Tag Archives: Companies Act

Carte blanche to notify law requires reform

The provocative abuse of the power to choose when to put into effect a law passed by Parliament has reached a point where judicial intervention is warranted

By Somasekhar Sundaresan

It is a year since the Reserve Bank of India (RBI) picked specific cases of borrowers for action to be taken by banks to invoke the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC). Much ink will be spilled about the year gone by. This column will not add to it.

However, the workings of the IBC and its impact on other laws, presents a good opportunity to note an important aspect of law making in India — the practice of government arming itself with legislation made by Parliament, with full liberty given to the government to decide when any provision of the law may actually be brought into effect. The legacy of legislation preceding the IBC underlines the extreme limits to which this can be stretched.

Originally, insolvency proceedings for “sick industrial companies” was governed by the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). In January 2003, the Companies Act, 1956 was amended to insert a Part VI-A titled “Revival and Rehabilitation of Sick Industrial Companies”. The government got Parliament to arm it with the power to notify such provision on such date as the government willed. Apart from provisions relating to setting up of tribunals, none of the provisions introduced into the 1956 company law to bring in an insolvency regime was notified into effect by the government.

In January 2004, a law to repeal the SICA was passed by Parliament, but this too empowered the government to notify the law as it chose and when it chose. Nothing happened for a decade. In 2013, new company law was introduced in the form of the Companies Act, 2013, again empowering the government to notify into effect various provisions on various dates as the government deemed fit. This law too contained provisions akin to Part VI-A of the 1956 Companies Act. Therefore, at this stage, two legislation governing company law, governing the same subject of insolvency was in existence but neither legislation was brought into effect. Finally, in May 2016, the IBC was passed by Parliament, again empowering the government to notify such provisions as it chose at such times as it chose.

The IBC contained provisions that would amend the law that had been passed to repeal the SICA — in other words, a law that had not been brought into effect was amended in its still-born state. The IBC also had provisions to delete the provisions introduced in the 2013 company law, but left out the provisions of the 1956 company law that is still on the statute book but not notified. Eventually, on November 1, 2016, through notifications, the provisions in the IBC that would amend the un-notified SICA repeal law were notified. On November 15, 2016, the government notified the provisions in the IBC that would delete the corresponding provisions in the 2013 company law (the 1956 law remained without notification). On November 25, 2016, the law repealing the SICA was notified to give it effect from December 1, 2016 — over 12 years after it was passed by Parliament. On November 30, 2016, the provisions of the IBC were notified with effect from December 1, 2016, to take over from the SICA.

Now, this tortuous journey of the law has other implications. A number of other legislation contained references to the SICA and its provisions — purely for example, exemptions from open offers in the Takeover Regulations and exemptions from delisting procedures under the Delisting Regulations. Not everyone is aware that the General Clauses Act provides that when a legislation is repealed and replaced, all references to the repealed legislation would automatically stand replaced in the eyes of the law by the newly introduced legislation. Therefore, the other regulatory authorities who are the authors of these legislation conduct a lot of activity proposing to amend their regulations to bring them in line with references to the new law; conducting debates over whether they should change the law; and handle voluminous unproductive work of dealing with procedures for making these changes.

The 2013 Companies Act in itself presented a piquant situation with the power given to the government to notify into effect such provisions as the government chose whenever it chose. When empowering itself with such a power, the government forgot to get Parliament to also empower the government with the power to notify the partial repeal of corresponding provisions of the 1956 Companies Act. Till date, enormous time, energy and monetary expense have been expended on litigation about how, in the absence of an explicit repeal of the old law, two provisions can or cannot co-exist and whether a provision can be said to have been “repealed by implication”.

Empowering the government to take its time to notify a law passed by Parliament is a practical feature, but equally, it is time those running Parliament gave thought to how they are abdicating their responsibility without seeking account of why a law has not been notified into effect despite being passed. The social conditions for which a law is introduced remain unaddressed when the notification is not effected — rendering the administration of the law completely arbitrary. Serious consequences have followed in welfare legislation due to this approach — cases in point being the law on domestic violence and the law prohibiting testing the gender of an unborn foetus.

The provocative abuse of the power to choose when to bring into effect a law passed by Parliament has reached a point where judicial intervention by a Constitutional Bench is warranted. In the past, the abuse of the promulgation of Ordinances by a state government had led to a limit of two times being imposed by the Supreme Court. The abuse of sticking the “money bill” label is another example of the courts being seized of such an issue. It is time to take a close hard look at how governments get Parliament to give them a “carte blanche” on use of this power.

This column was published under the title Without Contempt in all editions of Business Standard dated June 7, 2018

SC’s wake-up call with bail law

The abolition of grant of bail without hearing govt’s position, and requirement to satisfy court that accused is not guilty, has become so rampant that it has now found place even in basic company law
By Somasekhar Sundaresan

The recent judgment of the striking down as unconstitutional, the provisions on bail contained in the Prevention of Money Laundering Act, 2002, (PMLA) is a long-overdue wake-up call. The law mandated two conditions for grant of bail — first, the public prosecutor must be given a chance to oppose the request for grant of bail; and second, the court must be satisfied that the accused is not guilty and is unlikely to commit another offence when on bail.

Now, this unconstitutional provision has in the past been upheld as constitutional in dreaded “anti-terror” laws such as Terrorist and Disruptive Activities (Prevention) Act, 1987, (Tada). This was obviously canvassed with the in arguments in support of the provision. However, the court differentiated the context of the earlier judgment (terror law) as compared with the (which has now covered within its sweep multiple laws across the board). In fact, it is provisions such as these that made society dread  Once suspected of terror activity and arrested, the onus literally would shift to the accused to satisfy the court system to stay out of jail — remember consideration of bail is before the trial gets underway.

Interestingly, across governments (headed by political parties of supposedly varying colour), legislation with the bail provisions now held to be unconstitutional have been introduced. The abolition of grant of bail without hearing the government’s position, and the requirement to satisfy the court that the accused is not guilty has become so rampant that it has now found place even in basic company law. When fraud is alleged, the onus of satisfying the court considering the bail application that the accused is not guilty, and is unlikely to commit another offence, shifts to the accused under the Companies Act, 2013. Besides, the public prosecutor necessarily has to be heard — which simply means that even if she is unavailable and seeks a few adjournments, the person arrested has to stay inside jail even before trial. Moreover, the court must be satisfied that the person accused is unlikely to commit any offence when out on bail.

Time was when bail was the rule and jail was the exception. Today, across legislation, jail is the rule, and bail, the exception. Meanwhile, society fed by media, builds firm views on innocence or guilt. Not too many are unsure about Salman Khan not having been behind the wheel or Indrani Mukherjee not being guilty of killing her child — and indeed, it took a film and a book for society to question facts in the  In fact, a large segment of society resents the Talwars being exonerated on the grounds that their guilt is not proven. Now picture having to satisfy junior judiciary and magistracy that the judges should be satisfied that accused are not guilty. A perverse outcome of such provisions of law is that the judge would worry if the grant of bail would mean that the judge is satisfied that the accused are not guilty and that would be used a clean chit when the trial is actually conducted.

In the case, the was told that its earlier decisions had upheld actions under these provisions, but the apex court rightly pointed out that in those decisions, the question before the court did not involve a challenge to the constitutional validity of the provisions.

The started as a check on laundering of proceeds of crime earned out of a narrow set of specific serious offences. The list of these offences, set out in a schedule to the (titled “scheduled offences”), kept growing through amendments. Heinous crimes like human trafficking and drug running, the original big ones on the list of scheduled offences, suddenly found violations such as failure to make an open offer under takeover regulations, keeping them company.

This kind of legislative thinking is what has led to bail provisions usually seen in laws prohibiting drug trafficking to find their way into law governing the running of companies. In other words, the risk of being accused of fraud when running a company is as high as the risk of being accused of drug trafficking when it comes to personal liberty and the ability to be granted bail. In the decision, the has built multiple scenarios of the timing of initiation and conduct of trial under the primary law and the trial under the to show how mindless and arbitrary the formulation has been, and has held the conditions for grant of bail to be unconstitutional.

When differentiating from the earlier ruling upholding these provisions as constitutionally valid in Tada, the has also extracted portions of that earlier judgment, which show that the had then taken note of the existence of such provisions in other laws affecting revenue. However, the constitutional validity of these provisions in those revenue legislation had not been challenged — they were only noticed by the court then. Now that these provisions have been held to be unconstitutional in the context of PMLA, it is critical for such provisions to be reviewed in the context of every legislation in which they reside. A good rule of law system would mean that this is done without asking the courts to consider each case and when they get presented. But that is truly wishful thinking in the political economy. However, some low-hanging fruit like company law could be a good starting point.

A substantial part of this piece was published as the Without Contempt column in the Business Standard editions dated December 14, 2017

Last resort shouldn’t turn into first choice

By Somasekhar Sundaresan
The of India is reported to have blessed a settlement between a litigating lender and a corporate borrower after the process for insolvency under the newly-legislated had been set in motion.

 

The parties settled their differences and their settlement terms were approved setting aside the process, using the court’s powers under of the  This is a material development and points to the need to take a close re-look at some of the policy choices made in the new bankruptcy law, which is now about nine months old.

 

First, the process brings on par with lenders, who may have thousands of crores in loans to a borrower, any operational creditor (say, supplier of furniture) who claims dues of just over a lakh of rupees, in the legal capacity to trigger the “resolution process” under the code.  The grounds on which the National Company Law Tribunal might refuse to set the process in motion are limited — for operational creditors, the primary ground is the existence of disputes before the claim is made. In other words, only uncontested dues on which there is a default would lead to the being attracted. The case in the was not of an operational creditor but of a financial creditor, but that does not matter for the analysis here.

 

Second, once the resolution process is set in motion, a moratorium kicks in. No debt can be enforced on the company against whom the claim was made. While this might seem normal about “bankruptcy protection” it works well only for companies that are truly bankrupt. For companies that are solvent but have bona fide disputes over claims made by counter parties, this results in a prompt trigger of pariah status. If your promises cannot be enforced against you, no one would transact with you. This is all the more reason for the setting of the process into motion to be done with a great deal of care and caution. Until a recent ruling by the National Company Law Appellate Tribunal, various benches of the National Company Law Tribunal, which administers the new law, had taken a position that unless actual litigation had been initiated, no claim of any operational creditor could be regarded as disputed.

 

Third, not only would a moratorium kick in, but also an “interim resolution professional” would stand vested with all the powers of the board of directors of the company. The powers of the board of directors would stand suspended forthwith. The moratorium and the change of control are certainly fantastic features to handle the best interests of stakeholders of a truly insolvent company but they are certainly poisonous and not medicinal for a company that is solvent but can be threatened with initiation of the resolution process. Therefore, the very threat of a possible initiation of this process leads to coerced recovery that could in fact hurt a larger segment of lenders, who truly have the long-term financial interests of the company at heart.

 

This is why HDFC Bank Managing Director Aditya Puri’s statement that resorting to the insolvency courts is not the best solution unless the borrower is a wilful defaulter makes immense sense. In his reported words, this is a law of “last resort” and not the “first thing”. The capacity of any goods or services provider — an operational creditor — to set such a serious process in motion as the first thing, is worrisome. Once the moratorium kicks in, even the financial creditors of a company for which a moratorium has kicked in, would get hit and be unable to recover their dues.

 

Indeed, the creditors’ committee that is supposed to work during the moratorium could comprise a majority of creditors, who see a future in the company and can drown out the voice of the lone creditor who does not. Therefore, theoretically, if one does call the bluff of an aggressive operational creditor or a disgruntled financial creditor, and stays the course, the initiation of the resolution process can eventually come to mean nothing. However, this is theoretical and not practical. Once the world at large rearranges its view of a company whose promises cannot be enforced and has to deal with a chartered accountant or company secretary acting as a resolution professional without experience in running a business, even a reasonable view of creditworthiness of a doubtful debtor has to change to a perception of a bad debtor.

 

In this context, the coding in the law that entails no roll-back once the resolution process is set in motion is a hard and blunt weapon of last resort, which can cause more injury than warranted when used as the first resort. When the uses “for doing complete justice” and takes on record the settlement terms between a creditor, who has set the resolution process in motion and the debtor on whom a moratorium has kicked in, it is because really unjust and unintended consequences can emerge from the working of this law.

 

For the long-term health of the effectiveness of the bankruptcy law, it would have been better to help the new law build its core strengths by generating capacity and getting the resolution professionals and bankruptcy professionals to build bandwidth and gain competence before unleashing the burden of handling the entire society’s corporate debts on them. The burden of private corporate debt recovery could have been held back from imposing itself on the enforcement machinery until the immediate task of serious financial debts working itself through. The Supreme Court, which has powers to intervene and roll back a moratorium in the interests of justice, having used this power, it is time for a serious and quick rethink and pilot short amendments to make this law effective with a review scheduled for after two years.

 

This column was published in the Business Standard’s editions dated July 27, 2017 under the title Without Contempt