The concept of ‘fit and proper’ in corporate laws are just as alluding as the qualifying authority of ‘reasonableness’ in constitutional and administrative laws. The phrase ‘fit and proper’ as an epithet has been employed across commercial laws to provide regulatory oversight and assessment criteria for evaluating inter alia directors and key managerial personnel to ensure that such persons are capable to run the company.

In India this criterion has been an object of proliferate use by regulatory authorities like Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). The key idea behind such criteria application is to increase corporate governance standards, and thereby investor protection and economy preservation.

One of the key regulations of SEBI which deploy this criterion are Securities and Exchange Board of India (Intermediaries) Regulations 2021 (Intermediaries Regulation). This regulation aims to governs all middlemen in the capital market.

Recently, SEBI issued a notification amending the vide Securities and Exchange Board of India (Intermediaries) (Third Amendment) Regulations 2021 (“Notification”). The Notification is effective from the date of its publication in the Official Gazette.

Key Changes

Key changes introduced to the Intermediaries Regulations are as follows:

• Application of ‘fit and proper person’ criteria: The ‘fit and proper person’ criteria shall apply to the applicant or the intermediary, principal officer, directors or managing partner, compliance officer and key managerial persons, promoter or persons holding controlling interest or persons exercising control over the applicant or intermediary, directly or indirectly.

• Principle based criteria for determining a ‘fit and proper person’: In addition to principle based criteria of integrity, reputation, character, absence of convictions/ restraint orders, the Notification has added additional criteria of honesty, ethical behaviour and fairness, as well as no order of conviction involving moral turpitude.

• Financial soundness attributes for determining a ‘fit and proper person’: In addition to financial soundness attributes of competence including financial solvency and net worth and absence of categorisation as a wilful defaulter, the Notification requires that the person should not be declared a fugitive economic offender, subject to recovery proceedings and should not have any charge sheet in any matter concerning economic offences, or order of restraint, prohibition or debarment in any securities laws or financial markets.

• Other additional disqualifications criteria for determining a ‘fit and proper person’: The Notification has added the following disqualifications as negative criteria for determination as a ‘fit and proper person’:

1. criminal complaint or information under section 154 of the Code of Criminal Procedure 1973 has been filed against such person by the Board and which is pending;
2. winding up proceedings have been initiated or passed;
3. unsoundness of mind; and
4. any other disqualification as may be specified by SEBI from time to time.

• Consequence of being declared as not ‘fit and proper person’: A declaration of such nature shall be effective for a period stated in the order or for a period of five years from the date of effect of the order, if no period is specified. Also disqualification of an associate or group entity, shall not have any bearing on the criteria for applicant/ intermediary, unless the applicant/ intermediary had incurred the same disqualification.

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Abstract

The Tata – Mistry case had all ears owing to its controversial nature and cardinal questions of law involved. However, ever since the Supreme Court has pronounced its judgment new questions came to the fore. That is, in order to achieve profitability in its true sense should a company’s decision be based on the majority shareholder’s ruling or should it rather focus on the interest of all the stakeholders involved? In other words, out of the two contrasting principles of corporate democracy and corporate governance, which one should prevail in order to balance all the stakes? The case was also scrutinized from another lens to look for any acts oppressive or prejudicial that might have been undertaken by the company and resulted into the rights of the minority shareholders being neglected. This article, therefore analyses whether corporate democracy really undermined the interests of the minority shareholders in this case or do they require a re-look? Do the concepts of corporate democracy and corporate governance stand in absolute contravention to each other or they stem from the same genesis and are just different means to a same objective?

KEYWORDS: Tata, Cyrus Mistry, Corporate governance, Corporate Democracy, Minority Interests.

Introduction

Indian corporate sector suffered one of its most vigorous jolts, first in the year 2016 when tussle between the Tata and Mistry took the media and nation by storm. To know of the age old multinational conglomerate undergo a managerial strain, who nearly contributes to about 2.24% towards the Indian finances was taxing in itself. Further, coming to know of Cyrus Mistry as the adversary in the present case, who was the serving Executive Chairman as well as the Director of Tata Sons before the fall out, made it clear that the issue is not one of a mere administrative rift but a corporate combat enough to undermine the roots of the company. 

Cyrus Mistry, scion of another established conglomerate – Shapoorji Pallonji Group has had a long association with the Tata’s. It goes back to the year 1965 when Shri Pallonji Mistry, father of Cyrus Mistry acquired 48 preference shares and 40 equity shares of Tata Sons and later in 1980 was appointed as the Non-Executive Director of the company.  He paved way for his son in the year 2004, after voluntarily stepping down from the post and consequently Cyrus Mistry took over the designation in the year 2006. After serving as the Non-Executive Director for about 6 years and becoming one of the prominent faces of the Tata Group, he was nominated for the post of Executive Deputy Chairman, successor of Ratan N. Tata, after due deliberations by the Selection Committee of Tata Sons which was subject to approval by General Meeting of the Shareholders. Not only his appointment was upheld in the Shareholder’s meeting but they also left it on the Board of Directors to re-appoint him as the Executive Chairman of Tata Sons. This is how, on 18.12.2012 Cyrus Mistry was appointed as the Executive Chairman of the Tata Sons, succeeding Ratan N. Tata and took over the reins. Over the years Cyrus Mistry under the name of Shapoorji Pallonji Group went on to acquire a total shareholding of 18.5% in the Tata Sons, thereby becoming the second largest shareholder after Tata Trusts which carries a total stake of 66% in the company.

However, things took an ugly turn when an unanticipated ouster of Cyrus Mistry from the post of Chairmanship started doing the rounds. The removal came from none other than the Chairman Emeritus of Tata Sons, Mr. Ratan N. Tata and majority of the Board of Directors (7 out of 9). Little was known initially, that the ouster would not settle for just being a sensational news but will go on to become one of the biggest corporate battles to be fought ever in the history of India. 

The legal confrontation between the Tata and Mistry went through three phases: National Company Law Tribunal which upheld the removal of Mistry as legal and set aside all the allegations against Tata’s, followed by an appeal filed by Mistry in National Company Law Appellate Tribunal which decided in favour of Mistry and termed his removal as illegal. It further held such removal as oppressive and prejudicial to the interests of the minority shareholders/company and ordered his reinstatement as the Executive Chairman of Tata Sons. Finally, an appeal filed by the Tata’s was heard in the Supreme Court which on 26.03.21 settled the case by overruling NCLAT’s judgment in its entirety.

It becomes imperative to point out that the present case is not only limited to its controversial dispute between two notable tycoons of the country, but it also involved a pertinent question of whether the principle of corporate democracy will override the necessity of balancing the interest of all the stakeholders involved? In other words, whether corporate governance will be overshadowed by the age old practice of corporate democracy? This article seeks to answer the aforesaid by analysing the Supreme Court’s holdings in the present case. 

Corporate Governance V. Corporate Democracy

Over the years, we have witnessed a paradigm shift from the concept of corporate democracy to corporate governance. Sadly, it has been majorly limited to texts and provisions and hardly ever seen to be executed in reality owing to the absence of a concrete and specific statute, enlisting ways in which corporate governance is to be carried out and setting out penalty in case of non-compliance. Some of the provisions in the Companies Act, 2013 relating to independent directors, audit committees, constitution of boards etc., that seeks to introduce corporate governance are limited only to listed companies. Moreover, the guidelines issued by SEBI and Standard Listing Agreement of Stock Exchanges are also applicable to the limited companies only and lack clarity thereby creating an ambiguity in their application. This limitation therefore eliminates a major chunk of corporate sector as still many companies remain unlisted, considering that a conglomerate like TATA remains an unlisted company. 

Corporate democracy which is based on the notion of “majority rules”, believes shareholders to be the actual owners of the company and hence are endowed with the power to frame some of the most important decisions by virtue of their voting rights corresponding to the ordinary shares held by them, one of most dominant powers being the formation of board of directors. It believes that shareholders are the requisite part of the company and forms the majority of stakeholders owing to which they must be responsible for influencing paramount corporate decisions. 

Corporate Governance on the other hand aims to balance the interest of all the stakeholders involved which include minority shareholders, managers, employees, customers etc. and opines that only when all the stakes are balanced, profitability in its true sense can be achieved. Corporate governance, therefore does not solely relies on shareholder’s supremacy and promotes upliftment of the company by taking into account the interest of every stakeholder, irrespective of their designation or the no. of shares held by them. The concept is based on 3 principles, namely – (1) Accountability: Corporate governance requires the board to be accountable of their decisions to the shareholders and entire management. It further necessitates the requirement of regular intimation of vital information to all the stakeholders, such as changes in the shareholding pattern, future business strategies etc. (2) Transparency: Due accountability and perpetual communication flow paves way for transparency which promotes greater sense of confidence in the company’s management. (3) Responsibility: The board must be responsible of its decisions and is required to act on behalf of the company in furtherance of its best interests. Their personal consideration must not prejudice the managerial decisions in any manner.

Out of many questions of law contested in the case of Tata Consultancy Services Limited v. Cyrus Investments and Pvt. Ltd. & Ors. , the chief dispute revolved around one question – Whether the ouster of Cyrus Mistry by Ratan N. Tata and the Board of Directors illegal? Was it against the principles of corporate governance? And, whether under the garb of corporate democracy the interests of the minority shareholders were forsaken? 

Rise of the Feud

The main question upon which the debate of corporate governance v. corporate democracy surfaced revolved around the unprecedented removal of Cyrus Mistry from the office of chairmanship. Accordingly, in order to proceed further it is imperative to know of the circumstances which led to this. Cyrus Mistry’s performance and managerial decisions within the capacity of chairman failed to meet the desired outcomes as were anticipated. It was therefore on the basis of “sense of dissatisfaction”, as mentioned by the Tata’s, that compelled them to take such an action. On 25.10.2016, Mistry sent a response via mail which was directed towards the nominee directors and was not only unprofessional but also derogatory as they were referred as “postmen”. Moreover, the said response was also leaked to the media channels which then took no time to create a nation-wide commotion. This again amounted to an unprincipled conduct and on being questioned by the court to justify such a move, Mistry failed to provide a satisfactory answer. Further, such professional shortcomings aggravated when he went ahead to disclose some of the sensitive business information to the Income Tax Department while he continued serving as the director of Tata Sons, thereby creating a breach of confidentiality. When Tata Sons sent a legal notice addressing the move as out of his professional ambit, Mistry sent a few more documents containing sensitive information to the Income Tax Department, as if out of vengeance. It was only after the chain of these rebellious acts discharged by Mistry when the Board in their Extraordinary General Meeting held on 06.02.2017 removed him from the position of Director of Tata Sons as well. 

Analysis

Mistry’s foundational stone of terming the acts of the company as oppressive and prejudicial of the interests of the minority holders were based on the decision taken by the board with respect to his removal from the office of chairmanship and directorship. However, it is well known that when the removal of a key person was backed by the majority’s consent and was done by reasons of unsatisfactory performance and unprofessional conduct, it cannot be termed as oppressive or prejudicial. To put it in a clearer context, since a move unfavourable to Mistry was undertaken which was based solely on merits doesn’t mean the act was illegal and oppressive to the minority holders just because he too forms part of the community. Moreover, Mistry in his petition also made an argument whereby he explained that how just 4 months before his ouster, things were completely fine, he was lauded by the board and the Nomination and Remuneration committee even suggested of his pay hike. These arguments were contradictory to his very own claims against the Tata’s. If Mistry’s performance was being acknowledged and appreciated by the nominee directors only a few months before his unceremonious removal and even an increased salary was proposed with respect to discharge of his professional duties, then how can the same people now act oppressively? Had this really been the case, the nominee directors would have never appointed a person like Mistry as the successor of Ratan N. Tata to take over a massive organization, who hardly owns a meagre 18.5% stake in it.  

In order to move further, articles 104B and 121 of AoA of Tata Sons must be considered. Mistry allegedly argued in the court that the affairs of Tata Sons were in contravention to the principles of corporate governance which the Companies Act, 2013 primarily focuses to envisage. He pointed towards the decision of his removal by the board of directors of which 1/3^rd members were appointed jointly by the two trusts, namely – Sir Dorabjee Tata Trust and Sir Ratan Tata Trust in accordance to Art.104 B and Art.121. He added that since the board had members dominated by the two trusts, corporate democracy was thereby undermining the interests of minority shareholders. He also wanted that the affirmative rights should be made available to the nominee directors of Shapoorji Pallonji Group. 

In response to the questions put forth, the apex court made certain observations. It was of the view that the incorporation and continuance of the Tata group has been familial ever since the incorporation of the business until the instatement of Mistry as the Executive Chairman was made. Mistry being an outsider was elevated to the rank of Chairmanship within a period of 6 years by the same nominee directors whom today he has accused of violating minority rights. If at all, the intentions of Tata group were to run the company by upholding majority supremacy, Ratan N. Tata would have never stepped down from the position of chairmanship only to hand it over to someone with relatively much less experience. Moreover, as we know that the stakes held by the Tata trusts jointly amounts to 66% and had they used their voting rights which are available corresponding to the shares owned by them, the entire organization must have been filled with their own men. However, through Art.104 B they have instead limited their right by appointing only 1/3^rd of the total members’ thereby giving chance to the outsiders and relying on them with much prestigious posts. In the year 2019, Uday Kotak Committee Report which dealt with corporate governance reflected its main objective to avoid the continuance and superiority of family run businesses and to achieve a wholesome board. It was suggested that in order to achieve the same the person serving as a chairman or non-executive director must not be relative to MD or CEO of the same organization. In compliance to the same, it is evident that even before this report came into being Tata Sons has been abiding by the requirements which are required for healthy corporate governance. As far as corporate democracy is concerned, the Company Law Board once opined – “The petitioners should come to court with clean hands and if they do not do so, they are not entitled to any relief against oppression & mismanagement. It is the duty of the courts to recognize the corporate democracy in managing its affairs by the company and the court should not restrict the powers of the Board of Directors.” In another case, Madras HC also surfaced -“The Company Law Board has to recognize the collective wisdom of majority of the members and respect the corporate democracy of a company in managing its affairs. The Company Law Board will not normally interfere with the day to day functions, management and administration of a company, unless it is shown that the decisions taken by the members at the Extraordinary General Meeting are ultra vires the Act or the Articles of Association of the company.”

Conclusion

There indeed has been a growing awareness regarding the concept of corporate governance for invoking transparency and profitability in its true sense. However, this does not sabotage corporate democracy. In the present case, Tata Sons being a private unlisted company is not obliged to execute the provisions which deal with corporate governance. Still as evident, the company has been managing its affairs in lines with the required provisions. Corporate democracy if practiced in its true sense has its own sets of benefits to offer. As the Supreme Court also opined in the present case – “We have not found any merit in the argument that Majority Rule has taken back seat by introduction of corporate governance in Companies Act, 2013, it is like corporate democracy is genesis, and corporate governance is species. They are never in conflict with each other; the management is rather more accountable to the shareholders under the present regime. Corporate governance is collective responsibility, not based on assumed free-hand rule which is alien to the concept of collective responsibility endowed upon the Board.”

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Applicability of Limitation Act to applications filed under section 7 and 9 of the IBC

Let us first and foremost draw our attention to Article 137 of the Limitation Act, which reads as; “Any other application for which no period of limitation is provided elsewhere in this Division.”

Conspicuously this Article will get attracted to applications filed under sections 7 and 9 of the Code and any such application filed beyond the prescribed period of “three years” as stated in Article 137 will be barred by limitation.

Now, adverting to the Report of the Insolvency Law Committee of March 2018 which sets forth the reason for the introduction of Section 238A into the Code, it is imperative to quote the observation of the learned division bench in B.K. Educational Services P. Ltd. v. Parag Gupta and Associates[1], held as follows:

“25... We have held that at least insofar as the Code is concerned, the intention of the legislature, from the very beginning, was to apply the Limitation Act to the NCLT and the NCLAT while deciding applications filed Under Sections 7 and 9 of the Code and appeals therefrom... Also, the argument that the NCLAT is an appellate tribunal which is common to three statutes, under one of which, viz., the Competition Act, no period of limitation has been prescribed, would not lead to any anomalous situation. When the Appellate Tribunal, i.e., the NCLAT decides an appeal under the Competition Act, since an appeal is a continuation of the application filed before the Competition Commission (See Lachmeshwar Prasad Shukul and Ors. v. Keshwar Lal Chaudhuri and Ors. MANU/FE/0002/1940: AIR 1941 FC 5), the NCLAT will decide the appeal on the footing that the Limitation Act did not apply to an application made before the Competition Commission. On the other hand, insofar as applications are filed Under Section 7 or 9 of the Code, or petitions or applications filed under the Companies Act, the NCLAT will decide such petitions/applications on the footing that the Limitation Act will apply to such petitions/applications. Merely because appeals under different statutes are sent to one appellate tribunal would make no difference to the position in law.

27. It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. "The right to sue", therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred Under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.”

The Limitation Act, as is made clear by the abovementioned judgment, would apply to the IBC right from its commencement and the “date of default” will play a crucial role in determining if the right to sue is available to the party.

The judgment delivered by the Hon’ble Supreme Court in Gaurav Hargovindbhai Dave vs. Asset Reconstruction Company (India) Ltd. and Ors.[2], further made it clear that The Act of Limitation will be applicable to the applications filed under sections 7 and 9 of the Code.

The brief facts of the case were that the borrower was declared NPA on July 21, 2011. An application under section 7 of the IBC was filed on October 3, 2017. The NCLT while applying article 62 of the Limitation Act, 1963, held the period of limitation to be 12 (twelve) years from the date when the money sued for, becomes due.

Accordingly, it held that the application was filed within the limitation period and admitted the application. The NCLAT held that the time of limitation would begin to run for the purposes of limitation only from December 1, 2016, i.e. when the IBC was brought into force. Consequently, it dismissed the appeal.

Moreover, In V Hotels Ltd., Tulip Star Hotels Ltd. v. Asset Reconstruction Co.[3], the NCLAT while allowing the appeals and holding that the application under section 7 was not maintainable emphasized that Article 62 of the Limitation Act would not come into play in the context of IBC as it only applies to suits. It further stated that the present case was an application filed under section 7 of the Code and hence, would fall within the purview of Article 137 of the Limitation Act.  

 In Jignesh Shah & Ors v. UOI[4], the Apex Court emphasized and reiterated its annotation in B.K. Educational Services Ltd., that the Winding-up petition filed beyond the period of three years from the date of default, as mention in Article 137 of the Limitation Act was time-barred and therefore, could not be proceeded with any further.

As rightly opined by the Tribunals and Supreme Court in the above-mentioned judgments, the purpose of the legislature, while introducing the Code could not have been to bring to life those debts which had already become obsolete. Hence, any application filed in relation to a debt that is time-barred will be subject to rejection by the Adjudicating Authority. 

Limitation period begins from the date of Default

The most important aspect pertaining to applications filed under sections 7 and 9 IBC is the Date of Default. The clock starts ticking from the very date default is committed. Any application filed after three years from the date of default gets barred by limitation.

Article 137 clearly mentions that the limitation period starts “When the right to apply accrues.”

Section 7 (1) of the Code reads as “ A financial creditor either by itself or jointly with [other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government] may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred”;

While section 8(1) of the Codes reads as “An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.”

Consequently, both, sections 7 and 8 indicate that an application for initiating the process of an insolvency resolution can be filed on the occurrence of a “default” and hence, the limitation period under Article 137 sets in motion from the date when the right to apply accrues, that is, the date of default under sections 7 and 8.

This has been asserted by Hon’ble Venugopal M., J. in Deepak Kumar v. Pheonix ARC Pvt. Ltd.[5]; “16. as Article 113 of the Limitation Act relates to suits, Article 137 of the Limitation Act pertains to “applications.” Right to sue accrues when Default occurs.”

Jignesh Shah & Ors v. UOI[6], further clarifies that the dawning of the period of limitation starts right from the day the default occurs; “22. …the starting point of the period of limitation is when the company is unable to pay its debts…”

It is imperative to point out that section 434 is a supposing provision referring to three circumstances in which a Company shall be deemed to be “unable to pay its debts” Under Section 433(e).

In the first circumstance, if a demand is made by the creditor to whom the company owes a sum exceeding one lakh and due, requiring the company to pay the sum so due, and the company has for three weeks thereafter “neglected to pay the sum”, or to secure or compound for it to the reasonable satisfaction of the creditor.

“Neglected to pay” would arise only on default to pay the sum due, which would clearly be a fixed date depending on the facts of each case. Similarly in the second circumstance, if execution or other process is issued on a decree or order of any Court or Tribunal in favor of a creditor of the company, and is returned unsatisfied in whole or in part, default on the part of the debtor company occurs.

This again is clearly a fixed date depending on the facts of each case. In the third circumstance, it is necessary to prove to the “satisfaction of the Tribunal” that the company is unable to pay its debts. Here again, the trigger point is the date on which default is committed, on account of which the Company is unable to pay its debts. This again is a fixed date that can be proved on the facts of each case.

Thus, Section 433(e) read with Section 434 of the Companies Act, 1956 would show that the trigger point for the purpose of limitation for filing of a winding-up petition Under Section 433(e) would be the date of default in payment of the debt in any of the three situations mentioned in Section 434.”

A Suit for Recovery does not shift forward the date of Default

The next point of contention with respect to IBC and limitation, which has created dubiety time and again, is whether a suit for recovery leads to an extension of the period of limitation as prescribed for filing applications under sections 7 and 9 of the Code.

A perusal of the judgments as mentioned below will make it clear that the trigger point for the purpose of limitation for filing a winding-up petition or an application under section 7 or 9 of the Code is the date on which default occurs. A suit for recovery is an entirely independent and distinct suit hence, cannot in any manner impact the limitation period within which a winding-up proceeding is to be filed. Moreover, Section 18 of the Limitation Act clearly mentions that only an acknowledgment in writing signed by the party against whom a right is claimed can compute a fresh period of limitation.

It has been very aptly explained in Jignesh Shah & Ors v. UOI[7] that when time begins to run, the limitation period can only be extended in the manner provided in the Limitation Act. Like an acknowledgment of liability under section 18 of the Limitation Act would certainly extend such a period of limitation. However, a suit for recovery based upon a cause of action that is within the limitation can in no way affect the separate and independent remedy of a winding-up proceeding by somehow keeping the debt breathing.

The finding in V Hotels Ltd., Tulip Star Hotels Ltd. v. Asset Reconstruction Co.[8] further reaffirms the aforesaid stance taken in Jignesh Shah while adding that an acknowledgment of liability under section 18 of the Limitation Act has to be in writing, duly signed by the party against whom such property of right is claimed.

Munshi Kumar Bhunsali & ors. v. Kotak Mahindra Bank & Ors.[9] also, throw light on the matter by observing that the proceeding to prosecute a suit against a company for recovery of debt cannot be taken into account while calculating the period of limitation as for the matter in question in a suit while that in a winding-up petition is entirely distinct.

Furthermore, as reflected below in V. Padmakumar v. Stressed Assets Stabilisation Fund (SASF) & Anr.[10], the NCLAT was of the same view in holding that a suit of recovery will not aid in moving forward the limitation period. It further stated that a judgment or a decree passed by a Court or DRT for recovery of money cannot extend the period of limitation for the purpose of computing the period for filing an application under section 7 of the IBC.

Therefore, a suit for recovery involves an issue that is altogether different from the issue involved in a winding up petition and hence, such a suit must not in any way affect the period of limitation and only an acknowledgement as mentioned in Section 18 of the Limitation Act will result in an extension of the period of limitation.

Section 18 of the Limitation Act as applicable to sections 7 and 9 of the Code

Acknowledgment u/s 18 of the Limitation Act and its requirements

In order to understand the effect of section 18 on applications filed under sections 7 and 9 of the Code, we must first understand the word “acknowledgment” as mentioned in section 18 of the Limitation Act. In order to do so, it is pertinent to first go through section 18 exhaustively.

Section 18 of the Limitation Act, 1963:

Effect of acknowledgment in writing—

(1) Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.

(2) Where the writing containing the acknowledgment is undated, oral evidence may be given of the time when it was signed; but subject to the provisions of the Indian Evidence Act, 1872 (1 of 1872), the oral evidence of its contents shall not be received.

Explanation.—For the purposes of this section,— (a) an acknowledgment may be sufficient though it omits to specify the exact nature of the property or right, or avers that the time for payment, delivery, performance, or enjoyment has not yet come or is accompanied by a refusal to pay, deliver, perform or permit to enjoy, or is coupled with a claim to set off, or is addressed to a person other than a person entitled to the property or right, (b) the word “signed” means signed either personally or by an agent duly authorized in this behalf, and (c) an application for the execution of a decree or order shall not be deemed to be an application in respect of any property or right.

Setting forth the essential requirements of an acknowledgement, in Khan Bahadur Shapoor Freedom Mazda v. Durga Prasad Chamaria[11], the Apex Court opined that Section 18(1) says, inter alia, that where before the expiration of the period of limitation prescribed for a suit in respect of any right, an acknowledgement of liability in respect of such right has been made in writing and signed by the party against whom such right is claimed, a fresh period of limitation shall be computed from the time when the acknowledgement was so signed.

Furthermore, it is pertinent to take a look at clause (2) of section 18 of the Limitation Act. This clause divulges the situation where an acknowledgment is undated. For such an undated acknowledgment oral evidence may be given about the time when it was signed. However, it prescribes that subject to the provisions of the Indian Evidence Act, 1872, such oral evidence may only be given for the time and not for the contents of the document.

Munshi Kumar Bhunsali & Ors. v. Kotak Mahindra Bank & ors.[12], the NCLAT further elucidated on a salient point to be considered while discussing acknowledgement with respect to the IBC is that an acknowledgement must be made within the limitation period. Any such acknowledgement of liability that is made after the period of limitation has expired will not resurrect a time-barred claim as there can only be an acknowledgement of existing and subsisting liability.

In Vivek Jha v. Daimler Financial Services India Pvt. Ltd. & Anr.[13], the effect of an acknowledgment was meticulously explained by Hon’ble Venugopal. M., J. as follows:

“31…An “acknowledgment” of liability not only saves the limitation period but also confers on an individual a “cause of action” on him to lay his claims. In this case, the appellant had made a payment of 3 lacks rupees through cheque on March 18, 2015, and that the said payment was made after the issuance of loan recall notice dated May 6, 2014, and later a demand notice dated August 17, 2017, was issued by the respondent to the appellant and co-borrower in respect of the loan agreement dated March 28, 2018, where the Corporate Debtor had agreed to pay Rs. 1,08,755/- per month beginning from March 30, 2013, to March 30, 2016, and also this tribunal keeping in mind that the application under section 7 of the IBC was filed by the respondent before the Adjudication Authority on December 16, 2017, this tribunal comes to a consequent conclusion that the claims of the respondent are not barred by the plea of limitation.”

One very important aspect that is more than often missed out is that an “acknowledgement of debt” must relate to an admission of an existing relationship of a debtor and creditor and their intention to continue it must also be evident. An unequivocal and unqualified admission of “debt” is to be established and simple admission of debt is sufficient in so far as “acknowledgement” is concerned[14]. An acknowledgement has to be in writing, within the period of limitation and it is to be signed by the litigant party whom the property or right is claimed. Moreover, an unconditional acknowledgement is enough to ‘furnish a cause of action’ for it implies a promise to pay.

From a reading of the above rulings, a few pertinent points become apposite to an acknowledgement under section 18 of the Limitation Act, which are as follows:

• Firstly, an acknowledgement must be an unconditional acknowledgement with regard to a subsisting liability, made in writing and signed by the person against whom the right is claimed.
• Secondly, it must be made before the applicable period of limitation has expired.
• Thirdly, the acknowledgement must suggest the existence of a jural relationship between the parties.
• Fourthly, acknowledgement as stated in the Limitation Act only starts a fresh period of limitation from the date the acknowledgement is signed by the party against whom a subsisting liability is claimed and does not create a new right of action.

What may or may not constitute an acknowledgement

The Hon’ble Tribunal through synchronous judgments has resolved that Balance Sheet or Annual Returns cannot be taken into account to elongate the period of limitation.

In RKG International v. Goradia Special Steels Ltd.[15], it was established by the Hon’ble Tribunal that:

“14. The petitioner has submitted that the Corporate Debtor in its balance sheet showed Sundry Creditors to the tune of Rs. – for the year ending 31/3/2011. However, on perusal of B/S for the said year as submitted by the petitioner, it is observed that what is stated in the said B/S cannot be an acknowledgment of liability in respect of the claim amount made in writing signed by the parties for the purpose of extending the period of Limitation under section 18 of the Limitation Act. The Corporate Debtor has not made an entry in his B/S regarding the amount due to the petitioner. Thus, the balance of Sundry Creditors as shown in the B/S of Corporate Debtor is of no avail to the petitioner.”

In V Hotels Ltd., Tulip Star Hotels Ltd. v. Asset Reconstruction Co.[16], the NCLAT arrived at the same conclusion by holding that books of Account cannot be treated as an acknowledgment of liability.

In V. Padmakumar v. Stressed Assets Stabilization Fund (SASF) & Anr.[17] , the NCLAT gave a very analytical explanation as to why the Balance Sheet or Annual Return cannot be constructed as acknowledgement. Firstly, the NCLAT observed that as filing of Balance Sheet/Annual Return is compulsory under section 92(4) of the Companies Act and a failure to do so results in penal action under section 92 (5) and (6), the Balance Sheet/Annual Return of the “Corporate Debtor” cannot be treated to be an acknowledgement under section 18 of the Limitation Act. Secondly, if we hypothetically accept that the Balance Sheet/Annual Return of the “Corporate Debtor” amounts to acknowledgement under section 18 of the Limitation Act then in such cases no limitation would be applicable as every year it is compulsory for the corporate debtor to file Balance Sheet/Annual Return, which is not the law.

Another facet is if a judgment or a decree passed by a Court for recovery of money by the Civil Court/DRT would amount to extending the date of default for the purpose of computing the period for filing an application under section 7 of the IBC.

The NCLAT, in G.E Rao v. Stressed Assets Stabilization Fund[18], while holding that a Balance Sheet/ Annual Return cannot be treated as an acknowledgment, also noted that a decree passed by the DRT or a suit will not extend the limitation period.

Further, in Ashish Kumar v. Vinod Kumar Pukhraj Ambavat[19], it was held by the Tribunal that an OTS (One-time settlement) letters the corporate debtor had offered to pay varying amounts to Allahabad Bank/Respondent No. 2 for full and final settlement of liability and thereby admitted the jural relationship of debtor-creditor.

In Akram Khan v. Bank of India Ltd. & Anr.[20], the NCLAT observed that an application moved by the Corporate Debtor for the reconstruction of the debt or the payment of interest, would not amount to an acknowledgment.

However, if a part of the debt is paid before the expiry of the period of limitation, a fresh period of limitation will start from the day the part payment is made. In the case of Ferro Alloys Corporation Ltd. v. Rajhans Steel Ltd.[21], it was held that S.19 provides for a fresh period of Limitation in case of part payment of a debt to be computed from the date of such payment.

The facts of the case were that the last of the part payments were made by opposite party no. 1 on July 17, 1985, which was well within the prescribed period of Limitation from the date of the bills and hence, a fresh lease of life was given to the petitioner company.

If computed with effect from June 17, 1985, the period of three years prescribed under Article 15 expired on June 17, 1988. Any claim preferred beyond June 17, 1988, for the realization of debt by way of filing suit or otherwise stood barred. The present petition was filed on September 29, 1992, and was more than four years after the debt had become time-barred.

Besides, an email in which the debtor conspicuously accepts his liability will be a valid acknowledgment, as was seen in, Michael Hart v. Nine Star Info Tech[22].

The facts of the matter being, that an e-mail dated April 1, 2008, had been sent by the managing director, admitting the liability of the respondent company and the issuance of the promissory note in favor of the appellant. In the said e-mail the respondent company had clearly admitted the fact that it could not make the payments, payable to the appellant, due to financial constraints. Additionally, it was held that the argument that the promissory note produced by the appellant was not sufficiently stamped and is defective was beyond the scope of a company proceeding.

At the same time in, Shri Hari Electricals v. Royal Palms[23], it was held that correspondence exchanged between the parties did not constitute an acknowledgment as the respondent did not admit his liability.

A perusal of the above two decrees makes it clear that for an email, a letter, or correspondence to constitute an acknowledgement, an acceptance of liability must be given by the party against whom a right is claimed. Any other sort of exchange between the parties disputing or denying the liability will not extend the limitation period.

Conclusion

In lieu of the above judgments, it can thus, simply be deciphered that limitation once commenced, cannot be interrupted unless there is either a part payment made before the expiry of the limitation period or there is an acknowledgment in writing made before the expiration of the limitation period by the party against whom a right is claimed.

For any writing to constitute an acknowledgement there must be a clarion admission of debt and the establishment of a jural relationship between the parties. Any letter, correspondence, email, OTS which clearly admits and acknowledges the liability before the period of limitation comes to an end will amount to an acknowledgement. However, a mere application moved by the “Corporate Debtor” to restructure debt or payment of interest, per contra, will not compound into an acknowledgement.

Furthermore, Books of Accounts do not constitute an acknowledgement under section 18 of the Limitation Act. It has been held time and again that a Balance Sheet or an Annual Return cannot shift forward the period of limitation. The reason for this is considerably intelligible in the sense that the Companies Act makes it necessary for filing of annual returns within the specified period, failing which the company and its officer who is in default shall be liable to a penalty of fifty thousand rupees which may extend to the maximum of five lakh rupees. Consequently, for the Balance Sheet or Annual Returns to amount to an acknowledgement it must be construed that no limitation is applicable as the Balance Sheet and Annual Returns are to be filed every year, which is not the law.

Another very important aspect while studying what makes up an acknowledgement are: judgments and decrees. The judgments and decrees passed by the courts and tribunals do not constitute an acknowledgement as they merely decide that the debt became due and payable and do not shift the date of default. It is not that after passing a judgment or decree, the default takes place immediately. By filing an application under section 7 of the IBC a decree cannot be executed. In such a case, it will be covered under section 65 IBC which stipulates that IPR or liquidation proceeding if filed fraudulently attracts penal action.

[1]AIR 2018 SC 560

[2](2019) 10 SCC 572

[3] [2020] 218 CC 198 (NCLAT)

[4]AIR 2019 SC 4758

[5] [2020] 219 CC 461 (NCLT)

[6]AIR 2019 SC 4758

[7]AIR 2019 SC 4758

[8] [2020] 218 CC 198 (NCLAT),

[9]Company Appeal (AT) Insolvency No. 1349 of 2019

[10]Company Appeal (AT) (Insolvency) No. 57 of 2020

[11]AIR 1961SC1236

[12]Company Appeal (AT) Insolvency No. 1349 of 2019

[13] [2020] 218 CC 479

[14] [2020] 219 CC 461 (NCLT)

[15]TCP 27 (IB)/MB/2018

[16] [2020] 218 CC 198 (NCLAT)

[17] Company Appeal (AT) (Insolvency) No. 57 of 2020

[18] (2020)219 CC 231(NCLAT)

[19] [2020] 219 CC 431 (NCLAT)

[20]2020(1) DRTC 168 NCLAT

[21]2000 CC (99) 426

[22] [2013] 179 CC 187 (Mad)

[23] [23] [2017] 201 CC 675 Bom

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Introduction

According to Section 2(20) of the Companies Act, 2013, a company is defined as a company that is incorporated under this Act or any other previous prevailing Companies Act.

A company can be formed in accordance with the provisions of Section 3 which provides for the incorporation of a company.

A company has the following features:

1. Incorporated association,
2. Independent legal entity,
3. Common seal,
4. Perpetual existence,
5. Limited liability, etc.

What is a Corporate Veil?

The separate or independent legal entity of a company is one of the most important and unique features of a company.

A separate legal entity means that the promoters and owners of a company have a separate identity from that of the company. Official documents are signed in the name of the company and not the promoters or owners. It shields the promoters and owners of a company from liability unlike in a sole proprietorship or a partnership wherein the owners have unlimited liability.

If the company incurs any debt or is involved in any contravention of the law, it the company which is liable and not the promoters or owners, hence they have limited liability.

The purpose of the doctrine of corporate veil is to ensure business efficacy and convenience as one of the attractive features of a company is limited liability. Limited liability means that the liability of each shareholder is to the extent of his or her ownership in the company.

So, basically, a corporate veil is something that separates the personality of a company from the personality of its shareholders and protects them from being personally liable for the company’s obligations.

One of the landmark cases in regard to the corporate veil is – Salomon v Salomon & Co. Ltd[i]

Here, Mr. Salomon incorporated the business of manufacturing shoes and boots by the name of “Salomon & Co. Ltd” and the company had seven shareholders, which were his family members.

He, his wife, his daughter, and his four sons were the shareholders of the company.

He sold his sole trader business to the company and retained 6 of the shares and received debentures worth 10 thousand pounds.

The business ran into some difficulties and was unable to pay the interest on debentures. Salomon made a claim on the basis that he was a secured creditor, and the company was defaulting on his payments.

It was held that the debts of the company were not the debts of Mr. Salomon because it was validly incorporated, and both are separate legal entities.

Understanding the Lifting of the Corporate Veil

There might be some instances wherein it is necessary to know who the people behind the corporate veil are and, in these instances, the corporate veil needs to be lifted and the real culprits need to be punished.

The courts usually lift the corporate veil where fraud has been committed, improper conduct wherein the public interest is at large, or where the sole purpose of incorporating the company is the evade taxes, etc.

Grounds for Lifting the Corporate Veil

The circumstances under which the corporate veil can be lifted can be divided into two types:

Statutory Provisions:

• Section 45 – Reduction of membership below the statutory limit: The minimum number of members or shareholders in a public company is seven and in a private company is two and if the membership is reduced below that then lifting of corporate veil is needed.

• Section 147 – Misdescription of name: If an officer of a company who signs any bill of exchange where the name of the company is not mentioned in the prescribed manners, such officer will be held liable and not the company.

• Section 239 – Power of inspector to investigate: This section provides for the power of the inspector to investigate the affairs of a company for allegations of mismanagement, oppression etc.

• Section 307 & 308 – These sections apply to every Director and deemed Director. It states that the nature of their shareholding must be mentioned in the shareholder’s register and non-compliance will result in the lifting of the corporate veil.

Judicial Interpretations:

Following are the instances where the judiciary can lift the corporate veil-

• Tax Evasion: Where it is evident that the company is trying to evade taxation, then the courts can lift the corporate veil and punish the people responsible.

• Fraud: In order to prevent fraudulent activities or improper conduct, the courts can lift the corporate veil. Since the fraudulent or improper conduct cannot be committed by the company, which is an artificial legal person, hence the people who manage it are responsible. In Gilford Motor Company Ltd. v Horne[ii]it was held that companies cannot be used as a cloak by members for their wrongdoings.

• Determination of enemy character: In certain situations, it becomes essential to lift the corporate veil and check the character of the individuals and to determine whether they are enemies of the country. In Daimler Co. Ltd. v Continental Tire and Rubber Co. Ltd[iii]– a company was set up in England for selling tires, the company was a German company and most of the control was held by German individuals. During the first world war, the company situated in England started a recovery process and it was eventually held that the company was an enemy character and hence the court chose to lift the corporate veil.

• Liability for ultra vires act: Every company is bound to perform only the acts which are mentioned in its Memorandum of Association, however if acts which are ultra vires the memorandum of association are done then lifting of corporate veil is required.

Conclusion

The principle is given in Salomon v Salomon Co & Ltd. is the rule and the above statutory and judicial provisions are an exception to the rule of the corporate veil.

The separate identity of a company is of utmost importance but there needs to be a balance and the corporate veil needs to be lifted whenever it is needed.

[i] Salomon v Salomon & Co. Ltd [1897] AC 22 (House of Lords)

[ii] Gilford Motor Company Ltd v. Horne  [1933] Ch. 935 (CA)

[iii] Daimler Co. Ltd. v Continental Tire and Rubber Co. Ltd 53 SLR 845

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The NCLAT stated that if the Balance Sheet of the corporate debtor amounts to acknowledgement under Section 18 then it is to be held that no limitation would be applicable because every year, it is mandatory for the corporate debtor to file Balance sheet. When the current judgement was challenged in the Supreme Court, the court held that the balance sheets can amount to acknowledgement of debt under Section 18 of the Limitation Act.

The facts in brief of this case are that the Corporate Debtor (Corporate Power Ltd.) had availed the loan from the Consortium Lenders for setting up 1080 MW coal-based plant at Chandwa of Latehar District in the State of Jharkhand in two phases comprising of 2×270 MW in each phase by executing common loan agreement with the lender’s bank. The Corporate Debtor has availed loan facilities aggregating to Rs.2175,00,00,000/- for the Phase-I project and availed Rs.2387,00,000/- for Phase–II project for setting up another 540 MW coalbased plant from the various bankers referred above and loan agreements have been executed between the Corporate Debtor and the above-referred Banks. However, the Corporate Debtor failed to repay the dues under the facilities granted by the above-mentioned Banks. Thereafter, State Bank of India issued a loan recall notice dated 27th March 2015 which was replied by the Corporate Debtor on 28th March 2015. The Consortium Lenders issued notices on 20th June 2015 under Section 13(2) of the SARFAESI Act, 2002 demanding a total amount of Rs.5997,80,02,973/- but the Corporate Debtor failed to repay the loan amount. The above-mentioned Banks had assigned the debt in favour of Asset Reconstruction. Therefore, the Financial Creditor has filed the Application for initiation of CIRP against the Corporate Debtor under Section 7 of the I&B Code.

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Part-II Insolvency Resolution and Liquidation for Corporate Persons

Chapter-II Corporate Insolvency Resolution Process(CIRP)

Section 21: Committee of creditors.

^*21. (1) The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors.

(2) The committee of creditors shall comprise all financial creditors of the corporate debtor:

   Provided that a ¹[financial creditor or the authorised representative of the financial creditor referred to in sub-section (6) or sub-section (6A) or sub-section (5) of section 24, if it is a related party of the corporate debtor,] shall not have any right of representation, participation or voting in a meeting of the committee of creditors.

   ²[Provided further that the first proviso shall not apply to a financial creditor, regulated by a financial sector regulator, if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares ³[or completion of such transactions as may be prescribed], prior to the insolvency commencement date.]

(3) ⁴[Subject to sub-sections (6) and (6A), where] the corporate debtor owes financial debts to two or more financial creditors as part of a consortium or agreement, each such financial creditor shall be part of the committee of creditors and their voting share shall be determined on the basis of the financial debts owed to them.

(4) Where any person is a financial creditor as well as an operational creditor,—

(a) such person shall be a financial creditor to the extent of the financial debt owed by the corporate debtor,and shall be included in the committee of creditors, with
voting share proportionate to the extent of financial debts owed to such creditor;

(b) such person shall be considered to be an operational creditor to the extent of the operational debt owed by the corporate debtor to such creditor.

(5) Where an operational creditor has assigned or legally transferred any operational debt to a financial creditor, the assignee or transferee shall be considered as an operational creditor to the extent of such assignment or legal transfer.

(6) Where the terms of the financial debt extended as part of a consortium arrangement or syndicated facility ⁵[*] provide for a single trustee or agent to act for all financial creditors, each financial creditor may—

(a) authorise the trustee or agent to act on his behalf in the committee of creditors to the extent of his voting share;

(b) represent himself in the committee of creditors to the extent of his voting share;

(c) appoint an insolvency professional (other than the resolution professional) at his own cost to represent himself in the committee of creditors to the extent of his voting share; or

(d) exercise his right to vote to the extent of his voting share with one or more financial creditors jointly or severally.

⁶[(6A) Where a financial debt—

(a) is in the form of securities or deposits and the terms of the financial debt provide for appointment of a trustee or agent to act as authorised representative for all the financial creditors, such trustee or agent shall act on behalf of such financial creditors;

⁸(b) is owed to a class of creditors exceeding the number as may be specified, other than the creditors covered under clause (a) or sub-section (6), the interim resolution professional shall make an application to the Adjudicating Authority along with the list of all financial creditors, containing the name of an insolvency professional, other than the interim resolution professional, to act as their authorised representative who shall be appointed by the Adjudicating Authority prior to the first meeting of the committee of creditors;

(c) is represented by a guardian, executor or administrator, such person shall act as authorised representative on behalf of such financial creditors,

and such authorised representative under clause (a) or clause (b) or clause (c) shall attend the meetings of the committee of creditors, and vote on behalf of each financial creditor to the extent of his voting share.

(6B) The remuneration payable to the authorised representative-

(i) under clauses (a) and (c) of sub-section (6A), if any, shall be as per the terms of the financial debt or the relevant documentation; and

(ii) under clause (b) of sub-section (6A) shall be as specified which shall be jointly borne by the financial creditors.]

⁷[(7) The Board may specify the manner of voting and the determining of the voting share in respect of financial debts covered under sub-sections (6) and (6A).

(8) Save as otherwise provided in this Code, all decisions of the committee of creditors shall be taken by a vote of not less than fifty-one per cent. of voting share of the financial creditors:

   Provided that where a corporate debtor does not have any financial creditors, the committee of creditors shall be constituted and shall comprise of such persons to exercise such functions in such manner as may be specified.]

(9) The committee of creditors shall have the right to require the resolution professional to furnish any financial information in relation to the corporate debtor at any time during the corporate insolvency resolution process.

(10) The resolution professional shall make available any financial information so required by the committee of creditors under sub-section (9) within a period of seven days of such requisition.

Reference

*This shall come into force w.e.f. from 01.12.2016.

1. Substituted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, for the word “related party to whom a corporate debtor owes a financial debt ” in proviso to section 21(2) (w.e.f. 06.06.2018).

2. Proviso to section 21(2) inserted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (w.e.f. 06.06.2018).

3. Ins. by the Insolvency and Bankruptcy Code (Amendment) Act, 2020, w.e.f. 28-12-2019.

4. Substituted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, for the word “Where” in sub-section (3) of section 21 (w.e.f. 06.06.2018).

5. Omitted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, the word “or issued as securities” in sub-section (6) of section 21 (w.e.f. 06.06.2018).

6. Sub-section (6A) and (6B) of section 21 inserted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (w.e.f. 06.06.2018).

7. Substituted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, w.e.f. 06.06.2018. Prior to the substitution, sub-section (7) and (8) alongwith proviso of section 21 as under:

“(7) The Board may specify the manner of determining the voting share in respect of financial debts issued as securities under sub-section (6) .

(8) All decisions of the committee of creditors shall be taken by a vote of not less than seventy-five per cent. of voting share of the financial creditors:

      Provided that where a corporate debtor does not have any financial creditors, the committee of creditors shall be constituted and comprise of such persons to exercise such functions in such manner as may be specified by the Board.”

8. Circular No. IBBI/CIRP/015/2018, 13th July, 2018, Appointment of Authorised Representative for Classes of Creditors under section 21 (6A) (b) of the Insolvency and Bankruptcy Code, 2016.

Disclaimer: Please refer Bare Act for original contents. Click here to access All Acts

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They have been prohibited from dealing in the securities market for a period of 12 months, barred from dealing with the securities of Future Retail Ltd, directly and indirectly for a period of 24 months.

Subsequently, they are liable to jointly disgorge an amount of Rs. 17.78 Crore with an interest of 12% per from the 20^th of April of 2020 till the actual payment has been made.

The amount of 17.78 Crore is equal to the sum of undue profits made by Biyanis, FCRL and other notices that have been made through the trade of shares on the basis of the unpublished price sensitive information.

An additional amount of 2,75,68,650/- is required to be paid by the FCRL and FCRL Employee welfare Trust with an interest of 12% per annum from 20^th of April 2020.

The market regulator has imposed a fine of another one crore rupees each owing to the Section 15 G of the SEBI Act 1992.

The current case is on the trade of shares between the 10^th of March of 2017 to the 20^th of April 2017 that was made holding information of unpublished price sensitive information, on the 20^th of April 2017, FRL announced their demerger creating a positive impact on its shares.

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In Reply, the Future Group called the prayer an abuse and argued that the emergency award cannot be passes as the order was passed by a Single judge in the suit.

To this, the Delhi High Court suggested both Amazon and Future Retail Ltd (FRL), in the case of Amazon.com NV Investment Holdings LLC v. Future Coupons Pvt Ltd & Ors., to settle their dispute outside the court, if possible. According to the court, In commercial matters, it always helps to find a solution and resolve the issue.

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CIVIL APPELLATE JURISDICTION

Civil Appeal No. 3063 of 2020

Dr Dhananjaya Y Chandrachud, J

This judgment has been divided into sections to facilitate analysis. They are

A The appeals
B CIRP for the Corporate Debtor
C Proceedings before NCLT
D Proceedings before NCLAT
E Transactions of the Corporate Debtor
F Relationship between Anil Nanda and Arun Anand
G Whether Spade and AAA are financial creditors of the Corporate Debtor
G.1 Submission of Counsel
G.2 Assessment of preliminary submissions
G.2.1 Res Judicata
G.2.2 Issues before NCLAT
G.2.3 Remand to NCLAT
G.3 Analysis
G.3.1 Statutory Provisions
G.3.2 Financial Creditor and Financial Debt
G.3.3 Collusive Transactions
G.3.4 Spade and AAA
H Whether Spade and AAA are related parties
H.1 Submission of Counsel
H.2 Statutory provisions
H.3 Analysis
I Whether Spade and AAA can be excluded from the CoC
I.1 Submissions of Counsel
I.2 Related Parties and CoC
I.3 Amendment to First Proviso of Section 21(2)
I.4 Related Parties – Interpretation In Praesenti
J Conclusion

Read the Full Judgement below

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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. 

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