Landmark Judgments in Corporate Laws

(from the perspective of Corporate Secretarial

compliance & Corporate Law Advisory)

Gaurav N Pingle,
Practising Company Secretary

Presentation at ICSI WIRC 3 days Practical Series

Workshop on NCLT | June 24, 2018 |
 Scope & Coverage
2

 Scope of presentation – ‗Landmark‘ & ‗Corporate

Laws‘– ?

 Scope of the landmark judgements

 Holding & Subsidiary Companies,
 AoA vis-à-vis Shareholders Agreement,
 Inspection of Book of Accounts & Statutory
Registers
 Meetings of Board of Directors,
 Meetings of Shareholders,
 Appointment & Rights of Directors.

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 Holding subsidiary relationship and capital gains tax
3
exemptions to wholly owned subsidiary

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 CIT Vs Sunaero Ltd.
[2012] 172 Comp Cas 562 (Delhi)
4

An exemption from capital gains tax in respect of

transfer of assets by the subsidiary to the holding
company was denied on the grounds that the
subsidiary was not a subsidiary since some of its
shares were held by individuals and they were not
proved to be nominees of the Holding Co. holding
the shares on its behalf

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 CIT Vs Sunaero Ltd.
[2012] 172 Comp Cas 562 (Delhi)
5

 Court pointed out that for availing of the benefit under section 47(v) of the
Income Tax Act, 1961, the subsidiary must be a wholly-owned subsidiary of the
holding company;

 Being a subsidiary is not sufficient. Thus, even if one of the shareholders was not
a nominee of the holding company, the benefit under section 47(v) has to be
denied.

 Court reiterated the principle that the normal presumption in law is that the
registered shareholder holds the shares in his own right and in his individual
personal capacity. He does not hold shares as a nominee of a third person;

 It is the contrary which has to be proved by the party who claims or asserts that
the recorded shareholder is a nominee. The onus is on the party who claims to
the contrary.

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 Power to file a suit on behalf of Co. : Is the
6
defect in authorization curable?
Sec.21 of Cos. Act, 2013:

Save as otherwise provided in this Act

(a) Document or proceeding requiring authentication
by a company; or
(b) Contracts made by or on behalf of a company,
may be signed by any KMP or an Officer or employee
of the Co. duly authorised by the BoD in this behalf.

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 State Bank of Travancore v. Kingston Computers (I) P. Ltd.
[2011] 163 Comp Cas 37(SC)
7

 SC underscored the importance of proper

authorisation in the case of litigation on behalf of a
company in order to avoid the mishap of dismissal of
the lawsuit at the entry level itself.

 SC called an improper document of authorisation

nothing but a scrap of paper as no resolution was passed
by BoD of the Co. delegating its powers to a director
and to authorise someone else to file the suit on
behalf of the company and a person who described
himself as a director was authorised by the CEO of
the company by a letter to file the suit.

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 Learnings from the SC Judgement
8

 Power to file the suit on behalf of the Co. must

flow from BoD,

 BoD‘s delegation of the powers to director /

officer of the Co. must contain the power to
delegate by that director / xofficer to anyone else.

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9 Inspection of Registers & Returns
Sec. 163(2) of Cos. Act, 1956
The registers, indexes, returns, and copies of certificates and
other documents referred to in sub-section (1) shall, except
when the register of members or debenture holders is
closed under the provisions of this Act, be open during
business hours (subject to such reasonable restrictions, as
the company may impose, so that not less than two hours in
each day are allowed for inspection) to the inspection—
a) Of any member or debenture holder, without fee; and
b) Of any other person, on payment of such sum as may be
prescribed for each inspection.
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 Anilkumar Poddar Vs Futura Commercials (P.) Ltd.
[2017] 136 CLA 1 (NCLT)
10

 Petitioner who does not have any kind of interest in the Co.
is not entitled to seek inspection of the records falling in
ambit of Sec. 163. More so, when petitioner is a rank
outsider, and Co. is Pvt. Ltd. Co. closely held by limited
members.

 Words „any other person‟ mentioned in Sec. 163 cannot be

construed to mean that any person can seek inspection
and supply of copies of the records falling in the ambit of
Sec. 163. A person can be called aggrieved only when such
person‟s interest is affected by the affairs of the company.
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 Anilkumar Poddar Vs Futura Commercials (P.) Ltd.
[2017] 136 CLA 1 (NCLT)
11

 Word „any other person‟ being preceded by the word

„member or debenture–holder‟ being the persons holding
interest in a Co., the following word „any other person‟
cannot be said that it is extendable to the persons having
no interest in the Co.

 Apart from the member or debenture–holder, there being

several other persons, having commercial interest in the
company such as creditors, lenders, customers, employees,
it can be said as referring to the category of persons
mentioned above.
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 Whether agreement between shareholders
12
of a company binds the company?

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 V. B. Rangaraj Vs.V. B. Gopalakrishnan
[1992] 73 Comp Cas 201
13

 Question before SC was as to the enforceability of an

agreement which was inconsistent with a private company‟s AoA
was considered in context of transfer of shares.

 Agreement between 2 groups of shareholders which

imposed some restrictions on the transferability of shares
held by them was not binding either on the Co. or its
shareholders because the restrictions so imposed by the
agreement were contrary to the provisions of the articles;
a sale of shares held by one of the 2 groups in breach of
the agreement could not, therefore, be held to be invalid.

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 V. B. Rangaraj Vs.V. B. Gopalakrishnan
[1992] 73 Comp Cas 201
14

Private agreement which is relied upon by the plaintiffs where under

there is a restriction on a living member to transfer his shareholding
only to the branch or family to which he belongs in terms imposes
two restrictions which are not stipulated in the article.

SC observed that:
Firstly, it imposes a restriction on a living member to transfer the share only
to the existing members.
Secondly, the transfer has to be only to a member belonging to the same
branch of family.
The agreement obviously, therefore, imposes additional restrictions on the
members right to transfer his shares which are contrary to the provisions of
Article 13. They are, therefore, not binding either on the shareholders or on
the company.

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 Whether agreement between shareholders
15
of a company binds the company?

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 Shanti Prasad Jain v. Kalinga Tubes Ltd.
[1965] 35 Comp Cas 351 (SC)
16

 In this case, the shareholders of a Public Co. originally

consisted mainly of 2 groups – A & B. Later on to meet the
financial difficulties of the company, C agreed to supply
finances on terms that he be allotted shares equal to those
held by A and B group after increasing their share capital;

 Co. was not a party to the agreement. Nor were the AoA
amended in order to incorporate the agreement;

 Later on the Co. converted itself into a public limited Co.

in order to obtain advances from the Industrial Finance
Corporation. At this time, though the AoA were amended,
the agreement was not incorporated therein.
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 Shanti Prasad Jain v. Kalinga Tubes Ltd.
[1965] 35 Comp Cas 351 (SC)
17

SC observed that:

 The agreement between A, B, C did not mean that if in

the future there was any increase in capital that will be
shared equally by the 3.

 The Co., much less the public limited company when it

was formed, not being a party to the agreement was
not bound by it.
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18 Whether Comfort Letter is guarantee?

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 United Breweries (Holdings) Ltd. v. Karnataka State Industrial
Investment & Development Corpn. Ltd.
[2013] 176 Comp Cas 292 (Kar)
19

The contract of guarantee was a -contract to perform the promise or discharge the liability of
a third person in case of his default.

The document did not reveal that the appellant had entered into a contract or an agreement
with the Corporation to discharge the liability of the company in case of default.

Therefore, the appellant could not be made liable for more than it had undertaken.
Admittedly, the Corporation had -insisted on the “letter of comfort” of the appellant while
disbursing the loan in favour of the company and accordingly, the appellant being the holding
company had given a letter of comfort as suggested by the Corporation.

Material on record, merely indicated the appellant‟s assurance that the -company would
comply with the terms of a financial transaction without guaranteeing performance in the
event of default. The order in so far as it fixed liability on the appellant was liable to be set
aside.

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20 Appointment of Directors

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 Sec. 196(3)(a) of Cos. Act, 2013
21

No co. shall appoint or continue the employment of

any person as MD,WTD or Manager who:

(a) Is below the age of 21 years or has attained age

of 70 years:
Extract of
Relevant
Provided that appointment of a person who has
provision: attained the age of 70 years may be made by
passing a special resolution in which case the
Explanatory Statement annexed to the notice for
such motion shall indicate the justification for
appointing such person.

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 Schedule XIII, Part I, Clause (c)
of Cos. Act,1956
22

No person shall be eligible for appointment as MD,

WTD or Manager of a Co. unless he satisfies the foll.
conditions:

He has completed the age of 25 years and has not

attained the age of 70 years:
Extract of
Provided that where—
Relevant
(i) he has not completed the age of 25 years, but has
provision: attained the age of majority; or
(ii) he has attained the age of 70 years; and
where his appointment is approved by a special
resolution passed by the company in general meeting,
no further approval of the CG shall be necessary for
such appointment
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 Bombay HC: Director turning 70 years not to
attract automatic „mid-stream‟ disqualification
23

Sridhar Sundararajan („SS‟)

Vs
Ultramarine & Pigments Ltd. &
Rangaswamy Sampath („RS‟)

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 Broad Facts
24

 RS was appointed as CMD of listed co. on August 13, 1990. On May

21, 1998, SS was appointed as director.

 On August 1, 2012, RS was re-appointed as CMD for term of 5

years till 2017. On same day, SS was also appointed as Joint-MD.

 Cos. Act, 2013 was enforced w.e.f.April 1, 2014

 RS attained the age of 70 years on November 11, 2014.

 SS contended that ―On the 70th birthday of RS, he earned himself

statutory disqualification‖

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 Interpretation of Single Judge
25

 Sec. 196(3) does not operate to interrupt appointment

of any Director made prior to coming into force of
2013 Act.

 It also does not interrupt the appointment of MD

appointed after April 1, 2014 where at the date of
MD‟s appointment / re-appointment was below the
age of 70 years but crossed that age during his tenure.

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 Contextual reading of the words in Sec. 196(3)
26

 Interprets Sec. 196(3), use of words “No company

shall appoint or continue the employment of….”,
states that words should be read contextually.

 Draws parallel reference from Sec. 269 of 1956

Act, holds ―there was no „discontinuance‟ of MD at the
age of 70 years and the section applied only to his
appointment (including re-appointment)‖.

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 „70 years‟ was never an automatic mid-
stream disqualification
27

 70 years was never an automatic mid-stream

disqualification even under 1956 Act.

 Single Judge relied on SC ruling in P. Suseela &

Ors. Vs University Grants Commission (2015)
wherein it was held that ―it is relevant to distinguish
between an existing right and vested right. Where a
statute operates in future it cannot be said to be
retrospective merely because within the sweep of it
operation all existing rights are included‖
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 Bombay HC Division Bench: Automatic disqualification trigger for
directors turning 70, though appointment made pre-Cos Act, 2013
28

Sridhar Sundararajan („SS‟)

Vs
Ultramarine & Pigments Ltd. &
Rangaswamy Sampath („RS‟)

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 “MD attaining 70 years would immediately
be disqualified”
29

 Bombay HC‘s Single Judge Order was quashed.

 Division Bench held that disqualification for MD appointment on ground

of age limit would act ‗automatically‘

 Thus, MD attaining 70 years would immediately be disqualified.

 RS was disqualified from continuing as MD, unless he fulfilled the requirements

of the proviso i.e. company has to continue his appointment by a special
resolution and, secondly, that resolution must state the reason why the
continuation is necessary.

 Intention was to change earlier position by providing that person who has been
appointed as MD before he was 70 years old is prohibited from continuing as
MD once he has attained the age of 70.
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 “Language of Sec. 196(3)(a) is plain,
simple & unambiguous”
30

 HC rejected RS‘s contention that Sec. 196(3)(a) is not applicable to MD‘s

appointment before April 1,2014, held ―it would otherwise retrospectively
affect vested right of such MD and, secondly, that there is presumption against
legislation operating retrospectively‖.

 Language of Sec. 196(3)(a) is plain, simple and unambiguous and it applies to

all MDs who have attained the age of 70 years and there is no distinction
between MD who have been appointed before April 1, 2014 and those after
April 1, 2014.

 Div. Bench rejected reliance on MCA Circular that clarified conditions

specified in Schedule XIII Part – 1 of Cos. Act, 1956 (requiring satisfaction
only at the time of appointment).
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 Sec. 164 & 167 of Cos. Act, 2013
31

Sec. 164 – Disqualifications for

director‟s appointment

Sec. 167 – Vacation of Office of

director

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 Sec. 164(2) of Cos. Act, 2013
32

No person who is or has been a director of a co.

which:

(a) has not filed financial statements or annual

Disqualifications
returns for any continuous period of 3 FYs; or
for director‘s
(b) …..
appointment
shall be eligible to be re-appointed as a director
of that company or appointed in other company
for a period of 5 years from the date on which
the said company fails to do so.
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 Sec. 167 of Cos. Act, 2013 – Vacation
of Office of Director
33

(1) The office of a director shall become vacant in case:

(a) He incurs any of the disqualifications specified in Sec.
164;
(b) …
(c) …
Vacation of
Office of (2) ….
director (3) Where all the directors of a company vacate their
offices under any of the disqualifications specified in
sub-section (1), the promoter or, in his absence, the
Central Govt. shall appoint the required number of
directors who shall hold office till the directors are
appointed by the company in the general meeting.

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 Kolkata CLB: Prospective application of Sec. 164 &167

34

Raj Shekhar Agrawal

Vs
Pragati 47 Development Ltd.

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 Facts of the case
35

 Petitioners filed 397/398 petition alleging acts of

oppression/mismanagement in affairs of Resp. Co.

 Petition was pending for adjudication;

 Respondents filed an application praying for an order

of injunction restraining / declaring as non-est
appointment of any Advocate-on-record / Counsels
under claimed authorization of erstwhile directors of
Respondent Co., as they had vacated their offices in
terms of Sec. 167(1)

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 ... Facts of the case
36

 Respondent Co. submitted that all erstwhile

directors vacated their offices in terms of Sec.
167(1) read with Sec. 164(2), due to default
committed by erstwhile directors in filing, the
financial statements of Respondent Co. & and its
subsidiary cos. for 3 consecutive years.

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 CLB: Prospective application of Sec. 164 & 167
37

 Provisions of Sec. 164 & 167 have been notified w.e.f.

April 1, 2014 and, hence, consequential action u/s
167(3) accrues on non-filing of financial statements for
3 years commencing from April 1, 2014.

 Erstwhile Directors continue to be validly and legally

appointed directors and hence, the said Board of
Directors is competent to appoint the Advocate by
following the provisions of law.
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38 Alternate Director

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 Sec. 313 of Cos. Act, 1956: Alternate Director
39

 BoD of a Co. may, if so authorised by its AoA or by a resolution passed by

the company in general meeting, appoint an Alternate Director to act for a
director (“Original Director”) during his absence for a period of not less
than 3 months from State in which meetings of Board are ordinarily held;
 Alternate Director appointed u/s 313(1) shall not hold office as such for a
period longer than that permissible to Original Director in whose place he
has been appointed and shall vacate office if and when the original director
returns to the State in which meetings of the Board are ordinarily held.
 If the term of office of the Original Director is determined before he so
returns to the State aforesaid, any provision for the automatic re-
appointment of retiring directors in default of another appointment shall
apply to the original, and not to the alternate director.

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 Sec. 161(2) of Cos. Act, 2013 : Alternate Director
40

BoD of a Co. may, if so authorised by its AOA or by a resolution passed by Co. in

general meeting, appoint a person, not being a person holding any alternate
directorship for any other director in the Co., to act as an alternate director for a
director during his absence for a period of not less than 3 months from India:
Provided that no person shall be appointed as an alternate director for an ID
unless he is qualified to be appointed as an ID under the provisions of this Act:
Provided further that an alternate director shall not hold office for a period
longer than that permissible to the director in whose place he has been appointed
and shall vacate the office if and when the director in whose place he has been
appointed returns to India:
Provided also that if the term of office of the original director is determined
before he so returns to India, any provision for the automatic re-appointment of
retiring directors in default of another appointment shall apply to the original, and
not to the alternate director.
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 Bombay HC: Decodes „Alternate Director‟, weighs on
intention & permanence, not flying visits & vacations
41

Naina D. Kamani
Vs
Janson Engineering & Trading (P.)
Ltd.

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 Presence of Alternate Director
42
at the time of appointment
 For Alternate Director to cease to be a Director, the
actual attendance at Board Meeting of the Director
appointing him is not contemplated u/s 313 of Cos. Act,
1956;
 Consequently, the return to the State would suffice
though the Director does not commence attending
Board Meetings held after his return.

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 HC interprets „return to the State‟ –
Length of time & intention is important
43

 If a Director merely comes to the State and leaves India again he

would not be able to transact business. Hence, Alternate Director
would require to continue until the Director appointing him would
have continued.
 What precisely the Section contemplates by the term “Original
Director returns to the State”, must be read as contemplating only
such return which would have some amount of permanence.
 Director must return to carry on the business. He must return for
a length of time. The intent of the Director must be not to make
his visit merely temporary when he does not partake in the
management of Co. and when he intends to go abroad again.

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 HC: “Intention to return to India… Not for
holiday or on vacation”
44

 It should therefore, be the intention to return to India

and the State in which the Board Meetings are
ordinarily held (i.e., where the registered office is
generally situate) not for a temporary period e.g., on a
holiday or on vacation. It will imply the intention akin to
the intention required to be domiciled in the State.
 Therefore, when original Director returned to India and
the State in which the BMs were held to carry on his
business in India that the Alternate Director would
vacate his office u/s 313(2) of Cos.Act, 1956.

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 Concept of „Compulsory Resignation‟
45

Compulsory Resignation
Vs.
Removal of Director

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 Sec. 164 – Disqualification of Directors
46

Sec. 164(3) of Cos. Act, 2013: A private company may by its AoA
provide for disqualifications for appointment as a director in addition
to those specified in Section 164(1) and (2).

Can a company provide in its AoA as follows:

“Office of a director shall be become vacant if he be requested in writing by
all his co-directors to resign.”

MCA Circular (dated August 17, 1963) stated:

“Private Co. which is not a subsidiary of public co. cannot circumvent the
provisions of Sec. 284 of the Act in the guise of including additional grounds
in its AoA for vacation of office by directors, the power can be exercised by
the Co. in general meeting as contemplated u/s 284 of Cos. Act”

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 Privy Council in Lee Vs Chou Wen Hsien
(1985) BCLC 45: (1984) 1BCC 99, 291 (PC)
47

Although the power of expulsion vested in the directors was a fiduciary power and
accordingly in exercising it they had to act in what they believed to be the best
interests of the company and not for ulterior purposes, the expulsion provisions in
the Co.‟s AoA was so drafted as to require a director to vacate immediately his office
once he had been requested to do so by the other directors.

Even if one or more of the requesting directors acted from ulterior

motives the expulsion would be effective, provided the stated events for
a valid expulsion had been satisfied.

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 Can permanent director be
48
removed from the Co.?
Tenure of:  No provision in Co. Law.
MD,

WTD,
 Can Co. appoint a director as
„permanent director‟?
Manager,

ID,
 Can such director be removed by Co.
Non-ID.

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 Tarlok Chand Khanna Vs Raj Kumar Kapoor
[1983] 54 Comp. Cas. 12 (Delhi)
49

 Co. has power u/s 284 of the 1956 Act to remove a

permanent director even if AoA put restriction on
removal of Permanent Director;

 Even where in terms of AoA - Permanent Director was

to hold office for life and also had a right during his life
time to nominate his successor on the board in event
of his death, that director could nevertheless be
removed u/s 284 of 1956 Act.
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50

Duties of Directors

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 Sec. 166 of Companies Act, 2013
51

 Subject to the provisions of Cos.Act, a director shall act in accordance with the Articles of Co.
 Director shall act in good faith in order to promote the objects of the company for the benefit
of its members as a whole, and in the best interests of the company, its employees, the
shareholders, the community and for the protection of environment.
 Director shall exercise his duties with due and reasonable care, skill and diligence and shall
exercise independent judgment.
 Director shall not involve in a situation in which he may have a direct or indirect interest that
conflicts, or possibly may conflict, with the interest of the company.
 Director shall not achieve or attempt to achieve any undue gain or advantage either to
himself or to his relatives , partners, or associates and if such director is found guilty of making
any undue gain, he shall be liable to pay an amount equal to that gain to the company.
 Director shall not assign his office and any assignment so made shall be void.
 If a Director of the company contravenes the provisions of this section such director shall be
punishable with fine which shall not be less than Rs. 1 lac but which may extend to Rs. 5 lacs.

ICSI WIRC 3 days Practical Series Workshop on NCLT |

June 24, 2018
Gaurav Pingle, CS, Pune |
 Delhi HC: Director carrying competing business breaches fiduciary
duty, imposes restriction, interprets Sec. 166
52

Rajeev Saumitra
Vs
Neetu Singh

ICSI WIRC 3 days Practical Series Workshop on NCLT |

June 24, 2018
Gaurav Pingle, CS, Pune |
 Facts : Director commencing competing business
53

 Plaintiff (‗Husband‘) & Defendant (wife) were holding

50% shares in Paramount Coaching Centre Pvt. Ltd.
(earlier, sole proprietary) Co. was in the business of
imparting education, training for various national
competitive examinations;

 Wife had approached Plaintiff to allow her to teach

English subject in the coaching institute;

 Wife had poor financial condition. After 8-9 months,

parties got married.

ICSI WIRC 3 days Practical Series Workshop on NCLT |

June 24, 2018
Gaurav Pingle, CS, Pune |
 … Facts : Director commencing competing business
54

 After marriage, wife started hatching conspiracy to get her family

members inducted in Co. and accordingly with necessary consents /
permissions were taken for conversion of Coaching Centre into Co.

 Simultaneously, wife incorporated OPC (‗Paramount Reader Publication

Pvt. Ltd.‘) and started competing with the business of Paramount Coaching
Centre Pvt. Ltd. i.e. diverting the business, staff, students and monies.

 Parties disputed on TM – ‗PARAMOUNT‘ & approached Civil Court.

 Husband filed petition u/s 397-398 for mismanagement in Paramount

Coaching Centre Pvt. Ltd.

ICSI WIRC 3 days Practical Series Workshop on NCLT |

June 24, 2018
Gaurav Pingle, CS, Pune |
 HC: Director carrying competing business breaches
„fiduciary duty‟
55

 HC held that wife has breached fiduciary duty u/s 166

of Cos.Act, 2013 by initiating competing business;

 Restrained her from using TM of ‗Paramount‘

 “She has not exercised her duty with due & reasonable
care, diligence & she was involved in the situation in which
there was a direct interest that conflicted with co.‟s interest,
in order to gain advantage by herself and her relatives…..
Being a Director, wife is guilty of making undue gain and
she is also guilty of carrying out competing business of co.‖

ICSI WIRC 3 days Practical Series Workshop on NCLT |

June 24, 2018
Gaurav Pingle, CS, Pune |
 HC: Sec. 166 stipulates „Duties of a Director to a Co.‟ and
not „Rights of Shareholders‟
56

 In case a Director violates the duties prescribed in Sec.

166, the cause of action accrues in favour of Co.;
 Sec. 166 is akin to the common law right. It is merely
repository to Director's fiduciary duties, it does not
apply to the shareholder;
 Even if his/her co. may or may not be benefitted from
the same, the said party is under a duty to pay over to
co. which he or she has betrayed by disloyalty.

ICSI WIRC 3 days Practical Series Workshop on NCLT |

June 24, 2018
Gaurav Pingle, CS, Pune |
 Wife has failed to cross the hurdle of mandatory provision
of Sec. 166 – Husband has filed solid evidence
57

 Defendant No.1 in the instant case has failed to cross

the hurdle of the mandatory provision of Sec. 166
(which is incorporated in April 2014) in Cos. Act, 2013;
 The plaintiff has filed solid evidence which is
unimpeachable, thus common remedy is available to
the plaintiff against the act of defendant No.1;

ICSI WIRC 3 days Practical Series Workshop on NCLT |

June 24, 2018
Gaurav Pingle, CS, Pune |
 Sec. 88 of Indian Trust Act:
58
Advantage gained by fiduciary
 Where a Trustee, Executor, Partner, Agent, Director of a
Company, Legal Advisor, or other person bound in a
fiduciary character to protect the interests of another
person, by availing himself of his character,
 Gains for himself any pecuniary advantage, or where any
person so bound enters into any dealings under
circumstances in which his own interests are, or may be,
adverse to those of such other person and thereby gains
for himself a pecuniary advantage,
 he must hold for the benefit of such other person the
advantage so gained.
ICSI WIRC 3 days Practical Series Workshop on NCLT |
June 24, 2018
Gaurav Pingle, CS, Pune |
 Section 16 of Partnership Act:
Personal profits earned by partners
59

Subject to contract between the partners:

(a) If a partner derives any profit for himself from any
transaction of the firm, or from the use of the
property or business connection of the firm or the
firm name, he shall account for that profit and pay it
to the firm;
(b) If a partner carries on any business of the same
nature as and competing with that of the firm, he
shall account for and pay to the firm all profits made
by him in that business.
ICSI WIRC 3 days Practical Series Workshop on NCLT |
June 24, 2018
Gaurav Pingle, CS, Pune |
60 Liability of Directors

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June 24, 2018
Gaurav Pingle, CS, Pune |
 Section 149(12) of Cos. Act, 2013
61

Notwithstanding anything contained in this Act:

1. Independent Director;
2. NED not being promoter or KMP,

shall be held liable, only in respect of such acts of

omission or commission by a company which had
occurred with his knowledge, attributable through Board
processes, and with his consent or connivance or where
he had not acted diligently.
ICSI WIRC 3 days Practical Series Workshop on NCLT |
June 24, 2018
Gaurav Pingle, CS, Pune |
 Sec. 179 of Income Tax, 1961
62

Sec. 179 of Notwithstanding anything contained in the Cos.

Income Tax, Act, 1956, where any tax due from Private Co.
1961 cannot be recovered, then, every person who
was a director of Private Co. at any time shall
be jointly and severally liable for the payment
Liability of
directors of of such tax
private
company in
liquidation Unless he proves that non-recovery cannot be
attributed to any gross neglect, misfeasance or
breach of duty on his part in relation to the
affairs of Co.
ICSI WIRC 3 days Practical Series Workshop on NCLT |
June 24, 2018
Gaurav Pingle, CS, Pune |
 Guj. HC: Pierces corporate-veil, Holds director
liable for tax-dues of „de facto‟ Pvt. Co.
63

Ajay Surendra Patel

Vs
Deputy Commissioner of Income-
Tax

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June 24, 2018
Gaurav Pingle, CS, Pune |
 Broad Facts:
64

 Petitioner was appointed as Additional director of Hirak Biotech Ltd.

(‗HBL‘) and was holding 98.33% of the shareholding in HBL.
 Income Tax Dept. raised demand for Rs. 240.82 lakhs on account of tax
evasion which pertained to the year during which petitioner was acting as
a director.
 Dept. initiated recovery proceedings and made all possible efforts to
recover impugned demand. It was then contended that substantial
accommodation entries were made during the period when petitioner
was director in HBL.
 Dept. holding that HBL was set-up essentially for accommodation entries,
invoked Sec. 179 of Income Tax Act.
 Petitioner-Director filed a writ petition before Gujarat HC.

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June 24, 2018
Gaurav Pingle, CS, Pune |
 Facts leading to lifting of Corporate Veil
65

 Existence of huge financial transactions, serious default,

total non-co-operation in Co.
 HC observed that Co. appears to have been
spearheaded by one of the directors only.
 Serious defaults in financial transactions with J&K Bank
& Ahmedabad People‘s Co-Op. Bank of huge amounts
 HC observed that “all these combination of
circumstances makes this is a fit case to resort to a
principle of lifting of corporate veil enshrined in Sec. 179 of
Income Tax Act”.
ICSI WIRC 3 days Practical Series Workshop on NCLT |
June 24, 2018
Gaurav Pingle, CS, Pune |
 HC‟s observation w.r.t.
66
“Accommodation entries”
Main Object of the Co. was to carry on the business of
floriculture, agriculture, horticulture etc.

However, the Co. had executed its business that of trading

and distribution of ice-cream quite de-hors from the main
object

HC observed that ―It appears that Co. is set-up for different

purpose than which is posed before the authority at the time of
incorporation. Therefore, the inference which has been raised by
Dept. that Co. is set up essentially for the purpose of
accommodation entries might not be ignored, though attempt is
made to establish contrary.‖
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June 24, 2018
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 History of Petitioners Background
67

 Petitioner has resigned in Sep. within a short span

 But, thereafter there was no substantial business of Co.
 After that there is huge accrual of debts of Co.
 And for recovery of that, even the properties have been auctioned
and sold away under the steps of Securitization Act and
 Therefore, it appears that after resignation of the petitioner
what has been left with the company is huge liabilities only.
 Huge demand to the extent of Rs. 240.82 lacs of Tax Revenue
remained outstanding and despite aforesaid vigorous steps, nothing
is recovered from Co. which has compelled the Dept. to initiate
action u/s 179 of Income Tax Act against all the responsible
directors.
ICSI WIRC 3 days Practical Series Workshop on NCLT |
June 24, 2018
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 Factual matrix – Director‟s gross neglect –
Income Tax provisions invoked by HC
68

 Entire factual matrix would clearly indicate that this

position of Co. in a gradual process to a virtual closure
is on account of gross neglect, misfeasance or beach
of duty on the part of directors in relation to Co.
affairs.

 Therefore, the conditions which are contained in

Section 179 before its invocation are appearing on
the face of it which rightly visualized by the Dept. for
passing the order which is impugned in the petition.
ICSI WIRC 3 days Practical Series Workshop on NCLT |
June 24, 2018
Gaurav Pingle, CS, Pune |
 Director‟s duties u/s 166 vis-a-vis
Corporate Governance
69

 Fiduciary obligation does not cease with Resignation.

 Sec.166(3) of Cos. Act which spells out that director

shall exercise his duties with due and reasonable care.

 HC relied on SC‘s ruling in N. Narayanan v.

Adjudicating Officer, SEBI [AIR 2013 SC 3191],
wherein it was held that ―Failure of Corporate
Governance on the part of directors if they failed to
exercised due care and diligence and thereby, allowing
fabrication of figures and false disclosure, they would be
liable for such omissions and commissions‖.
ICSI WIRC 3 days Practical Series Workshop on NCLT |
June 24, 2018
Gaurav Pingle, CS, Pune |
 Public Co. considered as „Private Co.‟ for
Sec. 179 of Income Tax Act
70

 Close look at Co. affairs, the manner in which affairs proceeded with,
all indicate that in actual terms Co. has not acted as Public Ltd. Co. in
true sense;
 During tenure of petitioner, huge cash flow is deposited and
practically use of cash flow deposit to be looked into substantially the
Co. is used for object for which it has not been set-up;
 No involvement of public in Share Capital or in any form of asset and
there is no share subscription issued from public by Co. in question;
 Therefore, practically the Co. appears to have systematically operated
as if it is a private concern. On the contrary, Public Limited Co. has to
act more in responsible manner than Private Ltd. Co.

ICSI WIRC 3 days Practical Series Workshop on NCLT |

June 24, 2018
Gaurav Pingle, CS, Pune |
71 Board Meetings

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June 24, 2018
Gaurav Pingle, CS, Pune |
72 At board meeting – Can one director constitute quorum

ICSI WIRC 3 days Practical Series Workshop on NCLT |

June 24, 2018
Gaurav Pingle, CS, Pune |
 Relevant Provisions of Cos. Act, 2013
73

 Sec. 167(3): Where all the directors of a Co. vacate their offices under any of
the disqualifications specified in sub-section (1) of Sec. 167, the promoter or, in his
absence, the Central Govt. shall appoint the required number of directors who
shall hold office till the directors are appointed by Co. in the general meeting.

 Sec. 174(1): Quorum for a meeting of the Board of Directors of a company shall
be 1/3rd of its total strength or 2 directors, whichever is higher, and the
participation of the directors by video conferencing or by other audio visual
means shall also be counted for the purposes of quorum.

 Sec. 174(2): Continuing directors may act notwithstanding any vacancy in the
Board; but, if and so long as their number is reduced below the quorum fixed by
the Act for a meeting of the Board, the continuing directors or director may act
for the purpose of increasing the number of directors to that fixed for the
quorum, or of summoning a general meeting of the Co. and for no other purpose.

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June 24, 2018
Gaurav Pingle, CS, Pune |
 Pradip Kumar Banerjee Vs UoI
[2002] 108 Comp Cas 692(Cal)
74

 AoA fixed maximum number of directors at 15, but

there were only 6 directors actually holding the office
when the dispute arose and it was argued that at a
meeting of the Board at that point of time there was
no requisite quorum as there were only two directors
present. AoA provided that the quorum for board
meetings shall be 1/3rd of the total strength of BoD

 Calcutta HC held that the meeting had requisite

quorum.
ICSI WIRC 3 days Practical Series Workshop on NCLT |
June 24, 2018
Gaurav Pingle, CS, Pune |
 K. C. Pandalai v. South Indian General Assurance Co. Ltd.
[1941] 11 Comp Cas 327 (Mad)
75

 Resolution passed at a meeting where Quorum is not

available due to presence of an interested director is
invalid;

 Where a resolution to set off an amount out of the amount due

to a director by the Co. against what he owed in respect of
shares allotted to him, was passed at a board meeting where 2
of 3 directors were brothers and therefore interested in the
resolution, so that excluding the presence of these 2 directors
there was only 1 director present resulting into inadequate
number to constitute a quorum.

 Court held that, the resolution was invalid.

ICSI WIRC 3 days Practical Series Workshop on NCLT |
June 24, 2018
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 NCLT: Quashes Board resolutions passed without Joint
MD participation, despite availability on „Skype‟
76

Rupak Gupta
Vs
U.P. Hotels Ltd.

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June 24, 2018
Gaurav Pingle, CS, Pune |
 Cos. (Meetings of Board & its Powers)
Rules, 2014
77

Rule 3(3): Co. shall comply with foll. procedure,

Rule – 3
for convening & conducting BMs through video-
Cos. (Meetings
of Board and conferencing or other audio visual means.
its Powers)
Rules, 2014

Rule 3(3)(e): Director, who desire, to participate

(Meetings of
may intimate his intention of participation
Board through through the electronic mode at beginning of
video
conferencing or calendar year and such declaration shall be
other audio
visual means)
valid for one calendar year.

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June 24, 2018
Gaurav Pingle, CS, Pune |
 Obligation upon directors convening the meeting to provide every
facility to directors asking video conference
78

 Rule 3 is meant for providing video-conferencing, indeed it

is the duty of directors convening the Board meeting to
inform other directors regarding the options available to
them to participate in video-conferencing mode or other
audio video mode or other options available to them.

 It is the obligation upon directors convening the meeting to

provide every facility to directors asking video conference
and enable them to participate in Board meeting.

ICSI WIRC 3 days Practical Series Workshop on NCLT |

June 24, 2018
Gaurav Pingle, CS, Pune |
 NCLT‟s observations on Board Meeting via video-
conferencing
79

 “Sub-rule 3(e) only says that if intimation is given at

beginning of Calendar Year that will remain valid for
entire Calendar Year. It is not said anywhere that if it is
not given at beginning of year, Video Conference
facility is not to be provided in that Calendar Year.

 It does not mean that directors are not entitled for

Video Conferencing if intimation is not given at
beginning of Calendar Year.

 When a provision is read, it has to be read wholly and

not in pieces”

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June 24, 2018
Gaurav Pingle, CS, Pune |
 Participation in board meeting through video conferencing –
80 Whether right of a director or subject to availability of facility
by company?

ICSI WIRC 3 days Practical Series Workshop on NCLT |

June 24, 2018
Gaurav Pingle, CS, Pune |
 Achintya Kumar Barua alias Manju Baruah Vs Ranjit Barthkur
[2018] 91 taxmann.com 123 (NCLAT)
81

 Section 173(2) of the Act gives right to a director to participate in the meeting
through video-conferencing or other audio-visual means and the Central Govt.
has notified Rules to enforce this right and it would be in the interest of the
companies to comply with the provisions in public interest;

 Coming to the facts of the present matter, it can be seen that NCLT took note
of the fact that the company in this matter had all the necessary infrastructure
available.

 NCLT came to the conclusion that the provisions of section 173(2) of the 2013
Act are mandatory and the companies not be permitted to make any deviations
therefrom;

 NCLT‟s order could not be interfered. NCLT order must be said to be progressive
in the right direction and there is no reason to interfere with the same.

ICSI WIRC 3 days Practical Series Workshop on NCLT |

June 24, 2018
Gaurav Pingle, CS, Pune |
82 General Meetings
Notice of Meeting: Accidental omission to give notice
or non-receipt of notice would not invalidate the
proceedings at a general meeting

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June 24, 2018
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 Sadhan Kumar Ghosh Vs Bengal Brick Field Owner‟s
Association [2011] 163 Comp Cas 493
83

 Plaintiff had not been able to demonstrate that those in control of the
company management had deliberately failed to issue notice of the EGM
to the plaintiff;

 Certificate of Posting produced by the defendants carried a stamp of

postal authority and prima-facie established dispatch of notice;

 The amendments approved by the members in the meeting had been

approved by the Central Govt. as required for companies governed by
Section 25 of 1956 Act;

 The injunction seeking to set-aside the amendment of the MoA and AoA
was to be declined. “Accidental omission to give notice or non-receipt of
notice would not invalidate the proceedings at a general meeting.”
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 Proxy for attending general meeting – is it
84
mandatory to appoint a proxy by proxy form only?

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June 24, 2018
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 Gharda Chemicals Vs Jer Rutton Kavasmaneck
[2006] 129 Comp Cas. 642 (Bom.)
85

 It is however not mandatory to appoint a proxy only

through the Form in Schedule IX;

 Even though Schedule IX to Act sets-out form of proxy,

it may be varied if circumstances so require;

 So long as any instrument contains all the requisite

particulars set-out in the Form in Schedule IX, it can be
treated a proxy.
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June 24, 2018
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 Gharda Chemicals Vs Jer Rutton Kavasmaneck
[2006] 129 Comp Cas. 642 (Bom.)
86

 If an instrument contains all the requisite particulars

such as name of Co., name of the person executing the
instrument, name of the person empowered to vote as
the proxy, etc., as set out in the Form in Schedule IX to
the Act then such an instrument can be treated a
proxy, e.g. Power of Attorney.

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June 24, 2018
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 Bombay HC: Compulsory voting by postal ballot/e-
voting not applicable to Court-convened meetings
87

In the Scheme of Amalgamation

of

Wadala Commodities Ltd.

with

Godrej Industries Ltd.

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 Postal Ballot
88

(1) Notwithstanding anything contained in this Act, a company:

Extract (a) shall, in respect of such items of business as the Central

Government may, by notification, declare to be transacted only by means
of postal ballot; and
of (b) may, in respect of any item of business, other than ordinary business
and any business in respect of which directors or auditors have a right
Sec. 110 to be heard at any meeting, transact by means of postal ballot,
in such manner as may be prescribed, instead of transacting such
business at a general meeting.
of
(2) If a resolution is assented to by the requisite majority of the
Cos. Act, shareholders by means of postal ballot, it shall be deemed to have been
duly passed at a general meeting convened in that behalf.
2013

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June 24, 2018
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89

Whether in view of Sec. 110 of Cos. Act, 2013 and

SEBI Circular (May 21, 2013), a resolution for
approval of Scheme of Amalgamation can be
passed by majority of equity shareholders casting
their votes by Postal Ballot (which includes e-
voting) in complete substitution of an actual
meeting?

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June 24, 2018
Gaurav Pingle, CS, Pune |
 Justice GS Patel‟s incisive commentary
90

 Heart of Corp. Governance lies transparency and well-established principle of indoor

democracy that gives shareholders qualified, yet definite and vital rights in matters
relating to company functioning in which they hold equity.
 Principal among these, is not merely right to vote on any particular item of business, so
much as the right to use vote as an expression of an informed decision. Therefore,
Shareholder has an inalienable right to ask questions, seek clarifications and
receive responses before he decides which way he will vote.
 Schemes of Arrangement/Compromise are amended at a meeting itself. These
amendments come from the floor or even perhaps from Board itself. Amendment is then
put to vote.
 In a postal ballot, no such amendment is possible. If we were to restrict ourselves to
a postal ballot, no shareholder or any director could ever suggest any
amendment. Scheme would stand or fall only in its original form. This is
contrary to the mandate of Sec. 391-394.

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June 24, 2018
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 „Called‟ Meeting V/s „Ordered‟ Meeting
91

 Even so Sec. 230 still speaks of „calling of a meeting‟

and „not merely putting the matter to vote‟. It has to
be remembered that all schemes that are put to meeting
of shareholders are proposed schemes. This means that
they are subject not only to approval by voting but also,
possibly, to an amendment at the meeting itself.

 Meetings for approval of Schemes u/s 391/394 of

1956 Act are not „called‟ by Co. Such meetings are
„ordered‟ by the Court.
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 Dialogue & discourse are fundamental to
making of every such informed decision
92

 Nothing could be more detrimental to shareholders‟

rights than stripping them of the right to question, the
right to debate, the right to seek clarification; and,
above all, the right to choose, and to choose wisely.

 Vote is an expression of Opinion & it must reflect an

informed decision. Dialogue & discourse are
fundamental to making of every such decision.

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June 24, 2018
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 Conclusion
93

 Provisions for compulsory voting by postal ballot & by e-voting to exclusion

of actual meeting cannot & do not apply to „court-convened meetings‟

 At Court convened meetings, provision must be made for postal ballots & e-
voting, in addition to an actual meeting.

 Elimination of all shareholder participation at an actual meeting is

anathema to some of the most vital of shareholders' rights,

 It is strongly recommended that till this issue is fully heard and decided, no
authority or any company should insist upon such postal-ballot-only
meeting to the exclusion of an actual meeting.

 Govt. & SEBI should appear before Court, when this matter is next taken up
for a consideration of this issue.

ICSI WIRC 3 days Practical Series Workshop on NCLT |

June 24, 2018
Gaurav Pingle, CS, Pune |
94 Q & A Session

ICSI WIRC 3 days Practical Series Workshop on NCLT |

June 24, 2018
Gaurav Pingle, CS, Pune |
95

Thank you ICSI WIRC for the wonderful

opportunity!! 

Thank you Members for active participation! 

(E): [email protected]
(W): www.csgauravpingle.com
(M): +91 9975565713

ICSI WIRC 3 days Practical Series Workshop on NCLT |

June 24, 2018
Gaurav Pingle, CS, Pune |