2/24/2016 0 Comments
Chartered Secretary Magazine: February 2016 "Landmark Judgement: Supreme Court Directs RBI to Disclose Information to Applicants under RTI Act, 2005"
DELEP GOSWAMI, FCS, ADVOCATE, SUPREME COURT OF INDIA, NEW DELHI
ANIRRUD GOSWAMI, ADVOCATE, GOSWAMI&GOSWAMI, ADVOCATES, NEW DELHI
India has, in recent past, witnessed many scams, like the 2G spectrum scam causing the Government exchequer losses of Rs.1.76 lakh crores and almost Rs.1.86 lakh crores, in the “Coalgate” scam. All these were brought to the notice of the Hon’ble Supreme Court of India through public interest litigations by public interest activists and NGOs like Common Cause and the Centre for Public Interest Litigation (CPIL) and despite the strenuous efforts made by the Government to hide from the public the file noting on decision making processes, the vital information could be fished out by activists by using the Right to Information Act, 2005 (“RTI Act”). However, another important area of concern is frauds and irregularities committed in the Banking sector in opening of Bank Accounts for siphoning off money from India to foreign tax-free havens. Adding to this, there is laxity shown in recovering loans and outstanding from the defaulters and non-remedial action on host of other irregularities and illegalities which plague the banking sector. However, the Reserve Bank of India (‘RBI’) and other banks have been denying disclosure of all these vital and basic information to information seekers/activists under the garb of the veil of secrecy on the plea that the disclosure of such information does not serve any public interest and that, it would, instead adversely impact public interest and confidence in the banking sector, thereby posing very severe implications and prejudicial impact on the financial and economic stability of the country. More particularly, the RBI argued that the information obtained/provided by the Banks inspected, was “fiduciary” in nature and those were shared on the principle of “trust and confidence” and hence such information could not be shared with the information seekers under the RTI Act.
Given this backdrop, a landmark judgement has been delivered on 16th December, 2015 by the Hon’ble Supreme Court of India in Transferred Cases (Civil) Nos.91 to 101 of 2015 (hereinafter referred to as the “RTI Judgement”) which will have a far-reaching impact on the accountability and responsible behaviour of Banks, and more particularly, the RBI. The moot question in the RTI Judgement was: whether the information sought for under the RTI Act can be denied by RBI and other Banks to the public at large on the ground of economic interest, commercial confidence, fiduciary relationship with other Banks on the one hand and the public interest on the other?
On their RTI Applications being denied by the respective Banks, the RTI Activists filed appeals before the Central Information Commission (CIC), which allowed the petitions and directed the Banks to furnish information to the petitioners. Writ petitions were filed by RBI and other banks against these decisions before the High Courts at Bombay and Delhi. At the same time, RBI also filed a petition in the Supreme Court of India to transfer the pending cases to the Supreme Court and this resulted in the common hearing in the aforesaid RTI Judgement.
The information sought for by public interest activists from the RBI and other Banks included, inter alia, the following:-
1. The procedure, rules and regulations of inspection being carried out on Co-operative Banks by the RBI and the copies of inspection and audit reports in respect of Makarpura Industrial Estate Co-op Bank and report on all Co-operative Banks gone into liquidation and action taken against all Directors and Managers for recovery of public funds and powers utilized by RBI and analysis and procedure adopted; and the names of remaining co-operative banks and RBI’s observations against irregularities and action taken reports.
2. Based on the written statement made by the Finance Minister on the floor of the Parliament that some Banks like SBI, ICICI Bank, Bank of Baroda, Dena Bank, HSBC Bank etc. were issued “letter of displeasure” for violating FEMA guidelines for opening of accounts, whereupon some other Banks were even fined Rs.1 crore for such violations, the RTI activist sought for the names of the Banks with details of violations committed by them. The Activist also sought for “Advisory Note” issued to the ICICI Bank for accounts opened by some fraudsters at the Patna Branch and information sought was about the exact nature of irregularities committed by the Bank under FEMA, and details of other offences committed by the IBL through various branches in India and abroad, along with action taken by the Regulator, including the names and designations of the officials; branch name; type of offence committed and the punishment awarded by the concerned Authority etc. While the RBI stated that “Supervisory actions were taken based on scrutiny conducted under Section 35 of the Banking Regulation (BR) Act”, the information in the scrutiny report is denied citing the ground of fiduciary capacity.
3. In another application, the Activist sought from National Bank for Agriculture and Rural Development (NABARD) copies of all correspondence with Maharashtra State Government/RBI/any other Agency of the State/Central Co-operative Bank from January, 2010 onwards and to provide confirmed/draft minutes of meetings of Governing Boards/Board of Directors/Committee of Directors of NABARD from April, 2007 till date of the application.
4. With regard to RBI uploading the entire list of Bank defaulters on the Bank’s website, the RBI replied that pursuant to Finance Minster’s speech made in Parliament on 28.2.1994, “in order to alert the Banks and FIs and put them on guard against the defaulters to other lending institutions, the RBI has put in place scheme to collect details about borrowers of banks and FIs with outstanding aggregating Rs.1 crore and above, which are classified as “doubtful” or “loss” or where suits are filed, as on 31st March and 30th September each year. In February, 1999, RBI had also introduced a scheme for collection and dissemination of information on cases of wilful default of borrowers with outstanding balance of Rs.25 lakhs and above. At present, RBI disseminates list of above said non-suit filed “doubtful” and “loss” borrowed accounts of Rs.1 crore and above on half-yearly basis (i.e. as on March 31st and September 30th) to Banks and FIs for their confidential use. The list of non-suit filed accounts of wilful defaulters of Rs.25 lakh and above is also disseminated on quarterly basis to Banks and FIs for their confidential use. Section 45-E of the RBI Act, 1934 prohibits the RBI from disclosing “credit information” except in the manner provided therein.”
5. Yet, in another application based on newspaper reports, the Activist sought for details from the RBI on the criterion adopted in deciding fine and penalties imposed on the Banks for contravention of various directions and instructions, such as, failure to carry out proper due diligence on user appropriateness and suitability of products, selling derivative products to users not having risk management policies; not verifying the underlying/adequacy of underlying and eligible limits under past-performance route, issued by RBI in respect of derivate transactions. In reply, the RBI stated that for violations, the Banks were issued with Show-cause Notices and denied the information.
6. In another application, an RTI Activist sought for details from RBI about the total Market-to-Market losses suffered on account of currency derivatives to the tune of Rs.32,000/- crores and wanted the Bank-wise breakup of the MTM losses. In reply, the RBI sought exemption under Section 8(1)(a) and ( e) of the RTI Act, 2005 as, under 8(1)(a) the disclosure of information sought would prejudicially affect the sovereignty and integrity of India and the security, strategic scientific or economic interests of the State, in relation with foreign State or lead to incitement of an offence.
7. Yet, in reply to another RTI application seeking information regarding accusations against SCB for non-compliances of RBI instructions on “derivatives”, the RBI stated that complaints are received the RBI and they constitute the “third party information” and as such it could not be disclosed in terms of Section 8(1)(d) of the RTI Act, 2005. As regards, the details sought from RBI regarding all the written replies/correspondence made by SCB with RBI and the RBI recordings on oral submissions made by SCB, the RBI stated that “action has been taken against the Bank based on the findings of Annual Financial Inspection (AFI) of the Bank, which is conducted under the provisions of Section 35 of the BR Act, 1949 and that the findings of the inspection are confidential in nature intended specifically for the supervised entities and for corrective action by them.
8. Yet, another RTI Activist sought for information from RBI about the basis of classification of Banks into various grades.In all of the above cases, the RBI denied providing any information sought for by citing the ground that the concerned information was received by the RBI in a fiduciary capacity and the disclosure of such information would prejudicially affect the economic interests of the State and harm the Bank’s competitive position and hence such information are exempt from disclosure in terms of the provisions of Section 8(1)(a) (d) and ( e) of the RTI Act, 2005.
Thus, during the course of arguments before the Supreme Court, the RBI submitted that the impugned orders passed by the CIC under the RTI Act were illegal and without jurisdiction and referred to various provisions of the RBI Act, 1934; the Banking Regulation (BR) Act, 1949 and the Credit Information Companies (Regulation) (“CICR”) Act, 2005 and submitted that the RBI being the statutory authority has been constituted under the RBI Act, 1934 for the purpose of regulating and controlling the money supply in the country. The powers, role and duties of the RBI were reiterated before the Supreme Court, including RBI’s powers to determine “Banking Policy” in the interest of banking system, monetary stability and sound economic growth. The RBI submitted that it exercises powers conferred under Section 35 of the BR Act, 1949 and conducts inspection of the Banks in the country and in its capacity as the regulator and supervisor of the banking system of the country, RBI has access to various information collected and kept by the Banks and such information accessed by the inspecting officers of the RBI would be confidential. RBI also submitted that its role is to safeguard the economic and financial stability of the country and it has large contingent of expert advisors relating to matters deciding the economy of the entire country and nobody can doubt the bona-fide of the RBI. Referring to the decision of the AP High Court in B. Suryanarayana –vs- TheKolluru Parvathi Co-op Bank Ltd (1986-AIR-AP-244), the RBI submitted that the Court will be highly chary to enter into and interfere with the decision of the RBI and also referring to another Supreme Court decision in Peerless General Finance and Investment Company Limited & Another –vs- RBI (1992-Vol.2-SCC-343) and contended that the Courts are not to interfere with the economic policy which is a function of the experts. The RBI also submitted that it is empowered to supervise and monitor the Banks under its jurisdiction through on-site inspection conducted on annual basis under the statutory powers derived by it under section 35 of the BR Act, 1949, off-site returns on key financial parameters and engaging banks in dialogue through periodical meetings and RBI takes supervisory actions where warranted for violations of its guidelines/directives, depending on the seriousness of the offence, its systematic implications and penal action may range from imposition of penalty, issuance of strictures or letters of warning. RBI further submitted that while RBI recognizes and promotes enhanced transparency in bank’s disclosures to the public, as transparency strengthens market discipline, a bank may not be able to disclose all data that may be relevant to assess its risk profile, due to the inherent need to preserve confidentiality in relation to its customers. Further, as per RBI policy, the reports of the annual financial inspections, scrutiny of all banks/financial institutions are confidential documents and cannot be disclosed as its disclosure would create misunderstanding/misinterpretation in the minds of the public and that may prove significantly counter-productive and would not serve the public interest, as it might adversely impact public confidence on the Banks and would have serious implication for financial stability and would adversely affect the economic interest of the State and would not serve the larger public interest.
The RBI also argued that the CIC also erred in holding that even if the information sought for is “exempted” under Section 8(1)(a), (d) or ( e) of the RTI Act, still Section 8(2) of the RTI Act would mandate the disclosure of the information and questioned whether the RTI Act, 2005 over-rides various provisions of special statutes, which confer confidentiality in the information obtained by the RBI and if the RTI Applicants were right in their contention, the various provisions of the BR Act; RBI Act and CICR Act would be repealed or over-ruled by the RTI Act, 2005. Further RBI contended that under Section 34A of the BR Act, 1949, production of documents of confidential nature cannot be compelled and that its inspection report on other Banks u/s 35(5) can only be disclosed, if the Central Government orders the publishing of such report. The RBI Counsel also pointed out that other statutory provisions of privacy are contained in the SBI Act, 1955; the SBI(subsidiary Banks) Act, 1959 and Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970 and hence, it was argued that the RTI Act, 2005 cannot override the provisions for confidentiality conferred on the RBI by the earlier statutes referred to hereinabove.
RBI also referred to certain exemptions carved out in the RTI Act to harmonise the conflicting interests and in that context referred to the Supreme Court’s decision in CBSE & Another –vs-
Aditya Bandopadhyay & Others (2011-8-SCC-497).
On behalf of the RTI Activists, it was argued that it is the people who have created legislatures, executives and the judiciary to exercise such duties and functions as laid down in the Constitution itself and that the right to information regarding the functioning of public institutions is a fundamental right as enshrined in Article 19 of the Constitution of India. They reiterated observations of the Supreme Court in the case of S.P. Gupta –vs- President of India and Ors (AIR-1982-SC-149) regarding the right to information in the following paragraph:-
“There is also in every democracy, a certain amount of public suspicion and distrust of Government, varying of course, from time to time, according to its performance, which prompts people to insist upon maximum exposure of its functioning. It is axiomatic that every section of the Government must be actuated by public interest, but even so, we find cases, though not many, where Governmental action is taken not for public good, but for personal gain or other extraneous considerations. Sometimes Governmental action is influenced by political and other motivations and pressures and at times, there are also instances of misuse or abuse of authority on the part of the executive. Now, if secrecy were to be observed in the functioning of the Government and the processes of Government were to be kept hidden from public scrutiny, it would tend to promote and encourage oppression, corruption and misuse or abuse of authority, for it would all be shrouded in the veil of secrecy, without any public accountability. But, if there is an open Government with means of information available to the public, there would be greater exposure of the functioning of Government and it would help to assure the people a better and more efficient administration. There can be little doubt that exposure to public gaze and scrutiny is one of the surest means of achieving a clean and healthy administration. It has been truly said that an open Government is clean Government and a powerful safeguard against political and administration aberration and inefficiency.”
The RTI Activist’s counsel also pointed out to para 56 of the Supreme Court’s judgement in Union of India –vs- Association for Democratic Reforms (AIR-2002-SC-2112) that “the right to get information in a democracy is recognized all throughout and is a natural right flowing from the concept of democracy.” Further submission was made that the RTI Act, 2005, as noted in its very preamble, does not create any new right, but only provides machinery to effectuate the fundamental right to information and that the institution of the CIC and the SICs are part of that machinery.
In its aforesaid RTI Judgement, the Supreme Court noted that one of the RTI Activists had asked about the details of the loans taken by industrialists that have not been repaid and he had asked about the names of the top defaulters who have not repaid their loans to public sector banks. The RBI resisted the disclosure of the information claiming exemption under Section 8(1)(a) and 8(1)( e) of the RTI Act on the ground that disclosure would affect the economic interest of the country, and that the information has been received by the RBI from the Banks in fiduciary capacity. The CIC found these arguments made by RBI to be totally misconceived in facts and in law, and held that the disclosure would be in public interest. While tracing the origin of passing of the RTI Bill by the Parliament, the Supreme Court observed that the right to information has been held as inherent in Article 19 of our Constitution, thereby, elevating it to a fundamental right of the citizen. Therefore, a citizen has to merely make a request to the concerned Public Information Officer specifying the particulars of the information sought by him and he is not required to give any reason for seeking information, or any other personal details, except those necessary for contacting him. The RTI Bill also stated that the categories of information exempted from disclosure are a bare minimum and are contained in clause 8 of the Bill and that even these exemptions are not absolute and access can be allowed to them in public interest, if disclosure of the information outweighs the harm to the public authorities. The information exempted from disclosure are those which would prejudicially affect the sovereignty and integrity of India; which has been expressly forbidden, which may result in a breach of privileges of Parliament or the Legislature; and also information pertaining to defence matters and these are listed in Section 8(1) (a) to (g) and that there are exceptions this clause.
With regard to the contention of the RBI about “fiduciary relationship”, the Supreme Court referred to its own decisioin in CBSE & Anr –vs- Aditya Bandopadhyay & Ors, where, after referring to various authorities to ascertain the meaning of the term “fiduciary relation” the Court had observed thus :-
“ A relationship in which one person is under a duty to act for the benefit of the other on matters within the scope of the relationship. Fiduciary relationships – such as trustee-beneficiary, guardian-ward, agent-principal, and attorney-client – require the highest duty of care. Fiduciary relationships usually arise in one of four situations : (1) when one person places trust in the faithful integrity of another, who as a result gains superiority or influence over the first, (2) when one person assumes control and responsibility over another, (3) when one person has a duty to act for or give advice to another on matters falling within the scope of the relationship, or (4) when there is a specific relationship that has traditionally been recognized as involving fiduciary duties, as with a lawyer and a client or a stockbroker and a customer.”
The Supreme Court held that the RBI does not place itself in a fiduciary relationship with the financial institutions (though, in word it puts itself to be in that position) because, the reports of the inspections, statements of the bank, information related to the business obtained by the RBI are not under the pretext of confidence or trust. In this case neither the RBI nor the Banks act in the interest of each other. By attaching an additional “fiduciary” label to the statutory duty, the Regulatory authorities have intentionally or unintentionally created an in terrorem effect. The Supreme Court also observed that the RBI is supposed to uphold public interest and not the interest of individual banks. RBI is clearly not in any fiduciary relationship with any bank. RBI has no legal duty to maximize the benefit of any public sector or private sector bank, and thus there is no relationship of ‘trust’ between them. RBI has a statutory duty to uphold the interest of the public at large, the depositors, the country’s economy and the banking sector. Thus, RBI ought to act with transparency and not hide information that might embarrass individual banks. It is duty bound to comply with the provisions of the RTI Act and disclose the information sought by the respondents herein.
The Supreme Court observed that the baseless and unsubstantiated argument of the RBI that the disclosure would hurt the economic interest of the country is totally misconceived. In the impugned order, the CIC has given several reasons to state why the disclosure of the information sought by the respondents would hugely serve public interest, and non-disclosure would be significantly detrimental to public interest and not in the economic interest of India. RBI’s argument that if people, who are sovereign, are made aware of the irregularities being committed by the banks then the country’s economic security would be endangered, is not only absurd but is equally misconceived and baseless.
The Supreme Court also observed that the Financial Institutions have an obligation to provide all the information to the RBI and such an information shared under an obligation/duty, cannot be considered to come under the purview of being shared in “fiduciary relationship” and that one of the main characteristic of a “fiduciary relationship” is “trust and confidence”, something that RBI and the Banks lack between them.
The Supreme Court also referred to section 2(f) of the RTI Act which defines “information” and it means, inter-alia “information relating to any private body which can be accessed by a public authority under any other law for the time being in force”. The Supreme Court therefore held that the RBI is liable to provide information regarding inspection report and other documents to the general public and that by not making them accessible to the public under the guise of “fiduciary relationship”, reveals that the Banks are trying to cover up their underhand actions and hence they are even more liable to be subjected to public scrutiny, especially when many FIs have resorted to such acts, which are neither clean nor transparent, and the RBI in association with them has been trying to cover up their acts from public scrutiny and thus the Supreme Court observed that it is the responsibility of the RBI to take rigid action against those Banks which have been practising disreputable business practices. The Supreme Court also rejected the argument of the RBI that disclosure of information sought for will also go against the economic interest of the nation and held that argument to be “wholly misconceived”. Making the information available to the people is actually economic empowerment of its citizens so that evaluate the actions of the legislature and executives, which is very important in a participative democracy and this will serve the Nation’s interest better, including its economic interests.
This landmark decision of the Supreme Court would hopefully bring in the desired positive changes in the banking industry which is having non-performing assets worth Rs.2.78 lakh crores as in 2014-15, besides addressing numerous violations plaguing the banking sector.
2/8/2016 0 Comments
SUPREME COURT AFFIRMS SEBI’S ORDERS FOR CURBING SHARE MARKET MANIPULATIONS -Published in Taxmann's Journal "Corporate Professionals Today" in November 16-30, 2015 Issue
DELEP GOSWAMI, FCS, ADVOCATE, SUPREME COURT OF INDIA, NEW DELHI
ANIRRUD GOSWAMI, ADVOCATE, GOSWAMI & GOSWAMI, ADVOCATES, NEW DELHI
For regulating the stock market operations and to prevent stock market manipulations, the Securities and Exchange Board of India (SEBI) exercises a significant and unique role. Towards this end, the SEBI has framed many Rules and Regulations for compliance by the listed companies and by the stock brokers and stock market operators. One such Regulation which is required to be scrupulously complied with by companies and market operators is the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997 (in short “Takeover Regulations”). Another important regulation is SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (in short “2003 Regulations”). Since the provisions of the SEBI Act, 1992 (as amended from time to time) and the various regulations framed by SEBI have tremendous bearing on the stock market operations, SEBI performs its assigned role effectively and more forcefully as a market regulator.
In the aforesaid background, the recent judgement of the Hon’ble Supreme Court of India passed on 18th September, 2015, in re: Kosha Investments Limited –vs- SEBI (2015-61 taxmann.com 264 –SC) (hereafter referred to as the “Kosha Judgement”) deserves to be highlighted as the Supreme Court had the occasion to deal with and interpret the provisions of the aforesaid two Regulations and the principles enunciated in the Kosha Judgement will have tremendous impact on such share market transactions in the times to come. In the Kosha Judgement, the Supreme Court upheld the action taken by SEBI in directing that, in the facts and circumstances of the said case, the Acquirer of shares of a listed company was under obligation to make public announcement for open offer when it exceeded the share acquisition threshold limits set out in the Takeover Regulations, even if the Acquirer subsequently divests the acquired shares. From the Kosha Judgement it becomes clear that when the acquirer company filed appeal before the SEBI’s Appellate Authority (“SAT”), the SAT also upheld the impugned orders passed by the SEBI. However, the Acquirer, namely, Kosha Investments Limited (“KIL”) filed an appeal before the Hon’ble Supreme Court of India, and after hearing both the sides, the Hon’ble Supreme Court of India passed the aforesaid Kosha Judgement.
Brief facts leading to the aforesaid Kosha Judgement is that the Appellant KIL is one of the Indian promoters of another company viz. Snowcem India Limited (“SIL”), which is listed in the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). As a stock market regulator SEBI noticed that there was a heavy trading in the shares of SIL in BSE and NSE and the prices of the scrips of SIL shot up from Rs.52/- to Rs.128/- during heavy transactions in the said scrip during the period of June, 1999 to August, 1999. SEBI also noticed that the said acquisitions of shares of SIL were made by KIL and by a particular set of share brokers/traders. During its investigation, SEBI noticed that KIL was already holding between 15% to 75% shares of SIL (also described as “the Target Company” under the Takeover Regulations) and as such pursuant to the Takeover Regulations, KIL could acquire additional shares of SIL through creeping acquisition mode, that is, without public announcement only up to 5% of the paid up share capital of SIL during the period of 12 months ending on 31st March, 2000. However, SEBI’s investigation revealed that by acquiring 11,36,700 shares of SIL during the period during June, 1999 to August, 1999, the Appellant KIL had acquired shares constituting more than 5% of the paid up share capital of SIL and for making such acquisition, KIL was liable to make public announcement as required by Regulation 11(1) of the Takeover Regulations.
For the purposes of its investigation, SEBI issued a “Show Cause Notice” (SCN) dated 16.9.2002 to KIL asking it to show cause as to why suitable directions prohibiting it from dealing in securities for a period should not be issued to it under Section 11B of the SEBI Act, 1992 read with Regulation 11 and 12 of the 2003 Regulations for non-compliance of the provisions of the Takeover Regulations. The SCN mentioned that KIL, who was one of the promoters of SIL, was among the top traders who had traded in the scrip with the intention to artificially raise the price of the scrip in co-ordination with certain entities connected with it. It was pointed out in the SCN that there were a common set of clients acting in concert through selected brokers of BSE and NSE who were involved in circular trading. It was also mentioned in the SCN that SEBI’s investigating team had observed that on many occasions, KIL had received funds from SIL and the same were deployed to buy shares of SIL and these payments were in turn made to share brokers to purchase shares of SIL. It was also alleged in the SCN that orders placed by other clients were done in such a way that they were matching and appearing to be acting in concert, which indicated circular trading of the SIL scrip. The SCN alleged that the Appellant KIL had aided and abetted the management of SIL in the price manipulation of the scrip and therefore it violated the Regulation 4(a), (b) and (d) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. The SCN also annexed details of the investigation conducted by SEBI during the aforesaid period.
In reply to the show cause notice issued by SEBI and during the course of personal hearing granted to KIL, the acquirer KIL stated that it was an independent company with its own Board of Directors and that SIL was also run by the Board of Directors as an independent legal entity. However, in their reply, KIL mentioned that being a promoter company, KIL used to get sometimes request from SIL that they needed funds for meeting their financial requirements and KIL would arrange funds from banks and other financial institutions with collateral security of SIL shares. KIL further stated that sometimes it would become necessary to liquidate the shares in the market to meet with the obligations. Therefore, the sale and purchase of shares would happen in order to meet with the loan requirements of SIL. Further, KIL reiterated that all that KIL would do under such circumstances, was to enter into normal financial transactions with the sole objective of meeting the financial needs of SIL and that all transactions with brokers were financial transactions and no attempt was made by KIL to create artificial volumes in the market. Further, KIL also denied that there was any transfer of funds from SIL to KIL and to brokers, and that transactions were done during the normal course of business. On the basis of those submissions KIL requested that the proceedings against it before SEBI should be dropped.
SEBI, in its order, held that KIL was already holding between 15% to 75% in SIL, and thus KIL could acquire additional shares up to 5% during any period of 12 months through creeping acquisition mode and since KIL acquired more than the stipulated 5% shares of SIL during the said period of 12 months, KIL was liable to make a public announcement to acquire shares in accordance with the Takeover Regulations. In view of the findings made by SEBI and in exercise of the powers conferred upon the SEBI under Section 19 read with Section 11-B of the SEBI Act read with Regulations 44 and 45 of the said Regulations, SEBI directed KIL, inter-alia, to make public announcement in terms of Regulation 11(1) of the said Takeover Regulations, taking 29th June, 1999 as the reference date for circulation of offer price and the public announcement was directed to made within 45 days of passing of the SEBI’s order.
Further, in exercising the powers conferred under Section 19 of the Securities and Exchange Board of India Act, 1992, read with Sections 11 and 11B of the SEBI Act, 1992, and Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, SEBI restrained KIL from buying, selling, or dealing in securities in any manner, directly or indirectly for a period of two years.
Against the aforesaid SEBI’s order, KIL filed an appeal before the SEBI’s Appellate Authority (namely, “SAT”) and submitted that the order passed by SEBI was on some surmises, conjectures and suspicion. KIL also contended that as per its Memorandum and Articles of Association, it was empowered to inter alia, invest, hold, sell and deal with shares, stocks, bonds, etc., and to carry on the business of an investment company, and to buy, underwrite sub-underwrite, invest in and acquire and hold shares, stock, etc. Therefore, it was a legitimate activity on the part of the appellant to buy and sell shares, including that of SIL. In SAT, the appellant KIL also argued that the appellant company was trading in the shares of not only SIL, but of other companies also and it also pointed out that the period of June, 1999 to August, 1999 has been taken out of context, whereas KIL had been purchasing and selling the shares of SIL from much earlier period and hence the specified transactions ought to be seen as only financial transactions. KIL further contended that it did not act in concert with a common set of clients/through select brokers of the BSE and NSE as alleged by SEBI and that KIL was not involved in circular trading in the scrip of SIL. KIL contended that it did not push up the price of the SIL scrip to artificial levels and argued that the stated increase in the price of SIL could be because of several independent market factors and reasons and that the share market was buoyant during this period as would be reflected by the indices of BSE and NSE and therefore SEBI should not have come to the conclusion that the increase in the price of the scrip was due to any manipulation. KIL also argued that there was no conclusive evidence to prove that the appellant was responsible for the spurt in volumes and increase in the price of scrip of SIL. KIL argued that there was no evidence to corroborate that KIL in concert with the other entities was responsible for increasing the volume of trade and raising the price of SIL scrip. All transactions entered into by KIL were financial transactions between the appellant and SIL and other brokers involved during the investigation period. Further, KIL argued that there was no evidence to establish the intentions of the Appellant that it had indulged in artificially raising the price of the scrip of SIL in conjunction with other persons /brokers. KIL further argued that if anybody has to be charged under SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, it should not be done on the basis of preponderance of probability, but there has to be direct evidence to prove. The learned counsel for KIL also argued that SEBI had wrongly restrained KIL from dealing in securities for a period of two years in exercise of the powers conferred on SEBI under Section 19 of the SEBI Act, 1992 read with Sections 11 and 11B of SEBI Act, 1992 and Regulations 11of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market), Regulations, 2003.
In SAT, the appellant KIL further argued that it had been only arranging funds by way of term loan, bridge loan, ICD, etc., and furnishing the shares of SIL as collateral security in respect of such borrowings, and whenever the aforesaid loans became due for repayment, the borrowing company would request the lender to liquidate either the whole or part of the loan by selling the mortgaged shares that were placed as collateral security after obtaining the consent of the appellant i.e., the pledger in this case. KIL reiterated its argument that such transactions were in the nature of ongoing transactions and there was no intention to increase the volume of transactions and artificially raise the share price of SIL through circular trading. KIL further argued that it was wrong to interpret that transactions between various brokers named in the impugned order and the appellant were unfair or unjust.
Counter arguments were advanced on behalf of SEBI. The SAT accepted the counter arguments advanced on behalf of the SEBI that even during the period June, 1999 to August, 1999, the appellant KIL had acquired 6,61,800 shares of SIL, which constituted 6.29% of the paid up share capital of SIL, which was beyond the permissible limit of 5% and hence the requirement of making public announcement in terms of Regulation 11(1) of the Takeover Regulations, 1997 had to be met by the appellant KIL, which the Appellant KIL failed to do and upheld the orders passed by SEBI against the appellant KIL.
Against the SAT order, the appellant KIL filed appeal in the Hon’ble Supreme Court of India. The appellant KIL contended that KIL as a promoter of SIL, KIL was having more than 15% shares of SIL, but KIL was also in the business of sale and purchase of shares, which was being done simultaneously and hence exceeding the limit of 5% at any one point of time was immaterial, unless on a net accounting, it could be found that such ceiling of 5% had been violated by the Appellant on account of its retaining more than 5% shares of SIL, at the end of a financial year. On the other hand, SEBI reiterated its stand that the ceiling of making acquisition of only up to 5% of the paid share capital of the target company was to be reckoned during a period of 12 months, that is, a financial year, and that the requirement of Regulation 11(1) of the Takeover Regulations, 1997 of making a public announcement was triggered not only on actual acquisition beyond the 5% limit, but even on entering into an agreement for such acquisition or deciding to acquire such volume of shares or voting right, in view of provisions of Regulation 14(1) of the Takeover Regulation, 1997.
The Hon’ble Supreme Court heard the arguments of both sides and to explain the rationale, gave an appropriate example in the following words, i.e., “Let us conceptualise the case of an entity holding 20 per cent of shareholding in a target company on 1st April of a given year. If it were to increase its holding by say 3 per cent and subsequently reduce it to 2 per cent. If at that point, it intended to purchase 4 per cent shares again, whether by way of fractions or otherwise, it would cross the threshold of 5 per cent. It would then have to make compliance with Regulation 11 of the Takeover Regulations, 1997. We hasten to clarify that if the aggregate percentage of acquisitions at any point of time during the financial year exceeds 5 per cent, the provision would get triggered. In other words, the provision of Regulation 11 mandating a public announcement will kick in at any stage, whence the shareholding of the said entity in the target company would exceed 25 per cent.”
In the Supreme Court, the Appellant KIL also contended that only in the event where the securities or shares are converted by the acquirer into voting rights by getting it registered or upon exercise of option to acquire voting rights, does the liability of making public announcement can be fastened. This was rightly countered by SEBI and the Hon’ble Supreme Court rejected the submissions of KIL and held that in respect of the shares acquired by KIL, only Regulation 14(1) of the Takeover Regulations, 1997 was applicable and also noted that no such plea was raised by KIL before SEBI or before the SAT and that such a plea was in desperation and hence undeserving of acceptance and therefore held that KIL was required to comply with Regulation 11(1). The Supreme Court thus dismissed KIL’s appeal and imposed cost of Rs.50,000/- on KIL to be paid to SEBI.
The analysis of the aforesaid judgement of the Supreme Court of India upholding the orders passed by SEBI and its appellate authority, i.e., SAT, points out that the desperate stand of the share market operators to justify the share market manipulations would be dealt with strictly by the regulatory authorities. The Kosha Judgement reinforces the objective behind enacting the Takeover Regulations which were an important step in ensuring that shareholders of a target company are treated equally and not denied any opportunity to decide whether they wish to continue holding shares of a company whose shares have been acquired by the acquirer, triggering the public announcement. Such tactics employed by companies operating in the stock market as intermediaries, only goes on to highlight the manipulative practices used for artificially orchestrating price rise of shares of the target company in the stock market.
It is indeed a step in the right direction and would signal well in disciplining the stock market operations which is the need of the hour to upkeep the confidence of the general investors in the stock market management.
2/8/2016 0 Comments
Supreme Court Clarifies Vicarious Liability of Accused Company Directors (Published in Taxmann's Journal: Corporate Professionals Today, January 16-31, 2016 Issue)
DELEP GOSWAMI, FCS, ADVOCATE, SUPREME COURT OF INDIA, NEW DELHI
ANIRRUD GOSWAMI, ADVOCATE, GOSWAMI & GOSWAMI, ADVOCATES, NEW DELHI
Special Court Summons Accused in 2G Scam Case
The famous 2G spectrum scam case being investigated by the Central Bureau of Investigation (CBI) generated lot of expectations by the corporate analysts that all the accused booked for the scam would be brought to justice and this case would set the trend of things to come in future in respect of economic fraud perpetrated by the corporate sector in cornering the scarce economic resources of the country in connivance with the responsible Government officials. The reports appearing in newspapers about the resignation of the then telecom minister of the Central Government and the arrest of a reputed member of the Parliament supposedly involved in the 2G scam and the arrest of certain top executives of the telecom companies created an impression that justice would be done and will then prevent repetitions of such types of corporate generated frauds. The question being asked was: “why did the CBI not book the Promoters/Chairman-cum-Managing Director of the companies involved in the 2G scam?” Therefore, when it was reported that the Judge of the Special CBI Court summoned two of the well-known industrialists of the country viz. Sunil Bharti Mittal and Ravi Ruia for prosecution, it was largely felt that at long last instead of catching hold of the “scapegoats”, the Court has correctly summoned the said owner/promoter industrialists to face the charge. However, this summoning of the promoter industrialists led them to approach the Supreme Court of India for their “discharge”, being wrongly summoned and the Supreme Court of India’s judgement dated 9th January, 2015 in the case Sunil Bharti Mittal –vs- Central Bureau of Investigation (2015-61-taxmann.com 220-SC) (in short “Sunil Mittal judgement”) resulted in a brilliant judgement on “vicarious liability” of company directors for offences by companies and will be a trend setter in relieving many promoter/industrialists from the dragnet of prosecution by the regulatory authorities.
Sunil Mittal vs. Central Bureau of Investigation –Accused Approach Supreme Court
The aforesaid Sunil Mittal judgement analysed the duties of the Company Directors. The Special Court which was set up for trying persons involved in the 2G spectrum scam involving telecom bigwigs and ministers alike, issued summons to chairpersons and managing directors of the accused companies by stating that they represent the “alter-ego” of companies and hence the acts of the companies could be attributed to them. The said judgement (“supra”) also analysed as to whether the application of the principle of “vicarious liability” would make the directors of a company liable for an offence committed by the company can be done only if the Statute provides for it and it cannot be applied in reverse order.
Principle of Vicarious Liability – Directors are ‘Alter Ego’ of Company
Brief facts leading to the filing of the petition in the aforementioned Sunil Mittal Judgement are that during monitoring of the investigation of CBI Case in respect of the well known infamous 2G spectrum case, the Hon’ble Supreme Court vide its order dated 16.12.2010 directed CBI to conduct investigation into various irregularities in grant of licences and allocation of spectrum in the 2G band and file charge sheet before the Special Judge. CBI named the then Telecom Secretary and three companies, namely, Bharti Cellular Limited; Hachison Max Telecom (P) Limited and Sterling Cellular Limited as the accused persons in respect of offences under section 13(2) read with section 13(1)(d) of the Prevention of Corruption Act, 1988 and allied offences. The Special Judge passed orders dated 19.3.2013 recording his satisfaction that there was enough incriminating material on record to proceed against the accused persons and thus directed the summons be issued to the three companies. At the same time, the Special Judge also directed that summons be issued to Chairman-cum-Managing Director of the above named three companies who used to chair the meetings of its Board of Directors. The Special Judge held that in light of the capacity in which these directors acted, they could be considered as the persons controlling the affairs of the company and the ‘directing mind and will” of the respective companies. The Special Judge observed that these persons could be considered to be the “alter ego” of their respective companies and the acts of the companies could be attributed and imputed to them. Against the said summoning order of the Special CBI Judge, the Chairman-cum-Managing Directors of the companies, namely, Shri Sunil Bharti Mittal and Shri Ravi Ruia filed appeals in the Supreme Court for quashing of the summoning orders.
Important Question: Can the Company be Prosecuted for an Offence Requiring ‘Mens Rea’?
During the course of argument in the above mentioned Sunil Mittal’s case, the Supreme Court noted that as to the question whether a company could be prosecuted for an offence which requires “mens-rea”, the Constitution Bench of the Supreme Court in its judgement in the case of Standard Chartered Bank –vs- Directorate of Enforcement (2005-60-SCL 217-SC) had held that a company can be prosecuted and convicted for an offence which requires a minimum sentence of imprisonment. In the said judgement, the Supreme Court clarified that it was not expressing any opinion on the question whether a corporation could be attributed with requisite “mens-rea” to prove the guilt. However, the aforesaid question fell directly for consideration of the Supreme Court in the case of Iridium India Telecom Limited –vs- Motorola Inc (2011-9-Taxmann.com 157/106 –SCL-28-SC) and the Court noted the law that prevails in America and England on this issue. After considering the legal propositions, the Supreme Court held that if the person or group of persons who control the affairs of the company commit an offence with a criminal intent (“mens-rea”), their criminality can be imputed to the company as well, as they are “alter-ego” of the company. The Supreme Court noted that an individual who has perpetrated the commission of an offence on behalf of a company can be made accused, along with the company, if there is sufficient direct evidence of his active role coupled with criminal intent and further he can be implicated in those cases where the statutory regime itself attracts the doctrine of “vicarious liability” by specifically incorporating such a provision. However, the Supreme Court held that when the company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence of any statutory provision to this effect.
Facts of the Case: Appellant was not named in CBI’s Chargesheet!
In the Sunil Mittal’s case, it was argued on behalf of the appellant Sunil Mittal that the CBI investigated into the role of the appellant and an opinion was formed that there was no material to implicate him and hence his name was omitted from the charge sheet filed in the court. In the case of appellant Ravi Ruia, it was argued that he was not even called for investigation by the CBI which would show that there was no material against him at all and his name was not mentioned in the charge-sheet. However, it was submitted before the Supreme Court that even at a later stage, if any evidence surfaces against the appellant, the Court is not powerless, as any person can be summoned as accused under section 319 of the Criminal Procedure Code at any stage of the trial. On behalf of the CBI, it was argued that there was evidence of meetings between the then Telecom Secretary and the Appellant for the same purpose during the same period which would constitute the circumstantial evidence to implicate these persons. The thrust of the submission of CBI senior counsel was that it is the “human agency” in the accused companies who was responsible as it was a “mens-rea” offence and such an agency/person has to be the top person, going by the circumstantial evidence. Therefore, even if in the charge-sheet, names of these appellants were not included, the Special Judge was within his powers to look into the matter in its entirety as the charge-sheet along with documents spanning over 25000 pages was submitted to him.
The Supreme Court in Sunil Mittal’s case noted that in another judgement of the Supreme Court in the case of Kishan Singh-vs-State of Bihar (1993-2 SCC 16), it was held that the Sessions Court has jurisdiction on committal of a case to it, to take cognizance of the offences of the persons not named as offenders, but whose complicity in the case would be evident from the materials available on record and hence, even without recording evidence, upon committal under section 209, the Sessions Judge may summon those persons shown in column 2 of the police report to stand trial along with those already named therein.
SC: High Court Should Interfere Very Cautiously Only Where Non-Interference Would Lead to Injustice
With regard to the proposition of law on the question of exercise of jurisdiction under section 482 of the Criminal Procedure Code, the Supreme Court noted the submission that interference by the High Court in exercise of its jurisdiction under Section 482 of the Cr PC can only be where a clear case for such interference is made out. Frequent and uncalled for interference even at the preliminary stage by the High Court may result in causing obstruction in the progress of the inquiry in a criminal case, which may not be in the public interest. But, at the same time, the High Court cannot refuse to exercise its jurisdiction if the interest of justice so required, where the allegations made in the FIR or complaint are so absurd and inherently improbable on the basis of which no fair-minded and informed observer can ever reach a just and proper conclusion as to the existence of sufficient grounds for proceeding. In such cases, refusal to exercise the jurisdiction may equally result in injustice, more particularly, in cases where the complainant sets the criminal law in motion with a view to exert pressure and harass the persons arrayed as accused in the complaint.
CBI Argues that Enough Circumstantial Evidence Lay Against Accused Company’s Chairman-cum-Managing Director- Hence Summons Are Justly Issued
On behalf of CBI, it was reiterated before the Supreme Court in the Sunil Mittal’s case that when it was a case of circumstantial evidence which appeared on record in abundance, the trial court was right in summoning the appellants and in fact, the judgement of Keshav Mahindra-vs- State of MP (1996-6-SCC 129) fully supported the impugned order. On behalf of the Intervenor, the role of the appellant Sunil Mittal was highlighted from the records, particularly the extract of file noting which inter-alia, contained the views of the Superintendent of Police and this constituted sufficient material to proceed against him and since it was only a summoning order, the appellants were free to seek discharge before the trial court.
SC: Magistrate Must Express In Its Order That Sufficient Incriminating Material is On Record Before Summoning The Accused
In the aforesaid Sunil Mittal’s case, the Supreme Court noted that the fulcrum of the issue before it was the validity of the impugned order vide which the two appellants who were not named by the CBI in the charge sheet have been summoned by the Special Judge. The Supreme Court noted in the present case, the question is not as to whether there is sufficient material against the appellants filed in the trial court to proceed against them and that whether such a material is there or not, is not reflected from the impugned order as that aspect is not even gone into. The learned Special Judge has not stated in the impugned order that after examining the relevant documents, including statement of witnesses, he is satisfied that there is sufficient incriminating material on record to proceed against the appellant as well. On reading of the impugned order, it is very clear that in para 2 of the impugned order, the Special Judge discusses the submissions of the Public Prosecutor in respect of the persons who were made accused in the charge-sheet. Insofar as charge sheet is concerned, it had named the Telecom Secretary Shyamal Ghosh, who was the public servant and other three accused persons are the corporate entities. Submission of the learned Public Prosecutor is recorded in this para that there is enough incriminating material on record against them and they be proceeded against, as per law. Immediately thereafter in para 3 of the impugned order, the learned Special Judge records his satisfaction on the perusal of the records, namely FIR, charge-sheet, statement of witnesses and documents and states that he is satisfied that there is enough incriminating material on record to proceed against the “accused persons”. Para 3 is clearly relatable to para 2. Here, the “accused persons” referred to are those four persons whose names are mentioned in para 2. Obviously, till that stage, appellants were not accused persons, as they are not named as such in the charge-sheet. After recording his satisfaction qua the four said accused persons, discussion about other three individuals (including the two appellants before the Supreme Court) starts from para 4 where the Special Judge “also” finds and refers to the positions which these three persons hold/held in the three companies respectively. In para 4, the learned Special Judge does not mention about any incriminating material against them in the statement of witnesses or documents etc. On the other hand, the reason for summoning these persons and proceeding against them are specifically ascribed in the para which, prima facie, are:-
Is The Principle of Attribution or Imputation Backed By Law?
The moot question before the Supreme Court was whether the aforesaid proposition to proceed against the Appellants is backed by law. The Supreme Court analysed its earlier judgements in Iridium India Telecom Ltd.’s case and in Standard Chartered Bank vs. Directorate of Enforcement (supra) and noted that it is abundantly clear that the principle which is laid down, is to the effect that the criminal intent of the “Alter Ego” of the company, i.e., the personal group of persons that guide the business of the company, would be imputed to the company/corporation. The legal proposition that is laid down in the aforesaid judgement is that if the person or group of persons who control the affairs of the company, commit an offence, with a criminal intent, their criminality can be imputed to the company as well, as they are “Alter Ego” of the company.
Principle of ‘Attribution’ and Imputation Applicable in Reverse Order in Sunil Mittal’s Case
However, in Sunil Mittal’s case, the Supreme Court noted that in Sunil Mittal’s case, this principle is applied in an exactly reverse scenario. Here, the company is an accused person and the learned Special Magistrate has observed in the impugned order that since the Appellants represent the directing mind and will of each company, their state of mind is the state of mind of the company and, therefore, on this premise, acts of the company are attributed and imputed to the appellants. The Supreme Court felt that it is difficult to accept it as the correct principle of law to be applied in the appellant’s case as it would run contrary to the principle of vicarious liability, detailing the circumstances under which a director of a company can be held liable. The Supreme Court further noted that no doubt a corporate entity is an artificial person, which acts through its officers, directors, managing director, chairman, etc. and if such a company commits an offence involving mens rea, it would normally be the intent and action of that individual who would act on behalf of the company. It would be more so, when the criminal act is that of conspiracy. However, at the same time, it is the cardinal principle of criminal jurisprudence that there is no vicarious liability unless the statute specifically provides so. Thus, an individual who has perpetrated the commission of an offence on behalf of a company, can be made accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent. Also, the situation in which he can be implicated is in those cases where the statutory regime itself attracts the doctrine of vicarious liability, by specifically incorporating such a provision.
In this regard, the Supreme Court analysed its earlier decisions in the following cases: Aneeta Hada (2012-21Taxmann.com-43/113-SCL-564-SC); Mahashtra State Electricity Distribution Company Ltd.(2010-8Taxmann.com-223/2011-105SCL-253-SC); and S.K.Alagh’s case (2008-5SCC-662). It further noted that in a criminal case of a serious nature, ‘mens rea’, cannot be excluded and once the charge of conspiracy failed, the onus lay on the prosecution to prove affirmatively that the appellant was directly and personally connected with acts or omissions pertaining to the offence.
The Supreme Court was unable to agree with the broad statement of law that the chairman of a company, who used to sign various papers and approve various tenders, even as a matter of routine, should have acted with care and caution and his negligence would be a positive proof of his intention to commit the offence. The Court also noted that the chairman of a company had to deal with a large variety of matters and it would not be humanly possible for him to analyse and go into the details of every small matter in order to find out whether there has been any criminal breach of trust.
SC: There is No Vicarious Liability Under Criminal Law Unless the Statute Also Takes That In Its Fold
The Supreme Court also referred to its earlier judgement in Shyam Sunder vs. State of Haryana (1989-4SCC-630) wherein it was stated that “but we are concerned with a criminal liability under penal provision and not a civil liability. The penal provision must be strictly construed in the first place. Secondly, there is no vicarious liability in criminal law, unless the statute also takes that within its fold. Section 10 does not provide for such liability. It does not make all the partners liable for the offence, whether they do business or not.” The Supreme Court then referred to another judgement in Maksud Saiyed vs. State of Gujarat (2008-5SCC-68) wherein it was held that “where a jurisdiction is exercised on a complaint petition filed in terms of Section 156(3) or Section 200 of Cr.PC, the Magistrate is required to apply his mind. The penal code does not contain any provision for attaching vicarious liability on the part of the managing director or the directors of the company, when the accused is the company… The Bank is a body corporate. Vicarious liability of the managing director and director would arise, provided any proposition exists in that behalf in the statute. Statute indisputably must contain provision fixing such vicarious liabilities. Even for the said purpose, it is obligatory on the part of the complainant to make requisite allegations which would attract the provisions constituting vicarious liability.”
Managing Director or Directors Cannot be Said To Have Committed Offence Merely Because of Their Holding Such Offices.
Yet in another judgement, namely, Keki Hormusji Gharda vs. Mehervan Rustom Irani (2009-4SCC-475), the Supreme Court held that “…the Penal Code, 1860, save and except in some matters, does not contemplate any vicarious liability on the part of a person. Commission of an offence by raising a legal fiction or by creating a vicarious liability in terms of the provisions of a statute must be expressly stated. The managing director or the directors of the company, thus, cannot be said to have committed an offence only because they are holders of offices. The learned Additional Chief Metropolitan Magistrate, therefore, in our opinion, was not correct in issuing summons without taking into consideration this aspect of the matter. The managing director and the directors of the company should not have been summoned only because some allegations were made against the company.”
In Sunil Mittal’s case, the Supreme Court noted that while issuing summons against the Appellants, the Special Magistrate has taken shelter under a so-called legal principle, which has turned out to be incorrect in law. He has not recorded his satisfaction by mentioning the role played by the Appellants which would bring them within criminal net.
Once Prima Facie Case Has Been Made Out, Magistrate is Empowered to Issue Process
The Supreme Court also noted that even if the CBI did not implicate the Appellants, if there was/is sufficient material on record to proceed against these persons as well, the Special Judge is duly empowered to take cognizance against these persons as well. A wide discretion has been given as to grant or refusal of process and it must be judiciously exercised. A person ought not be dragged into Court merely because a complaint has been filed. If a prima facie case has been made out, the Magistrate ought to issue process and it cannot be refused merely because he thinks that it is unlikely to result in a conviction.
Section 204 of Cr.PC - “Sufficient Grounds of Proceeding” – The Most Important Phrase To Consider
The Supreme Court further held that the words “sufficient grounds for proceeding” appearing in Section 204 of Cr.PC are of immense importance. It is these words which amply suggest that an opinion is to be formed only after due application of mind that there is sufficient basis for proceeding against the said accused and formation of such an opinion is to be stated in the Order itself. The Order is liable to be set aside if no reason is given therein while coming to the conclusion that there is prima facie case against accused, though the Order need not contain detailed reasons. A fortiori, the order would be bad in law if the reasons given turn out to be ex-facie incorrect. There has to be a proper satisfaction in this behalf which would be duly recorded by the Special Judge on the basis of material on record. In the instant Sunil Mittal’s Case, no such exercise was done and hence, the Supreme Court held that it was difficult to sustain the impugned Order dated 19.03.2013 in its present form insofar as it relates to implicating the Appellants and summoning them as accused persons and thus, the Supreme Court set aside the Impugned Order.
Supreme Court Reiterates Special Judge’s Power to Issue Summons at Later Stage of Trial
It is very interesting to note that as an epilogue, the Supreme Court stated that “while parting, we make it clear that since on an erroneous presumption in law, the Special Magistrate has issued the Summons to the Appellants, it will always be open to the Special Magistrate to undertake the exercise of going through the material on record and on that basis, if he is satisfied that there is enough incriminating material on record to proceed against the Appellants as well, he may pass appropriate orders in that behalf.” The Supreme Court also made it clear that even if at the summoning stage, no such prima facie material is found, but during the trial if sufficient incriminating material in the form of evidence surfaces against the Appellants, the Special Judge shall be at liberty to exercise his powers under Section 319 of the Cr.PC to rope in the Appellants by passing appropriate orders in accordance with law at that stage.
The whole country is watching and waiting as to how the accused in the infamous 2G Scam are booked, in which decisions were taken by the Central Government to help certain accused telecom companies, resulting in huge losses to the Government Exchequer. And since, the companies act through directors who are the actual beneficiaries of such illegal economic terrorism, these types of cases are required to be dealt with diligently and strictly. In the Sunil Mittal’s judgement, since the Supreme Court has given liberty to the Trial Magistrate to summon the Chairman-Cum-Managing Directors of the accused companies, this aspect needs serious consideration to correct the anomaly in the summoning order. Further, what steps the Central Government takes to attach the properties of the accused, acquired through the ill-gotten money by putting the exchequer to a loss, needs serious consideration. Some urgent steps are needed if the economic benefit are to percolate down to the common masses and not be cornered by few individuals of the company through economic terrorism.
2/8/2016 0 Comments
Ease of Doing Business In India - Article Published in Chartered Secretary December, 2015 Issue
(Published in Chartered Secretary December 2015 Issue)
Ease of doing business in India has many important areas starting from the stage of setting up of the business enterprise by incorporation of companies to the stages of commencement of production, exit policies and the most significant aspect of expeditious resolution of business/commercial disputes. For the purpose of this article, only some very significant changes which have been introduced in India with regard to expeditious incorporation of companies without the necessity to complete and comply with some formalities which were prevalent before these changes took place, and another important area, namely, the expeditious settlement of commercial disputes within a specified time-frame are being highlighted here.
The recent changes have been introduced with a view to attract foreign investments in India since the predominant grievance of foreign investors has been concerned with the protracted and long-drawn litigation process in the Indian Courts which takes a number of years to get settled. In the backdrop of litigations that have been hurtful to the foreign investor, be it in the acquisition of natural resources in the country for operating/harnessing or the aspect of international taxation, the resultant situation had been fairly grim, with foreign investors exiting the Indian economy. That said, the sheer number of years it takes for any complex commercial or industrial dispute to get resolved in India has been adversely affecting our country’s prospects of attracting foreign investors.
In order to transform India from a ‘least favoured’ to a ‘most favoured’ seat of international arbitration after Singapore and London, suitable amendments to the existing Arbitration Act were contemplated. Subsequently, in a significant move, the Government of India, has, as recently as on October 23rd, 2015, promulgated an Ordinance known as “The Arbitration and Conciliation (Amendment) Ordinance, 2015” (“the Ordinance, 2015”) thus making many significant changes in the Arbitration and Conciliation Act, 1996 (“the Arbitration Act”), which address the problems being faced by commercial litigants. Some of these changes introduced by the Ordinance, 2015 are as follows:-
1. A fixed timeline has been fixed for the Arbitrators to resolve cases within 18 months and towards this end, a clause has been incorporated where-under, after the completion of 12 months, certain restrictions have been put in place to ensure that the arbitration case does not linger on.
2. The Ordinance, 2015 has also amended the Arbitration Act and has introduced a cap on the fees payable to an arbitrator in the proceedings.
3. Conflicts of interest, if any, shall henceforth be required to be spelled out by the arbitrator, as per the amendment, in respect of the case being taken up for arbitration.
4. In order to ensure neutrality of arbitrators, it is proposed to amend Section 12 of the Arbitration Act to the effect that when a person is approached in connection with prospect of being appointed as an arbitrator, he/she shall disclose in writing about the existence of any relationship or interest of any kind, which is likely to give rise to justifiable doubts. Further, if a person is having specified relationship, he/she shall be ineligible to be appointed as an arbitrator.
5. Insertion of a new provision that the Arbitral Tribunal shall make its award within a period of 12 months. Parties may extend such period up to six months. Thereafter, it can only be extended by the Court, on sufficient cause. The Court while extending the period may also order reduction of fees of arbitrator(s) not exceeding five percent for each month of delay, if the court finds that the proceedings have been delayed for reasons attributable to the arbitral tribunal. If the award is made within a period of six months, arbitrator may get additional fees, if the parties may agree.
6. A provision for fast-track procedure for conducting arbitration has been proposed for insertion. Parties to the dispute may agree that their dispute be resolved through fast track procedure. Award in such cases shall be given within a period of six months.
7. Amendment has been made to Section 34 of the Arbitration Act relating to grounds for challenge of an arbitral award, and to restrict the term ‘Public Policy of India” (as a ground for challenging the award) by explaining that only where making of award was induced or affected by fraud or corruption, or it is in contravention with the fundamental policy of Indian Law or is in conflict with the most basic notions of morality or justice, the award shall be treated as being ‘against the Public Policy of India’.
8. A new provision has been added to provide that application to challenge the award is to be disposed of by the Court within one year.
9. Amendment has been made to Section 36 of the Arbitration Act to the effect that mere filing of an application for challenging the award would not automatically stay execution of the award. Award can only be stayed where the Court passed any specific order on an application filed by the party.
10. A new sub-section in Section 11 of the Arbitration Act to be added to the effect that an application for appointment of an Arbitrator shall be disposed of by the High Court or Supreme Court as expeditiously as possible and an endeavour should be made to dispose of the matter within sixty days.
11. A new Section 31A is to be added for providing comprehensive provisions for costs regime. It is applicable both to arbitrators, as well as related litigation in Court. It will avoid frivolous and meritless litigation/arbitration.
12. Section 17 is to be amended for empowering the Arbitral tribunal to grant all kinds of interim measures which the Court is empowered to grant, under Section 9 and such order shall be ‘enforceable in the same manner as if it is an order of Court.
13. Apart from above, amendments in Sections 2(1)(e) , 2(1)(f)(iii), 7(4)(b), 8(1) and (2), 9, 11, 14(1), 23, 24, 25, 28(3), 31(7)(b), 34 (2A) 37, 48, 56 and in Section 57 are also proposed for making the arbitration process more effective.
It becomes important to bear in mind that the reasoning behind legislating the said changes to the Arbitration Act stems from the need for ring-fencing arbitration proceedings from judicial intervention. Foreign investors exiting Indian business have not favourably looked at the powers of the Court to interfere and even overturn an arbitral award. The new law changes the situation dramatically. The Ordinance, 2015, says that the ‘Court’ will deal with the Arbitration rather than the ‘Chief Justice or his delegate’, which had previously been the position.
Further, in the presence of an arbitration clause in the agreement under dispute, the matter will now directly go to the Arbitration Tribunal, independent of the involvement of the Supreme Court, unlike the previous position. However, the limitations on the role of the Court can only gain further clarity by pronouncements by the Supreme Court on the issue.
As regards the aspect of the power to hear an application of arbitration, while previously only the Court could wield this power, henceforth, the Tribunal has been vested with the power to hear arbitration applications also, as the words “person or an institution” has been introduced in the Ordinance, 2015. Therefore, suitable Rules shall be required to be framed to ensure smooth enforcement of the provisions.
While the parties of an arbitration proceeding were entitled to approach the Court to seek interim relief under Section 9 of the Arbitration Act previously, the Ordinance, 2015, gives the Arbitration Tribunal the same powers as that of a ‘Court’ for awarding interim awards in an arbitration proceeding. However, the Ordinance, 2015, also makes it abundantly clear that barring few exceptional circumstances, once an arbitration proceeding commences, the Tribunal or the Arbitrators shall not award any interim reliefs to the parties.
Another significant change introduced in the Ordinance, 2015, is that while previously, the Tribunal was bound by the arbitration agreement and could give an award only limited to the allowances made in the agreement. Henceforth, the Tribunal is required only to take note of the existing arbitration agreement in a dispute, but if the merits of the matter require so, it can, while giving the arbitral award, break free from the bondage of the arbitration agreement.
While the Ordinance, 2015, in the Seventh Schedule lays down the circumstances under which a person shall not be appointed as an arbitrator, the parties have under the new law, been allowed the latitude to seek waiver of the Seventh Schedule in their Arbitration agreement.
Importantly, with a view to address the issue relating to protracted arbitration proceedings spanning several years, under the new law if the Arbitral Award has not been made within the statutory period of time, then the mandate of the arbitrators shall automatically stand terminated.
Companies (Amendment) Act, 2015
On May 25, 2015, the Companies Amendment Bill, 2014 which had been passed by both the houses of the Parliament, received the assent of the President of India, and was notified in the Official Gazette on May 26, 2015. This is the first amendment to the relatively new enactment, i.e., the Companies Act, 2013 (“the Act, 2013”) that had replaced the erstwhile Companies Act, 1956.
With the issuance of the Companies (Amendment) Act, 2015 (‘Amended Companies Act’), by the Ministry of Corporate Affairs, certain sections of the Companies Act, 2013 stand amended and the key changes, inter-alia, have been explained as below:-
1. The definitions of Private Companies and Public Companies have been amended. The requirement of minimum paid-up share capital (as per Section 2(68) of the Companies Act, 2013 - one lakh rupees in the case of a private company and as per Section 2(71) of the Act - ten lakh rupees in the case of a public company) has been discarded and henceforth, any company, be it private or public, can be incorporated without the requirement of having the minimum paid-up share capital.
2. Previously a director of a company having share capital was required to file a declaration with the Registrar of Companies, declaring that the share capital of the company is not less than the amount prescribed for subscription and that each subscriber to the Company’s Memorandum has paid the value of the shares committed by him/her. This requirement of filing the declaration before commencement of the business or exercising its borrowing powers, have been done away with under of the Amended Companies Act, 2015. Section 11 of the Act, 2013 has been amended and consequential changes have been made in Section 248 of the Act, 2013.
3. Under the Amendment Companies Act, the use of the common seal has been made optional and in the event a company does not have a common seal, any authorization can be done by either two directors of the company or by a director and a company secretary in case of a company that has appointed a company secretary. Thus, inter alia, Section 22(2) and Section 46 of the Act, 2013 have been amended.
4. For protection of the depositors in a company, a new section, i.e., Section 76A has been inserted by the Amendment Act, which introduces penal provisions for contravention of Section 73 and Section 76 of the Act, 2013 pertaining to acceptance and return of deposits by companies. For such contravention, the company in addition to returning the amount of deposits accepted along with applicable interest rate, shall also be liable to pay a fine not below Rupees 1 Crore which may be increased up to Rupees 10 Crore. Further, every contravening Officer of the Company shall face imprisonment which may extend to 7 years or with fine of at least Rupees 25 lakhs or with both. If such officer in default has been found to have wilfully committed the contravention, then he shall, in addition to the foregoing penal provisions, be liable for action under Section 447 of the Act (which deals with punishment for ‘Fraud’).
5. To provide confidentiality of business information and commercial details discussed and approved by the Board of Directors of a company and decided by means of a Resolution, the new Amendment Act stipulates that no person shall be entitled under Section 399 of the Act, 2013, to inspect or obtain the copies of the Board Resolutions of a company that have been filed with the Registrar of Companies under Section 117(3) of the Act, 2013.
6. A new proviso has been inserted in Section 123 of the Act, 2013, after the first two provisos, to the effect that no company shall declare dividend unless carried over past losses or depreciation in the previous year or years are set off against the profit of the company for the current year.
7. For ease in doing business, especially with regard to related party transactions, a new proviso has been inserted in Section 177(4) of the Act, 2013 and as per the new proviso, the Audit Committee of the Company has been empowered to give omnibus approvals for related party transactions on an annual basis.
8. Another change which the Amendment Act, 2015 has incorporated in the Act, 2013 relates to Section 185 on “Loans to Directors”. The change eases the provisions relating to loans to wholly owned subsidiaries and guarantees/securities on loans taken from banks by subsidiaries and its utilisation by the subsidiary company for its principal business activities.
9. To allow flexibility to the companies in ease of doing business in respect of genuine commercial decisions, another significant change which has been made through the Amendment Act, 2015 relates to “related party transactions” and now Section 188(1) of the Act, 2013 has been amended and the requirement of approval by the non-related shareholders to the “related party transactions” have been allowed to be done through ordinary resolution, instead of ‘special resolution’, which was mandated earlier.
10. Further, another significant change has been made by amendment to Section 188(1) of the Act, 2013 and now “related party transactions” between holding companies and wholly owned subsidiaries are exempt from the requirement of approval of non-related shareholders.
11. A new Section 435 was introduced in the Act, 2013 for setting up of Special Courts to try offences committed under the Act. To avoid clogging the Special Courts with both minor and major offences, now the Amendment Act, 2015 changes Section 435 and 436 of the Act, 2013 and makes it clear that the Special Courts will try only those offences carrying imprisonment of two years or more. This will hopefully speed up disposal of cases.
12. The Act, 2013 inserted a new section 447 for trial of offences of “fraud” and very stringent provisions have been made thereto. However, by the Amendment Act, 2015, changes have been made in Section 212(6) of the Act, 2013 which deals with investigation into affairs of a company by the Serious Fraud Investigation Office (SFIO) and obtaining “bail” was rather difficult. By virtue of the Amendment Act, 2015, bail restrictions have been eased and now bail restrictions would apply only for offences relating to fraud u/s 447 of the Act, 2013.
13. To speed up disposal of cases by the National Company Law Tribunal (NCLT), section 419 of the Act, 2013 has been amended and now it enables that the winding up cases will be heard by a 2 member Bench of the NCLT, instead of 3-member Bench, which was mandated under the Act, 2013.
14. Section 134(3) read with Section 143(12) of the Act, 2013 prescribed reporting of corporate frauds by the Auditors and the report of the Directors thereon in the company’s Board of Directors Report. Perhaps not to scare away investors with unduly hyped corporate misdoings/frauds, necessary changes have been made, and now amended Section 143(12) provides that “notwithstanding anything contained in this section, if an Auditor of a company in the course of the performance of his duties as Auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the Auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed. Provided that in case of a fraud involving lesser than the specified amount, the Auditor shall report the matter to the Audit Committee constituted under Section 177 or to the Board in other cases, within such time and in such manner as may be prescribed. Provided further that the companies, whose auditors have reported frauds under this sub-section to the Audit Committee, or the Board, but not reported to the Central Government, shall disclose the details about such frauds in the Board’s Report in such manner as may be prescribed.”
15. Section 462 of the Act, 2013 empowers the Central Government, in the public interest, by notification to direct that any of the provisions of the Act shall not apply to such class or classes of companies or shall apply to the class of classes of companies with such exemptions, modifications and adaptations as may be specified in the notification. The Amendment Act, 2015 has substituted sub-section (2) of Section 462 with a new sub-section, which enables faster process of giving exemptions to a class of companies and also rationalises the procedure for laying draft notifications granting exemptions, in the Parliament.
Insolvency and Bankruptcy Code
In November, 2015, the Bankruptcy Law Reforms Committee (BLRC) submitted its report to the Government and recommended a single code of resolving the insolvency of all corporate entities, be they companies, limited liability partnership firms or individuals. The BLRC, in a radical move has recommended the removal of all laws dealing with insolvency of registered entities and replacing it with this uniform Insolvency and Bankruptcy Code. Towards this, the BLRC has submitted a draft of the Insolvency and Bankruptcy Bill, 2015 (‘Draft Bankruptcy Code’) to the Government for its views and further action. The Draft Bankruptcy Code, however, does not seek to replace all the existing laws relating to the subject, contrary to popular belief and it states under Section 234 of the Draft Bankruptcy Code that the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920, both of which deal with individual insolvency, would be repealed.
Significantly, the Draft Bankruptcy Code seeks to amend certain provisions of the Companies Act, 2013 which deal with insolvency and winding-up of companies. Owing to limitation of space, this article does not go into the details of such provisions. Other laws that have also been sought to be replaced by respective provisions of the Draft Bankruptcy Code include provisions of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, the Limited Liability Partnerships Act, 2008, Recovery of Debts Due to Banks and Financial Institutions Act, and the Indian Partnership Act, 1932. It is reported that the new Bankruptcy Code proposed by the BLRC seeks to make borrowers more accountable to their loan agreements with banks and financial institutions. This new law also gives banks more power in dealing with business/borrower companies that have failed owing to the default on loans by promoters. The Draft Bankruptcy Code also recommends and considers the NCLT (which is yet to be made functional) to be the only forum where issues relating to insolvency of companies will be adjudicated. Given the different statutes that lay down the powers and liabilities of both the borrower and creditor, having a uniform code for bankruptcy will aid in bringing transparency and interpretation of the laws and help in furthering the ease of doing business in India. However, the Government has to clearly state the applicability of the Draft Bankruptcy Code, once it decides to enact the law, and whether the same will be prospective or retrospective and what will be the fate of the pending disputes.
The ‘Ease of Doing Business Index’ is an index that has been created by the World Bank. This index reveals how the world economies are ranked according to the ease of doing business within their geographical boundaries. While every country, including India, aspires a higher rating to indicate better regulations, easier clearance windows for business permits and a healthy enforcement mechanism, India has shown positive movement recently. India’s ranking has gained a 12 point jump on the ‘Ease of Doing Business’ Index. It has been reported that although many laws, including the corporate laws, namely the Companies Act, 2013 and the Arbitration Act, 1996 have been amended recently with a view to ease the conduct of business in India, the Union Finance Minister, Shri Arun Jaitley, has reportedly admitted the need for cutting down the number of permissions required for a business to function, so that the time lag between the decision to invest and the actual investment being made is shortened significantly. This calls for co-operation from the State Governments as well since the basic permissions such as availability of land, environmental permissions and sanction of building plans are all aspects that are currently the problem areas consuming a lot of time. The laws related to the aforesaid aspects need to be made simpler and the mechanism to provide permissions and approvals by the respective Central Government as well as the State Government bodies needs to be overhauled.
Apart from the World Bank ranking India at 130 out of 180 nations in the Ease of Doing Business Index, the World Economic Forum, too, has reported a similar improvement for India.
While it is a welcome move on the part of the Indian Government to have introduced significant and far-reaching changes to some of the key corporate laws in the country, including, as those highlighted in this article, the amendments made to the Act, 2013 and the Arbitration Act, the issues that have come up during litigation post the amendments, are yet to be pondered over by the Supreme Court and the Court’s interpretation of such pressing issues, as have been highlighted above in this article, is much anticipated to ensure smooth transition from unease to ease of doing business in India.
The important thing, however, is to note, with due appreciation, that the adverse trend on which India was up until now, treading, has been reversed and this is a reflection of the intention and the general temperament of the Government, which is to do away with outmoded and unproductive procedural laws and regulations and to bring, in their place, a revised and more promising framework regulations and legislations which will reinforce the confidence in the foreign investor and give a fillip to the Indian economy. The proposed changes, as well as the changes already introduced in the business-related laws have opened up newer work avenues for the corporate professionals and adequate preparedness is required to tap the opportunities now being thrown open to the corporate professionals.
2/5/2016 8 Comments
Supreme Court Of India Protects Rights of the Auction Purchaser In Recovery Of Dues By Banks By Sale Of Mortgaged Property
Delep Goswami, F.C.S., Advocate, Supreme Court Of India
Anirrud Goswami, Advocate, Goswami & Goswami
Enactment of Debt Recovery Act to quicken recovery of dues by Banks from defaulting borrowers
Advancing of loans by Banks to industrial and non-industrial borrowers is quite common and it is well known that to protect the Bank’s interest in recovering dues from the borrowers, apart from getting many documents signed by the borrower and the guarantors, the lending Bank also keeps the title deeds of the properties which are mortgaged to the Bank to ensure that if the borrower fails to repay the loan and interest thereon, the Bank can at least auction the mortgaged property and recover its dues from the borrower.
To cut short the delay in recovery proceedings filed by the lending Banks to the commercial
borrowers, the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act,
1993 (“Debt Recovery Act" - as amended from time to time) have been enacted and specialised
Tribunals, known as, Debt Recovery Tribunal (“DRTs”) have been set up to speedily dispose of the
recovery proceedings filed by the Banks and Financial Institutions. On the basis of the orders passed
by the DRT, the Recovery Officer attached to the DRT, proceeds to auction the mortgaged property
and the proceeds are handed over to the lender Bank after completion of the attendant formalities.
Unless the auction purchasers of such properties are protected and assured of their rights over the
purchased property, the whole system of sale of mortgaged properties by the Recovery Officer of
the DRT is put to lots of difficulties and such sale will lose its importance.
Brief facts of the case and Supreme Court’s decision on auction purchaser’s rights
In this regard, the decision of the Hon’ble Supreme Court of India passed in the case of Sadashiv Prasad Singh –vs- Harendar Singh & Others (2014-1CLJ-417-SC) (in short “SP Singh judgement”)
deserves special mention because this judgement protects the rights of the auction purchaser and insulates such auction purchaser from all possible attempts to thwart and deny the rights of the auction purchaser over the property purchased in a public auction.
Brief facts leading to the aforesaid SP Singh judgement of the Supreme Court are that the Allahabad Bank sanctioned in 1987 a loan of Rs.12.70 lakhs to a Timber Merchant Partnership Firm (viz. Amar Timber Works), after its partners had mortgaged certain properties to secure the loan amount. Since the loan amount, along with the outstanding interest, was not paid to the lending Bank, the
said Bank, in 1998, preferred an application before the DRT. The DRT allowed the Bank’s application in November, 2000 and issued direction for recovery of Rs.75.75 lakhs from the borrower firm.
During the pendency of the recovery proceedings, one of the partners of the borrower firm viz. Jagmohan Singh died on 27.1.2004. On 16.4.2004, the Recovery Officer attached a plot measuring 1298 sq.ft in the ownership of Jagmohan Singh, one of the partners of the firm. On 10.6.2004, one Harender Singh, brother of deceased Jagmohan Singh, filed an objection petition before the Recovery Officer alleging that the attached property did not belong to the judgment debtors, but had been purchased by him from his brother Jagmohan Singh by executing an Agreement of Sale dated 10.1.1991, which was duly notarized, though not registered. The said Harender Singh pursued the objection petition filed by him before the Recovery Officer till 26.10.2005, but choose
to abandon the proceedings thereafter.
The recovery proceedings remained pending for a further period of more than two years. Finally, the Recovery Officer passed an order dated 5.5.2008 for the sale of the property by way of public auction on 4.7.2008. The Recovery Officer fixed Rs.12.92 lakhs as the reserve price and also fixed 28.8.2008 as the date of auction.
At the auction held on 28.8.2008, one Sadashiv Prasad Singh was the highest bidder. Accordingly, the Recovery Officer ordered the sale of the property in his favour on 28.8.2008. On 22.9.2008, the
Recovery Officer, in the absence of any objections, confirmed the sale of the property in favour of Sadashiv Prasad Singh, the auction purchaser and the Recovery Officer ordered the handing over of
physical possession of the property to the auction purchaser. The auction purchaser Sadashiv Prasad Singh, took physical possession of the property on 11.3.2009. Thereafter, in furtherance of the proceedings initiated through Mutation Case No.295/2/09-10, the land in question was mutated in favour of the auction purchaser. The auction purchaser, in the mutation proceedings, duly supported his application with a letter dated 14.10.2008, of the Ministry of Finance, Government of India, Realisation Authority, Patna. No objections were filed in the mutation case preferred by
Sadashiv Prasad Singh, by or on behalf of Harender Singh, who had initially filed the objections Earlier before the Recovery Officer, DRT.
High Court’s decision on the petition filed by the objector to the auction sale
The said Harender Singh filed a Writ Petition in the High Court assailing the order of the Recovery Officer ordering sale of mortgaged property by public auction in discharge of the debts owed by the borrower Amar Timber Works. The said Writ Petition got dismissed on 27.11.2010 holding as under:-
“The above facts do weigh with the Court in not interfering with the sale or the proceeding where it has been reached. The Petitioner has no satisfactory explanation for not approaching the Court well within time challenging such a decision or the subsequent proceedings or orders of the Recovery Officer at an appropriate time. The conduct of the Petitioner by itself has precluded and prevented this Court from passing any order in his favour at this belated stage. The writ application has no merit. It is dismissed accordingly.”
Dissatisfied with the dismissal order by the single Judge, the petitioner Harender Singh preferred an appeal before the Division Bench of the High Court. In the proceedings before the Division Bench of the High Court, the said Harender Singh offered a sum of Rs.39 lakhs. In the proceedings before the Division Bench, the lender Bank had accepted to finally settle the matter on being paid a sum of Rs.45 lakhs, subject to the condition that the appellant Harender Singh pays a sum of Rs.15 lakhs immediately, and the balance amount of Rs.30 lakhs within a period of two years in a phased manner. Even though the learned counsel representing the appellant Harender Singh was agreeable to proposal of the Bank, the rival parties could not amicably settle the matter.
The Division Bench noted that the auction purchaser has purchased the mortgaged property by paying Rs.13.20 lakhs. The Court also noted that on a suggestion as to whether the Bank would accept Rs.45 lakhs in totality to settle the dispute and the Bank conveyed its no objection to settle the same, if the appellant paid Rs.15 lakhs immediately, so that the same can be paid to the auction purchaser, and Rs.30 lakhs should be paid within a period of two years in a phased manner. During the course of appellate proceedings, the High Court referred to Section 29 of the Debt Recoveries Act. The High Court, while interpreting section 29 of the Debt Recovery Act concluded that certain provisions of the Income Tax Act and Income Tax (Certificate Proceedings) Rules would be applicable mutatis mutandis in the matter of recovery of debts under the Debt Recovery Act. The High Court then referred to Rule 11 of the Income Tax (Certificate Proceedings) Rules and arrived at the conclusion that sub-rule (2) of rule 11 had not been complied with by the Recovery Officer, inasmuch as the objection raised by Harender Singh had not been adjudicated upon. As such, the Division Bench of the High Court concluded that the proceedings before the Recovery Officer were in flagrant violation of the provisions of rule 11(2) of the Income Tax (Certificate Proceedings) Rules.
Having so concluded, the High Court set aside the proceedings conducted by the Recovery Officer, including the sale of the property by public auction.
Having dealt with the controversy in the manner expressed in the foregoing paragraphs, the Division Bench of the High Court was of the view that the matter in hand ought to be settled by working out
the equities between the parties. Accordingly, the High Court disposed of the matter in the
following manner :-
“Though we have held the same could not have been sold in auction, yet equities are to be worked out. Regard being had to the fact that the respondent-purchaser has deposited Rs.13.20 lakhs between 28.8.2008 to 22.9.2009 and thus the amount is with the Bank for almost more than one year and 10 months and thereafter there had been challenge to the order in the writ petition and after dismissal of the writ petition, the present LPA has been filed in quite promptitude and that the amount of the respondent purchaser was blocked, it will be obligatory on the part of the appellant to compensate the respondent-purchaser at least by way of payment of interest at the Bank rate. We are disposed to think that if a sum of Rs.17 lakhs is paid to the auction-purchaser, it would sub-serve the cause of justice and house of the appellant shall be saved and, accordingly, it is directed that the appellant shall deposit a sum of Rs.17 lakhs within a period of four weeks from today in the Bank. After such deposit, the Bank shall hand it over to the purchaser by way of a bank draft. The same shall be sent by registered post with acknowledgement due. Thereafter, the appellant shall deposit a further sum of Rs.32 lakhs within a period of two years; sum of Rs.16 lakhs by 25th March, 2011 and further sum of Rs.16 lakhs by 25th March, 2012. Needless to say, pro-rata interest shall accrue in favour of the Bank for the said period. After the amount is paid to the purchaser, it would be duty of the Recovery Officer to hand over the possession to the Appellant.”
The said Division Bench order of the High Court was assailed in the Supreme Court by the said auction purchaser Sadashiv Prasad Singh to protect his rights on the property purchased in public auction and separately by the Appellant Harender Singh on the ground that the impugned High Court order places him in the shoes of the auction purchaser and as such he could have only been asked to pay a sum of Rs.17 lakhs and that requiring him to pay a further sum of Rs.32 lakhs is unsustainable in law and accordingly deserved to be set aside.
Decided judgements of the Supreme Court on auction purchaser’s rights
In the Supreme Court, counsel for the auction purchaser contended that in terms of the law declared by the Supreme Court , the property purchased by a third party auction purchaser, in compliance of a court order, cannot be interfered with on the basis of the success or failure of the parties to a proceeding, if auction purchaser had bona-fide purchased the property and relied on the judgement rendered by the Supreme Court in Ashwin S Mehta and Another –vs- Custodian and Others (2006-2 CLJ-193-SC), and stressed on the following observation made therein :-
“In that view of the matter, evidently, creation of any third-party interest is no longer in dispute, nor the same is subject to any order of this Court. In any event, ordinarily, a bona-fide purchaser for value in an auction-sale is treated differently than a decree-holder purchasing such properties. In the former event, even if such a decree is set aside, the interest of the bona-fide purchase in an auction-sale is saved : see Nawab Zain-ul-abdin Khan –vs- Mohd.Asghar Ali Khan (1887-15-IA 12). The said decision has been affirmed by the court in Gurjoginder singh –vs- Jaswant Kaur (1994-2 SCC 368)”
The Counsel of the auction purchaser also relied on another decision of the Supreme Court in Janatha Textiles and others –vs- Tax Recovery Officer and Another (2008-12-SCC 582), wherein the
conclusions drawn in Ashwin S. Mehta (supra) came to be reiterated. In the above judgement, the Supreme Court relied upon the decisions of the Privy Council and other judgements of the Supreme Court wherein it was concluded that it is an established principle of law that a third party auction purchaser’s interest, in the auctioned property continues to be protected, notwithstanding that the underlying decree is subsequently set aside or otherwise. In the aforesaid S.P. Singh judgement, the Supreme Court therefore observed as under :-
“Law makes a clear distinction between a stranger who is a bona-fide purchaser of the property at an auction-sale and a decree-holder purchaser at a court auction. The strangers to the decree are afforded protection by the Court because they are not connected with the decree. Unless the protection is extended to them, the court sales would not fetch market value or fair price of the property.”
The Supreme Court while hearing the aforesaid case, also referred to one exception recorded in Velji Khimji & Company –vs- Official Liquidator of Hindustan Nitro Product (Gujrat) Limited and Others (2008-9 SCC 299), wherein it was held as under :-
“In the first case mentioned above i.e. where the auction is not subject to confirmation by any authority, the auction is complete on the fall of the hammer, and certain rights accrue in favour of the auction purchaser. However, where the auction is subject to subsequent confirmation by some authority (under a statute or terms of the auction), the auction is not complete and no rights accrue until the sale is confirmed by the said authority. Once, however, the sale is confirmed by that authority, certain rights accrue in favour of the auction purchaser, and these rights cannot be extinguished, except in exception cases such as fraud. In the present case, the auction having been confirmed on 30.7.2003 by the Court, it cannot be set aside, unless some fraud or collusion has been proved. We are satisfied that no fraud or collusion has been established by anyone in this case.”
Supreme Court’s judgement upholding the rights of the auction purchaser
The Supreme Court, in the aforesaid judgement noted that it is apparent that the rights of an auction purchaser in the property purchased by him cannot be extinguished, except in cases where the said purchase can be assailed on grounds of fraud or collusion. The Supreme Court noted that the auction purchaser was not a party to the loan given by the Bank to the borrower and was not a party to the controversy with regard to the adjudication of the dues of the Bank recoverable from the borrowers. The auction purchaser purchased the property in a public auction and there was no objections raised about the said auction process, nor was there any allegation of fraud or collusion. The property purchased in public auction was handed over to the auction purchaser and he got the same mutated in his name. The Supreme Court also noted that the impugned High Court order was passed in order to work out the equities between the parties and the entire deliberations in the High Court were based on offers and counter offers, inter-se, between the Allahabad Bank on the one hand and the Objector viz. Harender Singh, on the other, whereas the rights of the auction purchaser Sadashiv Prasad Singh were not at all taken into consideration and was deprived of the property which came to be vested in him as far back as on 28.8.2008. It revealed that the escalation of prices had taken place thereafter and the value of the property purchased by Sadashiv Prasad Singh was presently much higher than the bid amount. It was nobody’s case that the auction purchaser purchased the property at a price lesser than the then prevailing market price, there was no justification whatsoever to set aside the auction purchase made by him on account of escalation in the price of the property thereafter. The Supreme Court held that the High Court in ignoring the vested rights of the auction purchaser committed an error in depriving him to the property which he had genuinely and legitimately purchased at a public auction. The High Court clearly overlooked the equitable rights vested in the auction purchaser while disposing of the appeal filed by Harender Singh. The Supreme Court also noted that if the objector Harender Singh had any grievance against the auction sale, he could have invoked the provisions of Section 30 of the Debt Recovery Act, which he failed to do so. The Supreme Court therefore observed that in exercise of its Writ Jurisdiction, the High Court ought not to have interfered with the matter agitated by Harender Singh in hiswrit petition. Also, because of third party rights which had emerged in the meanwhile, the High Court ought to have dismissed/rejected Harender Singh’s petition on the ground of delay and laches.
The Supreme Court therefore came to the conclusion that the High Court clearly erred while setting aside the auction ordered in favour of the auction purchaser. The High Court’s impugned order dated 17.5.2010 was therefore set aside and sale of the property in favour of Sadashiv Prasad Singh was therefore confirmed.
The aforesaid judgement of the Supreme Court confirms the rights of the auction purchaser of properties sold by the Recovery Officer of the Debt Recovery Tribunals in terms of the Debt Recovery Act and the aforesaid S.P. Singh judgement will instil confidence of the third party auction purchasers in the auction sale and will go a long way in finality of sale of mortgaged properties of the defaulting borrowers. At a time when the Central Government has promulgated the Ordinance to enforce “The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Bill 2015”, such clear cut rational decision by the Supreme Court in settling commercial disputes will go a long way in giving finality to auction sale of mortgaged properties to recover dues by Banks from the defaulting borrowers.
Anirrud Goswami, Advocate, Goswami & Goswami, Associates and Advocates,