Corporate Laws – Company Law Update

CORPORATE LAWS
CS Makarand Joshi
Case Law Update

1. Company Law disqualification and sought quashing

of the impugned list of disqualified
Sandeep Agarwal & Anr. v. Union of India directors
& Anr., Delhi High Court, Order dated 2nd
September, 2020 Arguments on behalf of the Petitioners
Facts of the case • Section 164(2) and Section 167(1)(a) of the
• The Petitioners were directors in two Companies Act, 2013 were materially
companies, one of the companies amended by Companies (Amendment)
was struck off from the register of Act, 2017 and introduction of
Companies on 30th June, 2017 due to disqualification in proviso u/s. 167(1)(a)
non-filing of financial statements and was made effective from 7th May, 2018
annual returns • The judgment of Mukut Pathak &
Ors. vs. Union of India & Ors., 265
• The Petitioners, being directors of
(2019) DLT 506 was referred by the
the struck off company, were also
Petitioners. It was, further, submitted
disqualified w.e.f. 1st November, 2016
that the conjoint reading of both the
for a period of 5 years till 31st October,
sections referred above showed that the
2021 u/s. 164(2)(a) of the Companies
disqualification would not apply in a
Act, 2013 retrospective manner
• Pursuant to such disqualification, the • It was, further, stated that the active
Petitioners’ DIN and DSC had also been company wanted to take the benefit
cancelled of the Companies Fresh Start Scheme
• Therefore, the Petitioners were not able (“CFSS” hereinafter), 2020 dated 30th
to carry out business and file returns March, 2020 introduced by Ministry
etc. in the active company whereby active companies were
permitted to make good any defaults in
• Accordingly, the Petitioners had filing of documents and seek immunity
filed a writ petition to challenge the from disqualification

ML-55 October 2020 | The Chamber's Journal | 153 |

 Corporate Laws – Company Law Update

• However, since the directors, who had mentioned by the Respondents, sought
to sign the papers, had been disqualified the following directions:
and their DIN and DSCs had been
o ROC be directed not to treat the
deactivated. the active company was not
Petitioners as disqualified directors
able to avail the benefit of such scheme
and to seek issuance of writ of
mandamus, quashing publication
Arguments on behalf of the Respondents
of their names in the list of
• The judgment in Mukut Pathak (Supra),
disqualified directors
referred to by the Petitioners, had been
challenged by way of an appeal by o The Respondents be directed to
the Ministry. This appeal which was unfreeze the Petitioners’ DINs and
pending, however no stay had been DSCs and to enable them to file
granted documents/returns of behalf of
company on which they had been
• The Respondents also relied upon the
serving as directors
recent order passed by the Division
Bench in 2 writ petitions i.e. Anamika • The Divisional Bench’s order dismissed
devi vs. Union of India & Anr. and the mentioned petitions. However, the
Gaurav Kumar vs. Union Of India & court highlighted that “the power of
Anrto submit that the disqualification judicial review are discretionary and the
list had been notified in 2017, the question of delay is to be examined in
challenge to the same was extremely the particular facts and circumstances
belated, hence the writ petition deserved of each case” in light of its observation
to be dismissed that the filing of writ-petition was very
belated.
Held
• The facts and circumstances, in the
• The judgement in Mukut Pathak, insofar
present case, showed that, CFSS was
as the merits of the case concerned,
new scheme which was notified on
was squarely applicable in the present
30th March, 2020 which had not been
case. The said judgment clearly held
invoked before the Division Bench.
that the proviso to Section 167(1)(a)
of the Act couldn’t be read to operate • The scheme was obviously launched
retrospectively by Government. to give a reprieve to
such companies who had defaulted in
• Furthermore, the proviso to
filing documents. Such companies were
Section 167(1)(a), being a punitive
allowed to file requisite documents and
measure with respect to rights and
to regularize their operations, so as to
obligations of directors, couldn’t be
not face disqualification.
applied retrospectively unless the
statutory amendment expressly provided • In the present case, the Petitioners
so. were directors of 2 companies– one
whose name had been struck off and
• the 2 writ petitions, on which the
one, which was still active. In such
Division Bench had passed orders, as

| 154 | The Chamber's Journal | October 2020 ML-56

 Corporate Laws – Company Law Update

a situation, the disqualification and Readers may refer to the following judgements:
cancellation of DINs would be a severe 1. Kaynet Finance Limited vs. Verona
impediment for them in availing Capital Limited on 9 July, 2019 (Bombay
remedies under the scheme, in respect HC)
of the active company. 2. Mukut Pathak & Ors. vs. Union of India &
Ors., 265 (2019) DLT 506 (Delhi HC)
• In order for the scheme to be effective,
the Petitioners, directors of these
companies, ought to be given an 2. SEBI
opportunity to avail such scheme. The
launch of the scheme itself constituted Utsav Pathak (‘Appellant’) vs. Securities
a fresh and a continuing cause of action. and Exchange Board of India (SEBI),
Under such circumstances the question (‘Respondents’), Securities Appellate Tribunal
of delay or limitation would not arise (‘SAT’), Order dated 12th June 2020

• Considering the COVID-19 pandemic, Facts of the case

the MCA had launched the CFSS, which 1. CRISIL Ltd (“the Company”) is a credit
ought to be given full effect. Since it is rating agency and is registered with
not uncommon to see directors of one SEBI and its shares are listed on the
company being directors in another Bombay Stock Exchange (BSE) and
company, under such circumstances, to National Stock Exchange (NSE). SEBI,
disqualify directors permanently and not on the basis of reference received
allow them to avail of their DINs and from NSE relating to suspected insider
DSCs could render the Scheme itself trading by certain persons, conducted
nugatory. an investigation of trading activity in the
scrip of the Company.
• In order to enable the directors of
Koksun Papers i.e. the Petitioners, to 2. On June 3rd, 2013 McGraw Hill Asian
continue the business of the active Holdings along with Persons Acting
company in the fitness of things and in Concert (“PAC”) namely, McGraw
also in view of the judgment in Mukut Hill Financial Inc., S&P India LLC
Pathak (supra), the disqualification of and Standard & Poor LLC had made
the Petitioners as directors was set aside. an announcement of open offer to
The DINs and DSCs of the Petitioners acquire up to 1,56,70,372 equity shares
were directed to be reactivated, within of the Company which amounted to
a period of three working days. 22.23% of the total shareholding of
the Company. The open offer was
Footnote: made @ ` 1210/- per share even
though the price of the share on
Although the order, passed by the court, stated
that the disqualification of Petitioners as directors
that date on the stock exchange was
was set aside, in our understanding, the order ` 1129.90/- per share. The
had probably set aside the vacation of office of announcement of the public offer led to
the directors from the active company and not an increase in the price of the shares by
the disqualification that occurred u/s 164(2) of the almost 20%.
Companies Act, 2013.

ML-57 October 2020 | The Chamber's Journal | 155 |

 Corporate Laws – Company Law Update

3. This open offer was considered as 7. The AO on the basis of circumstantial

a Price Sensitive Information (“PSI”) evidence came to the conclusion that
under the SEBI (Prohibition of Insider the Appellant had tipped the Tippees
Trading) Regulations, 1992 (“PIT with regard to the PSI and, therefore
Regulations”). violated Regulation 3(ii) read with
Clause 2.0 and 2.1 of Schedule I Part
4. A Confidentiality Agreement was B of Model Code of Conduct of PIT
entered between the McGraw Hill Asian Regulations for Other Entities. The
Holdings and Morgan Stanley India AO further held that on the basis of
Company Private Limited (“Merchant information supplied by the Appellant,
Banker”) on 4th April, 2013 to work Tippees traded in shares of the
on the open offer assignment for Company in large quantities during
acquisition of the shares of the UPSI period which had not been seen
Company. before based on the trading activity of
5. The Appellant was an employee Tippees.
of Merchant Banker during the 8. Consequently, the AO by its order dated
unpublished price sensitive information August 30th, 2019 held the Appellant
period (“UPSI period”) and was also guilty of insider trading, however, did
directly involved with the activities not impose any penalty as Appellant.
pertaining to the open offer. The
Managing Director of Merchant Banker Appeal filed
had confirmed the fact that the The Appellant had filed the appeal to the SAT
Appellant was one of the employees as he was aggrieved by the charge of insider
who was working on the open offer trading levied by AO.
assignment of the Company and was
privy to the PSI. Arguments made by Appellant before SAT
6. The Adjudicating Officer of SEBI (“the 1. The Appellant argued that statements
AO”) after considering the material given by Tippees were not considered
evidence on record and after giving by the AO. If the said statements were
an opportunity of hearing to the considered, one would have found
Appellant, found that the Appellant was that the Tippees were all independent
a ‘connected person’ under Regulation professional persons who could take
their own decisions logically. Their
2(c)(ii) of the PIT Regulations and also
statements would have adequately
an ‘insider’ as per Regulation 2(e). The
proven that Appellant was not having
AO further found that Ms Priyanka
good terms with his sister and her
Pathak (sister of appellant), Husband of
family
Ms Priyanka Pathak, mother-in-law of
Ms Priyanka Pathak and Father in law of 2. It was, further, argued that finding
Ms Priyanka Pathak (collectively referred of the AO that the Appellant had
to as “Tippees”) were ‘persons deemed tipped the Tippees was based on
to be connected’ as per Regulation 2(h) surmises and conjectures and was
(viii) of the PIT Regulations. not based on any foundational facts

| 156 | The Chamber's Journal | October 2020 ML-58

 Corporate Laws – Company Law Update

or evidence. The mere fact that ‘insider’ being privy to PSI i.e. the open
the Appellant was closely related offer and also pricing of open offer.
to the Tippees could not lead to a Based on these foundational facts, the
finding of guilt without considering AO had rightly come to a conclusion
the second part of Regulation 2(e) that the Appellant had tipped the
(i) of the PIT Regulations which Tippees.
stated that to become an ‘insider’
3. It was, further, submitted that there
it was necessary to prove whether
was a close relationship between the
the person was reasonably expected
Appellant and the Tippees. which the
to have access to UPSI by virtue of
Appellant had tried to conceal before
connection in respect of securities
the SEBI. The trading pattern of Tippees
of company. Reliance was placed on
was also brought to the notice of the
rulings in the case of Chintalapati
SAT which as per the Respondents
Srinivasa Raju vs. SEBI, (2018) 7
lead to an irresistible inference that
S CC 443 and order of SEBI in A .
the Appellant had passed on the
Vellayan & A R Murugappan dated
information to the Tippees.
12th May, 2016 wherein it was held
that finding of guilt on the basis of
family relationship was not proper. Held
1. It held that the Appellant had not
3. It was, further, submitted that SEBI denied the fact that he was privy to
had investigated Ajay Bhalla and his UPSI. The Appellant had also not
firm Kotak Premier Investment and denied that he was ‘a connected person’
was found to have traded far more and an ’insider’. Further he had also
than the Tippees in question and had not denied that the fact that he had
made a profit of more than ` 5 crores. close relationships with Tippees.
The Appellant highlighted that Ajay Consequently, Regulation 2(e)(i) of PIT
Bhalla, etc. had been let off, whereas Regulations were fully applicable upon
the Appellant had been found guilty the Appellant as he was a ‘connected
merely on the ground that he had close person’ and was in possession of and
relationship with the Tippees. had access to PSI. These facts were
corroborated by the statement of the
Arguments made by SEBI before SAT Managing Director of the Merchant
1. The Respondents submitted that in Banker.
a case of insider trading, there is
2. It was held that given the facts that
hardly any direct evidence and from
(i) Appellant being a ‘connected person’
the foundational facts itself, one could
and an ’insider’ was privy to UPSI,
infer on a preponderance of probability
(ii) had close relationship with Tippees,
or could infer from a circumstantial
(iii) during investigation he had made
evidence as to whether a person was
attempts to conceal his relationship
guilty of insider trading.
with Tippees, (iv) Trading Pattern of
2. It was contended that the Appellant Tippees showed that Tippees traded
was a ‘connected person’ as well as an only in shares of the Company during

ML-59 October 2020 | The Chamber's Journal | 157 |

 Corporate Laws – Company Law Update

UPSI Period by purchasing large Facts of the Case

chunks and selling it immediately after • The Appellant had filed an application
announcement of the open offer, (v) the u/s Section 7 of the Insolvency and
Tippees sold all other shares to finance Bankruptcy Code, 2016 (“IBC”) with
buy orders of the Company led to draw National Company Law Tribunal
reasonable, logical, and irresistible (“NCLT”) to initiate Corporate
inference that the Appellant had passed Insolvency resolution process (“CIRP”)
on PSI to Tippees. against the Invest Care Real Estate LLP
(the Respondents/the Corporate Debtor)
3. The order of the AO holding the
Appellant guilty of insider trading • The Appellant had given loan of `
needed no interference. It was, further, 40 Lakhs to the Corporate Debtor
stated that the decisions cited by the and the same was to be repaid in
Appellant on the issue that a person four instalments along with interest.
could not be held guilty only on the However, the amount had not been
strength of proximity of relationship repaid. The Appellant claimed to be
with the Tippees were distinguishable regarded as a ‘Financial Creditor’ and
on facts and were not applicable in the hence invoked IBC.
instant case.
• The Respondent contended that the
Appellant was a general partner of the
Cases referred
LLP and claimed that the amount was
Appellant: Chintalapati Srinivasa Raju vs.
not loan but a capital contribution for
SEBI, (2018) 7 SCC 443, SEBI AO Order
being general partner of the LLP
A. Vellayan & A R Murugappan dated
12.05.2016, SEBI AO Order Sanjay Gala • The NCLT had rejected the Appellant’s
02.12.2016 petition on the grounds that
the Appellant was not a ‘Financial
Respondent: USA vs. Raj Ratnam, 09 Cr.
Creditor’.
1184 (RJH), V. K. Kaul vs SEBI in Appeal
No.55/2012 decided on 08.10.2012, • Aggrieved by the order of NCLT,
Chintalapati Srinivasa Raju vs. SEBI (2018) the Appellant filed an appeal with
7 SCC 443, Rajiv Gandhi vs. SEBI in Appeal NCLAT
No.50/2007 decided on 09.05.2008,SEBI vs.
Kishore R Ajmera(2016) 6 SCC 368,SEBI Arguments by the Appellant
vs. Kanaiya Lal Baldevbhai Patel (2017) 15 • The Appellant had given loan of
SCC 753and SEBI vs Rakhi Trading Pvt. Ltd. ` 40 Lakhs to the Corporate Debtor
(2018) 13 SCC 753. and the same was to be repaid in four
instalments. The late husband of the
3. IBC Appellant had also invested ` 1 Crore.
Rita Kapur (‘Appellant’) vs. Invest Care Real • It was, further, contended that neither
Estate LLP (Respondents), National Company the principal amount nor interest
Law Appellate Tribunal, (NCLAT) New Delhi, thereon had been paid to her and to her
Order dated 2nd September 2020 late husband.

| 158 | The Chamber's Journal | October 2020 ML-60

 Corporate Laws – Company Law Update

• It was also alleged that the loan had to this document, the Supplementary
been converted into equity on 25th Agreement dated 25th March, 2014
March 2014, which was against the was also executed by all the partners
terms and conditions of the Loan including the Appellant.
Agreement 9th July, 2013.
• The Auditor Certificate also certified
• The Appellant also disputed the the investment as capital contribution
signature on the Amended Agreement including that of the Appellant.
dated 1st December, 2013.
• The Respondents, further, submitted
• The Appellant claimed to be a ‘Financial that the Appellant was not a ‘Financial
Creditor’ and disputed how the Loan Creditor’ rather was a related party.
could be converted into equity based
on a certified copy of the resolution Held
signed by two designated partners and • The court noted the following facts:
not by other partners. It was alleged as
pre-planned acts to deceive, defraud the o The Appellant, a senior citizen, and
Appellant her late husband had invested huge
amount in the Corporate Debtor
• The Appellant relied on the judgments
passed by the NCLAT/Supreme Court o The Corporate Debtor suffered from
to prove her stand on the issue several irregularities
of (a) striking down and unfair and • The provisions of section 7 of the IBC
unreasonable contract and (b) the provides for initiation of the CIRP by a
dishonesty should not be permitted ‘Financial Creditor’ only and that too,
to bear the fruits and benefits to the if there was a ‘debt’ and a ‘default’.
persons who played fraud or made Therefore, the relevant question was
misrepresentation amongst others. whether the Appellant was to be
considered as a ‘Financial’ Creditor u/s
Arguments by the Respondents 5(7) of the IBC and whether the ‘debt’
• Apart from raising several issues in the was ‘Financial Debt’.
appeal regarding irregularity in signing
of Power of Attorney/Authority Letter, • Since the ‘debt’ was converted into
the Respondent had alleged that the ‘Capital’, it could not be termed as
Appellant was the ‘Investor’ initially as ‘Financial Debt’ and the Appellant
a loan-provider in July, 2013. could not be described as a ‘Financial
Creditor’.
• However, all the 40 Investors became
either a designated partner or a general • Accordingly, it was held that the
partner by way of the ‘Amended grievance of the Appellant did not fall
Agreement’ dated 1st December, under the provision of the IBC and the
2013. This document had also been appeal was dismissed.
signed by the Appellant. In addition 

ML-61 October 2020 | The Chamber's Journal | 159 |