DIRECTOR KYC | COMPANIES (APPOINTMENT AND QUALIFICATION OF DIRECTORS) RULES, 2014

Introduction:

The Central Government has recently notified the fourth amendment to the Companies (Appointment and Qualification of Directors) Rules, 2014 (Amendment). By this Amendment, the Central Government, Regional Director (Northern Region) or any other officer (as authorised) are required to de-activate the Director Identification Number (DIN) of an individual who does not submit his particulars as per e-form DIR-3-KYC within the timelines mentioned in the Amendment.

The Amendment was notified on 5 July 2018 and has already come into force from the 10 July 2018.

This legal update briefly summarises the Amendment and describes its ramifications.

Amendment:

1.      Insertion of DIR-3-KYC: The Amendment includes insertion of DIR-3-KYC which contains all details of the DIN allotted individuals, like his full name, fathers name, place of residence (permanent and present), gender, residential status, nationality, voter ID card number, PAN, Aadhar number, driving license number, personal number and personal email ID. The e-form also makes it mandatory for foreign nationals to provide passport details. Proof of identity and proof of address is also to be attached while submitting the e-form. This form is to be digitally signed and duly submitted within the stipulated time as mentioned below.

2.      Deactivation and Reactivation of DIN: If any individual fails to comply with filing of DIR-3-KYC, than their DIN will be deactivated and the same individual can reactivate his DIN only after filing the e-form DIR-3-KYC along with the prescribed fees.

3.      Timeline of filing of DIR-3-KYC: All individuals, who have a DIN allotted to them as of 31 March 2018 shall submit the e-form DIR-3-KYC on or before the 31 August 2018. All individuals who has been allotted a DIN after 31 March 2018 shall submit the e-form on or before the 30 April 2019.

MHCO COMMENT

This Amendment promulgated by the Ministry of Corporate Affairs (MCA) is a part of the process of updating its directors database. In order to avoid the difficulties of reactivating a deactivated DIN, it is advisable that all individuals with an allocated DIN submit the e-form DIR-3-KYC on or before 31 August 2018.

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.

 

MAHARASHTRA REPEALS SECTION 9A OF CPC | DELETION OF OBJECTION ON JURISDICTION AS A PRELIMINARY ISSUE

 Maharashtra Government very recently passed an ordinance deleting Section 9A of the Code of Civil Procedure, 1908 (CPC).

SECTION 9A of CPC

Section 9A of CPC was introduced because the practice of granting injunctions, without going into the question of jurisdiction even though raised was leading to grave abuse. It was against this backdrop that Section 9A was introduced into the CPC.

Section 9A of CPC provided that ``Where at the hearing of application relating to interim relief in a suit, objection to jurisdiction is taken, such issue to be decided by the Court as a preliminary issue``. However this Section 9A over a period of 30 years led to judicial backlog and also provided a method to delay the proceedings.

Raising an issue under Section 9A of CPC, led to an extensive argument on merits on the issue of jurisdiction which resulted in an entire trial on the issue of jurisdiction thereby causing delays and the grant of ad-interim reliefs. Further, it led to conducting of 2 trials, one for determining the issue of jurisdiction and the other on the remaining issues for which the suit is filed.

Against this background, the Maharashtra Government passed the Ordinance deleting this Section 9A.

INTRODUCTION OF CODE OF CIVIL PROCEDURE (MAHARASHTRA AMENDMENT) ORDINANCE, 2018

The statement of objects and reasons of the CPC Ordinance, 2018 (“Ordinance”) lays out why the said provision was deleted-

``All this needlessly burdens the Court with duplication and results in a waste of judicial time and resources. In fact, in Madhuriben K. Mehta vs. Ashwin Rupsi Nandu ((2012) 5 Bom. CR 27), the Bombay High Court took the view that section 9A has led to the “abuse of duplication of work by repeated applications which has become an endemically circuitous practice. It is, therefore, considered expedient to amend the Code of Civil Procedure, 1908, in its application to the State of Maharashtra, by deleting the said section 9A.``

APPLICATION OF 9A OF CPC AFTER THE INTRODUCTION OF THE ORDINANCE

The CPC provides as follows:

1. If the consideration of preliminary issue framed under Section 9A of CPC is pending the same shall be deemed to be an issue framed under Order XIV of CPC.
2. If evidence has been led by any party on the preliminary issue under Section 9A of CPC, the same shall be considered by the Court along with evidence, if any, led on other issues in the suit at the time of final disposal of the suit.
3. In cases where the preliminary issue framed under Section 9A of CPC has been decided, holding that the Court has jurisdiction to entertain the suit and such a decision is challenged before a revisional Court then on date of commencement of the said Ordinance, such revisional proceedings shall stand abated.
4. In cases where the preliminary issue framed under Section 9A of CPC has been decided, holding that the Court has no jurisdiction to entertain the suit and such a decision is challenged before a revisional Court then such revisional proceedings shall continue and the said Ordinance shall not be applicable. Provided that in case the appellate or revisional court remands the matter to the trial court for reconsideration, upon receipt of these proceedings by the trial Court, all provisions of the principal act shall apply.
5. In all cases, where an ad-interim relief has been passed under sub-section (2) of section 9A of CPC prior to its deletion, such order shall be deemed to an ad-interim order made under Order XXXIX of the Principal Act (Order XXXIX-Temporary Injunctions and Interlocutory Orders).
   
   
   MHCO COMMENT: The government is hoping that by deletion of Section 9A of CPC, it would reduce the burden of the Courts. However, the actual impact must be analysed over a period of time.
    
   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.
    
    

FINANCING ARRANGEMENTS | TRIGGER TAKEOVER OFFER REQUIREMENT

The Securities and Exchange Board of India (SEBI) very recently passed an order in a matter involving New Delhi Television Limited (NDTV or Target Company) stirring-up the issue of what amounts to `Control` under the Takeover Code.

BRIEF FACTS OF THE CASE:

1. In 2008, the promoters of NDTV i.e. RRPR, Prannoy Roy and Radhika Roy (collectively referred as Promoters) made an open offer under the old SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover Code) to acquire shares of NDTV which is a listed company.
2. A loan of Rs 350 crores was taken from Vishvapradhan Commercial Private Limited (VCPL) in order to finance this open offer. There were extensive loan and other agreements entered into between the Promoters and VCPL which granted VCPL the following packaged rights:
   • warrants in RRPR - which conferred upon VCPL the right to convert warrants into 99.99% of the equity share capital of RRPR;
     
     
   • purchase right by which VCPL could acquire the shares of RRPR from its shareholders;
     
     
   • call option in respect of shares that RRPR held in NDTV;
     
     
   • veto rights by which several actions could not be carried out by RRPR and NDTV without the prior approval of VCPL.
     

3. SEBI investigated whether the above packaged rights, conferred upon VCPL, amount to acquiring control in the Target Company thereby triggering the requirement of an open offer under Regulation 12 of the Takeover Code (i.e. change of control of the Target Company without acquisition of its shares).
4. Regulation 2(1)(c) of the Takeover Code defines ‘Control’ as ``shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner``
5. There have also been a few attempts by the SEBI and the Securities Appellate Tribunal (SAT) to address the question of control in the following cases:
   • In the Subhkam Case, SAT held that affirmative voting rights (AVRs) do not amount to control and therefore will not trigger the open offer requirements under Regulation 12 of the Takeover Code. However, Supreme Court has set aside this SAT order stating that it should not treated as a precedent;
     
     
   • In the Kamat Hotel Case , SEBI vide its order dropped the charges on the ground that the inter-se agreement was a term agreement which had already lapsed.
     

Accordingly, there was no conclusion to decide trigger of control over a company under the Takeover Code.

6. SEBI in this matter had to ascertain whether these packaged rights between RRPL and VCPL amount to control.
7. SEBI noted that the various rights given to VCPL were exercisable “at any time during the tenure of the Loan or thereafter”. In other words, even if the promoters were to repay the loan, the conversion option would not have been rendered void, which is an abnormal stipulation.
8. Accordingly, SEBI concluded that the transaction was indirectly one of acquisition in the disguise of a loan. Accordingly, VCPL has been directed to make an open offer under the Takeover Code. 
   
   
   MHCO COMMENT
   
   The definition of `Control` is similar in the old Takeover Code and the new Takeover Code of 2011. AVR and other similar preferential packaged rights have always been a controversial area where SEBI has taken a stand that it amounts to exercising control. Therefore, until Supreme Court rules on control, in acquisition financing transactions, the financing documents would need to be carefully drafted to ensure that the financier through the bundle of rights granted by such documents does not indirectly acquire control of the company whose shares are being purchased. If such care is not exercised, SEBI could order an open offer by the financier.
   
   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

IBC AMENDMENT ORDINANCE | INCLUSION OF HOME BUYERS | AN ANALYSIS

Introduction

Pursuant to the Insolvency Law Reform Committee Report dated 3 April 2018 (``Report``), the Government has promulgated the Insolvency and Bankruptcy (Amendment) Ordinance (``Ordinance``) on 6 June 2018 to implement the recommendations in the Report by amending the Insolvency and Bankruptcy Code, 2016 (``IBC``). One of the objectives of the Ordinance is to balance the interests of various stakeholders in the IBC including home buyers. This post analyses the issues that arise from the amendments made by the Ordinance to include home buyers in the IBC.

The Ordinance includes home buyers as financial creditors by inserting an Explanation to Section 5(8)(f) which defines a “financial debt”. Financial debt is defined to mean a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes inter alia any amount raised under any other transaction having the commercial effect of borrowing. Under the newly inserted Explanation (i) any amount raised from an allottee under a real estate project is deemed to be an amount having the commercial effect of a borrowing; (ii) the definition of ``allottee`` and “real estate project” are to be taken from the Real Estate (Regulation and Development) Act, 2016 (``RERA``). “Allottee” is defined under RERA in relation to a real estate project as a person to whom a plot, apartment or building has been allotted, sold (whether as freehold or leasehold) or otherwise transferred by the promoter and includes a subsequent acquirer of such property. “Real estate project” is defined under RERA inter alia as the development of a building or a building consisting of apartments or converting an existing building or a part thereof into apartments or the development of land into plots or apartments for the purpose of selling all or some of the said apartments or plots or building, as the case may be. The Explanation results in the categorisation of home buyers as financial creditors under the IBC.

The IBC and RERA

The first issue that arises from the inclusion of home buyers in the IBC is whether such a step was necessary considering the provisions of RERA. RERA was enacted with the objective of establishing the Real Estate Regulatory Authority for regulation and promotion of the real estate sector, to promote efficiency and transparency in the sector and to protect the interests of consumers in the sector. RERA provides for registration of real estate projects with the competent authorities and imposes numerous obligations on the promoter of such real estate projects. Of relevance is the obligation of the promoter to enter into an agreement for sale with the allottees and adhere to the provisions of such agreement for sale. If the promoter breaches the terms of such agreement for sale, the allottee can choose to withdraw from the project and, in such a case, is entitled to return of any money paid by him along with interest and compensation as determined by the adjudicating authorities. RERA also imposes stringent penalties on the promoter for failure to adhere to the stipulations of RERA. It appears to be a complete code on the protection of allottees of real estate projects.

The IBC was enacted inter alia to consolidate and amend the laws relating to reorganisation and insolvency of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. It is important to emphasise that the IBC is not a recovery mechanism although commencing proceedings under IBC may practically result in the recovery of dues. The primary reason for this is that if a financial creditor files an application before the National Company Law Tribunal (``NCLT``) for commencement of the corporate insolvency resolution process against a corporate debtor and such application is admitted, a corporate insolvency resolution professional is appointed for the corporate debtor who is entrusted with management of the corporate debtor and the Board of Directors of such corporate debtor is superceded. This stipulation in the IBC leads to a settlement of a number of cases before the application is admitted.

For a home buyer to commence proceedings under the IBC as a financial creditor, there should be a default in relation to his financial debt. “Default” is defined to mean the non-payment of the debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or corporate debtor, as the case may be. The Ordinance creates a deeming fiction in relation to any amount raised by an allottee under a real estate project. But, when can a default in relation to such amount be said to occur? Is it when the agreement of sale is breached in any regard by the corporate debtor or is it only in relation to delays in completion of the real estate project and handing over possession? In relation to delays, is it any delay or an inordinate delay? The Ordinance is not clear on this aspect. This problem occurs because a debt has a repayment schedule while an amount raised from an allottee in a real estate project may or may not have a repayment stipulation in the agreement for sale. Given this ambiguity, the provisions of RERA would aid the allottee in withdrawing from a real estate project where the promoter has breached the agreement for sale. Therefore, was the amendment brought about by the Ordinance really necessary? Is it an indication that the provisions of RERA are inadequate?

There is another facet to this issue that needs discussion. Section 88 of RERA provides that RERA shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force. Further, Section 89 of RERA provides that the provisions of RERA shall have effect, notwithstanding anything inconsistent contained in any other law for the time being in force. Similarly, Section 238 of the IBC provides that the provisions of the IBC shall have effect, notwithstanding, anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Can it be argued that the IBC and RERA are inconsistent because of the nature of consequences that flow under each legislation? I submit that this is not the case since the admission of an application under the IBC results in the commencement of the corporate insolvency resolution process while a complaint under RERA could result in the adjudicating authorities imposing penalties on the promoter and an order for return of money to the home buyer with interest and compensation. However, there is a catch. Once an application is admitted under the IBC, the NCLT must order a moratorium on the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority. This moratorium would be in effect from the date of the order till the completion of the corporate insolvency resolution process. Thus, it appears that once an application is admitted under the IBC and a moratorium declared, any proceedings commenced under RERA would be suspended till completion of the corporate insolvency resolution process. While the corporate insolvency resolution process is to be completed within 180 days, which may be extended by a further 90 days on an application by the Committee of Creditors (“CoC”), practically this stipulation is rarely met. Therefore, if the home buyer is unable to settle the matter with the developer / promoter and his application under IBC is admitted, the moratorium may defeat the purpose of his inclusion in the IBC. Is this in the best interests of the home buyer?

A linked issue relates to the relief that a home buyer can claim once an application is admitted by the NCLT against the corporate debtor who is a promoter / developer. The process under the IBC contemplates submission of resolution plans to the insolvency professional based on an information memorandum circulated by the insolvency professional. These plans are then placed before the CoC who, pursuant to the amendment brought about by the Ordinance, must approve a plan by a 66% majority. Once such approval is in place the NCLT must give its final approval for the approved resolution plan which would bind all stakeholders, including home buyers. Most developers in India are burdened by large debt, most of which is secured. The ability of a home buyer to influence the approval of a resolution plan and ensure his interests are protected appears limited given this scenario. The question, therefore, remains as to what a home buyer can do if he is unable to recover any money paid by him to the developer after a resolution plan has been approved? Can he continue with proceedings under RERA? Further, if a resolution plan is not submitted or is rejected, the corporate debtor goes into liquidation. In the priority waterfall prescribed by Section 53 of the IBC, it appears that a home buyer would be an unsecured creditor and can only recover his dues after workers, secured creditors and employees have recovered their dues. Given that a corporate debtor who is being liquidated may not have sufficient assets to meet large amounts of debt, the possibility that a home buyer will receive any money on liquidations appears slim.

Other Issues

An elaborate mechanism for representation of home buyers at meetings of the CoC is also prescribed by the IBC. As part of this mechanism, an authorised representative must be appointed if the number of home buyers seeking relief exceeds a specified threshold. The authorised representative must take instructions of each home buyer he represents and vote in accordance with those instructions at the meetings of the CoC to the extent of the voting share of such home buyer. The actual process of such voting is to be laid down by the Insolvency and Bankruptcy Board of India. For corporate debtors with large amounts of debt from other financial creditors, the ability of the home buyer or group of home buyers to influence the outcome of decisions at meetings of the CoC appears limited. This is further enhanced by the fact that the Ordinance reduces the voting threshold for decisions of the CoC from 75% to 66%. Where provision is not made in the IBC specifying a voting threshold for decisions of the CoC, decisions by the CoC are to be based on the approval of a simple majority of the financial creditors. Due to these changes, a home buyer is unlikely to have a major say at the meeting of the CoC.

The Ordinance does not deal with the manner in which home buyers can apply to the NCLT for initiating the corporate insolvency process against a developer. As it stands, even a single home buyer could make such an application. Problems may arise if multiple home buyers from a single developer initiate multiple proceedings. Also, if the developer has multiple projects, multiple proceedings could be initiated by home buyers in each project. This could clog the NCLT and lead to delays that are contrary to the time bound process mandated by IBC.

Conclusion

As is usual with most legislation in India, the amendments brought about by the Ordinance in relation to home buyers do not address a number of issues that should have been considered before the changes were made. I submit that strengthening the processes under RERA would have been a more optimal solution rather than including home buyers as financial creditors in the IBC. The efficacy of the IBC as a remedial mechanism for home buyers appears doubtful. The only positive from such inclusion is that home buyers could put pressure on an errant developer with adequate means to recover their moneys through a settlement after an application has been filed under IBC.

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