Companies Act Archives - MUDS

The Constructive Notice Doctrine in the Companies Act of 2013

Shweta Gupta — Wed, 15 Sep 2021 03:49:42 +0000

The Doctrine of Constructive Notice is the legal concept of presumption of knowledge of that certain subject or information.

A business is a separate legal entity that can be formed by a group of persons to profitably carry out economic operations. The company’s formation and operation are governed by a set of laws, rules, and regulations. The objective of establishing such regulations is to protect both the company and its management, as well as any outsiders who have a contractual relationship with the company. A set of rules and principles have been established to safeguard the company from outsiders and the other way around.

Companies make money by utilizing the resources of the country. As a result, companies play a critical role in economic growth, necessitating the establishment of laws governing them. These rules function as a disincentive to unethical and unfair commercial practices.

The Constructive Notice Doctrine

The concept of Constructive Notice is one of the most important ideas we meet when studying Company Law. The theory of Constructive Notice means that the AOA is well-known by an outsider who wishes to hold any contact with the firm shortly since the AOA is a public document and is available to everyone u/s 399 of the Companies Act, 2013.

From the time the business is registered, the AOA and MOA are considered “public papers.” They are open to the general public for viewing. As a result, it is believed that everyone who interacts with the company is familiar with its policies and procedures. The Doctrine of Constructive Notice is the name given to this assumption.

The rule of constructive notice applies not only to MOAs and AOAs but also to all other documents that must be filed with the Registrar of Companies, such as Section 117 special decisions. The theory of constructive notice, on the other hand, does not apply to papers filed with the registrar of companies only to preserve records.

The notion, according to Palmer, only applies to papers that influence the company’s rights.

Constructive responsibility is a concept that attempts to simplify business rules. It protects businesses from outsiders when they interact with them. Nonetheless, this regulation was seen to cause more harm than benefit, lowering its credibility. When the rule in dispute is internal, the courts established the idea of indoor management to limit the application of this provision.

This English term was originally only used in cases of fraud, but it rapidly expanded to include cases of extreme carelessness.

Difference between constructive notice and actual notice

The terms “constructive notice” and “actual notice” are often interchanged. A person may have constructive notice even though he does not have actual notice. Actual notice occurs when a person becomes aware of an event or issue for the first time. Constructive notice, on the other hand, implies legal notice even though no actual notice was ever given. However, under the circumstances, the individual should have a reasonable understanding of the procedure. For example, we regularly encounter legal notices in newspapers and other publications.

In Oakbank Oil Co. v. Crum (1882) 8 A.C. 65, it was decided that everyone who interacts with the business is presumed to have not only read the company’s MOA and AOA but also fully grasped its actual meaning. Constructive Notice is the name for this sort of notice.

Characteristics of Doctrine of constructive notice

Constructive Notice, sometimes known as legal fiction, happens when courts assume parties have the knowledge they do not have.

When serving an interested party becomes difficult due to the party ignoring the process server at his door or being unable to be recognized when service is attempted, this notice is commonly utilized.

Constructive notice is preferred above actual notice; for example, if the summons is duly served with necessary papers, the case may be dismissed for lack of notice.

The individual who was duly served and received the constructive notice but did not get a physical copy of the summons and supporting documents owing to any other cause would not be entitled to dismiss the case on the grounds of failure of service in the constructive notice.

Effects of the doctrine of constructive notice

According to the Constructive Notice thesis, it is the outsider. It is responsible for knowing the papers that govern the company. He should be well-versed in all legal papers before signing any deal with the firm. It is also the responsibility of the third party to comprehend the real meaning of the provision and conditions included therein. According to the idea, corporate bodies are preferred.

The Madras High Court disputed the scope of constructive responsibility in the case of Kotla Venkataswamy vs. Rammurthy, AIR 1934 Mad 579. The question, in this case, was whether the mortgage bonds were issued lawfully in line with the company’s AOA, therefore rendering the business liable.

All deeds, checks, certificates, and other papers must be signed on behalf of the Company by the Managing Director, the Secretary, and the Working Director before they are recognized valid, according to Article 15 of the Company’s AOA.

The plaintiff accepted a mortgage deed signed by only the secretary and an executive director in this case. According to the court, the plaintiff cannot bring a claim under this deed. The Court went on to say that if the plaintiff had read the articles, they would have seen that a deed to carry out the job required by the firm’s three authorized officials was badly signed, and they would not have accepted such a deed.

Even though she may have acted in good faith and that her funds were used for the company’s advantage, the bond is void.

Nonetheless, the court later developed a principle in Royal British Bank v. Turquand (1856) 6 E&B 327, holding that, while the third party should have notice of all the contents of the MOA & AOA, they are not required to scrutinize internal matters and see whether the corporation followed all internal procedures.

The Doctrine of Indoor Management is an exception to the Doctrine of Constructive Notice

The theory of constructive notice is an exception to the principle of indoor management, and it’s important to note that it doesn’t allow outsiders to have access to or notice of the company’s internal actions. As a result, if an act is allowed by an MOA or AOA, an outsider might assume that all formalities are followed in carrying out the act, which is known as the Turquand Rule or the Doctrine of Indoor Management. This is based on The Royal British Bank vs. Turquand (1856), 6 E&B 327, a landmark case.

The notion of indoor management asserts, in layman’s terms, that the company’s indoor concerns are its responsibility. As a result, those who engage with a company through its directors or other persons must understand this indoor management idea. They might assume that the members of the firm are acting or carrying out their tasks within the scope of their stated authorization. As a result, if an act authorized by the Articles is carried out in a certain way, outsiders working with the company may conclude that the director or other authorities acted on their behalf.

OBJECTIVES

Business is a realm in which all contractual parties must be protected, and excellent business can only assure the expansion of the economy and commerce. Though this concept appears to be in place to protect those doing business with the firm, its primary goal is to promote corporate investment to keep the business and the economy functioning efficiently.

In Dey v. Pullinger Engg Co. (1921) 1 KB 77, Justice Bray stated:

“The wheels of business would not run smoothly if people engaging with businesses were required to thoroughly inspect a company’s internal equipment to ensure that nothing was wrong.”

Exceptions to the doctrine of indoor management:

Indoor management theory isn’t ideal in every circumstance; in fact, there are some instances where it can’t or shouldn’t be used. These exceptions, like the doctrine’s inception, have been established by the courts, and they are as follows:-

Recognized irregularity

If the individual dealing with the irregularity was aware of it, the principle of indoor management is inapplicable. This is the first and most crucial restriction on the concept’s use. As a result, “insiders,” or individuals who, under their position inside the business, are in a position to know whether or not internal regulations have been observed, could not rely on the presumption of irregularity.

Suspicion of carelessness

Because the words “in the absence of circumstances putting him on inquiry” were used in the Turquand case, the benefits of this principle are unavailable to the person who had suspicions of irregularity, because, in this scenario, he is required to satisfy himself with the transaction’s legality and all issues relating to it.

In the matter of Anand Bihari Lal V. Dinshaw & Co, Air, 1942 Oudh 417, the plaintiff accepted the transfer of the company’s property from its accountant. The transaction was deemed null and void. The plaintiff could not have presumed that the accountant had the authorization to transfer the plaintiff’s property since there was no power of attorney. carelessness.

Forgery

Turquand’s rule does not apply to forgeries. As noted in Ruben v. Great Fingall Consolidated, (1906) AC 439, persons dealing with limited liability organizations are not compelled to inquire into their indoor administration and will not be damaged by irregularities of which they are uninformed, but this does not apply to a forgery. The plaintiff, in this case, was the owner of a respondent company’s share certificate. The company secretary, on the other hand, issued it, attaching the corporate seal and forging the signatures of two directors.

Articles as a medium of communication

The AOA frequently uses the phrase “power of delegation.” To claim protection under this regulation and this sort of exemption, you must know the AOA’s MOA. No one is protected if they did not consult with it or behave in line with its provisions.

Acting ostensibly outside the scope of the company’s officer’s power

This is the most commonly used exemption to the “Turquand rule.” It goes without saying that if an officer’s action looks to be outside his power, it should not be relied upon, and if it is, the company cannot be claimed to be bound by it.

“The plaintiff accepted the transfer of property of the business by an accountant of the firm, which was obviously outside the skills of an accountant, and the company was declared not to be bound,” according to the Anand Behari Lal v. Dinshaw and Co. AIR case.

Conclusion

Constructive criticism is usually criticized as a fanciful philosophy. Because the idea of constructive notice is a fictional concept created by courts through judicial declarations, this is the case. Many contracts are created between the outsider and the company in a single day. Every outsider is required by the doctrine to be aware of all of the company’s legal documents. This is done to ensure the smooth and effective operation of the corporate world.

The post The Constructive Notice Doctrine in the Companies Act of 2013 appeared first on MUDS.

A Case Study Explaining Directors’ Disqualification Removal through Writ Petition

Shweta Gupta — Sat, 07 Nov 2020 06:01:42 +0000

A Case Study Explaining Directors’ Disqualification Removal through Writ Petition

With the implementation of the Companies Act 2013 the Ministry of Corporate Affairs applied strict norms on companies defaulting on the set compliances mentioned in the act. The Companies Act 2013 had many changes compared to the old Act of 1956. The new Act comprised of strict provisions for non-complying companies which included directors; disqualification. The Act says if any company fails to meet the compliance standards set by the government, then the Registrar of Companies can remove their names from its list of regularised and also, order disqualification of directors for five years.

In this article, we will understand

The situations in which companies are considered defaulters.
Why and for how long the directors are disqualified?
What are the ways to remove the director’s disqualification?
Judiciary’s perspective on cases of removal of director’s disqualification thorough a case from Allahabad High Court.

We will also understand the process of removal of a director from the perspective of a directors’ disqualification removal case in Allahabad High Court. This will help us understand the general viewpoint od judiciary on cases related to the removal of directors’ disqualification.

Rules for Companies to fall in Defaulter’s List

The Companies Act of 2013 required companies to furnish documents related to their finances and operations every year. Defaulting on submission of these documents for a continuous period of three years had stricter provisions of punishment compared to the previous version of Companies Act. The act considered the director of the company responsible for actions of the company and so, has a policy of strict actions against them in case their company defaults.

Grounds for Disqualification of Directors

The directors of the company are responsible for the smooth operation of the company and therefore they are responsible for any action taken by the company that leads to failure in complying with the directions of Government. The following points will give information on rules or issues which can lead to directors’ disqualification,

Any directors of the company who has been convicted under section 188 by the Court regarding party transections during last five years.
The Court also has the authority over the disqualification of directors’ who are undischarged insolvent.
If any court or tribunal has earlier ordered the disqualification of the director.
If the directors fail to inform about their respective shares in any company held by them alone or in collaboration.
If the director is convicted in any offence by the Court and sentenced to imprisonment for more than 6 months.
If the organisation fails to redeem any debentures on their due date or fails to pay the interest due.
If the company of the director has not filed its financial statements and annual returns for three years consecutively.
Failure to pay the declared dividend and continuing so for one year or more could also lead to disqualification of the company’s director.
If the company has failed to repay the deposit made to it or pay interest on those deposits.

If any director has applied for his/her adjudication as an insolvent or if the directors’ application for the same is still pending.
If any Court confirms that the director is not of sound mind.

Ways to Remove Directors’ Disqualification

During the initial few years of introduction of the new Companies Act, it was a common understanding that there was no remedy available for directors who are disqualified by RoC. It was thought that waiting for the five years exile period to end is the only way to resume directorship work. However, there was another option which encompassed the revival of the disqualified company after struck off from RoC. Once the company is revived, its directors could also apply for the revival of their role. There were about 2.4 companies that were axed by the Ministry of Corporate Affairs (MCA) using the Companies Act in 2017. These companies started exploring the options for their revival and the directors hoped to get their DIN reactivated. When the MCA came up with the Condonation of Delay Scheme 2018, the company’s directors hoped to get their company revived without paying heavy penalties and apply for their disqualification removal.

It is the responsibility of the company’s director to file all the financial details of the company with the Ministry of Corporate Affairs every year as per the Companies Act. If the directors fail to submit these details for three consecutive years, then the Ministry could go on to remove the company from RoC and deactivate its directors’ DIN for five years. In the year 2018, the Central Government came up with Condonation of Delay Scheme (CODS) where directors could file the relevant document to get their DINs reactivated. The scheme involved the payment of a moderate fee and condonation of hefty penalties due to defaulting on a payment. Many companies at that time used this scheme for revival and removal of directors’ disqualification. This is how this scheme worked:

The disqualified directors were needed to submit all the statutory document with the RoC to get their DIN activated temporarily.
The documents are submitted with the statutory fee prescribed in Section 403 of the Companies Act.
The small fee needed was only 30000 Rs. With an e-CODS form and so saved companies form hefty penalties.

Remedies Applicable for Directors’ Disqualification Cases after CODS

There were many directors and company owners who could not get advantage from CODS Scheme to revive their business and thus, their directors also missed the chance at the revival of their careers. The directors’ who failed to use this scheme for the removal of disqualification were left with two options. Either they should apply in the National Companies Law Tribunal and hope to get company revival order. Once the company was revised, they could apply for the removal of their disqualification and reactivation of DIN. In this case, when the NCLT passed the order of company revival, then RoC used to verify this order and relevant documents of the directors. But this procedure could only be followed if the companies wanted revival, the other option for directors who just wanted to activate their DIN without applying for the revival of their company was to apply for removal of disqualification in the respective High Court through a Writ Petition. The option of writing a Writ Petition to High court is attributed to constitutional rights conferred by Article 226 of the constitution to seek relief.

Drafting a Concise Writ Petition

The disqualified director must undertake to use his constitutional right to file the Writ Petition under Article 226 of the Constitution in the respective High Court. The High Court should be chosen according to the area of jurisdiction of the company. In the application, the petitioner should include the following information,

List of date and events of disqualification.
Affix an urgent application with a Notice of Motion.
Should give reasonable justification to court for not filing the statutory documents that led to the disqualification of company and removal of its name from RoC.
Inform Court about the current status of the company and its directors seeking relief.
List out the companies in which the petitioner is serving as a director.
File a copy of the impugned Press Release or Notice issued by the RoC that lists out the names of the disqualified directors.
Personal information such as name address and designation of each Memo of parties should be mentioned in the petition.
A prayer cause should be attached to dismiss the publication issued by the RoC under Companies Act’s Section 164 (2).

After this, the High Court issues orders after hearing the option for reactivation of the DIN of directors. The directors need to file the copy of the order and all other statutory documents to the RoC to continue with the process p0f registration.
Once the defaulter petitioner fulfils all the required documents and completes payment of all the penalties, the RoC will start the process of reactivation.

Understanding Judiciary’s View on Writ Petitions through a Case

Let’s understand how filing a Writ Petition can help in the removal of directors’ disqualification and how Allahabad High Court quashed cancellation of DIN of 161 directors by RoC Uttar Pradesh.

In this case, the petitioners were directors of companies which defaulted on submitting their yearly financial statement continuously for a period of three years. The resulted in RoC applying Section 164(2) of the Companies Act leading to company’s name being struck off from RoC and disqualification of their directors. The directors were also disqualified from the directorship of other companies (which were not defaulters). The petitioners also alleged that no show-cause notice was served to them before disqualification and RoC didn’t verify any facts before ordering the cancellation of their DINs for five years. It was argued by petitioners that the ruling of Section 164(2) that disqualifies directors from the directorship of other non-defaulter companies is an irrational and unreasonable violation of the fundamental rights mentioned under Article 19 (1) (g). With these and other arguments, the petitioners asked for the removal of disqualification from directorship and also asked the court to order RoC to reactivate their DIN numbers.

Order of Allahabad High Court (Disqualification of Directors)

In its orders, the Allahabad High Court’s bench of Justice Rajeev Mishra and Justice Sudhir Agrawal quashed cancellation of DINs of directors and allowed writ petitions partly. The court said,

“The above discussion leads to the consequence that all writ petitions have to be allowed partly and action of respondents in deactivating DIN of petitioners is to be quashed. We accordingly allow writ petitions partly. We also quash the list published by ROC, declaring petitioners in all these writ petitions as disqualified to be Directors of companies and debarment of being Director for a period of five years. Uttar Pradesh ROC, now, shall be at liberty to give notice to petitioners to verify and establish the facts whether disqualification alleged to have been suffered by petitioners-Directors so as to attract Section 164 (2) of Act, 2013, actually exists or not. After giving them the opportunity and being satisfied that such disqualification has occurred, it will proceed further in accordance with the law.”

The above order is a welcome sign for all the directors who are looking for removal of their disqualification from Allahabad High Court. This order could pave the way for other directors to file for relief in the High Court if they want to remove disqualification without the revival of their company. The case has also led the way for directors who were working in multiple companies but removed from directorship just because one of their company defaulted.

Why Do You Need an Experienced Representative?

Taking legal help to file a Writ Petition in the High Court is necessary considering the technicalities involved in the process. There are lots of details that should be considered before drafting the petition and only an experienced professional can handle this kind of job. Also, an expert professional from a legal firm will not only help you in the filing of the petition but also help in representing your case in the Court. An advocate from a reputed firm will attend all the hearing of the Court and put arguments effectively to ask for relief from disqualification. Once the Court grants a favorable order, the expert will help you in following the complete procedure mentioned in the order. He will also help you file all the necessary documents in RoC before activation of DIN.

If you are worried about the outcome of filing a Writ petition in high Court or confused whether it will bring positive results, then this should serve as good news to you. There have been many instances across High Courts from all over the country where director’s disqualification has been removed after hearing on Writ petition filed by them. The judiciary has granted interim relief to many directors and, quashed orders of RoC in some cases. So, you can safely assume that the judiciary generally gives a favourable decision to directors who give valid reasons for defaulting. This should serve as a ray of hope for disqualified directors who are sceptical of filing writ petition for disqualification removal of their directorship. Just select an experienced legal firm that can represent your case efficiently and hope for a positive outcome.

The post A Case Study Explaining Directors’ Disqualification Removal through Writ Petition appeared first on MUDS.

PoSH Training for Corporates: ICC Structure and Complaints Redressal Mechanism

Shweta Gupta — Sat, 31 Oct 2020 12:03:38 +0000

The PoSH (Prevention of Sexual harassment Act) law seeks to empower women to fight against sexual harassment at the workplace. Over the years, the Prevention of Sexual Harassment (PoSH) Act has helped many women in getting justice for the cases of sexual harassment they have faced in the workplace. However, it has also become a threatening tool for some women to extort money from their organization’s management through malicious PoSH complaints. There is sometimes a lack of awareness among employees which can lead to unwanted cases of sexual misconduct. Also, many organizations do not know how to set up a proper POSH complaint redressal system or constitute the internal complaints committee. Hiring an external member for the internal complaints committee is also an issue that organizations frequently face. The solution to all these problems lies in PoSH training of employees and management of the organization through a professional legal firm.

What Is ICC and Who Are the Members?

ICC or Internal Complaints Committee is a group of people that is mandatory to constituted in every organization with ten or more employees. This committee is provided with the rights equivalent to a court by PoSH Act and is responsible for the investigation and hearing of cases of sexual harassment in any organization. The structure of the ICC is mentioned in the PoSH Act. It consists of-

A Chairperson/ Presiding Officer – It must be a woman employed at the senior level at the workplace and has a credible record.
Two Members – Shall be amongst the employees preferably committed to the cause of women/ experience in social work/ have legal knowledge.
External Member – External member could be a doctor, an Advocate, or from an NGO working for the cause of women. the external member empanelment is also mandatory for each company. the member should be well versed with the provisions of the PoSH act. It is common for corporates to hire a legal expert as an external member in ICC to help the committee over the legal complications of any case.

The formation of an ICC is a must for all branches of corporates. All organizations must file an annual report of the cases handled throughout the year by ICC to the Ministry of Women and Child Development. Not following these norms could lead to action taken against the organization or even cancellation of their license.

What Should be an Ideal Complaint Redressal Mechanism?

An ideal PoSH complaint redressal mechanism is a must for any organization for the time-bound disposal of PoSH complaints. The structure should include an easy medium for women to register their complaints. The ICC should maintain confidentiality in such matters during the investigation and hearing of a complaint. the investigation must be unbiased and the point of view of all parties must be considered. ICC should also ensure that the victim gets instant action for their workplace safety. this includes transferring the alleged perpetrator to a different department or branch where the victim won’t have to face the perp till the investigation is complete. A time-cap must be introduced for all complaints to ensure efficient redressal of such cases.

How PoSH Training Helps?

Conducting PoSH training of employees helps them to get aware of their rights under the PoSH Act.
This helps women to come out and report any sexual misconduct from a college or a senior in the workplace and so, ensures a safe working environment.
PoSH Training also enables employees to learn about fake PoSH complaints or what can be categorized as malicious complaints. This can reduce no. of false or fake complaints in the organization.
Proper PoSH training for management makes them aware of the process to create a robust and effective complaint redressal system.
It also helps the management to set up an internal complaints committee.

How to Get PoSH Training for Employees

Contact a Legal firm that has experts with complete knowledge of the PoSH Act and have experience in conducting training sessions for employees in prestigious organizations.
These firms mostly have professionals who have worked in the internal complaints committee of other organizations and can help in creating ICC in the new company.
The experts can easily make employees understand the most technical terms of the Act clearly with their effective communication skills.

Conducting PoSH training sessions for employees must be made mandatory so that the employees understand the consequences of sexual misconduct and what acts constitute sexual harassment. This will help in creating a more secure and tension-free environment for women at the workplace. Companies can take help from legal firms to understand the formation of ICC and a well-structured complaint management system. Legal firms can also help companies in becoming PoSH compliant and following all the norms of the PoSH Act.

The post PoSH Training for Corporates: ICC Structure and Complaints Redressal Mechanism appeared first on MUDS.

Procedure for Removal of Director Disqualification | Latest Provisions

Shweta Gupta — Tue, 27 Oct 2020 07:43:23 +0000

The New form of Companies Act introduced in 2013 had many changes compared to the old Act of 1956. The new Act consisted of strict provisions for non-complying organisations and their directors. According to the Act, if any company fails to comply with the rules of operations set by the government, then the Registrar of Companies can remove their names from its list of regularised and also order its directors’ disqualification for five years.

In this article, we will understand

What was the impact of these new provisions in the act?
On what grounds directors are disqualified from the organisation?
What are the ways to remove the director’s disqualification

We will also understand the process of removal of a director from the perspective of a directors’ disqualification removal case in Kolkata High Court. This will help us understand the general viewpoint of the judiciary on cases related to the removal of directors’ disqualification.

Grounds for Directors’ Disqualification

The companies Act of 2013 required companies to furnish documents related to their finances and operations every year. Defaulting on submission of these documents for a continuous period of three years had stricter provisions of punishment compared to the previous version of Companies Act. The act considered the director of the company responsible for actions of the company and so, has a policy of strict actions against them in case their company defaults.

“Any company can have one or more number of directors working full-time or Part-time. All these directors will fall under the category of OFFICERS and strict actions will be taken against them if their companies fail to abide by the set rules.”

The directors of the company are responsible for the smooth operation of the company and therefore, they are responsible for any action taken by the company that leads to failure in complying with the directions of the Government. The following points will give information on rules or issues which can lead to directors’ disqualification,

If the organisation fails to redeem any debentures on their due date or fails to pay the interest due.

If the company of the director has not filed its financial statements and annual returns for three years consecutively.
Failure to pay the declared dividend and continuing so for one year or more could also lead to disqualification of the company’s director.
If the company has failed to repay the deposit made to it or pay interest on those deposits.
If any director has applied for his/her adjudication as an insolvent or if the directors’ application for the same is still pending.
If any Court confirms that the director is not of sound mind.
Any director of the company who has been convicted under section 188 by the Court regarding party transactions during the last five years.
The Court also has the authority over the disqualification of directors’ who are undischarged insolvent.
If any court or tribunal has earlier ordered the disqualification of the director.
If the directors fail to inform about their respective shares in any company held by them alone or in collaboration.
If the director is convicted in any offence by the Court and sentenced to imprisonment for more than 6 months.

How to Remove Directors’ Disqualification?

During the initial few years of introduction of the new Companies Act, it was a common understanding that there was no remedy available for directors who are disqualified by RoC. It was thought that waiting for the five years exile period to end is the only way to resume directorship work. However, there was another option which encompassed the revival of the disqualified company after striking off from RoC. Once the company is revived, its directors could also apply for the revival of their role. There were about 2.4 companies that were axed by the Ministry of Corporate Affairs (MCA) using the Companies Act in 2017. These companies started exploring the options for their revival and the directors hoped to get their DIN reactivated. When the MCA came up with the Condonation of Delay Scheme 2018, the company’s directors hoped to get their company revived without paying heavy penalties and apply for their disqualification removal.

New Ray of Hope! The Condonation of Delay Scheme, 2018

It is the responsibility of the company’s director to file all the financial details of the company with the Ministry of Corporate Affairs every year as per the Companies Act. If the directors fail to submit these details for three consecutive years, then the Ministry could go on to remove the company from RoC and deactivate its directors’ DIN for five years. In the year 2018, the Central Government came up with the Condonation of Delay Scheme (CODS) where directors could file the relevant document to get their DINs reactivated. The scheme involved the payment of a moderate fee and condonation of hefty penalties due to defaulting on a payment. Many companies at that time used this scheme for revival and removal of directors’ disqualification. This is how this scheme worked:

The disqualified directors were needed to submit all the statutory documents with the RoC to get their DIN activated temporarily.
The documents are submitted with the statutory fee prescribed in the Section 403 of the Companies Act.
The small fee needed was only 30000 Rs. With an e-CODS form and so saved companies form hefty penalties.

What about the Companies not Using CODS?

There were many directors and company owners who did not use CODS Scheme to revive their business and thus, their directors also missed the chance at the revival of their careers. The directors’ who failed to use this scheme for the removal of disqualification were left with two options. Either they should apply in the National Companies Law Tribunal and hope to get a company revival order. Once the company was revived, they could apply for the removal of their disqualification and reactivation of DIN. In this case, when the NCLT passed the order of company revival, then RoC used to verify this order and relevant documents of the directors. But this procedure could only be followed if the companies wanted revival in the first place. The other option for directors who just wanted to activate their DIN without applying for the revival of their company was to apply for removal of disqualification in the respective High Court through a Writ Petition. The option of writing a Writ Petition to High court is attributed to constitutional rights conferred by Article 226 of the constitution to seek relief.

Courts Perspective on Writ Petitions

Let’s understand how filing a Writ Petition can help in the removal of directors’ disqualification and how Kolkata High Court responded to such petition through the case of Mukul Somany v. Registrar of Companies, West Bengal, 2018.

In this case, the petitioner was in the list of disqualified directors released by the RoC. The petitioner’s company was defaulter because of which he was disqualified from directorship. According to the Act, the petitioner could also not continue as director of other companies which were not defaulters. The removal of directorship came as some companies under the directors incorporated in the year 2010 were not filing annual returns for 3 years as they had not received the certificate of commencement of business. Hence, the directors were disqualified from the post of directors in any company they were working with. The order was effective from the 1^st November 2016, under section 164(2) of Companies Act.

any company they were working with. The order was effective from the 1^st November 2016, under section 164(2) of Companies Act.

View of Kolkata High Court:

The petitioners contended relying on the case of Arun Seth v. Union of India, that Section 164(2) of the Companies Act came into force since April 1, 2014, and so, it cannot be applied to incidents before the FY 2013-14. The respondents form the government said that the Section was brought to penalize defaulters from any period and not necessarily the defaulters after the Act came into force. Considering both arguments, the Kolkata High Court upheld petitioners’ arguments saying that the retrospective application of the Companies Act is unjustified. Further, the court said that the directors shouldn’t be removed from the directorship of companies which are working according to the guidelines of RoC. The Court in its final order stayed the disqualification of directorship of petitioners from the active company and allowed them to continue in them. However, the relief was not meant for the directorship of companies which were struck off.

This case paved the way for other directors to file for relief in the High Court if they want to remove disqualification without the revival of their company. Even after the CODS was over, filing of the Writ petition to remove directors’ disqualification is still the proven way to end the exile for directors.

Procedure to File a Writ Petition

The disqualified director must undertake to use his constitutional right to file the Writ Petition under Article 226 of the Constitution in the respective High Court. The High Court should be chosen according to the area of jurisdiction of the company. In the application, the petitioner should include the following information,

List of date and events of disqualification.

Affix an urgent application with a Notice of Motion.
Should give reasonable justification to the court for not filing the statutory documents that led to the disqualification of the company and removal of its name from RoC.
Inform Court about the current status of the company and its directors seeking relief.
List out the companies in which the petitioner is serving as a director.
File a copy of the impugned Press Release or Notice issued by the RoC that lists out the names of the disqualified directors.
Personal information such as name address and designation of each Memo of parties should be mentioned in the petition.
A prayer cause should be attached to dismiss the publication issued by the RoC under Companies Act’s Section 164 (2).

After this, the High Court issues orders after hearing the option for reactivation of the DIN of directors. The directors need to file the copy of the order and all other statutory documents to the RoC to continue with the process p0f registration.
Once the defaulter petitioner fulfils all the required documents and completes payment of all the penalties, the RoC will start the process of reactivation.

Why Taking Legal Help is Necessary?

Taking legal help to file a Writ Petition in the High Court is necessary considering the technicalities involved in the process. There are lots of details that should be considered before drafting the petition and only an experienced professional can handle this kind of job. Also, an expert professional from a legal firm will not only help you in the filing of the petition but also help in representing your case in the Court. An advocate from a reputed firm will attend all the hearing of the Court and put arguments effectively to ask for relief from disqualification. Once the Court grants a favourable order, the expert will help you in following the complete procedure mentioned in the order. He will also help you file all the necessary documents in RoC before activation of DIN.

The Court is in general agreement with the aggrieved petitioners on the following points:

Retrospective implementation of the Prospective Act: In some cases, the Court also found the act being applied retrospectively for disqualification of directors. The Courts deemed this kind of application to be unjustified.
Contradictory Provisions in Acts of 1956 and 2013:: The High Court finds it objectionable that the provisions of the Companies Act of 1956 did not have these regulations for the private companies and their directors, and so the new Act should not impose it on them in 2017.
Ruling orders of RoC are Against Natural Justice: In most cases of directors’ disqualification, the aggrieved petitioners have mentioned that they never got any notice regarding their removal from RoC before the orders. Therefore, they never had a chance to clarify to RoC why they were not able to meet all the compliance standards of RoC. This is against the constitutional right of any individual as it doesn’t allow one person to show the cause of their actions and passes the order unilaterally.

Based on these points you can safely assume that a well-drafted writ petition and representation in court by an expert advocate can lead to the removal of disqualification. Now the only problem here is to keep a positive outlook about the case and find a good legal firm to help in disqualification removal. Pick a reliable and trustworthy firm after thorough research to avail services related to disqualification removal.

The post Procedure for Removal of Director Disqualification | Latest Provisions appeared first on MUDS.

Related Party Transactions

m0dsAdmn — Tue, 10 Oct 2017 09:59:56 +0000

What is Related Party Transactions: A Transaction for a transfer of resources or obligations between related parties as defined below, regardless of whether or not a price is charged as per (AS-18).

(1) Related Parties

Related Party	Relations
Director, KMP or their Relatives and Director, KMP of Holding Co.	Self
Firm	Director / Manager / Relative is a Partner
Private Limited Company	Director / Manager is a Director / Shareholder
Public Limited Company	Director / Manager is a Director / Shareholder holding more than 2% shares along with relatives
Any Body Corporate	Whose BoD / MD / Manager is accustomed to act on direction of a Director / Manager
Any Person	on whose directions a Director / Manager is accustomed to act
A Company	Holding, Subsidiary, Fellow Subsidiary or an Associate Company [Exempt for Pvt. Ltd. Cos.]
Holding Company	Self

(2) Who are Relatives

Member of HUF
Father/Step-father
Mother/Step-Mother
Son/Step-son
Son’s Wife
Sister/Step-sister
Daughter
Daughter Husband

(3) Required of Related Party Disclosure/Approval Section 188(1) of the Companies Act, 2013

Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement
with a related party with respect to —

sale, purchase or supply of any goods or materials;
selling or otherwise disposing of, or buying, property of any kind;
leasing of property of any kind
availing or rendering of any services;
appointment of any agent for above purpose
such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and
underwriting the subscription of any securities or derivatives thereof, of the company:

Provided that nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis

Explanation

Such transactions may be prejudicial to the interest of Company or its stakeholders and hence require scrutiny. Even a related party relationship could have an effect on the financial position and operating results of a Company

office or place of profit” means any office or place—
1. if the director is holding it then he receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
2. where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the holder receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
the expression “arm’s length transaction” means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest. Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution:[Expl. 2 of Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014 – In case of wholly owned subsidiary, the resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between WOS and holding company.]Provided further that no member of the company shall vote on such resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party: [Exempt for Pvt. Ltd. Cos. – MCA Notification dated June 5, 2015]

(4) Register of Contract:

Register(s) to be maintained in form MBP-4

To be placed before the next meeting of the Board and signed by all the directors present at that meeting. To be kept at the regd. office and shall be open for inspection during business hours and extracts may be taken therefrom, and copies thereof may be furnished to any member. The register to be produced at the commencement of every AGM and shall remain open and accessible during the continuance of the meeting.

No entry required to be made in Form MBP-4:

(a) for the sale, purchase or supply of any goods, materials or services if the value of such goods and materials or the cost of such services does not exceed five lakh rupees in the aggregate in any year; or
(b) by a banking company for the collection of bills in the ordinary course of its business.

(5) Internal Control of Related Party transactions:

Duties of Independent Director: pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company
177(4) Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include approval or any subsequent modification of transactions of the company with related parties
Certification in form MGT-8 by a practicing Company Secretary
PCS to certify that with respect to the contracts / arrangements with related parties as specified in section 188 of the Act during the financial year, the Company has complied with provisions of the Act & Rules made there under.

(6) Related Party and Secretarial Standards

Secretarial Standard-1 (SS-1): Related Party transactions to be carried out in physical meetings of the Board only and NOT by circulation.

Secretarial Standard-2 (SS-2):A Member who is not entitled to vote on any particular item of business being a related party, if present, shall be counted for the purpose of Quorum.

(7) Proposed Change in Related Party Transaction

If 90% or more members, in number, are relatives of promoters or are related parties, they can vote on resolutions concerning related party transactions in General Meetings.
in sub-section (3), for the words “shall be voidable at the option of the Board”, the words “shall be voidable at the option of the Board or, as the case may be, of the shareholders” shall be substituted

(8) Related Party Transaction: Prior Approval

Rule 15(2) Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.

A contract or arrangement entered into by a director or any other employee, without obtaining the consent of the Board or approval by a resolution in the general meeting under sub-section (1) may be ratified by the Board or, as the case may be, by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into.

Prior Approval by way of resolution is required.

*If consent is not obtained or such contract or arrangement is not ratified within 3 months, such contract or arrangement shall be voidable at the option of the Board and if the contract or arrangement is with a related party to any director, or is authorized by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

*Without prejudice to anything contained in sub-section (3), it shall be open to the company to proceed against a director or any other employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract or arrangement. [Section 188(4)]

(9) Penalties

On a director or any other employee of a company, who had entered into or authorized the contract or arrangement in violation of section 188 —

in case of listed company – imprisonment upto one year or fine of 25,000/- to 5,00,000/- or with both; and
in case of any other company – fine of 25,000/- to 5,00,000/-
A person convicted for offence under section 188 stands disqualified from holding office of Director for a period of 5 years [Section 164(1)(g)

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