Category Archives: CORPORATE LAW

INDIAN CONSUMER PROTECTION LAW GETTING AMENDED

The Ministry of Consumer Affairs proposed to amend Consumer Protection Act 1986 and provided in its website the amendment proposals for all stakeholders to comment.  Here is a small note regarding proposed amendments.

  • Introduction of mediation as another way of resolving consumer disputes.  Hence, a new definition of mediation is proposed.  A new chapter 4 is introduced to the enactment establishing a consumer mediation cell which in detail provides the qualification for a mediator, the office of mediator, and its setup and procedure of mediation, the time frame for mediation which is 30 days, etc, and it also narrates process of mediation, how settlement to be arrived, recorded, etc.
  •  The amendment also proposes to create a new executive machinery for investigation and enquiry of Unfair Trade Practices and other complaints relating to the consumer.  Thus, it proposes to create Central Consumer Protection Authority and a new Consumer Protection Commission will be formed.  The amendment proposes additional five deputy commissioners under the commission.  The place and working hours of this authority will be like a central government office and the authority shall be located in Delhi and the additional responsibility of the Central Consumer Protection Authority is provide inexpensive and speedy redressal of grievance and complaints.  This authority can enquire suo moto or upon a complaint or from a direction from a government, parliament, and judiciary any violation of consumer rights enumerated in Consumer Protection Act.  This authority can intervene in judicial proceeding with consent of the court in all allegations of violation of consumer rights.  The Authority can conduct search and seizure of documents, records and articles and other forms of evidence, summon delinquent manufacturers, record oral evidence, make orders on the basis of such investigation to withdraw services and issue safety notices and alerting consumer against unsafe goods, direct discontinuation of practices which are found to be unfair and prejudicial to consumer interest, order withdrawal of advertisements found to be false, declare any unfair consumer contract as null and void, accept undertaking from bodies who breached law that they will desist from continuing such practices, file class action suit at National Consumer Forum on behalf of consumers, draw up code of conduct for fair business practices, impose administrative penalty on those found violating provisions of this law, etc.
  • The definition of the word “Defect” and “Deficiency” contained in section (1)(f) is proposed to be expanded by replacing the word “means” with “include.”  Consciously withholding relevant information to consumer is included within the definition of “Deficiency.”
  • The definition of Unfair Trade Practice is proposed to be expanded by including non-issuance of a cash memo or a bill as an Unfair Trade Practice.  Another proposal was to add the right of the consumer to reject and return the good or refuse to avail services.  A refusal to refund the consideration within 30 days is considered an Unfair Trade Practice.  The concept of Unfair Contracts is proposed and it states that a contract that requires manifestly excessive security deposit to be given by a party to the contract for the performance of contractual obligations, imposing any penalty on a party to the contract disproportionate to the loss occurred to the breach of the other party, refusal to accept early repayment of debt, a right of a party to terminate unilaterally without any cause are considered Unfair Contracts.
  • This Amendment proposes an exclusive bench in National Consumer Authority to hear class action suits.  Consumer protection Authority will have regional offices headed by a deputy commissioner.  The powers of the central consumer commission will be handled at district level by District collector or magistrate who can suo moto or otherwise investigate matters relating to consumer rights violation.  The orders made by the district collector or district magistrate is appealable before the Deputy Commissioner of Consumer Protection Authority and order of Deputy Commissioner shall be appealed to the Central authority.
  • The new amendment proposes that consumer complaint can be filed in the form of an e-mail to either District Collector or Deputy Commissioner and all complaints shall be acknowledged within a week and complaint shall be disposed within one month.
  • Any noncompliance of order of Central Authority will be reported to District Law enforcement authority who will take immediate action and report compliances. The National Consumer Commission and State Consumer Commission will be renamed as National Forum and State forum.  The salaries, perks, and other benefits of judges of consumer forum are amended.
  • Section 13 is proposed to be amended whereby in all claims below 5 lakhs both the parties to the dispute are not allowed to engage advocates.   No advocates can appear before state forum for any parties unless the billed value of the goods or services claimed in a complaint is 50 lakhs or above. In a national forum, no advocate shall appear if the claim is below 1cr and 50 lakhs.
  • The consumer forum after admission of the complaint shall refer the matter for resolution by mediation.
  • The consumer forum is given the power to award punitive damages which shall not be less than 10 times the value of the goods or service or 25% of the profit from the total sale of the said goods whichever is higher.
  • After the proposed amendment to challenge an award of a district forum, the appellant has to mandatorily deposit 50% of the award.    The amendment suggests that there won’t be second appeal.  That means that an order of district forum can be appealed before state forum and no further appeal shall be before national forum.
  • The enforcement of order of the consumer form if not complied with, the person shall be required to pay not less than Rs. 500  per day or 1.5% of the value awarded whichever is higher for each day of delay for such noncompliance of order.  The consumer forum is given the power to attach the property of the person and if the default in compliance of an order continues for more than 3 months, the attached property shall be sold.  The amendment further proposes directing the district collector to recover the money  from defaulter as arrears in land revenue.

This proposed amendments would bring substantial changes in the enforcement of consumer rights. However, some of the provisions like preventing lawyers from appearing in a Judicial process, based on pecuniary limits of the case is unfair and unconstitutional.  I could also notice many drafting errors and inconsistencies. The Ministry has requested all stakeholders to issue comments.  All right conscious citizens may  carefully read the proposed amendments and make meaningful suggestion and participate in this legislative exercise.

ENFORCEABILITY OF SHAREHOLDERS AGREEMENT

Various agreements are entered into by and between companies or its shareholders with others regarding transfer of shares, restrictions on voting,  and other rights attached to the shares of a company. These agreements are  of various kinds like shareholders agreement, share subscription agreement, pledge agreement, investment agreement, etc.  This article deals with couple of Supreme court judgments,  that discuss the legality of those agreements.

Any company established in India has its functions regulated by Articles of Association.  The Articles regulate the rights attached to shares, lien; transfer, transmission, and forfeiture of shares, alteration of capital; company meetings;  resolutions, etc. of the company and all other relevant aspects of governance of a company.

In case of a private company, transfer shares are restricted as per the articles of Association. Section 3(1)(iii) of The Indian Companies Act 1956 mandates the restrictions required.  This section is quoted hereunder:

3(1)(iii) ” private company” means a company which, by its articles,-

(a)restricts the right to transfer its shares, if any;

(b)limits the number of its members to fifty not including-

(i)persons who are in the employment of the company, and

(ii)persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and

(c)prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company: Provided that where two or more persons hold one or more shares, in a company jointly, they shall, for the purposes of this definition, be treated as a single member;

Section 3(1)(iii)(a) clarifies that Articles of a private company restricts the right to transfer its shares, if any.  Articles not only restricts transfer of shares but also prohibits invitations to general public to subscribe.  Thereby any transfer of shares of the private company should have to qualify the necessary restrictions in the Articles.  Section 82 of The Indian Companies Act 1956 further states that the transfer of shares or debentures should be considered as that of transfer of movable property and in the manner provided by Articles.  Section 82 is reproduced hereunder:

Section 82:  The shares or debentures or other interest of any member in a company shall be movable property, transferrable in a manner provided by the articles of the company.

 

Hence, it is clear from these sections that for any transfer of shares or debentures has to follow the rule book of Articles for it to be considered a valid transfer.

On the other hand Agreements such as shareholder agreement, share subscription agreement, pledge agreement, investment agreement, share purchase and cooperation agreement, etc., are signed by and between companies and shareholders or between two shareholders or between shareholders and outsiders as the case may be.  These agreements creates contractual obligations in relation to transfer of shares or enjoyment of shares or exercise of rights attached to the shares Viz. voting etc. What is the validity of  such agreements, if the provisions of the said agreements are a) not incorporated in the Articles of association of the company or b) if the provisions of the said agreements are contradictory to the Articles of Association.

The supreme court in V.B. Rangaraj vs. V.B. Gopalakrishanan & Others 1992 AIR (SC) 453  considered on whether the shareholders can among themselves enter into an agreement which is contrary to or inconsistent with the Articles of the company.  It is a case of a private  agreement whereunder there is a restriction on a member for transfer of his shares only to members of the company who belongs to a branch of family to which he belongs.  The agreement obviously therefore imposes some additional restrictions on the members right to transfer the shares other than those prescribed in the articles of the company. Court opined that such  additional restrictions are not binding on the company.

The only restriction on the transfer of shares of a company is as laid down in its Articles, if any.  A restriction which is not specified in the Articles is, therefore, not binding either on the company or on the shareholders.  The vendee of the shares cannot be denied registration of the shares purchased by him on a ground other than that stated in the Articles.”

 

A private agreement, the terms of which are not incorporated into the Articles, is only valid to the extent the Articles permit.

However, Supreme Court in the recent case of Vodafone International Holdings v Union of India & Another CDJ 2012 SC 068, this judgment was reconsidered by Justice Radhakrishnan.  Quoting another judgment of the Supreme Court in Gherulal Parekh v. Mahadeo Das Maiya (1959) SCR supp (2) 406 which states that freedom of contract can be restricted by law only in cases where it is for some good for the community.  Companies Act 1956, FERA 1973, RBI regulations or I.T. Act do not explicitly or impliedly forbid shareholders of a company to enter into agreements as to how they should exercise voting rights attached to their shares.  The court viewed shareholders can enter into any agreement in the best interest of the company but the only thing is that the provisions in the Shareholders Agreement shall not go contrary to Articles of Association.  The essential purpose of a shareholders agreement is to make provisions for proper and effective internal management of the company.  The court summarized the position very clearly.  A breach of Shareholders agreement which does not breach the Articles of Association is a valid corporate action and parties can get remdies under the general law of the land.

Earlier Supreme court In  Supreme Court in S.P. Jain v Kalinga Cables Ltd. (1965) 2 SCR 720 considered the validity of shareholdres agreement.  In this judgement supreme court distinguished between the shareholders agreement for issuance of new shares and agreement for transfer of already issued shares. In cases where agreement offering issuance of new shares, court viewed that it is imperative to have company a  party. On the otherhand  it is not mandatory to make company a party in cases where the agreement is relating to already issued shares of a company.

Hence, the position of law is very clear that agreement between two shareholders of a company or between shareholders and outsider of company in relation to rights attached to the shares of the company is valid & legally enforceable provided the provisions of the said agreement are not in breach of the Articles of Association.  In order to bind the company it should be made party to the agreement. Inroder, to bind all the stake holders of a company, all agreements imposing restrictions relating to rights attached to a shares are to be incorporated in the Articles of Association of the company.

Rajesh Vellakkat

RETIREMENT OF PARTNER FROM PARTNERSHIP

Here is a small note on the legal steps to be taken when a partner retires from partnership, to have safe exit. What steps are to be taken by the firm, so that firm is escaped from future acts and wrong doings of the retired partner.

Following the appropriate procedure laid down in Partnership Act is highly important because firm could be sued for the acts of retired partner. The retired partner can be sued for the wrong-doing of the firm as well.

A firm, unlike a company is not separate entity in the eye of law. A Partnership is an association of people, a partner is an agent of the firm and a partner can represent all other partner and bind them.  Hence, any act of the partner will be considered as the act on behalf of the firm and vice-versa. As per partnership law, a partner is entitled to share profit and loss of the firm.  This being a legal status of the partner and the firm, it is important to announce to the public at large when partner is retiring from a partnership.

In the absence of a public notice of retirement, a third party can make claim against the firm for the acts of the retired partner, in similar way, third parties can sue the partner even for the act done by the firm.  Section 32 of the Partnership Act describe the procedure to follow on retirement.

Section 32: Retirement of a partner.

(1) A partner may retire-

(a) with the consent of all the other partners,

(b) in accordance with an express agreement by the partners, or

(c) where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.

(2) A retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm, and such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement.

(3) Notwithstanding the retirement of a partner from a firm, he and the partners continue to be liable as partners to third parties for any act done by any of them which would have been an act of the firm if done before the retirement, until public notice is given of the retirement: Provided that a retired partner is not liable to any third party who deals with the firm without knowing that he was a partner.

(4) Notices under sub- section (3) may be given by the retired partner or by any partner of the reconstituted firm.

The above section makes it abundantly clear that a public notice is to be given regarding retirement otherwise the retiring partner will be liable for the acts of the firm.

Hence it is important  to know,  how public notice is given. The same  is discussed in Section 72. Of the Partnership Act

Section 72 of Partnership Act is reproduced below;

72. Mode of giving public notice. A public notice under this Act is given-

(a) where it relates to the retirement or expulsion of a partner from a registered firm, or to the dissolution of a registered firm, or to the election to become or not to become a partner in a registered firm by a person attaining majority who was admitted as a minor to the benefits of partnership, by notice to the Registrar of Firms under section 63, and by publication in the Official Gazette and in at least one vernacular newspaper circulating- in the district where the firm to which it relates has its place or principal place of business, and

(b) in any other case, by publication in the Official Gazette and in at least one vernacular newspaper circulating in the district where the firm to which it relates has its place or principal place of business.

From these two sections it is very clear that if a retiring partner fails to  issue a public notice in any vernacular newspaper as well as in public gazette, he is liable to the acts of the firm and vice-versa.

Incase, the firm is a registered partnership, then the retiring partner/ firm should ensure that the entries in the Register of Firms are amended reflecting the retirement of the person concerned.

Partnership is an important legal structure, popularly followed as preferred choice of entity for all small and medium  sized enterprises. However, partners of a firm while retiring from the partnership, ignore the above legal prescriptions and fail to give public notice. This has resulted in many legal disputes and financial liabilities impacting the partner/ or the firm, for the acts not done by him or authorized by him and vice versa.

Rajesh Vellakkat  and Prathap.K

One Person Company; a new Business Structure

Companies Act 2013, which was passed by the parliament recently and notified in the gazette, contains a new business structure called One Person Company. The said structure is intended to give the facility to create limited liability one person owned business entity.  Currently sole proprietorship business can have limited liability status. Enabling Limited liability one proprietor business enterprises give advantages in many respects. This kind of one person owned limited liability business entities are prevalent in U.S.A, Singapore, and some countries in Europe.

Section 2(62) of the new Companies Act defines One Person Company. It says a company which has only one person as a member.  From the definition of section 2(68) and section 3 it can be inferred that One Person Company is a category of private limited company. Section 3 of the Act, says that to form a One Person Company, the person who is forming the company should sign a memorandum and the said memorandum should nominate another person in case of subscribers death or incapacity to contract, to take charge of the One Person Company. The concerned letter from the nominee should also be filed before the registrar. The rules regarding administration of One Person Company is not very clear as the rules are yet to be formulated. The provisions of the Companies Act state that a One Person Company should have minimum one director. However, it can go up to 15. In a One Person Company a meeting of the Board of Directors in every quarter is not required. Section 173(5) says that one meeting in each half of the calendar year is sufficient. Section 122  of the Act says that provisions relating to the power of the company law tribunal to call for meeting, provision relating to extra ordinary general meeting, notice of the meeting, quorum, proxies, voting, poll, postal ballet etc are not applicable to One Person Company.

Section 122(3) of the act says that incase of One Person Company the resolution of the person is communicated to the company and entered in the minutes book and sign and dated by the member shall be treated as a valid meeting. As per Section 92 of the act the Annual return of a One Person Company can be either signed by the company secretary or by the director of the company. For other companies signature of both the director as well as company secretary is mandatory.

We need to wait for the final notification of the Company Rules to know more about One Person Company and the compliances and resolutions to be followed by such kinds of companies. However, one thing is sure this will help India’s unorganized proprietary businesses to move in to a new structured regime. This will also help a) individuals to venture in to high risk businesses, as the liability of the promoter is limited to the share capital provided b) separate ownership and management of proprietary business.

By Rajesh Vellakkat

COMPANIES ACT 2013- Highlights

The Companies Act, 2013 is passed by the Parliament  recently has received the assent of the President of India on 29th August, 2013. The Companies Act, 2013 has been notified in the Official Gazette on 30th August, 2013 but the provisions of this Act shall come into force on such date(s) as the Central Government may notify in the Official Gazette.

Ministry of Corporate affairs by a recent notification,  certain provisions of the Companies Act 2013 brought into force.  Some 55 sections of the new companies Act came into force from September 12, 2013. Remaining sections will be  notified later.

Here is the highlights of this new legislation:

  • A single person can form a company 
  • Maximum number of shareholders allowed in a private company is now 200
  • Mandatory requirement of women directors in notified category of companies
  • Atleast one director should be resident in India
  • Maximum number of directors is now 15
  • A person can hold directorship maximum in 20 companies
  • In listed companies auditors to change in every five years
  • Atleast 2% of the profit should be used to meet corproate social responsibility
  • Treasury stock is banned
  • National company law tribunal will be established and National company Law appellate tribunal
  • Appeals from the orders of the appellate tribunal will be directly to supreme court
  • Special courts ( criminal courts ) to deal with company law related crimes
  • Specific office to deal with corporate fraud ( Serious Fraud Investigation office)