DISPUTES ARISING OUT OF TRUSTS | NON ARBITRAL IN INDIA

The Indian Trusts Act, 1882 Act ("Trust Act"), which is a comprehensive code broadly, lays down inter alia the manner of creation of trust, the rights, powers and duties of the Trustees, provisions relating to breach of trusts, remedies for seeking redressal of grievances arising out of the Trust Deed etc.

In a recent case of Vimal Shah & Ors V/s Jayesh Shah and Ors ("Vimal Case"), the Supreme Court of India ("Supreme Court") has held that the disputes relating to Trusts, Trustees, and beneficiaries arising out of the Trust Deed and/ or Trust Act are not capable of being adjudicated by an arbitrator despite existence of an arbitration agreement between the parties.

Brief Facts of Vimal Case:

• A private trust deed was executed in favor of six minor beneficiaries in 1983 ("Trust Deed"). Under the Trust Deed, two trustees were appointed to manage the affairs of the Trust. The Trust Deed also provided for an arbitration clause.
• Since 1990, certain differences arose amongst the beneficiaries. The arbitration clause in the Trust Deed was invoked by them and subsequently, an application for appointment of Arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") was preferred by some of the beneficiaries ("Section 11- Application").
• The said Section 11- Application was contested inter alia on the ground that the said Application is not maintainable as the beneficiaries having not signed the Trust Deed, they cannot be termed as 'parties' to such Trust Deed and nor can such Trust Deed be termed as an arbitration agreement within the meaning of Section 2(b), 2(h) and Section 7 of the Arbitration Act.
• The Bombay High Court allowed the Section 11- Application and appointed a sole arbitrator for adjudication of disputes. Aggrieved by the order one of the parties preferred an appeal before Supreme Court.
  

Issues for Determination: The following issues cropped up before the Supreme Court for its determination:

• Whether an arbitration clause in a Trust Deed constitutes a valid arbitration agreement under provisions of the Arbitration Act?

• Whether disputes relating to the management of Trust are capable of being settled through arbitration?

Judgement and Analysis:

Trust Deed and Arbitration

With regards to the validity of arbitration clause in a Trust Deed, the Supreme Court held that an arbitration clause in a Trust Deed does not constitute a valid arbitration agreement as required under Section 2(b) read with Section 7 of the Arbitration Act. The SC placed reliance on its own judgment in Vijay Kumar Sharma case (2010 (2) SCC 486, 2010 (1) SCR 582) ("Vijay's Case"). In this case, a similar question arose as to whether a clause in a Will which provided for settling disputes by an arbitrator in respect of bequeathed property would constitute a valid arbitration agreement or valid arbitration Clause. It was held that in no case an arbitration clause in a Will constitutes a valid arbitration agreement. It was further held that such a clause is a unilateral declaration by the testator.

While comparing the Trust Deeds with Will of the Testator, the Supreme Court opined that principles laid down in Vijay's case must be made applicable to an arbitration clause in a Trust Deed, in the light, that, in both the cases it is the Settlor / Testator who signs the document alone in favour of Beneficiaries / Legatees, the Beneficiaries / Legatees are not required to sign the document and hence they are not regarded as party to such deed or an agreement between such parties.

The Supreme Court while deciding the issue also placed reliance on a judgment of Honorable Calcutta High Court in Bijoy Ballav Kundu’s case (AIR 1965 Calcutta 628) ("Bijoy Case"). In this case, an Arbitration clause in a Trust Deed was invoked and an award was passed. The legality of Award was challenged in the Civil Court. The same was set aside by the Civil Court. An appeal was preferred to the Calcutta High Court. The Calcutta High Court analysed that for a valid agreement there must be a proposal and an acceptance. It further held that by accepting a trust, a trustee merely undertakes to carry out obligations of managing a trust. In accepting the Trust, the trustees are bound to follow the provisions of the Trust Deed whether or not they accept the clauses of the Trust Deed.

The Supreme Court, applying the principles in Bijoy’s Case, opined that, the concept of proposal and acceptance which are integral conditions of a valid agreement are not required in the case of a Trust. Although the Trustees accept the creation of the trust, they merely undertake to carry out the terms of Trust Deed. Such terms are mere directions in respect of how the affairs of the Trust are supposed to be managed. It cannot be said that the Trustees or beneficiaries have agreed amongst themselves as to how they should spend the money or manage the Trust. The Supreme Court held that the Trusts Act provides a forum for redressal of grievances and the same should be strictly interpreted.

Management of Trust | Settled through Arbitration

Supreme court held that the disputes relating to trust, trustees and beneficiaries arising out of the Trust Deed and the Trust Act are not capable of being decided by an arbitrator despites existence of arbitration agreement to that effect between the parties. The Supreme Court placed reliance on another of its own judgement in the Booz Allen case (2011) 5 SCC 532 ("Booz Case") wherein, the following six categories of disputes were held to be non-arbitral disputes which include (i) rights and liabilities arising out of or giving rise to criminal offences; (ii) matrimonial disputes; (iii) guardianship matters; (iv) insolvency and winding up; (v) testamentary matters; (vi) eviction or tenancy matters where tenants enjoy statutory protection.

The Supreme Court opined that the Trusts Act specifically confers jurisdiction on civil courts to redress grievances in the respect of Trusts and hence the same cannot be decided by an arbitrator under the Arbitration Act. Finally, the Supreme Court laid down an additional seventh category of disputes that are non-arbitral namely, cases arising out of Trust Deed and Trusts Act.

MHCO COMMENT

Many countries across the globe are considering the introduction of arbitration provisions in trust laws. Although strictly speaking, the Trust Deed cannot be considered as an agreement as rightly laid down by the High Court, however, a liberal approach and modification must be followed in the sense that benefiting from the trust may be deemed an agreement to submit to arbitration. However, until then, in the light of the above judgment, disputes relating to trusts are non-arbitral in India.

ARBITRABILITY OF FRAUD | IS EVERY FRAUD ARBITRABLE?

Fraud is broadly understood as a concealment of material facts or a false representation through statements or actions that injure the person who relies upon them. Arbitrability of fraud, has been a highly contested issue in the field of alternate dispute resolution. The Supreme Court in N Radhakrishnan v Maestro Engineers and Ors ("Radhakrishnan Case") held that, cases where fraud and serious malpractices are alleged, the matter can only be settled by court and are not subject to arbitration. However, recently the apex court in A Ayyasamy vs A Paramasivam & Ors ("Ayyasamy Case"), held that simple fraud is subject to arbitration provided an arbitration agreement exists between the parties. However serious frauds such as criminal offences, shall continue to be adjudicated by courts.

FACTS OF THE AYYSAMY CASE:

• Five brothers and their father, entered into a partnership deed for the running of a hotel in Tamil Nadu, that contained an arbitration clause.

• The business was being managed and administered by the father and after his death, the same was entrusted to the Appellant, the eldest brother.

• Disputes arose between the parties and the Appellant fraudulently signed a cheque to transfer money to his son from the hotel account, without the knowledge and consent of the Respondents instead of depositing the same into the common bank account of the partnership firm. He also refused to show accounts books of the hotel to the Respondents.

• The Respondents therefore were forced to file a declaratory suit, proclaiming that they were entitled to participate in the administration of the hotel and seeking a permanent injunction restraining the Appellant from interfering with the same.

• The Appellant meanwhile filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") to refer the dispute to arbitration.

• The Trial Court, however dismissed the aforesaid application, relying on the Radhakrishnan Case wherein the Supreme Court laid down that serious offences such as allegations of criminal acts, malpractices and serious allegation of fraud are required to be determined by the Courts and when the matter is complicated and requires the parties to adduce evidence for the determination of the offence, then the judicial authority i.e. the Court can refuse to refer the dispute to arbitration and adjudicate the same, despite the subsistence of an arbitration agreement between the parties.

Thereafter, the Appellant filed a revision petition in the High Court contending that the trial court committed a jurisdictional error. However, High Court dismissed the Petition, also relying upon the Radhakrishnan Case. Being aggrieved by the same, the Appellant preferred an appeal before the Supreme Court.

The Supreme Court in this judgement has clearly stated that the Arbitration Act does not make a provision excluding any category of disputes by treating them as non-arbitrable. When an agreement has an arbitration clause, in such cases the judicial intervention would be minimal. Under the Arbitration Act, an Arbitral Tribunal has the power to rule its own jurisdiction and the civil court does not possess jurisdiction to decide the same. The Supreme Court has held where there are mere allegations of fraud simpliciter, such issues can be determined by the Arbitral Tribunal.

Well-recognised examples of Non-Arbitrable disputes: In the Ayyasamy Case, the Supreme Court has also laid down the well-recognised examples of non-arbitrable disputes which are:

• disputes relating to rights and liabilities which give rise to or arise out of criminal offences;

• matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;

• guardianship matters;

• insolvency and winding-up matters;

• testamentary matters (grant of probate, letters of administration and succession certificate); and

• eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes. Fraud is one such category spelled out by the decisions of this Court where disputes would be considered as non-arbitrable.

Supreme Court has further held that rights in personam (right exercisable against specific individuals) are considered to be amenable to arbitration; and all disputes relating to rights in rem (rights exercisable against the world) are required to be adjudicated by courts and public tribunals.

The Supreme Court has held that (i) when there is a serious allegation of fraud which makes it a criminal offence, or (ii) when the allegation of fraud becomes so complicated that it becomes necessary that such complex issues wherein extensive evidence is required to be produced by the parties for the determination of the offence by the civil court, or (iii) where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, then the Court can dismiss an application under Section 8 of the Arbitration Act and proceed with the suits on merit.

Therefore, the Supreme Court has made it clear that simple fraud is arbitrable whereas instances of serious fraud are to be determined by Courts. However, the Supreme Court has not provided any definition of `serious fraud` and interpretation of the same shall be interpreted on a case to case basis.

MHCO COMMENTS:

Ayyasamy Case will prevent parties from delaying arbitral proceedings on the grounds that fraud is not arbitrable. This is also in line with the recent amendments to the Arbitration Act. The basic principle of the Arbitration Act is that arbitration is essentially a voluntary assumption of an obligation by contracting parties to resolve their disputes through a private tribunal. The intent of the parties is expressed in the terms of their agreement. Where commercial entities and persons of business enter into such dealings, they do so with knowledge of the efficacy of the arbitral process. In view of the aforesaid, the parties are bound to relegate the dispute to arbitration unless it involves serious issues which are non-arbitrable.

This article was released on 22 November 2016.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.
 

COMPANIES MEDIATION AND CONCILIATION RULES

Section 442 of the Companies Act, 2013 (`Act`) empowers the Central Government to constitute a panel of experts to mediate and settle disputes pending before the National Company Law Tribunal, National Company Law Appellate Tribunal (`Tribunals`) or the Central Government. The Ministry of Corporate Affairs (`MCA`) through a recent notification enacted the Companies (Mediation and Conciliation) Rules, 2016 (`Rules`) which prescribe the procedural aspects of such mediation and conciliation.

In this legal update we summarise the following important provisions laid down by the Rules:

• Constitution of Panel of Mediators or Conciliators: The Regional Director is empowered to constitute a panel of persons to act as mediators / conciliators, from persons who are (a) former judges of the Supreme Court, High Court, District Court; (b) former Members or Registrars of a Tribunal constituted at the National level under any law for the time being in force; (c) former members of the Indian Corporate Law Service or Indian Legal Service with fifteen years experience; (d) those who are qualified legal practitioners for not less than ten years; (e) those who have been professionals for at least fifteen years of continuous practice as Chartered Accountants or Cost Accountants or a Company Secretaries; (f) former Members or Presidents of any State Consumer Forum, or (g) experts in mediation or conciliation who have successfully undergone training in mediation or conciliation.

• Procedure of mediation and conciliation: The parties are free to appoint a sole mediator or conciliator of their choice. If however, the parties are unable to arrive at a mutual decision, the forum in which their litigation is pending may direct each party to appoint a mediator / conciliator of its choice or appoint a person from the panel of experts to act as the mediator/conciliator. The Tribunal may also suo moto refer a dispute, pending before it to mediation / conciliation if it deems fit.

• Duty of mediator/conciliator to disclose certain facts: It shall be the duty of a mediator or conciliator to disclose to the Tribunal or Central Government, as the case may be, about any circumstances which may give rise to a reasonable doubt as to his independence or impartiality in carrying out his functions.

• Mediator and Conciliator not bound by the provisions of the Indian Evidence Act and CPC: The mediator or conciliator shall not be bound by the Indian Evidence Act, 1872 or the Code of Civil Procedure, 1908 while disposing the matter, but shall be guided by the principles of fairness and natural justice, having regard to the rights and obligations of the parties, usages of trade, if any, and the circumstances of the dispute.

• Role of the mediator/conciliator: The mediator / conciliator shall facilitate a settlement between the parties and attempt to arrive at a mutual consensus. However, he shall not and cannot impose any settlement nor the mediator or conciliator give any assurance that the mediation or conciliation shall result in a settlement and the mediator or conciliator shall not impose any decision on the parties.

• Time limit for mediation or conciliation: The process for any mediation or conciliation shall be completed within a period of three months from the date of appointment of expert or experts from the Panel. However, in the case of a mediation in relation to a proceeding before the Tribunals, it may on the application of the mediator or conciliator or any party to the proceedings, extend the period for mediation or conciliation by such period not exceeding three months. If a party fails to attend a session or a meeting fixed by the mediator or conciliator deliberately or wilfully, two consecutive times, the mediation or conciliation shall be deemed to have failed and mediator or conciliator shall report the matter to the Tribunals/ Central Government, as the case may be.

• Communication between mediator or conciliator and the Central Government/Tribunals: In order to preserve the confidence of parties in the Tribunal, as the case may be, and the neutrality of the mediator or conciliator, there shall be no communication between the mediator and the Tribunal, in the subject matter. However, if any communication between the mediator or conciliator and the Tribunal, as the case may be, is necessary, it shall be in writing and copies of the same shall be given to the parties or their authorised representatives. Further communication between the mediator and the aforesaid authorities can only be limited to the topic stated in the rules.

• Expenses of the mediation/conciliation: At the time of referring the matter to the mediation or conciliation, the Tribunal/Central Government, as the case may be shall fix the fee of the mediator or conciliator. As far as possible, a consolidated sum may be fixed rather than a fee for each individual session or meeting. The expenses of the mediation or conciliation shall be borne equally by the various contesting parties, unless otherwise directed.

• Bar on initiation of judicial or arbitral proceedings during pendency of mediation/conciliation: The parties shall not initiate, during the mediation or conciliation any arbitral or judicial proceedings with respect to the same matter, except that, a party may initiate arbitral or Judicial proceedings, where, in his, opinion, such proceedings are necessary for protecting his rights.

• Matters which shall not be referred to for mediation/ conciliation: The following matters shall not be referred to mediation or conciliation: (a)matters relating to proceedings in respect of inspection or investigation, matters which relate to defaults or offences for which applications for compounding have been made by one or more parties; (b) cases involving serious and specific allegations of fraud, fabrication of documents forgery, impersonation, coercion etc; (c) cases involving prosecution for criminal and non-compoundable offences; (d) cases which involve public interest or interest of numerous persons who are not parties before the Tribunal.

MHCO COMMENT

The notification of these rules and establishment of the Panel of mediators and conciliators is a much needed step, which shall hopefully translate into an increase in the use of mediation and conciliation for commercial disputes and reduce the burden on the Tribunals.

This article was released on 17 October 2016. 

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

AMENDMENTS TO SECURITIZATION LAWS

The Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act (Act) recently received Presidential assent and thereafter was duly notified in the official gazette. The Act seeks to empower banks to confiscate security in the case of a loan default, a development that assumes significance in view of the recent defaults made by industrialist Mr Vijay Mallya. Finance Minister Arun Jaitely emphasized the need for 'firmness coupled with fairness' in recovering bad loans. The Act majorly seeks to amend four laws:

• Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

• Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI Act).

• Indian Stamps Act, 1899.

• Depositories Act, 1996.

This legal update is an attempt to highlights key amendments brought out by the Act.

AMENDMENTS TO SARFAESI ACT

The SARFAESI Act specifies 3 (three) modes of recovering outstanding debt:

• sale of property;

• arrest and detention of defendants; or

• appointment of a person to manage the property of the defendant.

Section 14 of the SARFAESI Act allows secured creditors to take possession over collateral, against which a loan had been provided, upon a default in repayment. This process can be undertaken by the secured creditor, making in request in writing to the Chief Metropolitan Magistrate or District Magistrate, to take possession of the same. The same process under the new Act will have to be completed within 30 days by the District Magistrate. At the same time the Act also provides that secured creditors will not be able to take possession over the collateral unless the transaction and the collateral security has been registered with the Central registry, established under the Act by the creditors or secured creditors.

Revamping the DRT mechanism, the Bill proposes electronic filing of recovery applications, documents and written statements. The Act initiates regularization of all the records of transactions related to secured assets and creates a Central database for the pursuance of the same.

The Act also provides that in the event any secured creditor jointly with other secured creditors or any asset reconstruction company (ARC) or financial institution or any other assignee has converted part of its debt into shares of a borrower company and thereby acquired a controlling interest in the borrower company, such secured creditors shall not be liable to restore the management of the business to such borrower.

The Act further empowers RBI to audit and inspect ARC from time to time and in the event the RBI is satisfied that business of an ARC is being conducted in a manner detrimental to public interest or to the interests of investors in security receipts issued by such ARC, the Reserve Bank may, for securing proper management of an ARC, remove the chairman or any director and appoint central bank officials to its Board. The Central Bank will be empowered to impose penalties for non-compliance with its directives, and regulate the fees charged by these companies to banks at the time of acquiring such assets.

AMENDMENTS TO RDDBFI ACT

Section 28 of the Act provides that the Presiding Officer of the Debt Recovery Tribunal (DRT) shall hold office for a term of 5 years and shall be eligible for reappointment. It also increases the retirement age of the Presiding Officer from 62 years to 65 years. It also increases the retirement age of Chairpersons of Appellate Tribunals from 65 years to 67 years

Also Section 14 of the Act describes the local limit of jurisdiction where an Application can be filed before the DRT:

• where the cause of action, wholly or in part, arises;

• where the secured asset is located; or

• the branch or any other office of a bank or financial institution is located.

The Act maintains that the banks and financial institutions will be required to file cases before the DRT which has jurisdiction over the defendant’s area of residence or business. The Act further allows banks to file cases in DRT which has jurisdiction over the area of bank branch where the debt is pending.

AMENDMENTS TO THE STAMP ACT

The Act now amends Section 8F of the Indian Stamp Act exempting deed of assignment signed at the time of an Asset Reconstruction Company buying a loan from a bank from the levy of Stamp duty.

AMENDMENTS TO DEPOSITORIES ACT

The Act now states that every depository, on receipt of intimation from a participant should register any issue of new shares in favour of any (a) Bank; (b) Financial Institute; or (c) ARC (collectively referred as Lenders) or any other assignee of such Lenders, by conversion of part of their debt into shares pursuant to reconstruction of debts of the company agreed between the company and such Lenders.

MHCO COMMENT

The major motive of the new amendments is to empower the banks to take effective legal action against defaulters. The current amendments to securitization law and DRT law would ensure fulfillment of that the objective. It has also been assured by government that the Banks would take a compassionate view on education loan defaults. The newly enacted law hence simplifies the procedure for quick disposal of pending cases of banks and financial institutions by the DRT.

This article was released on 4 October 2016.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

PROPOSED AMENDMENTS TO THE BENAMI TRANSACTION ACT

The Benami Transaction Prohibition Amendment Bill 2015 (Bill) has been recently passed by both houses and awaits presidential assent. The Bill makes some much needed changes to the outdated Benami Transaction (Prohibition) Act, 1988 (Benami Act). Following are the important changes brought about by the Bill: 

• Definition of Benami Property and Benami Transaction: The Bill defines Benami Property as any property which is the subject matter of a benami transaction and also includes the proceeds from such property. The Bill also widens the scope of benami transaction and defines the term as a transaction or arrangement where consideration has been paid by one person and the property is held by another or where the property is held for the benefit of another. The Bill also includes transactions which are made under fictitious names or where the owner is not aware of his ownership and where the person providing consideration is fictitious within the ambit of benami transactions.

• Exceptions to Benami Transactions: When property is held by a person for the immediate or future benefit of another person who has provided the consideration for the same, such a transaction shall ordinarily be considered a benami transaction except in the following cases: when a property is held by: (i) a member of a Hindu Undivided Family, and is being held for his or another family members benefit, and has been provided for or paid off from sources of income of that family; (ii) a person in a fiduciary capacity; (iii) a person in the name of his spouse or child, and the property has been paid for from the person`s income.

• Benamidar and Beneficial Owner: The Bill also defines the terms Benamidar and Beneficial Owner. A Benamidar is a person or a fictitious person, as the case may be, in whose name the benami property is transferred or held and includes a person who lends his name. A Beneficial Owner means a person, whether his identity is known or not, for whose benefit the benami property is held by a benamidar.

• Prohibition on transfers of Benami Property: Any property, which is subject matter of Benami Transaction, shall be liable to be confiscated by the Central Government. No person, being a benamidar shall re-transfer the Benami Property held by him to the Beneficial Owner or any other person acting on his behalf. Where any benami property is re-transferred in contravention of the above provision, the transfer of such property shall be deemed to be null and void.

• Authorities under Amendment Act: The Bill seeks to establish four authorities to conduct inquiries or investigations regarding benami transactions: (i) Initiating Officer; (ii) Approving Authority; (iii) Administrator; and (iv) Adjudicating Authority.

• Attachment of Benami Property: Where the Initiating Officer has cause to believe that a person is a benamidar, he can issue notice to such person to show cause why the property in his possession should not be treated as benami property. If the Initiating Officer apprehends that such person may alienate the benami property, he can with the consent of the Approving Authority attach the property for a period not exceeding 90 days. If the Initiating Officer makes an order, to continue attachment of the property after 90 days, until a final order is passed, the Initiating Officer will refer the case to the Adjudicating Authority. The Adjudicating Authority will then examine all documents and evidence relating to the matter and then pass an order on whether or not to hold the property as benami.

• Powers of Adjudicating Authority: The Adjudicating Authority shall make the final decision as to whether property is benami property. And in cases when it adjudicates that the property is benami, he Adjudicating Authority shall, after giving an opportunity of being heard to the person concerned, make an order confiscating the property held to be a benami property.

• Appellate Authority: The Bill also seeks to establish an Appellate Tribunal to hear appeals against any orders passed by the Adjudicating Authority. Appeals against orders of the Appellate Tribunal will lie to the high court. The Central Government may by notification, designate one or more Courts of Session as a Special Court or Special Courts for such area or areas or for such case or class or group of cases as may be specified in the notification.

• Penalties: Whoever is found guilty of entering into benami transactions, shall be punishable with rigorous imprisonment for a term which shall not be less than one year, but which may extend to seven years and shall also be liable to fine which may extend to twenty-five per cent of the fair market value of the property. Any person who is required to furnish information under Benami Act and knowingly gives false information to any authority or furnishes any false document in any proceeding under this Benami Act, shall be punishable with rigorous imprisonment for a term which shall not be less than six months but which may extend to five years and shall also be liable to fine which may extend to ten percent of the fair market value of the property.

MHCO COMMENT

The proposed amendments clearly aim to strengthen the Benami Act in terms of procedure so as to overcome the practical difficulties which arise in its implementation. 

This article was released on 18 August 2016.

AMENDMENTS | COMPANIES INCORPORATION RULES

The Ministry of Corporate Affairs (MCA) has notified the Companies Incorporation (Third Amendment) Rules, 2016 vide a notification in the official gazette on 27 July 2016. This update captures some of the important changes brought about by the amendment:

• Eligibly to Incorporate One Person Company: Earlier the rules stated that no person shall be eligible to incorporate more than a single One Person Company or become nominee in more than one such company. However, the new rules now state that 'A natural person shall not be member of more than a One Person Company at any point of time and the said person shall not be a nominee of more than a one Person Company'. Therefore an individual may now incorporate multiple One Person Companies, subject to renouncing membership of the earlier companies or cessation of the corporate existence of the earlier One Person Companies.

• DIN Verification: In case a subscriber to the memorandum possesses a valid Director Identification Number (DIN) and the particulars provided therein are up to date, on the date of application and the declaration to this effect is given in the application, the proof of identity and residence of such subscribers, need not be attached.

• Certified Resolution: Partnership firms are no longer required to submit to the Registrar the certified true copy of the resolution agreed to by all the partners specifying inter alia the authorization to subscribe to the memorandum of association of the proposed company and to make investment in the proposed company, the number of shares proposed to be subscribed in the body corporate, and the name of the partner authorized to subscribe to the Memorandum.

• Online Business: Every company which has a website for conducting online business or otherwise, shall disclose/publish its name, address of its registered office, the Corporate Identity Number, Telephone number, fax number if any, email and the name of the person who may be contacted in case of any queries or grievances on the home page of the said website. The Central Government may as and when required, notify the other documents on which the name of the company shall be printed.

• Shifting of registered office: A company was not allowed to shift its registered office if any inquiry, inspection or investigation had been initiated against the company or any prosecution was pending against the company under the Act. However, the amendment states that if on completion of such inquiry, inspection or investigation no prosecution is envisaged or no prosecution is pending, shifting of registered office shall be allowed. The same is applicable to the shifting of the registered office of a Company from one state to another.

• No Change of Name in the Event of Default: Henceforth, the change of name shall not be allowed to a company which has not filed annual returns or financial statements due for filing with the Registrar or which has failed to pay or repay matured deposits or debentures or interest thereon. However, the change of name shall be allowed upon filing of the necessary documents or payment or repayment of matured deposits or debentures or interest thereon as the case may be.

• Unlimited Liability to Limited Liability: The Rules also prescribe the procedure for conversion of a company with unlimited liability into one with limited liability, which includes inter-alia, (a) the passing of a special resolution, (b) publication of notice in newspapers seeking objections to the conversion and (c) thereafter making an application to the ROC along with the documents prescribed by the rules, which includes, a copy of the altered memorandum and articles, declaration of solvency signed by two directors, NOC from secured creditors, Auditor's certificate, etc.

Further, this converted company shall not change its name for a period of one year from the date of such conversion. The company shall also refrain from declaring or distributing any dividend without satisfying past debts, liabilities, obligations or contracts incurred or entered into before conversion.

It is important to note that an Unlimited Liability Company shall not be eligible for conversion into a company limited by shares or guarantee in case- (a) its net worth is negative, or (b) an application is pending under the provisions of the Companies Act 1956 or the Companies Act, 2013 for striking off its name, or (c) the company is in default of any of its Annual Returns or financial statements under the provisions of the Companies Act, 1956 or the Companies 4ct,2013, or (d) a petition for winding up is pending against the company, or (e) the company has not received amount due on calls in arrears, from its directors, for a period of not less than six months from the due date; or (f) an inquiry, inspection or investigation is pending against the company. 

MHCO COMMENT

We believe this amendment to the Rules have been made with the intention to mitigate the practical difficulty faced by people in incorporating companies and with the intent of increasing transparency and accountability in corporate governance.

This article was released on 4 August 2016.

FDI REFORMS | INDIA IS NOW THE MOST OPEN ECONOMY IN THE WORLD FOR FDI

After significant changes in the Foreign Direct Investment (``FDI``) policy in November 2015, the Union Government through a very recent Press Release announced further important changes that now make India one of the most open economies in the world.

Changes introduced in the FDI policy include (a) Increase in the FDI sectoral caps; (b) Bringing more activities under automatic route; and (c) Easing of conditions for foreign investment in certain sectors. 

Following are the significant changes introduced by the Government:

• Defence Sector:: Earlier, FDI beyond 49% was permissible only through the government approval route in cases of access to modern or ‘state of the art’ technology in the country. But now, this condition of ‘state of the art’ technology has been removed. Government approval is required for cases beyond 49%, in cases wherever it is likely to result in access to modern technology in the country or other exceptional reasons, which are to be recorded.

Further, this FDI limit for the defence sector has also been made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959 which was until recently reserved exclusively for Government Agencies.

• Civil aviation: Earlier the policy on airports permitted 100% FDI under automatic route in Greenfield Projects and 74% FDI in Brownfield Projects under automatic route. FDI beyond 74% for Brownfield Projects was under government route. 100% FDI has not been permitted under automatic route in Brownfield airports. Earlier, in the case of domestic airlines, FDI of up to only 49% (under automatic route) was permitted. Now FDI up to 49% has been allowed under the automatic route and up to 100% after government approval.

• Single Brand Retail Trading (SBRT): Earlier, FDI above 49% in SBRT was permitted under the government route. However, if the FDI exceeded 51%, additional conditions, including the condition on sourcing 30% of the value of goods from India, was imposed. It has now been decided to relax local sourcing norms up to 3 years and provide a relaxed sourcing regime for another 5 years for entities undertaking SBRT of products having ‘state-of-art’ and ‘cutting edge’ technology. However, the terms state-of-art and cutting edge technology have not been defined.

• Pharmaceuticals: 74% FDI is now permitted under automatic route in brownfield pharmaceutical sector and the government approval route will continue beyond 74%. Earlier, 100% FDI in brownfield pharma was allowed only through the government approval route.

• Food Products Manufactured in India: 100% FDI is now permitted under the government approval route for trading in respect of food products manufactured or produced in India. This also includes trading through e-commerce. Earlier, the sectoral limit on the trading of the aforesaid food products depended on the nature of trade (whether it was single brand, multi brand or wholesale cash and carry).

• Entry routes in Broadcasting Carriage Services: Earlier 100% FDI was permitted with up to 49% being under automatic route and above 49% was under the government route in Teleports (setting up of up-linking HUBs/Teleports); Direct to Home; Cable Networks; Mobile TV; Headend-in-the Sky Broadcasting Service (`Broadcasting Carriage Services`). Broadcasting Carriage Services can now avail of 100% FDI under automatic route. However, infusion of fresh FDI beyond 49% in a company, which has not sought license/permission from sectoral Ministry, resulting in a change in the ownership pattern or transfer of stake by existing investor to new foreign investor, will require FIPB approval.

• Private Security Agencies: FDI up to 49% is now permitted under automatic route in this sector and FDI beyond 49% and up to 74% would be permitted with government approval route. Earlier, only up to 49% FDI was permitted under the government route.

• Establishment of branch office, liaison office or project office: For establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, it has been decided that approval of Reserve Bank of India or separate security clearance would not be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted.

• Animal Husbandry: Earlier, 100% FDI in Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture and Apiculture was allowed under Automatic Route under controlled conditions. It has now been decided to do away with this requirement of ‘controlled conditions’ for FDI in these activities.

MHCO COMMENT

Presently, only the press release has been issued by the Government. However, the Press Note and amendments to FEMA will provide better clarity with regards to the effect that the aforesaid change shall bring about. These changes are in consonance with the Make in India initiative of the government. The aim of Government is clearly to liberalise the FDI regime and provide an environment where doing business in India much easier than before. 

This article was released on 23 June 2016.

(The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.)