noteworthy rulings under companies act,...

Noteworthy Rulings under

Companies Act, 2013

Gaurav N Pingle,

Practising Company Secretary, Pune.

(E): [email protected]

(W): www.csgauravpingle.com

Lecture Series on Company Law at Thane Chapter of ICSI

mailto:[email protected]

http://www.csgauravpingle.com/

HC: Compulsory voting by postal ballot/e-voting not

applicable to Court-convened meetings

Bombay HC

Justice GS

Patel

In the Scheme of Amalgamation

of

Wadala Commodities Ltd.

with

Godrej Industries Ltd.

Sun., March 10, 2019

2

Company Law Lecture Series at Thane Chapter of ICSI (2019)

By Gaurav Pingle, Company Secretary, Pune

Postal Ballot

Extract

of

Sec. 110

of

Cos. Act,

2013

(1) Notwithstanding anything contained in this Act, a company:

(a) shall, in respect of such items of business as the CentralGovernment may, by notification, declare to be transacted only bymeans of postal ballot; and

(b) may, in respect of any item of business, other than ordinarybusiness and any business in respect of which directors or auditorshave a right to be heard at any meeting, transact by means ofpostal ballot,

in such manner as may be prescribed, instead of transacting suchbusiness at a general meeting.

(2) If a resolution is assented to by the requisite majority of theshareholders by means of postal ballot, it shall be deemed to havebeen duly passed at a general meeting convened in that behalf.


3



Rights of shareholders

Clause

49(I)(A) of

SEBI circular

speaks of

‘Rights of

shareholders’,

which

includes:

Right to participate in and to besufficiently informed on decisionsconcerning fundamental corporatechanges;

Right to participate effectively and vote ingeneral shareholder meetings;

Right to ask questions to the board, toplace items on the agenda of generalmeetings, and to propose resolutions,subject to reasonable limits.


4



Issue involved in the case:

Whether in view of Sec. 110 of Cos. Act, 2013 and

SEBI Circular (May 21, 2013), a resolution for

approval of Scheme of Amalgamation can be passed

by majority of equity shareholders casting their

votes by Postal Ballot (which includes e-voting) in

complete substitution of an actual meeting?


5



Justice GS Patel’s incisive commentary

Heart of Corp. Governance lies transparency and well-established principle of

indoor democracy that gives shareholders qualified, yet definite and vital rights in

matters relating to company functioning in which they hold equity.

Principal among these, is not merely right to vote on any particular item of

business, so much as the right to use vote as an expression of an informed decision.

Therefore, Shareholder has an inalienable right to ask questions, seek

clarifications and receive responses before he decides which way he will vote.

Schemes of Arrangement/Compromise are amended at a meeting itself. These

amendments come from the floor or even perhaps from Board itself. Amendment is

then put to vote.

In a postal ballot, no such amendment is possible. If we were to restrict ourselves

to a postal ballot, no shareholder or any director could ever suggest any

amendment. Scheme would stand or fall only in its original form. This is

contrary to the mandate of Sec. 391-394.


6



‘Called’ Meeting V/s ‘Ordered’ Meeting

Even so Sec. 230 still speaks of „calling of a meeting‟

and „not merely putting the matter to vote‟. It has to

be remembered that all schemes that are put to meeting

of shareholders are proposed schemes. This means that

they are subject not only to approval by voting but also,

possibly, to an amendment at the meeting itself.

Meetings for approval of Schemes u/s 391/394 of

1956 Act are not „called‟ by Co. Such meetings are

„ordered‟ by the Court.


7



Dialogue & discourse are fundamental to making of

every such informed decision

Nothing could be more detrimental to shareholders‟

rights than stripping them of the right to question,

the right to debate, the right to seek clarification;

and, above all, the right to choose, and to choose

wisely.

Vote is an expression of Opinion & it must reflect

an informed decision. Dialogue & discourse are

fundamental to making of every such decision.


8



Conclusion

Provisions for compulsory voting by postal ballot & by e-voting to exclusion ofactual meeting cannot & do not apply to „court-convened meetings‟

At Court convened meetings, provision must be made for postal ballots & e-voting, in addition to an actual meeting.

Elimination of all shareholder participation at an actual meeting is anathema tosome of the most vital of shareholders' rights,

It is strongly recommended that till this issue is fully heard and decided, noauthority or any company should insist upon such postal-ballot-only meeting tothe exclusion of an actual meeting.

Govt. & SEBI should appear before Court, when this matter is next taken up fora consideration of this issue.


9



NCLT: Quashes Board resolutions passed without Joint MD

participation, despite availability on ‘Skype’

NCLT, New

Delhi

B.S.V. Prakash

Kumar, Judicial

Member

Rupak Gupta

Vs

U.P. Hotels Ltd.


10



Cos. (Meetings of Board & its Powers) Rules,

2014

Rule – 3

Cos.

(Meetings of

Board and its

Powers)

Rules, 2014

(Meetings of

Board

through video

conferencing

or other audio

visual means)

Rule 3(3): Co. shall comply with foll.procedure, for convening & conducting BMsthrough video-conferencing or other audiovisual means.

Rule 3(3)(e): Director, who desire, toparticipate may intimate his intention ofparticipation through the electronic mode atbeginning of calendar year and suchdeclaration shall be valid for one calendaryear.


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Obligation upon directors convening the meeting to provide every facility

to directors asking video conference

Rule 3 is meant for providing video-conferencing,indeed it is the duty of directors convening the Boardmeeting to inform other directors regarding the optionsavailable to them to participate in video-conferencingmode or other audio video mode or other optionsavailable to them.

It is the obligation upon directors convening themeeting to provide every facility to directors askingvideo conference and enable them to participate inBoard meeting.


12



NCLT’s observations on Board Meeting via video-

conferencing

“Sub-rule 3(e) only says that if intimation is given atbeginning of Calendar Year that will remain valid forentire Calendar Year. It is not said anywhere that if it isnot given at beginning of year, Video Conference facilityis not to be provided in that Calendar Year.

It does not mean that directors are not entitled for VideoConferencing if intimation is not given at beginning ofCalendar Year.

When a provision is read, it has to be read wholly and notin pieces”


13



Sec. 196 of Cos. Act, 2013

Managerial Appointment

(i.e. Appointment of MD, WTD or Manager)


14



Sec. 196(3)(a) of Cos. Act, 2013

Extract of

Relevant

provision:

No co. shall appoint or continue the employmentof any person as MD, WTD or Manager who:

(a) Is below the age of 21 years or has attainedage of 70 years:

Provided that appointment of a person who hasattained the age of 70 years may be made bypassing a special resolution in which case theExplanatory Statement annexed to the notice forsuch motion shall indicate the justification forappointing such person.


15



HC: Director turning 70 years not to attract

automatic ‘mid-stream’ disqualification

Bombay HC

Justice GS

Patel

Sridhar Sundararajan (‘SS’)

Vs

Ultramarine & Pigments Ltd. &

Rangaswamy Sampath (‘RS’)


16



Broad Facts

RS was appointed as CMD of listed co. on August 13, 1990. OnMay 21, 1998, SS was appointed as director.

On August 1, 2012, RS was re-appointed as CMD for term of 5years till 2017. On same day, SS was also appointed as Joint-MD.

Cos. Act, 2013 was enforced w.e.f. April 1, 2014

RS attained the age of 70 years on November 11, 2014.

SS contended that ―On the 70th birthday of RS, he earned himselfstatutory disqualification‖


17



Interpretation of Single Judge

Sec. 196(3) does not operate to interrupt

appointment of any Director made prior to coming

into force of 2013 Act.

It also does not interrupt the appointment of MD

appointed after April 1, 2014 where at the date of

MD‟s appointment / re-appointment was below the

age of 70 years but crossed that age during his

tenure.


18



Contextual reading of the words in Sec. 196(3)

Interprets Sec. 196(3), use of words “No company

shall appoint or continue the employment of….”,

states that words should be read contextually.

Draws parallel reference from Sec. 269 of 1956

Act, holds ―there was no „discontinuance‟ of MD at

the age of 70 years and the section applied only to

his appointment (including re-appointment)‖.


19



„70 years‟ was never an automatic mid-stream

disqualification

70 years was never an automatic mid-stream

disqualification even under 1956 Act.

Single Judge relied on SC ruling in P. Suseela & Ors.

Vs University Grants Commission (2015) wherein it

was held that ―it is relevant to distinguish between an

existing right and vested right. Where a statute

operates in future it cannot be said to be retrospective

merely because within the sweep of it operation all

existing rights are included‖


20



HC: Automatic disqualification trigger for directors turning 70,

though appointment made pre-Cos Act, 2013

Bombay HC

Justice VM

Kanade

&

Justice Dr.

Shalini

Phansalkar-

Joshi

Sridhar Sundararajan (‘SS’)

Vs

Ultramarine & Pigments Ltd. &

Rangaswamy Sampath (‘RS’)


21



“MD attaining 70 years would immediately be

disqualified”

Bombay HC‘s Single Judge Order was quashed.

Division Bench held that disqualification for MD appointment on groundof age limit would act ‗automatically‘

Thus, MD attaining 70 years would immediately be disqualified.

RS was disqualified from continuing as MD, unless he fulfilled therequirements of the proviso i.e. company has to continue his appointmentby a special resolution and, secondly, that resolution must state the reasonwhy the continuation is necessary.

Intention was to change earlier position by providing that person who hasbeen appointed as MD before he was 70 years old is prohibited fromcontinuing as MD once he has attained the age of 70.


22



“Language of Sec. 196(3)(a) is plain,

simple & unambiguous”

HC rejected RS‘s contention that Sec. 196(3)(a) is not applicable to MD‘s

appointment before April 1,2014, held ―it would otherwise retrospectively

affect vested right of such MD and, secondly, that there is presumption

against legislation operating retrospectively‖.

Language of Sec. 196(3)(a) is plain, simple and unambiguous and it

applies to all MDs who have attained the age of 70 years and there is no

distinction between MD who have been appointed before April 1, 2014 and

those after April 1, 2014.

Div. Bench rejected reliance on MCA Circular that clarified conditions

specified in Schedule XIII Part – 1 of Cos. Act, 1956 (requiring

satisfaction only at the time of appointment).


23



Cos. Act, 2013 vis-à-vis SEBI LODR Reg.

Sun., March 10, 2019Company Law Lecture Series at Thane Chapter of ICSI (2019)


24

Reg. 17(1A) of SEBI (LODR) Regulations:

No listed entity shall appoint a person or continue the

directorship of any person as a non-executive director who

has attained the age of 75 years unless a special resolution

is passed to that effect, in which case the Explanatory

Statement annexed to the notice for such motion shall

indicate the justification for appointing such a person.

[effective from April 1, 2019]

Nomination

Nomination of Shares


25



Sec. 109A of Cos. Act, 1956

Relevant

Extract of

Section

109A(3) of

Cos. Act,

1956

Notwithstanding anything contained in any other law for the time being

in force or in any disposition, whether testamentary or otherwise, in

respect of such shares in, or debentures of, the company, where a

nomination made in the prescribed manner purports to confer on any

person the right to vest the shares in, or debentures of, the company, the

nominee shall, on the death of the shareholder or holder of debentures of,

the company or, as the case may be, on the death of the joint holders

become entitled to all the rights in the shares or debentures of the

company or, as the case may be, all the joint holders, in relation to such

shares in, or debentures of the company to the exclusion of all other

persons, unless the nomination is varied or cancelled in the prescribed

manner.


26



Sec. 72(3) of Cos. Act, 2013

Relevant

Extract of

Section 72(3)

of Cos. Act,

2013

Notwithstanding anything contained in any other law for the time being

in force or in any disposition, whether testamentary or otherwise, in

respect of the securities of a company, where a nomination made in the

prescribed manner purports to confer on any person the right to vest the

securities of the company, the nominee shall, on the death of the holder of

securities or, as the case may be, on the death of the joint holders, become

entitled to all the rights in the securities, of the holder or, as the case may

be, of all the joint holders, in relation to such securities, to the exclusion

of all other persons, unless the nomination is varied or cancelled in the

prescribed manner.


27



HC: Settles succession law; Legal heir, not

‘nominee’ entitled to deceased person’s shares

Bombay High Court

Justice GS Patel

The Judgment has been upheld

by the Division Bench of

Bombay HC

Jayanand Jayant Salgaonkar

Vs

Jayashree Jayant Salgaonkar


28



Objective of Sec. 109A & meaning of ‘vest’

Sec. 109A & 109B of Cos. Act, 1956 must be read as code in itself andtheir statutory intent must be gleaned from the plain meaning of words.

Objective of Sec. 109A: ―Fundamental focus of Sec. 109A is not the law ofsuccession. Sole intention is to afford the company or depository a legallyvalid quittance so that it does not remain forever answerable to a raft ofsuccession litigations, but the nominee continues to hold in a fiduciarycapacity and is answerable to all claimants under succession law‖

‗Vest‘& ‗Nominee‘ are to be seen from that statute alone & no other.

Nominations u/s 109A-109B & Bye-Law 9.11 of Depositories Act cannot& do not displace law of succession, nor do they open 3rd line ofsuccession


29



Harsha Nitin Kokate case is „per incuriam‟

Non-obstante clause over-rides every other statutory provision,including Succession Act. There can be no quarrel with this well-settled proposition.

Bombay HC‘s decision in Harsha Nitin Kokate case does notconsider Apex Court‘s decisions in Vishin N. Khanchandani‘s case,Shipra Sengupta‘s case, Challamma Vs Tilaga. Each one of thesewas binding on Kokate case.

View taken in Kokate case is contrary to, and does not consider anyof these. It is, for that reason, per incuriam

Per incuriam= Through/characterized by lack of due regard to law/ facts


30



Bombay HC – Division Bench observations

Right of a Nominee against shares of a deceased shareholder is not

absolute and asserted that said right vests with ‗legal heir‘ of the deceased;

Sec. 109A of Cos. Act, 1956 is not intended to provide a mode of

succession or to establish norms for dealing with matters of succession;

Object of Section is to ensure that deceased shareholder is represented by

someone;

Object of Section is also to ensure that commercial sector does not suffer

because of potential delay on part of legal heirs of a deceased shareholder

in establishing their rights of succession in order to claim the shares;

“Companies Act has nothing to do with the law of succession”


31



Participation in board meeting through video conferencing – Whether

right of a director or subject to availability of facility by Co.?

NCLAT

New Delhi

Achintya Kumar Barua alias

Manju Baruah

Vs.

Ranjit Barthkur

[2018] 91 taxmann.com 123

(NCLAT)


32



Section 173(2) of Cos. Act, 2013



33

The participation of directors in a meeting of the Board may beeither in person or through video conferencing or other audio visualmeans, as may be prescribed, which are capable of recording andrecognising the participation of the directors and of recording andstoring the proceedings of such meetings along with date and time:

Provided that the Central Government may, by notification, specifysuch matters which shall not be dealt with in a meeting throughvideo conferencing or other audio visual means:

Provided further that where there is quorum in a meeting throughphysical presence of directors, any other director may participatethrough video conferencing or other audio visual means in suchmeeting on any matter specified under the first proviso.

Important facts of case



34

One of the directors moved an application before NCLT seeking facility ofattending B/M through video-conferencing;

NCLT directed non-applicants to provide such facilities subject to fulfilling therequirements of Rule 3 of the Companies (Meetings of Board and its Powers)Rules, 2014;

Other directors appealed against the order of NCLT. The other directors wereaggrieved as they had apprehension that when the original petitioner participates inthe meetings through video-conferencing, it would not be possible to ensure thatnobody else was present from where the original petitioner would be participating;

Other directors contended that the Secretarial Standards on meetings of the boardof directors have considered this aspect and they have prescribed that such optionunder the provisions of the Act and the Rules should be restored to only when thefacilities were provided by the company to its directors.

Important observations of NCLAT



35

The word „may‟ which has been used in this sub-Section (2) of Section 173 only

gives an option to the Director to choose whether he would be participating in

person or the other option which he can choose is participation through video-

conferencing or other audio-visual means.‖

The word ‗may‘ does not give option to the company to deny this right given to the

directors for participation through video-conferencing or other audio-visual means,

if they so desire;

NCLAT appreciated the provisions in the Act and the Rules with respect to the

meeting of the board of directors through video conferencing or other audio visual

means, termed it as ‗progressive step‘;

NCLAT rejected the other directors‘ defense that Secretarial Standard allows

participation by a director in board meeting through video conferencing only if the

company provides such facility. NCLAT ruled that ―Such guidelines cannot

override the provisions under the Rules. The mandate of Section 173(2) read with

Rules mentioned above cannot be avoided by the companies.‖

„Reduction of share capital‟ can be effected in

pursuance of the order of NCLT u/s 230



36

NCLAT,

New DelhiR. Systems International Ltd., In re.

Sec. 230 of Cos. Act, 2013



37

Section 230(1) of Companies Act, 2013:

Where a compromise or arrangement is proposed—

(a) Between a company and its creditors or any class of them; or

(b) Between a company and its members or any class of them,

the Tribunal may, on the application of the company or of any creditor or member of thecompany, or in the case of a company which is being wound up, of the liquidator appointed underthis Act or under the Insolvency and Bankruptcy Code, 2016, as the case may be, order a meetingof the creditors or class of creditors, or of the members or class of members, as the case may be,to be called, held and conducted in such manner as the Tribunal directs.

Explanation.—For the purposes of this sub-section, arrangement includes a reorganisation of thecompany‘s share capital by the consolidation of shares of different classes or by the division ofshares into shares of different classes, or by both of those methods.

Section 230(12) of Companies Act, 2013: Explanation – For the removal ofdoubts, it is hereby declared that the provisions of section 66 shall not apply to thereduction of share capital effected in pursuance of the order of the Tribunal underthis section.

Observations of NCLT



38

The appellant filed an application u/s 230 beforeNCLT in relation to the scheme of arrangementwhich contemplated reduction of share capital inrelation to the appellant company.

NCLT dismissed said the application holding thatprovisions for exclusive reduction of share capitalwere provided elsewhere in the Act and theapplicant, if so advised could prefer applicationunder the said provision of the Act.

On appeal, NCLAT observed as follows:

„Reduction of share capital‟ can be effected in

pursuance of the order of NCLT u/s 230



39

NCLAT observes that from the NCLT order, it appears that NCLTreferred to Sec. 66, being specific provision for rejecting theapplication u/s 230 as Scheme and Arrangement related toreduction of share capital;

From Explanation below Sec. 230, it will be evident that for passingan order u/s 230 to compromise or make arrangements with thecreditors and the members, the provisions of section 66 shall notapply for reduction of share capital. Such order can be passed bythe Tribunal u/s 230 of the Act.

NCLT failed to notice the „Explanation‟ below Sec. 230, whichmakes it clear that even for reduction of share capital effected inpursuance of the order of NCLT u/s 230, the provision of Sec. 66shall not apply.

Case was remitted to NCLT to decide the application u/s 230 inaccordance with law.

Q & A Session


40



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