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.

Review of Foreign Direct Investment (FDI) policy on various sectors

The Department for Promotion of Industry and Internal Trade (DPIIT) has reviewed the extant FDI policy on various sectors and has made following amendments in the Consolidated FDI Policy Circular of 2017 (FDI Policy) vide Press Note No. 4 dated 18 September, 2019. The amendments will take effect from the date of FEMA notification.

Sectors	Erstwhile	As amended by DPIIT
Coal Mining	-          100% FDI - Automatic Route (1)   For Coal & Lignite mining for captive consumption by power projects, iron & steel and cement units and other eligible activities permitted under and subject to the provisions. (2)    For Setting up coal processing plants like washeries, subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing	-          100% FDI- Automatic Route In addition to the points (1) and (2),the below is added (3)   For Sale of coal, for coal mining activities including *associated processing infrastructure subject to provisions of Coal Mines (special provisions) Act, 2015 and the Mines and Minerals (development and regulation) Act, 1957 as amended from time to time, and other relevant acts on the subject. *Associated Processing Infrastructure would include coal washery, crushing, coal handling, and separation (magnetic and non-magnetic
Contract Manufacturing	-          No specific provision	-          100% FDI- Automatic Route in contract manufacturing in India through a legally tenable contract, whether on Principal to Principal or Principal to Agent basis. -          Further, a manufacturer is permitted to sell its products manufactured in India through wholesale and/ or retail, including through e-commerce, without Government approval
Digital Media	-          No specific provision	26% - Government Route for uploading/ streaming of News & Current Affairs through Digital Media, on the lines of print media
Single Brand Retail Trading	-          30% of value of goods has to be procured from India if SBRT entity has FDI more than 51% -          Sourcing requirement the relevant entity would be the company, incorporated in India, which is the recipient of foreign investment for the purpose of carrying out single brand product retail trading -          SBRT entities have to operate through brick and mortar stores before starting retail trading of that brand through e-commerce	-          All procurements made from India by the SBRT entity for that single brand shall be counted towards local sourcing, irrespective of whether the goods procured are sold in India or exported. -          Sourcing of goods from India for global operations' can be done directly by the entity undertaking SBRT or its group companies (resident or non-resident}, or indirectly by them through a third party under a legally tenable agreement. -          Retail trading through online trade can also be undertaken prior to opening of brick and mortar stores, subject to the condition that the entity opens brick and mortar stores within 2 years from date of start of online retail Note: -          Conditions mentioned for Single Brand Retail Trading [refer SBRT conditions (b) and (d) of FDI Policy] will not be applicable for undertaking SBRT of Indian brands. -          Indian brands should be owned and controlled by resident Indian citizens and/or companies which are owned and controlled by resident Indian citizens. -          Sourcing norms will not be applicable up to three years from commencement of the business i.e. opening of first store or start of online retail, whichever is earlier for entities undertaking single brand retail trading of products having `state-of-art' and 'cutting-edge' technology and where local sourcing is not possible. Thereafter, provisions of [refer SBRT conditions (e) of FDI Policy] will be applicable. A Committee under the Chairmanship of Secretary, DPIIT, with representatives from NITI Aayog, concerned Administrative Ministry and independent technical expert(s) on the subject will examine the claim of applicants on the issue of the products being in the nature of 'state-of-art' and 'cutting-edge' technology where local sourcing is not possible and give recommendations for such relaxation.

Whether an exclusive jurisdiction clause in a commercial contract covers insolvency proceedings initiated under the Insolvency and Bankruptcy Code, 2016 (IBC)?

The National Company Law Appellate Tribunal (NCLAT) in Excel Metal Processors Limited v. Benteler Trading International GMBH and Anr  decided that exclusive jurisdictional clauses do not cover proceedings under the IBC.Exclusive jurisdictional Clauses are contractual terms that explicitly state the mutual intent of the parties.

Facts of the Case

The applicant (a German Company) filed an application under section 9 of the IBC for default in paying .The Corporate Debtor stated that the case was not maintainable in the Indian Court as the agreement between the parties stated   “any suit or case is maintainable only in the Court at Germany.”

Since, NCLT has jurisdiction to entertain an application under I&B Code, the Parties cannot derive advantage of the terms of the Agreement where Parties agreed that any suit or case being maintainable only in the Court outside India. NCLAT rejected the appeal and   upheld the decision of NCLT.

NCLAT relied on NCLTs decision in Binani Industries Limited vs Bank of Baroda  and held   insolvency proceeding is neither a ‘suit’ nor a ‘litigation’ and is not a recovery proceeding.

‘Corporate Insolvency Resolution Process’/ Insolvency Proceedings is not a ‘suit’ or a ‘litigation’ or a ‘money claim’ for any litigation; No one is selling or buying the ‘Corporate Debtor’ a ‘Resolution Plan’; It is not an auction; it is not a recovery, which is an individual effort by the creditor to recover the dues through a process that had debtor and creditor on opposite sides; and it is not liquidation. The object is mere to get resolution brought about, so that the Company do not default on dues.

Conclusion

Section 408 of the Companies Act, 2013, the National Company Law Tribunal has been constituted in different States. In terms of the said provision, the Central Government has notified and vested the power on respective National Company Law Tribunals to deal with the matter within its territory, where the registered Offices of the Companies are situated.

As per Section 60(1) of the I&B Code, “The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located”.

As admittedly, the Registered Office of the ‘Corporate Debtor’ namely – Excel Metal Processors Private Limited was situated in Mumbai-, it was held that the National Company Law Tribunal, Mumbai Bench has the jurisdiction to entertain an application under Section 9 of the I&B Code and the Appellant cannot derive advantage of the terms of the Agreement reached between the parties.

NCLAT held that exclusive jurisdiction clauses do not cover insolvency proceedings and the NCLT and the NCLAT both have jurisdiction over such matters.

The tribunal decided that exclusive jurisdictional clauses do not cover proceedings under the IBC.

Does Transaction of Sale of Equity shares fall under the category of “operational debt “?

·     In the matter of Viakunth Motor Finance Pvt Ltd Vs Endless Properties Pvt Ltd

The Operational Creditor (Viakunth Motor Finance Private Limited) sold certain shares of a Company to the Corporate Debtor (Endless Properties Private Limited) and transferred the shares to the Corporate Debtors Account after executing a number of documents.

The Operational Debtor despite receiving several reminders from the Corporate Creditor failed to repay the sale consideration of shares amounting to Rs.25 lakh.The Operational creditor filed an application u/s 9 of IBC for initiating CIRP against Corporate Debtor.

We need to first go through the wordings of the word ‘Debt’ , ‘Operational Debt’ and ‘Operational Creditor ‘ as per IB&C to have a comprehensive view 

“Debt- means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.’
‘Operational Debt- means a claim in respect of the provision of goods or services including employment or a debt in respect of the 1 [payment] of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.’
‘Operational Creditor - means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.’

On referring to the concerned sections it is understood that “ a person seeking CIRP initiation  under Section 9 of I &B Code must be a person to whom a claim in respect of section 5 (21 )i.e. in the present case in respect of the provision of goods or services including employment or a debt in respect of repayment of dues arising under any law and payable to the Central Government ,State Government or local authority is owed . Therefore ,in the case at hand whether the claim in respect of the provision of goods or services also has to be ascertained for which the learned counsel appearing for applicant relied upon section 2 (7) of the Sale of Goods Act 1930.

Section 2(7) defines goods as “every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass and things attached to or forming a part of the land which are agreed to be served before sale or under contract of sale.”

Considering the above it is clear that shares fall within the meaning and ambit of goods. Hence,the application was admitted at NCLT initiated CIRP against the Corporate Debtor on being satisfied that Operation debt is due to operational Creditor and Corporate Debtor Committed a default in payment.
NCLT declared moratorium.

eCSIN - A Platform to monitor Company Secretaries employment

The Institute of Company Secretaries of India (ICSI), through its Council has issued the Employee Company Secretary Identification Number (eCSin) guidelines. Through eCSin, an effort is made to bring more transparency by creating platform to identify company secretaries employed in a particular company.  The objective of issuing eCSin is to monitor the appointment and cessation of company Secretaries in employment as per section 203 of Companies Act, 2013

The Key points of the guidelines are as under:

• eCSin is required to be generated by Company Secretary who is in employment as a company secretary as well as the demitting the office in any manner
• eCSin is a system generated random alphanumeric number
• No fee is prescribed for generation of eCSin
• eCSin is required to be quoted on the consent letter/resignation or cessation letter as the case may be which is required to be attached with the Form DIR-12 prescribe for appointment or cessation of Company Secretary under Companies Act, 2013
• Quoting of eCSin is mandatory w.e.f. 1 October, 2019 and till that time is recommendatory in nature
• Due date for generation of eCSin is 31 December, 2019 w.r.t. members in respect of whom form 32 under the provisions of erstwhile Companies Act, 1956 or form DIR-12 under the provisions of the Companies Act, 2013 has been filed upto and including 30 September, 2019

Any non- compliance with these guidelines shall render the members liable for action under the Company Secretaries Act, 1980 read with First and Second Schedule to the said Act which deals with professional misconduct.

Annual Return prescribed for the Auditors which are governed by the NFRA

Ministry of Corporate Affairs (MCA) has amended National Financial Reporting Authority (NFRA) Rules, 2018 vide notification dated 5 September, 2019 has prescribed the form NFRA-2 as the Annual Return which is to be filed by the auditor governed by the NFRA authority. The form NFRA-2 is to be filed by 30 November (Earlier it was 30 April) every year.

The details required under Form NFRA-2 are as follows:

1. Details of Auditors:

a) Details of Auditor (Registration no., PAN, Details of auditors registration no., etc)

b) Partners and employees of the auditor

• No. of partners
• Details of Partners i.e. Name, registration no., name of every firm or auditor in which the person is partner
• Total no. of CA or its equivalent employed by auditor

c) Details of the Auditor affiliations with any network or Similar Arrangements of the Auditor

*d) General Information

• Jurisdictional information of auditor where the auditor is registered
• Description of the audit supervisory process undertaken by regulator which overseas auditor performing audit
• Auditor subjected to quality control review by any regulator in the relevant jurisdiction, if yes, details of same such as rating, adverse remarks by regulator etc
• Auditor subjected to any other review by any regulator if yes, details of same

e) Quality Control policies of the Auditor during the audit

f) Details of disciplinary or other proceedings initiated against the auditor such as Name of regulator/agency that has initiated action Brief description of the same

g) Details of Special Circumstances during past 3 years if any, such as Resignation/withdrawal of audit report

2. Details of audit clients and Auditors Report:

Details of audit clients and audit reports of the auditor for companies/body corporates covered under Rule 3(1)(a) to (e)

• Basic KYC details such as Name of the Company, CIN etc
• Fees received by auditor in INR or rate of conversion used (Categories – Statutory audit services, tax audit and other taxation services, attestation and certification services, non-audit services, out of pocket expenses)
• Details of Findings in auditors report – Unfavourable/qualified
• Report modified or not
• Opinion on any specified matter which auditor unable to express in the Auditors report

In addition to above, the following additional information is also required for material subsidiary/associate company as referred in Rule 3(1)(e)

*A) General Information

•  Jurisdictional information of auditor where the auditor is registered 
•  Auditor  subjected to quality control review by any regulator in the relevant jurisdiction, if yes, details of same such as rating, adverse remarks by regulator etc.
• Auditor  subjected to any other review by any regulator if yes, details of same  

B) Audit Clients and Audit reports of the auditor 

a) CIN and name of Indian company/body corporate

b) Name and LLPIN/Registration no. of Audit firm who issue audit report to Indian company/body corporate
c) Whether GAAS have been followed, if not name of the auditing standards followed?
d) Whether GAAP have been followed, if not name of the accounting standards followed?
e) Consolidated income/net worth of the Indian company/overseas subsidiary/associate

3. Consent of the Auditor: Consent to co-operate and comply with any request for information/production of documents made by NFRA

4. Classes of Companies governed by the NFRA Authority:

For the ease of reference, the classes of companies which are governed by the NFRA as provided in rule 3 of the NFRA rules are as follows:

• Listed Companies (Rule 3(1)(a))
• Unlisted Public Companies having paid up capital >= 500 crore OR turnover >= 1000 crores OR aggregate o/s loan + Debenture + Deposit >=500 crores as on 31 March of immediately preceding FY (Rule 3(1)(b))
• Insurance Companies (Rule 3(1)(c) )
• Banking companies (Rule 3(1)(c) )
• Companies engaged in the generation or supply of electricity (Rule 3(1)(c) )
• Companies governed by Special Act (Rule 3(1)(c) )
• Body corporate which has been referred by the CG (Rule 3(1)(d))
• Body corporate incorporated or registered outside India – which is material subsidiary/ associate company of any company or body corporate incorporated or registered in India as referred in clause (a) to (d) of Rule 3 (i.e. Income /networth of such subsidiary/ associate company >20% of consolidated income /networth of company/body corporate as the case may be) (Rule 3(1)(e))

In case of failure to comply with the rules, the auditor shall be punishable as per the provisions of section 450 of the Companies Act, 2013 which states fine up to Rs. 10,000 and in case contravention is continuing one Rs. 1000 per day after the first during which the contravention continues

*P.S. Pursuant to the Gazetted copy of Notification amending NFRA rules, 2018, there is a slight change in point 3 of the form NFRA 2. The details of jurisdictional information of auditor is required to be given only by the auditors for the companies covered in Rule 3(1)(e).  

Gazette Notification link is as follows:
http://egazette.nic.in/WriteReadData/2019/212306.pdf