Introduction

A Franchise is a set-up or arrangement where one organisation or a company follows the business idea, and business model of the parent company whilst also using the brand name of such parent company. In simpler terms, a franchise is essentially a business operating under an existing name.

In the franchise, there are two parties namely, the Franchisor (also called the ‘parent company) and the Franchisee (the individual owning a particular outlet of the franchise)While talking about a franchise, some of the popular names that may come to your mind are, McDonald’s, Dominos, Archies, Puma, Zara and many more. India is a ‘ Hot’ market for franchising.

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Take a stroll through any Indian metropolis, and the thriving markets will welcome you with the best top brands. A franchise operates the same through its expansions, for example, the quality of a ‘Puma’ shoe you purchase in India will be the same had you purchased it in some other country.

Further, to float the boat of a business franchise, there must be a Franchise Agreement. A franchise agreement is a legally-binding document that sets out the rights and duties of both the parties involved, that is, the Franchisor and the Franchisee. A franchise agreement is a legal document that grants the franchisee a licence from the franchisor. A licence simply means that one party grants another party authorization to do or use something valuable.

10 THINGS THAT YOU MUST CONSIDER WHILE DRAFTING A FRANCHISE AGREEMENT

Disclosure

Both the franchise agreement and the disclosure documents capture significant information that will help a potential franchisee make an informed decision. The disclosure document, in particular, will highlight important confidential and valid data about the franchisor, the arrangement being offered, and the prerequisites for both parties involved. While the disclosure document discusses the franchisor-franchisee relationship, the franchisee agreement is the legally binding arrangement that regulates that relationship.

The Obligations of a Franchisee

This clause is one of the key highlights of a franchising agreement. Since the Franchisor is already established in the market there is a lot at stake for the franchisor while granting a licence to the franchisee. The obligations of a franchisee help to safeguard the interests of the franchisor in the agreement as a failure to carry out the franchisee’s obligation may inevitably harm the brand name of the franchisor. This clause contains details about the commencement date, location details, business promotion, and product details while maintaining the quality of the product, the sale price of the product and so on.

The Obligations of the Franchisor

The obligations of the Franchisor are always slightly higher than that of the franchisee owing to the fact that it is the franchisor who is lending the business model and name to the franchisee. This clause contains a permit which allows the franchisee to carry out the business under the name of the franchisor. Further, it also specifies the layout of the store, for example, the layout of the Zara store in India would be the same as in Australia. In addition to this, the franchisor must also supply a workforce to the franchisee whilst training them to work in the franchise.

Intellectual Property and Trademark Rights

The franchisee is granted the right to use the franchisor’s name, trademarks, service marks, logos, slogans, design concepts, and other branding indicators under the terms of the franchise agreement. Other intellectual property, such as the user guide and proprietary software systems, will also be granted by the franchisor.

Territories and Boundaries of the Franchise

This particular clause in the agreement is present to define the boundaries of the franchise. It lays down certain limits within which the franchise cannot be located. This clause ensures that there isn’t competition which would otherwise negatively impact the sales of the product.

The Fees and Cost of the Franchise

Aside from the initial price, this section of the contract includes the cost of owning a franchise, such as monthly remuneration, marketing, and other expenses. Many franchise contracts also specify how much money franchisees must have on hand prior to actually purchasing the unit so that franchisors can be confident that their franchisees will be able to manage everything from salaries to equipment maintenance and property preservation.

Franchise Renewal

A franchise agreement must contain a renewal clause which would enable the Franchisor and the Franchisee to renew their contract to continue the franchise.

Termination Policy

Specifics about how a franchise can be terminated are included. If a dispute arises between the franchisor and the franchisee, there may be an Arbitration clause that prevents either party from going to court unless an arbitrator first evaluates the case and makes a suggestion.

Term of the Franchise

A franchise agreement is typically for ten or twenty years. This section of the contract will also specify the terms under which the franchise can be sold to someone else, which may be rigorous in order to ensure that any future franchisee is qualified to be an owner. There may be a right of first refusal clause that allows the franchisor to repurchase the franchise rather than selling it to someone else.

Indemnification and Insurance

The franchise agreement will involve the franchisee keeping certain insurance coverage for the duration of the franchise. Expect indemnification provisions as well. For example, the franchisee is essential to “indemnify, defend, and hold harmless” the franchisor from any claims, costs, damages, or expenses arising from the franchisee’s activities. This is significant as the franchisee carries out the business under an already established business.

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The Doctrine of Indoor Management is a 150 years old doctrine that came into existence to protect the outsiders from the company. This doctrine is the exact opposite of the doctrine of Constructive Notice. This is because while the former protects the outsiders from the company, the latter protects the company from the outsiders. Common law judgments paved way for both of these concepts as they focused upon the reasonableness, fairness, and equity of the statutory enactments.

Meaning 

To understand the meaning of the doctrine of Indoor Management, the doctrine of constructive notice should be understood. There are two important public documents in a company called the Memorandum of Association and Articles of company. These two documents provide the scope, powers, objects, duties, and limitations of the company. Hence, the company must comply with them. When an outsider enters into a contract with the company, he/she must refer to the above-mentioned documents and make sure he/she conforms with them. In the eye of the law, even if a person fails to refer them, it is assumed that he did look through it and he is in conformity with the contents of the documents. This is known as the doctrine of Constructive Notice. 

The exception to this doctrine is the doctrine of Indoor Management. The outsider needs to look into the contents of the Memorandum of Association and Articles of company. However, an outsider is not allowed to notice the internal affairs of the company. For example, let’s consider the scope of the company that is mentioned in the documents. The outsider only theoretically knows that that is the scope. But he does not whether the members of the company are acting within that scope mentioned. In simple terms, an outsider only theoretically knows how the company is operating, but not exactly as he is not allowed to watch them operate. This doctrine is also known as the Turquand Rule.

Origin

The first case that gave rise to the doctrine of Indoor Management is the Royal British Bank v. Turquand. Before dealing with the facts, it’s important to mention that the articles of the company mentioned that the directors of the company shall borrow money on bonds after passing a resolution in the general meeting. Keeping this in mind, the directors of the company borrowed money from the Plaintiff on bonds. However, they did not pass a resolution according to the articles. Hence, the Shareholders claimed that the company is not liable to pay. The court observed that the outsider while entering into a contract of the company can only be aware of the contents of the articles but not whether it is being followed by them. That is considered to be the internal affairs of the company which he/she need not be aware of. Hence, the court held that the company is liable to pay the money back. 

Exceptions

Knowledge of irregularity

Irregularity is essentially when the company does not act according to the memorandum of association and articles of association. So, if the outsider affected by the irregularity was aware of the same, then the doctrine of indoor management shall not apply. In the case of Howard v. Patent Ivory Mfg. Co., the directors were aware that they did not obtain the assent of the general meeting when they were lending money to the company. Hence, they could not invoke Turquand Rule, to defend the issue of debentures to themselves.

Suspicion of irregularity

When the outsider suspects that an irregularity exists and ignores making the necessary inquiries, he/she cannot invoke this doctrine. This is because he/she had the chance to learn about the irregularity but he/she voluntarily decided not to. In the case of Anand Bihari Lal v. Dinshaw & Company, the plaintiff accepted the transfer of the company’s property by an accountant, even though it was way beyond the scope of the accountant’s power. Hence, the court held the transfer to be void.

Forgery

When the act committed is void ab initio or involves forgery, then the question of application of the rule does not even arise. In Ruben v. Great Fingal Consolidated, the secretary of the company forged the signature of two directors and issued the certificates. The doctrine cannot be applied in this case because forgery makes the transaction void ab initio and hence the doctrine cannot be extended to cover forgery.

Representation through articles

The Articles of Association usually contains a clause that deals with the delegation clause. For example, if a company has a clause that delegates anyone or more than one of the directors to borrow money, but has not delegated, then an outsider can assume that the clause was enforced. In the case of Lakshmi Ratan Cotton Mills v. J.K Jute Mills Co, the Articles of Association authorizes its directors to borrow money and delegates that power to one or more of them. G being one of the directors, borrowed money from the plaintiff even though the company did not pass the resolution to delegate G that power. In this case, the plaintiff can assume that G had the authority through the articles.

Acts outside apparent authority

If an officer from a company does an act that is beyond his power or that is not mentioned in the Articles and the outsider contracting with him cannot avail this doctrine as it makes it clear that he did not refer to the articles like he was supposed to. In the case of Kreditbank Cassel v. Schenkers Ltd., in the name of the company, the manager of the company endorsed few bills of exchange to the payee for his debt. In this case, he was not given the authority, and hence the company is not liable.

Conclusion

The concept of Indoor Management came into existence to protect the third party from the acts of the company. In this case, the good faith of the outsider is important. Ignorance or Negligence or bad faith are explicit exceptions to this doctrine. This essentially helps the company from abusing the protection given through constructive notice.

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The appellant initiated the liquidation proceeding against this company which was passed on 12^th September 2017. Later the appellant contended that instead of reviving the company through settlement under the Section 230 of the companies’ act, 2013, it sought to close the business of the company. It was further submitted by the appellant that even though the order was passed by the Tribunal, the liquidator did not initiate any steps to ensure that Section 230 is duly followed.

However, the appellant was not able to show the certificate to the government authorities that the company is an MSME. Therefore, the counsel for appellant relied on the Section 240 A of the IBC to submit that the certificate or memorandum to show that the company is an MSME is not required and just going by the definition in the act and the balance sheet, it can be proved that the company is an MSME.

But the Tribunal taking in consideration all the arguments, dismissed the appeal and stated that When we find that it is not necessary for us to pursue Section 230 of the Companies Act at the stage of Liquidation, the same not being part of Procedure of IBC when the Corporate Debtor is in Liquidation, both the Appeals must fail, not having substance in the contentions raised. The Company Appeal also needs to be dismissed as the Appellant is pushing forward a scheme of amalgamation compromise and arrangement for three companies which are already in Liquidation under IBC.

The post The Certificate or Memorandum showing that the company is an MSME is required to take the benefit under Section 240 A of IBC: NCLAT appeared first on LexForti .

On this, the Respondents stated that when the preliminary finding were raised, sufficient time was given to the petitioners to file the reply but the petitioners filed the late reply which was considered by the authority. It was also submitted that the sufficient time was given even after sending the show cause notices. After considering all the argument form both the parties the court held that that there is no doubt that the section 207 of the companies Act, 2013, statements of the directors of the company have been recorded. However, under these circumstances, the petitioner ought to give reasonable opportunity to be heard. In the present case, the preliminary finding was issued in September 2020, and owing to the belated reply, the authorities have proceeded further, to issue the said show cause notices and it is not clear if the reply submitted was considered or not.

The post Companies to be given reasonable right to be heard before the registrar goes for inspection and investigation of the company: Delhi HC appeared first on LexForti .

According to Section 434(1)(c) of the Companies Act, 2013, All the cases pending in the District courts and High Courts to NCLT, provided that the NCLT has the jurisdiction of those cases under Section 241 of the Companies Act and has been barred under Section 430 of the Act. Using the same lines, the High Court of Delhi, in the case of Naresh Dayal v. Delhi Gymkhana Club Ltd., stated that if the National Company Law Tribunal has no power over the matter or cause of action, it would not be conferred the jurisdiction to decide on those matters.

In this case, seven plaintiffs, constituting the permanent members of the Delhi Gymkhana, filed a representative suit. In the suit, they stated that the Club was conferring “Green Card holder” status on certain category of persons though it was not provided for in its Articles of Association. According to the plaintiffs, the facility of the green card was not being extended to those children who did not enjoy the facilities of the Club as minors as no such condition was mentioned in the AOA. Thus, the Plaintiff prayed the hon’ble court to declare the be extended to the children of all the permanent members irrespective of their age and whether they had used the facilities of the Club or not as minors.

In reply to this, the Club questioned the maintainability of the suit and contended that the NCLT is the appropriate forum to file such suit for which the plaintiff countered by arguing the contrary.

The Court on gathering all the arguments and contentions, stated that the suit does not any oppression, misbehavior classification for accounts of the Club nor did it seek winding up or rectification of record. The plaintiffs are merely seeking equal treatment for all members after membership is granted and permanent injunction against those who are not the members but are enjoying the activities which are meant for only those members who are permanent.

This pleas and cause of action is outside the jurisdiction of the NCLT even if the Section 434(1)(c) is interpreted widely.

The post NCLT has no jurisdiction over the matters which it is not empowered to, by the Companies Act, 2013 appeared first on LexForti .

Amazon has addressed several letters to the authorities to bring the stake sale deal to their notice but has not received any remedy.

In response the Future Retail Ltd. has filed for an injunction in December 2020 before the Delhi High Court to prevent Amazon from issuing these letters. 

Though the Court held that the case of Future Retail Ltd. prima facie has merit, the injunction was not granted.

Amazon in its injunction petition plead before the Delhi High Court to implement the stay order passed by the Singapore International Arbitration Centre on the said stake sale deal worth of Rs. 24,000/-.

It was contended by the advocate appearing for Amazon that, since the respondents failed to raise objections or take action against the order delivered by the Emergency Arbitrator the parties would be required to abide by the order. 

It was further contended that the letters directed to the authorities like SEBI and CCI by the Future Retail Ltd seeking the award to be ignored do not hold any value.

Section 17(2) of the Arbitration and Conciliation Act expressly provides that interim awards are to be considered as orders of a court and no party can unilaterally declare it to be a nullity. 

The e-commerce giant also prayed for a restraining injunction order against the respondents to prevent them disposing any of the retail assets and sought damages.

In addition, they sought for civil detention of the Directors and promoters of the Future Group. 

The post Stake sale deal of Future Group-Reliance to be stayed? appeared first on LexForti .

Introduction

The National Company Law Tribunal or NCLT is a quasi-judicial body that adjudicates matters and issues related to Indian companies which have been established under the Companies Act, 2013. Constituted on 1 June 2016 by the government of India by virtue of Section 408 of the Companies Act, 2013, based on the recommendation of the V Balakrishna Eradi committee on the law relating to the insolvency and the winding up of companies.

Historical Background

Before the establishment of National law tribunal, company-related issues were resolved by the Company Law Board. In 2002, in companies act, 1956 amendments were made for the formation of National company law tribunal instead of Company law board. There were 4 benches of the board Delhi, Kolkata, Mumbai and Chennai.

But this 2002 amendment was challenged by Madras lawyer. The Constitutionality of this was questioned and thereby the formation of NCLT was delayed.

Company issues related to industries and finance were dealt with by BIFR board (Board for Industrial and Financial Corporation) and Appellant of same. Also, different merger and amalgamation decision was decided by the High court.

This means that there was no one jurisdiction for company issues and these different boards and courts complicated the process. There was a need for one body to deal with all the company related issues.

By the provisions of companies act, 2013 National Company law Tribunal was formed on 1 June 2016. This changed all the proceedings. In 2016, the Supreme Court upheld high court judgement and Company law board was abolished and its pending work was transferred to NCLT.

 Previously, in company law board CA and CS were able to file a petition but if the matter leads to the High court lawyer used to represent the company. After the formation of NCLT, CA and CS are treated at par with lawyers. High court jurisdiction shifted to NCLT.

Jurisdiction

After the formation of NCLT, it acquired the jurisdiction of the following-

1.  Company law board
2.  BIFR  (Board for Industrial and Financial Corporation)
3.  AAIFR (Appellate Authority for Industrial and Financial Reconstruction)
4.  High court

This means that the NCLT is empowered to look into the matters of these boards and corporation for resolving company issues. Also, the proceedings under the Act are to be dealt with by this tribunal such as arbitration, compromise, winding up etc.

Benches

National Company Law Tribunal Benches

Source: https://nclt.gov.in/content/national-company-law-tribunal-benches

At present, 16 benches are present, six at New Delhi along with Principal bench, 2 at Ahmedabad, Chennai and Kolkata, 3 at Hyderabad with one at Amaravathi, 5 at Mumbai and one each at Allahabad, Bengaluru, Chandigarh, Cuttack, Guwahati, Jaipur and Kochi.

*All benches are division benches except for Amravathi.

*Indore bench is not yet notified.

Structure of benches

Each Bench is headed by a President, 16 judicial members, and 9 technical members. The current and the first President of the NCLT is Justice MM Kumar.

NCLAT

It is the appellant tribunal for the cases decided by NCLT. It is formed by the government of India under Section 410 of the Act. A company can also appeal to the Supreme Court if it is not satisfied by the decision granted by NCLT or NCLAT.

NCLT Functions

1. Registration/ De-registration of Companies
2. Transfer of shares / Refusal of shares
3. Deposits
4. Power to Investigate
5. Freezing assets of the company
6. Converting a public limited company into private limited company (Section 459)
7. Class Action
8. Reopening of accounts
9. Winding up of the company

• Registration of Companies

A company can be de-registered by NCLT when under Section 7(7) of Companies Act, 2013 of the companies act, 2013 registration certificate is obtained by wrongful manner or illegally.

• Transfer of shares Section 58 of Companies Act, 2013

If a company rejects or refuses the transfer of securities or shares then NCLT can intervene if the company approaches it.

• Deposits

Any matter arising out of deposits in a company then it can go to the tribunal.

• Power to Investigate Section 213 of Companies Act, 2013

It could take place in India and outside as well. Earlier, an application by 200 people was made which is now by 100 to order an investigation by NCLT.

• Freezing of assets

Under Section 221 of Companies Act, 2013 NCLT can freeze the assets of a company under investigation or scrutiny.

• Converting a public limited company into private limited company (Section 459)

Section 13 to 18 deals with the conversion of a company. It states that NCLT permission is required for any such action.

• Class Action Section 245 of Companies Act, 2013

• Oppression and Mismanagement Section 241 of Companies Act, 2013

• Winding up of the company

Under Section 242 of Companies Act, 2013, NCLT has power to dissolve a company.

Conclusion

NCLT is a tribunal which took over roles of various other bodies. NCLT is the adjudicating authority for all the companies in India. It makes the dispute resolution process faster in India. Instead of going to court this is a speedy mechanism which companies can go to for any redressal.  

NCLAT at New Delhi is the appellant tribunal which again helps in reducing the work load of the Supreme Court as before going to the Supreme Court a company can appeal at NCLAT. Though, the Indian Constitution provides that orders from every court or tribunal can be appealed before Supreme Court, it is the highest appellant court of the country.

NCLT has changed the dispute resolution mechanism of the Indian Companies, it has treated professionals at par with lawyers and the companies have no longer need to engage into courtroom proceedings.

The post Everything you should know about National Company Law Tribunal (NCLT) appeared first on LexForti .

Abstract

The central part of FSDR Bill 2019 revolves around the notion of establishing an effective resolution regime. It envisages the setup of machinery having critical powers for resolving banks, such as power to terminate; contracts, record debt, modify liabilities or set up bridge institutions.

To bring the disputed institution into resolution the Prompt Corrective Action framework will be adopted; also to ensure timely intervention on clearly defined triggers in the financial sector.

The Resolution Authority would set up a Prompt Corrective Action framework for all the institutions. It will also get appointed to tackle the financial sector; failures without superseding the burden to taxpayers while using a transparent mechanism. The concerned RA would be authorised to cancel or modify liabilities; of the errant bank to its creditors and modify the insurance limit.

There have been several questions raised on the long term efficiency of the Resolution Authority; as there is a possibility that excess power to any institution may lead to manipulation of the power. Once the Bill is implemented; the RA may become a future financial Supremo for all financial operations all over the country.

The result of concentrating power sometimes become devastating due to lack of proper checks and balances. Applying the same concept in the arena of the implementation of RA shows some clear indication that credibility and transparency; would become paramount to retain the trust of the private depositors who otherwise have to shift to non-banking investments like gold or real estate.

Without proper enforceable accountability of the incumbent, even a small misstep by this body could cause creditor to opt out of the banking system and find a safer option sometimes may be less profitable. FSDR Bill 2019 is a a positive initiative aiming the development of country’s financial structure but with certain drawbacks.

The main fear revolves around the centralisation of power to RA in the financial sector. Therefore the article discusses about the role of quasi-judicial bodies i.e National Company Law Tribunal; in regulating the arbitrary power if exercised by Resolution Authority established under the FSDR bill 2019.

Keywords: Financial Resolution and Deposit Insurance, Financial Sector Development and Regulation (Resolution) , Financial Resolution Authority

Introduction

In 2019, media reported that Government was preparing to table a new legislation; the Financial Sector Development & Regulation (Resolution) Bill (FSDR, hereafter).

Reportedly FSDR is meant to rescue banks; among other financial sector institutions, from collapse. [1]It replaces the Financial Regulation and Deposit Insurance Bill, 2017 (FRDI hereafter); which was withdrawn in 2018 following public outcry against a “bail-in” provision, which small depositors did not trust.

There was no formal declaration about the introduction of the act; and hence what is known about FSDR is from articles and YouTube interviews.[2] The uncertainty of the provisions due to the lack of any formal draft presented by the concerned ministry; makes it difficult to understand especially since the law when operationalized, can impact millions of individuals, institutions and public funds.

FSDR creates a Financial Resolution Authority (FRA) with absolute authority to undertake resolution measures.

• Its ambit will be “restricted to only orderly resolution and not to restoration and recovery.”
• It will have a representation of all financial sector regulators—RBI+ SEBI+ PFRDA+ (IRDAI)+ the Central government

Structure:

• Each regulator will be tasked with creating a PCA framework for institutions under their ambit.
• The Resolution Fund, which will replace DICGC, will collect premiums based on ‘risk-based assessment’. However, if there is a systemic issue, a government will bailout (to provide liquidity).[3]
• The FSDR has removed the controversial ‘bail-in’ provision
• Deposit insurance cover will be increased, it is the RA that will decide the extent of increase and will also have the power to modify the deposit insurance limit.

Functions of RA

• The RA, along with sector regulators, will classify all service-providers into five categories, namely, low, moderate, material, imminent and critical.
• The power of the RA to initiate action against the entity will depend on the classification.

Tools of Resolution:

• These include the use of one or more of the following: 1) transferring the whole or part of the assets and liabilities to another entity; 2) creating a bridge service-provider; 3) cancellation /modification of liabilities; 4) Merger or amalgamation; 5) Acquisition; 6) Liquidation; 7) Run-off, in case of an insurance company, if deemed appropriate.
• Time frame for Resolution: Resolution has to be completed in one year, with the provision for an extension of one additional year, except in the case of liquidation.
• Administrator ship: When the resolution process kicks in, the RA will suspend the board and take over as the administrator.
• It is empowered to make executive decisions on behalf of the entity including appointment or removal of managers and act as a receiver. A decision on liquidation, however, has to be cleared by the NCLT, which will appoint the RA as liquidator.[4]

National Company Law Tribunal

The Indian economy has always been stroked by different phases of boom and depression. The expansion of Indian Corporate Sector with diversifying operations. With the ever-expanding functions and corporate transactions; Banks and the financial institutions are facing staggered recovery issues making them vulnerable to the Non-performing asset crisis. Specialized Tribunals like NCLT is mainly equipped; for targeting the weak spots and promoting the interests of the banks the financial institutions; the stakeholder and the Corporate sector itself.

Relating the power of NCLT in the context of the new FSDR Bill we can refer that according to FSD; when financial sector entities like stock exchanges; clearing authorities and depositories or other capital market and insurance market intermediaries fail or are about to fail, the means for resuscitation are inadequate. FSDR establishes a comprehensive and effective resolution regime for the financial sector, of which banks are at the core. FSDR is a legislation to save financial institutions from bankruptcy caused by financial imprudence, mismanagement, defalcation, fraud, etc.

It will have a representation of all financial sector regulators–Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance and Regulatory Development Authority of India (IRDAI), Pension Fund Regulatory and Development Authority (PFRDA), the Central government and will have three whole-time members and two independent members. 

Critical analysis of the above mention structure of RA depicts the possibility of centralization of power, manipulation of which in a way would have harsh effect on the creditors. While the provisions looks very justifiable, the fact remains that the combination create a cocktail that without any notice could set off a chain of events that would end up in disaster for individual and families- the corporate in the finance sector, however, would not be affected.

Here comes the role of the quasi-judicial bodies as a redressal body to protect the interest of the aggrieved parties. The National Company Law Tribunal (NCLT) is a quasi-judicial body in India that adjudicates issues relating to Indian companies.

The Central Government has constituted National Company Law Tribunal (NCLT); under section 408 of the Companies Act, 2013 and was constituted on 1^st June 2016. The NCLT was constituted; on the basis of the recommendation of the justice Eradi committee on the law relating to insolvency and winding up of companies.

The power of NCLT includes the power to protection of interest of various stakeholders, especially non-promoter shareholders and depositors and also provide remedy of oppression and mismanagement by Authorities related to Corporate Sector.

Also, it has the Power to provide relief to the investors against a large set of wrongful actions committed by the company management or other consultants and advisors who are associated with the company which will include the actions of the aforementioned Resolution Committee established under the FSDR Bill.

Aggrieved depositors have the remedy of class actions for seeking redressal for the acts/omissions of the company which hurt their rights as depositors.

• The Tribunal is also empowered to investigate or for initiating investigation proceedings. Provisions are provided to assist investigation agencies and courts of other countries with respect to investigation proceedings.

• The NCLT has the power under the Companies Act to adjudicate proceedings pertaining to claims of oppression and mismanagement of a company, winding up of companies and all other powers prescribed under the Companies Act.

The RA expands its function as an administrator. It is empowered to make executive decisions on behalf of the entity including appointment or removal of managers and act as a receiver. A decision on liquidation, however, has to be cleared by the NCLT, which will appoint the RA as liquidator. 

Role of NCLT under FSDR Bill

Relating the power of NCLT in the context of the new FSDR Bill we can refer that according to FSDR, when financial sector entities like stock exchanges, clearing authorities and depositories or other capital market and insurance market intermediaries fail or are about to fail, the means for resuscitation are inadequate.[5] FSDR establishes a comprehensive and effective resolution regime for the financial sector, of which banks are at the core.

FSDR is a legislation to save financial institutions from bankruptcy caused by financial imprudence, mismanagement, defalcation, fraud, etc.

It will have a representation of all financial sector regulators–Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance and Regulatory Development Authority of India (IRDAI), Pension Fund Regulatory and Development Authority (PFRDA), the Central government and will have three whole-time members and two independent members. 

Critical analysis of the above mention structure of RA depicts the possibility of centralization of power, manipulation of which in a way would have harsh effect on the creditors. While the provisions looks very justifiable, the fact remains that the combination create a cocktail that without any notice could set off a chain of events that would end up in disaster for individual and families- the corporate in the finance sector, however, would not be affected.

Here comes the role of the quasi-judicial bodies as a redressal body to protect the interest of the aggrieved parties. The National Company Law Tribunal (NCLT) is a quasi-judicial body in India that adjudicates issues relating to Indian companies and with respect to the FSDR Bill it has certain roles specified in the bill.

The RA expands its function as an administrator.[6] It is empowered to make executive decisions on behalf of the entity including appointment or removal of managers and act as a receiver. A decision on liquidation, however, has to be cleared by the NCLT, which will appoint the RA as liquidator. 

The provision of Systemically Important Financial Institutions (SIFIs) states that institutions which fail will be designated as SIFIs and they can appeal against their liquidation to the National Company Law Tribunal (NCLT).

Role of NCLT as a redressal body in financial sector

The power of NCLT includes the power to protection of interest of various stakeholders, especially non-promoter shareholders and depositors and also provide remedy of oppression and mismanagement by Authorities related to Corporate Sector.

Also, it has the Power to provide relief to the investors against a large set of wrongful actions; committed by the company management or other consultants and advisors; who are associated with the company which will include the actions of the aforementioned Resolution Committee established under the FSDR Bill.

Aggrieved depositors have the remedy of class actions for seeking redressal for the acts/omissions of the company which hurt their rights as depositors.[7]

Under Section 245 of Companies Act, 2013; An application may be filed to the tribunal by either the members of the company or by the depositors or on the behalf of the members; stating that affairs have been conducted in the manner which is prejudicial to the interest of the company.

On the application made by the members or the depositors; the tribunal shall issue a public notice to be served on all of the members and depositors, where similar application is made from jurisdiction, the tribunal shall consolidate and consider it as one application and the class members or depositors shall be allowed to choose the lead applicant, and two class-action application filed for the same cause of application shall not be allowed.

The orders which are passed by the tribunal; shall be binding on the members, depositors, auditor which includes audit firm, advisors, expert or consultant and any other person associated with the company.

Also,

• The Tribunal is also empowered to investigate or for initiating investigation proceedings. Provisions are provided to assist investigation agencies and courts of other countries with respect to investigation proceedings.[8]

• The NCLT has the power under the Companies Act to adjudicate proceedings pertaining to claims of oppression and mismanagement of a company, winding up of companies and all other powers prescribed under the Companies Act.

Aggrieved party may make an appeal for any decision or order passed by NCLT within the period of forty-five days of the receipt of an order or decision to NCLAT. Further, NCLAT gives its decision within six months from the date of receipt of the appeal. No civil court has jurisdiction to decide the cases; where NCLT and NCLAT are empowered to do so.

Conclusion

A brief analysis of the above article leads to the conclusion that; though the FRDI bill has been renamed as the FSDR bill with certain modifications and has been reintroduced in 2020; and though it has removed the controversial ‘bail-in’ provision of the FRDI bill but has not reduced the worries linked to it.[9] And the fear in is persisting. There are several harmful rules in the bill which may have a retrospective effect during their operation, like-

1) Transferring the whole or part of the assets and liabilities to another entity;[10]
2) Creating a bridge service-provider;
3) Cancellation /modification of liabilities;
4) Merger or amalgamation;
5) Acquisition;
6) Liquidation;
7) Run-offs.

The forming of the RA is itself dangerous by removing all acts such as the Banking Regulations Act, Bank Nationalization Act, etc it can liquidate a bank, merge banks, modify rules and cause damage to the banks.

Data shows that 58% of bank deposits are the small deposits of millions of citizens, and the bail-in clause would trigger serious apprehensions. And 68% deposits are of senior citizens who will be badly affected.

At such a point the presence of quasi-judicial judicial body like NCLT is playing a prominent role in safeguarding their rights through regulating the liquidation appeals and accepting class action suits. NCLT not only put check and balances to such government actions but also boost the confidence of genuine depositors to become a part of the existing financial system. Also, the establishment of NCLT, has led to speedy remedy in resolving the company law disputes and will be disposed of expeditiously.

[1] S G Vombatkere, Author at Countercurrents, https://countercurrents.org/author/s-g-vombatkere/

[2] FSDR – The Ghost of FRDI: Rescuing failed banks at whose … https://countercurrents.org/2020/07/fsdr-the-ghost-of-frdi-rescuing-failed-banks-at-whose-cost/

[3] .ECONOMICS – Manifest IAS https://www.manifestias.com/6-economicsp/page/58/

[4] Moneylife Exclusive – FRDI Bill To Come Back as FSDR: Many .. https://www.moneylife.in/article/moneylife-exclusive-frdi-bill-to-come-back-as-fsdr-many-questions-unanswered/59010.html

[5] FSDR -Rescuing Failed Banks At Whose Cost? – The Citizen https://www.thecitizen.in/index.php/en/NewsDetail/index/4/19088/FSDR–Rescuing-Failed-Banks-At-Whose-Cost

[6] lawmax – lawmax | NCLT and NCLAT (formerly CLB)http://lawmax.in/

[7] National Company Law Tribunal – Powers & Jurisdiction https://www.indiafilings.com/learn/national-company-law-tribunal-powers-jurisdiction/

[8] End term | Bankruptcy | Liquidation https://www.scribd.com/document/357248118/End-term

[9] Will the bank depositors be safe? | Times of India Blog https://timesofindia.indiatimes.com/blogs/economic-update/will-the-bank-depositors-be-safe/

[10] .ECONOMICS – Manifest IAS https://www.manifestias.com/6-economicsp/page/58/

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What is Section 185 of Companies Act, 2013?

185. Loan to directors, etc.— (1) Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person:
     Provided that nothing contained in this sub-section shall apply to—
     (a) the giving of any loan to a managing or whole-time director—
     (i) as a part of the conditions of service extended by the company to all its employees; or
     (ii) pursuant to any scheme approved by the members by a special resolution; or
     (b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India;
     [(c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
     (d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:
     Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.]

Explanation of Section 185 of Companies Act, 2013

For the purposes of this section, the expression ―to any other person in whom director is interested‖ means—
(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;
(b) any firm in which any such director or relative is a partner;
(c) any private company of which any such director is a director or member;
(d) any body corporate at a general meeting of which not less than twenty-five per cent. of the total voting power; may be exercised or controlled by any such director; or by two or more such directors, together; or
(e) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
(2) If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees;

and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan
taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

Purpose of Section 185

Before the Companies Act, 2013; Companies Act 1956 was in force. Due to the previous Act, public companies on prior permission of the Central Government could grant loans, guarantees and securities.

As a result of it, Companies used to borrow funds and pass them to their subsidiaries. When compliances issues used to raise, subsidiaries were left on their own to tackle it.

To put a stop to this practice, Section 185 of the Companies Act, 2013 came into the force.

Section 185 of the Companies Act, put certain restrictions for granting loans to the Directors.

Section 185 after, Companies (Amendment) Act, 2017

• It limits the restriction on the loans to the Directors.
• Allows company to provide loan/guarantee/security to any person or entity in whom any of the Directors are interested, subject to:-
  • Special resolution shall be passed in the Company in the general meeting. (75% approval)
  • Utilization of loans by the borrowing company shall be solely for its principal business activities.
• Penalty provision’s ambit has been increased. It now extends to an officer in default of company (inclusive of Director, Manager, etc).

Penalty Provisions

• Fine not less than Rs. 5 Lakh extended up to Rs. 25 Lakh could be imposed upon the lending company
• Imprisonment for the officer in default, extendable up to 6 months along with fine not less than Rs. 5 Lakh and up to Rs. 25 Lakh.
• The recipient of the loan will be punishable with imprisonment which may extend to 6 months or with fine which shall not be less than Rs.5 lakhs but which may extend to Rs.25 lakhs or with both.

Exemption

As per Rule 10 of Companies (Meetings of Board and its Powers) Rules, 2014, s. 185 of the 2013 Act would not apply to

• A loan made by a holding company to its wholly owned subsidiary company;
• Guarantee given or security provided by a holding company; in respect of any loan given to its wholly owned subsidiary company;
• Guarantee given or security provided by a holding company; in respect of any loan given to its subsidiary company by any bank or financial institution.

Loans in Foreign Currency?

Indian companies in India may grant loans in foreign currency to the employees of their branches outside India; for personal purposes. Provided that the loan shall be granted for personal purposes in accordance with the; lender’s staff welfare scheme/loan rules and other terms and conditions as applicable to its staff resident in India and abroad.

[Regn. 5(7) of FEM (Borrowing or Lending in Foreign Exchange) Regulation, 2000 inserted vide Notfn. GSR 531(E), dt. 08-01-2003].

Note

Section 185 of the 2013 Act places a complete prohibition on loans to directors and any person in whom; the director is interested except the two exceptions provided in (a) and (b) of the proviso to s. 185(1) of the 2013 Act. There is no Central Government approval to such loans as they are prohibited. Punishment is given in s. 185(2) of the 2013 Act; which provides for imprisonment upto 6 months and fine of an amount up to rupee twenty five lakhs.

Section 20(1) of the Banking Regulation Act, 1949; also lays down the restrictions on loans and advances to the directors and the firms in which they hold substantial interest.

Person in whom the director is interested

Section 185 of the 2013 Act; provides an exhaustive list of who or what would be considered as a “person in whom the director is interested”. The list reads as follows:

• Any director of the lending company or of its holding company or any relative or partner of such director;
• Any firm in which the director or his relative is a partner;
• Any private company in which the director is a director or member;
• Any body corporate in which the director either singly or along with other directors, at any general meeting of the body corporate, exercises or controls not less than twenty five percent of the total voting power;
• Any body corporate, whose Board of directors, Managing Director or manager is accustomed to act in accordance with the directions or instructions of the Board, director or directors of the lending company

FAQs

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Sagufa Ahmed v. Upper Assam Plywood Products Pvt. Ltd.

Facts:

 The appellant- Sagufa Ahmed, filed an appeal challenging the National Company Law Appellate Tribunal (NCLAT) order of dismissing and application for condoning delay along with an appeal and time barred. The appellants claimed to hold 24.8 9% share of the company- Upper Assam plywood product (respondent no. 1), and filed an application before the Guwahati bench of NCLT for winding up the company, this was dismissed by an order dated 25^th October 2019. They then applied for a certified copy of the NCLT order dated 25^th October 2019 on 21^st November 2019 however the copy of application was filed where is the date 22^nd November 2019 they then filed a statutory appeal before the NCLT on 20^thSeptember 2020. The NCLT by order dated 4^th August 2020 dismissed the application for condoning the delay on the ground that it has no power to condone delay beyond a period of 45 days, so the appeal was dismissed. Aggrieved by the decision of the NCLAT, the appellants have approached the Supreme Court.

Issues:

• Whether the appellant can get extension for filing an appeal for condoning delay after expiry of period of limitation.
• Whether the extension granted by the Supreme Court on ‘period of limitation’ would apply for condonation of delay beyond the prescribed period.

Legal Provisions:

• Companies Act, 2013, Section 421- Appeal from orders of Tribunal
• General Clauses Act, 1897 Section 10- Computation of time.

Appellant’s Contention:

The appellant raised a two fold contention- first, the Appeal Tribunal erred in computing the period of limitation from the date of the NCLAT order which is contrary to section 421(3) of the Companies Act of 2013; and Secondly, the Appellate Tribunal did not consider lockdown as well as the order of the Supreme Court dated 23^rd March 2020 extending the period of limitation from filing any proceeding with effect from 15^th. March 2020 till further orders.

Observations of the Court:

The case was heard before the Supreme Court Bench of S.A. Bobde, CJI, A.S. Bopanna and V. Balasubramanian. The court noted that sec-240(3) of the Companies Act 2013 mandates the in NCLT to send a copy of every order passed under Section 420(1) to all the parties concerned, and Section 420(3) mandates a tribunal to send a copy of every order passed under the section to all parties concerned. NCLT rule 50 mandates the registry of NCLT to send a certified copy of the final order to all parties concerned. It also enables the registry to send certified copies with costs as per schedule of fees to persons who are not parties. Section 421(1) provides for an appeal before the Appeal Tribunal against order of NCLT, subsection (3) lays down the period of limitation for filing an appeal and makes provision conferring limited discretion upon the Appellate Tribunal to condone the delay.

The court so noted that the appellant’s contention of period of limitation prescribed under Section 421(3) starts from the date on which the certified copy of the Tribunal’s order is received by the aggrieved person, to be correct. Therefore, the appellant awaiting the receipt of free copy of order were justified in filing an application under Section 421(3), for fixing the date from which the period of limitation would start, however, in the present case, appellant applied for a certified copy 27 days after the order was announced in their presence. The court did not hold this fact against the appellant, but noted that form 19^th December 2019, the date on which they received a certified copy of the order, the period of limitation began. They noted that the appellant had 45 days to file an appeal which expired on 2^nd February 2020. The court observed that the Appellate Tribunal was empowered u/s- 421(3) to condone the delay of period of up to 45 days, this period of 45 days started from 2^nd February 2020 and expired on 18^th March 2020, as agreed by the appellant.

However, the appellant filed an appeal on 20^th July 2020 instead of doing so before 18^th March 2020. It was stated that to be relevant the lockdown was imposed on 24^th March 2020 and that there was no obstacle to the opponent to file an appeal on or before 18^th March 2020. For this difficulty, the appellant relied on the order of the Supreme Court dated 23^rd March 2020. The court noted that the appellant cannot take refuge under that order as it was only applicable to the ‘period of limitation’ and not on the ‘period up to which delay be condoned in exercise of discretion conferred by the statue’. The court observed that the said order was for the benefit of vigilant litigants prevented by the pandemic and lockdown from initiating proceedings within the period of limitation prescribed by general or special law. The court went through the meaning of the words ‘prescribed period’ as the period of limitation for filing any application, suit or appeal as per the schedule.

Judgement:

The court held that the appellant cannot claim the benefit of the Supreme Court order dated 23^rd March 2020, for enlarging the period upto which delay can be condoned. The second contention was held to be unjustifiable and untenable. The appeals were held liable to be dismissed.

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