclosure in Shareholding Pattern

Now since the definition of Encumbrance has been enlarged, while filing the Shareholding pattern for the quarter ended on 30th September 2019, all such cases which were not Encumbrance as per the earlier definition (and hence not disclosed anytime in earlier quarters’ shareholding patterns), but are covered under the new definition must be disclosed in the “Number of shares pledged or otherwise Encumbered” column in the Shareholding pattern for quarter ended 30th September 2019.

E. Need for Reconciliation:-

Generally Registrar and Transfer Agents of Listed companies provide the shareholding pattern to companies as per SEBI prescribed format, and listed companies submit the same to stock exchanges.

So, now listed companies will need to crosscheck whether promoter or promoter group entity had created any Encumbrance on their shares which was not covered in the earlier definition, but covered in new definition of Encumbrance, even if the number of such encumbered shares may be very minimal. If there is any such case, then such number of encumbered shares must be reconciled with the data provided by the Registrar and Share Transfer Agents and accordingly it must be disclosed in the Quarterly Shareholding pattern, even if that data may or may not be provided by the Registrar and Transfer Agents.

There can be many instances where the requirement of disclosure of reasons was not required by 4th Oct 2019 as per above mentioned Circular (as they may be below the said thresholds) but still it must be disclosed in Quarterly Shareholding Pattern, as even if 1 share is encumbered, it must be disclosed as per the format prescribed for Quarterly Shareholding Pattern.

If this exercise of reconciliation is not done and this disclosure is skipped in the Shareholding Pattern disclosure filed for the quarter ended 30th September 2019, then it will amount to non-compliance of Regulation 41 of SEBI LODR Regulations and may trigger show cause notices being issued by stock exchanges and so on….

Scope of e-Form DIR-12 widened for “ACTIVE-non-compliant Company”

Ministry of Corporate Affairs vide notification dated 16 October, 2019 has amended the Companies Incorporation rules. Pursuant to this amendment,

1. ACTIVE-non-compliant Company can now file e-form DIR-12 for appointment of director in addition to cessation in following cases: 
• The total number of directors is less than the minimum number under section 149(1)(a) (i.e. 2 in case of private company and 3 in case of public company) on account of disqualification of all or any of the director under section 164.
• The DINs of all or any it’s director have been deactivated.
• For implementation of the order passed by the Court or Tribunal or Appellate Tribunal under the provisions of the Companies Act, 2013 or under the Insolvency and Bankruptcy Code, 2016
2. Revised timelines has been prescribed for passing the order by the Regional Director (RD) in case of shifting of Registered Office from one jurisdiction to another jurisdiction of RoC but within the same State:

Particulars	Erstwhile timelines	Revised timelines
Confirmation order passed by RD	30 days	15 days
Filing of certified copy of RD with RoC	60 days	30 days

The notification can be downloaded from following link:

http://www.mca.gov.in/Ministry/pdf/CompIncEighthAmndtRules_18102019.pdf

 

MCA UPDATE

1. Amendment in Schedule VII

Nirmala Sitharaman - Minister of Finance and Minister of Corporate Affairs (MCA) on 20 September, 2019 has made announcement that the Centre has decided to expand the scope of corporate spending under the Corporate Social Responsibility (CSR) norms. 

Following to said announcement, MCA vide notification dated 11 October, 2019 amended Schedule VII of the Companies Act, 2013. 

Pursuant to the amendment, the scope of CSR is widen to cover incubators engaged in conducting research efforts in science, technology, engineering and medicine aimed at Sustainable Development Goals (SDGs) and to contribution to funded Universities, Indian Institute of Technology (IITs) and alike 

2. Amendment in Companies (Meetings of Board and its Powers) Rules, 2014

MCA vide notification dated 11 October, 2019 has amended the Companies (Meetings of Board and its Powers) Rules, 2014. The expression “business of financing companies” in Rule 11(2) has been substituted by the expression "business of financing industrial enterprises” which is referred to in section 186 (11) of the Companies Act, 2013 (the Act). The amendment is made to align with revised section 186 of the Act.

Notifications can be accessed on following links respectively: 

http://egazette.nic.in/WriteReadData/2019/213151.pdf

http://egazette.nic.in/WriteReadData/2019/213148.pdf

NCLAT slammed ROC for adopting a blood thirsty approach and allowed LLPs to file forms without penalties

Recently, the National Company Law Appellate Tribunal (herein after referred as Tribunal), allowed the Limited Liability Partnerships (LLPs), to file the rectified forms without any penalty. In this case, respondents (cluster of LLPs) filed the application with National Company Law Tribunal (NCLT) for allowing them to remove the objections and file a fresh Form – 3 without penalties besides allowing them to file their Form - 8 and Form - 11.

Facts of the Case:

• Respondents pursuant to their Conversion into LLP in the year 2012 filed LLP agreement in Form -3, 
• Annual Return in Form- 11 and Statement of Account and Solvency in Form 8 with the concerned authorities 
• However, the Form 8 for F.Y. 2015-16 was not accepted by the system on the pretext that the form could not be filed until Form-3 for the initial agreement was filed despite the fact that Form-3 was filed in the way back in 2012 
• An important point to be noted here is that Form 8 and Form 11 were filed and accepted by the system from 2012 to 2016 without raising any objection with respect to Form 3 
• After filing RTI, Respondents came to know that Form – 3 filed earlier was not taken on record, because there were some objection to the Form 3 and due to non-rectification the same was declared invalid 
• Respondents were informed to file fresh Form-3 alongwith a penalty of Rs. 10,86,000/- for removal of objections as regard to each of respondents 
• Respondents state that they did not receive any correspondence since 2012 informing objections raised on Form 3 which were required to be removed 
• NCLT was of the view that there was no wilful default or the negligence from the side of the respondents and allowed the respondents to rectify the omissions, if any and file form 3 within a period of one month by passing the order on 6 September, 2018 
• The order which was challenged by ROC and filed appeal in NCLAT

Observation of Tribunal 

• Case of non-submissions but case of confusion in filing, that too due to change in the procedure originally prescribed 
• While switching over to a computerized system the Appellant were supposed to notify the affected persons and allow them to file the Rectified/ Revised Forms as mandated without slapping any penalty on them 
• Adopting a blood thirsty approach and that too against compliant entities is unwarranted moreso when such entities complied with the legal requirements and made compliances in accordance with the then prevailing system. 
• Compliance of a procedure is to be taken leniently if it is not disturbing the enacted law itself 
• No flaw can be found in the impugned order which does not suffer from any legal infirmity apart from being justice oriented and conforming to the spirit of law.

Order

The Tribunal dismissed appeal and allowed the Respondents to rectify omissions, if any, in their Form-3 within a period of one month and the Appellant was directed to accept the same without any fee or additional fee.

Informant Incentive Mechanism under PIT Regulations

SEBI vide notification dt: September 17, 2019 has notified third amendment to SEBI (Prohibition of Insider Trading [PIT]) Regulations 2015. Vide this amendment SEBI has inserted new Chapter IIIA. This chapter provides for “Informant protection scheme”.  

Informant has been defined to include any person who voluntary submits to SEBI original information relating to alleged violation of insider trading laws that has occurred, is occurring or has a reasonable belief that it is about to occur. Informant may include employees and consultants of company. Original information has been defined to mean any information derived from independent knowledge and analysis of informant.

Informant has been given choice to submit information with or without disclosing his or her identity. If SEBI makes a substantial recovery of penalty based on information provided by informant he would be eligible for monetary sanctions. These monetary sanctions will be at the discretion of SEBI. Also in some exceptional situations informant will not be eligible for monetary sanctions.

Original information provided by informant and identity of informant shall be held in confidence and will be exempted from disclosure under Right to Information Act 2005.

SEBI has also provided that the Board may at its sole discretion, declare an Informant eligible for Reward not exceeding Rs. 1 Cr. and on submission of Informant Reward Claim Form (Schedule E), informant may be paid reward from the Investor Protection and Education Fund.

SEBI has also provided that ‘informant’ providing original information shall be prevented against retaliation and victimization. For this, Every person required to have a Code of Conduct under PIT regulations shall ensure that such a Code of Conduct provides for suitable protection against any discharge, termination, demotion, suspension, threats, harassment, directly or indirectly or discrimination against any employee who acts as informant.