INSOLVENCY RESOLUTION BY OPERATIONAL CREDITOR AND QUESTION WHETHER "DISPUTE" IN SECTION 5(6) IS AN INCLUSIVE OR EXCLUSIVE DEFINITION ?

INSOLVENCY AND BANKRUPTCY INFORMATION 

As per section 8 of the Code, an operational creditor is required to deliver a demand notice on occurrence of a default.Within ten days from the receipt of the demand notice, the corporate debtor shall bring to the notice of the operational creditor the “existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute” (emphasis supplied).

This is article of the series of editorials written by the Jeetam Kumar Saini on Corporate Laws(He also Written many articles Including Companies Act, 2013, SEBI, RBI Regulations, IBC) 9785949998

In this regard, the decision of the 


Hon’ble Supreme Court 


in

Mobilox Innovations Private Limited v. Kirusa Software Private Limited


clarifies that the dispute must be existing prior to the receipt of the notice and can be in a form other than a pending suit or arbitration proceeding.


The rationale given by the court is that it couldn’t have been the intent of the legislature that a dispute be only in the form of a pending suit or arbitration proceeding, and the relevant paragraph is extracted below:


“We have also seen the notes on clauses annexed to the Insolvency and Bankruptcy Bill of 2015, in which “the existence of a dispute” alone is mentioned. Even otherwise, the word “and” occurring in Section 8(2)(a) must be read as “or” keeping in mind the legislative intent and the fact that an anomalous situation would arise if it is not read as “or”. If read as “and”, disputes would only stave off the bankruptcy process if they are already pending in a suit or arbitration proceedings and not otherwise. This would lead to great hardship; in that a dispute may arise a few days before triggering of the insolvency process, in which case, though a dispute may exist, there is no time to approach either an arbitral tribunal or a court. Further, given the fact that long limitation periods are allowed, where disputes may arise and do not reach an arbitral tribunal or a court for upto three years, such persons would be outside the purview of Section 8(2) leading to bankruptcy proceedings commencing against them. Such an anomaly cannot possibly have been intended by the legislature nor has it so been intended.”

Further, the definition of the term ‘dispute’ in section 5(6) is an inclusive, and not an exhaustive definition. Thus, it was decided to amend section 8(2)(a) to replace ‘and’ with ‘or’, to be in line with the judgement of the Hon’ble Supreme Court discussed above, and the intent of the legislature.

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION.


(URC-1) Conversion of any other Entity in Companies Act,2013 as Part I Company

Companies (Authorised to Register) Second Amendment Rules, 2018


They shall come into force with effect from 15th August 2018

In the Companies (Authorised to Register) Rules, 2014 (hereinafter referred to as the said rules), in rule 2, in subrule (1), after clause (g), the following clauses shall be inserted, namely:-

“(h) “society” means a society registered under the Societies Registration Act, 1860 (21 of 1860) and includes a society registered under or deemed to be registered under any other law for the time being in force; 

(i) “trust” means an irrevocable public charitable or religious trust registered under any law for the time being in force and represented by its trustees, in whom the trust property is vested, as members; 

(j) “Registrar of Firms” means the Registrar appointed under section 57 of the Indian Partnership Act, 1932 (9 of 1932); (k) “Registrar of Trusts” includes a Charity Commissioner, an Inspector-General of Registration or such other authority having the duty of registering trusts in a State.”.  


"By way of this, Ministry of Corporate Affairs opens the Door to other registered entity to get them registered under the Companies Act,2013 as Part I Company.By this, in Future we will going to witness a tremendous Change in  Business Structures"


Documents Required by Entities to Registered under Companies Act,2013 as Part I Company:-

(a) In case of an application by a Limited Liability Partnership or firm for registration as a company limited by shares

(i) a list showing the names, addresses, and occupations of all persons named therein as partners with details of shares held by them respectively, showing separately shares allotted for consideration in cash and for consideration other than cash along-with the source of consideration and distinguishing, in cases where the shares are numbered, each share by its number, who on a day, not being more than six clear days before the day of seeking registration, were partners of the Limited Liability Partnership or firm as the case may be;

(ii) a list showing the particulars of persons proposed as the first directors of the company, alongwith Director Identification Number (DIN), passport number, if any, with expiry date, residential addresses and their interests in other firm or body corporate along with their consent to act as directors of the company; 

(iii) in case of a firm, deed of partnership, bye-laws or other instrument constituting or regulating the firm and in case the deed of partnership was revised at any time in the past, copies of the principal and all subsequent deeds including the latest deed, along with the certificate of the registration issued by the Registrar of Firms, in case the firm is registered; 

(iv) written consent or No Objection Certificate from all the secured creditors of the applicant; 

(v) written consent, from the majority of members whether present in person or by proxy at a general meeting, agreeing for such registration; 

(vi) an undertaking that the proposed directors shall comply with the requirements of the Indian Stamp Act, 1899 (2 of 1899) as applicable; 

(vii) a copy of the latest income tax return of the Limited Liability Partnership or firm, as the case may be.   

Law(s) Governing the eForm 

eForm URC-1 is required to be filed pursuant to Section 366 of the Companies Act, 2013 and Rule 3(2) of the Companies (Authorised to Register) Rules, 2014

Notes:-

  • Please ensure that secured creditors have given their consent have given their consent for registration under this Part.
  • Also ensure that prior to filing this eForm, a notice in newspaper about registration under this Part, one in English and in vernacular language seeking objections must be published.
  • A copy of such notice is to be filed along with this eForm.
  • The entity should address such objections, if any suitably
  • The entity after registration shall submit all necessary documents to registering authority for dissolution as the existing entity under relevant law.
What are the Attachments?

1. Particulars of members/partners along with the details of shares held by them, if any.
2. Declaration of two or more directors verifying the particulars of all members/ partners.
3. Affidavit from all the members/partners for dissolution of the entity.
4. Copy of the instrument constituting or regulating the entity.
5. Copy of Newspaper advertisement.
6. Certificate from a CA/CS/CWA certifying the compliance with all the provisions of Stamp Act, to the extent applicable.
7. Undertaking by the proposed directors for compliance with requirements of Indian Stamp Act, 1899
8. A copy of latest Income Tax Return of the firm

Conditional:

9. Copy of certificate of registration of the entity shall be mandatory to be attached in case Type of company is ‘Part I Section 8 company’ or ‘Part I LLP to company’.
10. Consent of majority of members is mandatory to be attached in case company is limited by shares or Unlimited company
11. Consent of at least three-fourth of members agreeing for registration under this part is mandatory to be attached in case company is limited by guarantee.
12. No objection certificate from the concerned Registrar of Firms or Registrar of Companies (LLP) is mandatory to be attached in case type of company is ‘Part I Firm to company’/ ‘Part I LLP to company’.
13. No objection certificate/Consent given by secured creditors is mandatory to be attached in case of any secured debt outstanding as on the date of application.
14. Copy of the resolution declaring the amount of guarantee is mandatory in case company is limited by guarantee.
15. Declaration from all the members regarding compliance as per section 8(1)(b) and section 8(1)(c) of the Act and detailed objects of the company shall be mandatory in case Type of company is ‘Part I Section 8 company’.


Points for Successful Submission of Form URC-1


  1. In case 20 days expired from the date of approval of RUN, this form cannot be filed
  2. The eForm will be processed by the office of Registrar of Companies (Non STP)
  3. Fee in case of company not having share capital Rupees 200

    Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION.(Information of Above are collected from respective law committee and Sources) 













    Nidhi Companies: Governance and Regulatory Aspects

    Series -I

    Introduction 

    As per section 406 of the Companies Act, 2013, “Nidhi” means a company which has been incorporated as a Nidhi with the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit, and which complies with such rules as are prescribed by the Central Government for regulation of such class of companies

    The primary object of Nidhis is to carry on the business of accepting deposits and lending money to member-borrowers only against jewels, etc., and mortgage of property. For over a century, Nidhis with the objective of cultivating the habit of thrift, have been generally promoted by public spirited men drawn from affluent local persons, lawyers and professionals like auditors, educationists, etc., including retired persons. The area of operation has been local – within municipalities and panchayats. Some Nidhis on account of their financial and administrative strength have opened branches within the respective revenue district and even outside. The principle of mutual benefit has been to pool the savings from members and lend only to members and never have dealing with Nonmembers. Such Members are only individuals. Bodies Corporate or Trusts are never to be admitted as Members. Nidhis are not expected to engage themselves in the business of Chit Fund, hire purchase, insurance or in any other business including investments in shares or debentures.

    Incorporation of Nidhi 

    (1) A Nidhi to be incorporated under the Companies Act, 2013 shall be a public company and shall have a minimum paid up equity share capital of five lakh rupees.

    (2) Nidhi shall not issue preference shares.

    (3) If preference shares had been issued by a Nidhi before the commencement of the Companies Act, 2013, such preference shares shall be redeemed in accordance with the terms of issue of such shares. 

    (4) No Nidhi shall have any object in its Memorandum of Association other than the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit. 

    (5) Every Company incorporated as a “Nidhi” shall have the last words ‘Nidhi Limited’ as part of its name.  

    Requirements for minimum number of members and net owned funds 

    Sub-Rule (1) of Rule 5 of the Nidhi Rules, 2014 deals with requirements for minimum number of members, net owned fund etc. It provides that: 

    (1) Every Nidhi shall, within a period of one year from the commencement of these rules, ensure that it has— 

    (a) not less than two hundred members;

    (b) Net Owned Funds of ten lakh rupees or more; 

    (c) unencumbered term deposits of not less than ten per cent of the outstanding deposits as specified in rule 14; and 

    (d) ratio of Net Owned Funds to deposits of not more than 1:20. 

    It may be noted that “Net Owned Funds” means the aggregate of paid up equity share capital and free reserves as reduced by accumulated losses and intangible assets appearing in the last audited balance sheet. Further, the amount representing the proceeds of issue of preference shares shall not be included for calculating Net Owned Funds. 

    Sub Rule (3) states that if a Nidhi is not complying with clauses (a) or (d) of sub-rule (1) above, it shall within thirty days from the close of the first financial year, apply to the Regional Director in Form NDH-2 along with fee specified in Companies (Registration Offices and Fees) Rules, 2014 for extension of time and the Regional Director may consider the application and pass orders within thirty days of receipt of the application. Sub-Rule (4) further states that if the failure to comply with sub-rule (1) of this rule extends beyond the second financial year, Nidhi shall not accept any further deposits from the commencement of the second financial year till it complies with the provisions contained in sub-rule (1), besides being liable for penal consequences as provided in the Act. 

    Membership of Nidhi 

    (1) A Nidhi shall not admit a body corporate or trust as a member.

    (2) Every Nidhi shall ensure that its membership is not reduced to less than two hundred members at any time. 

    (3) A minor shall not be admitted as a member of Nidhi. It may be noted that deposits may be accepted in the name of a minor, if they are made by the natural or legal guardian who is a member of Nidhi. 

    Directors
    (1) The Director shall be a member of Nidhi. 

    (2) The Director of a Nidhi shall hold office for a term up to ten consecutive years on the Board of Nidhi. 

    (3) The Director shall be eligible for re-appointment only after the expiration of two years of ceasing to be a Director. 

    (4) Where the tenure of any Director in any case had already been extended by the Central Government, it shall terminate on expiry of such extended tenure.

    (5) The person to be appointed as a Director shall comply with the requirements Director Identification Number.  

    Share capital and allotment 

    (1) Every Nidhi shall issue equity shares of the nominal value of not less than ten rupees each. 

    (2) No service charge shall be levied for issue of shares. 

    (3) Every Nidhi shall allot to each deposit holder at least a minimum of ten equity shares or shares equivalent to one hundred rupees: It may be noted that a savings account holder and a recurring deposit account holder shall hold at least one equity share of rupees ten. 

    Further, as per Rule 13 of the Nidhi Rules, 2014, 

    (1) The fixed deposits shall be accepted for a minimum period of six months and a maximum period of sixty months. 

    (2) Recurring deposits shall be accepted for a minimum period of twelve months and a maximum period of sixty months. 

    (3) In case of recurring deposits relating to mortgage loans, the maximum period of recurring deposits shall correspond to the repayment period of such loans granted by Nidhi. 

    (4) The maximum balance in a savings deposit account at any given time qualifying for interest shall not exceed one lakh rupees at any point of time and the rate of interest shall not exceed two per cent above the rate of interest payable on savings bank account by nationalised banks. 

    (5) A Nidhi may offer interest on fixed and recurring deposits at a rate not exceeding the maximum rate of interest prescribed by the Reserve Bank of India which the Non-Banking Financial Companies can pay on their public deposits.  

    Un-encumbered term deposits by Nidhi 

    Under Rule 14 of the Nidhi Rules, 2014, every Nidhi shall invest and continue to keep invested, in unencumbered term deposits with a Scheduled commercial bank (other than a co-operative bank or a regional rural bank), or post office deposits in its own name an amount which shall not be less than ten per cent of the deposits outstanding at the close of business on the last working day of the second preceding month. In cases of unforeseen commitments, temporary withdrawal may be permitted with the prior approval of the Regional Director for the purpose of repayment to depositors, subject to such conditions and time limit which may be specified by the Regional Director to ensure restoration of the prescribed limit of ten per cent. 

    Loans by Nidhi  

    (1) A Nidhi shall provide loans only to its members.

    (2) The loans given by a Nidhi to a member shall be subject to the following limits, namely:— .

    (a) two lakh rupees, where the total amount of deposits of such Nidhi from its members is less than two crore rupees; 

    (b) seven lakh fifty thousand rupees, where the total amount of deposits of such Nidhi from its members is more than two crore rupees but less than twenty crore rupees; 

    (c) twelve lakh rupees, where the total amount of deposits of such Nidhi from its members is more than twenty crore rupees but less than fifty crore rupees; and 

    (d) fifteen lakh rupees, where the total amount of deposits of such Nidhi from its members is more than fifty crore rupees: 

    Where a Nidhi has not made profits continuously in the three preceding financial years, it shall not make any fresh loans exceeding fifty per cent of the maximum amounts of loans specified in clauses (a), (b), (c) or (d). A member shall not be eligible for any further loan if he has borrowed any earlier loan from the Nidhi and has defaulted in repayment of such loan.

    (3) The amount of deposits shall be calculated on the basis of the last audited annual financial statements. 

    (4) A Nidhi shall give loans to its members only against the following securities, namely:—

    (a) gold, silver and jewellery, and the re-payment period of such loan shall not exceed one year.  

    (b) immovable property and, the total loans against immovable property [excluding mortgage loans granted on the security of property by registered mortgage, being a registered mortgage under section 69 of the Transfer of Property Act, 1882 (IV of 1882)] shall not exceed fifty per cent of the overall loan outstanding on the date of  approval by the board, the individual loan shall not exceed fifty per cent of the value of property offered as security and the period of repayment of such loan shall not exceed seven years. 

    (c) fixed deposit receipts, National Savings Certificates, other Government Securities and insurance policies. It may be noted that such securities duly discharged shall be pledged with Nidhi and the maturity date of such securities shall not fall beyond the loan period or one year whichever is earlier and in the case of loan against fixed deposits, the period of loan shall not exceed the unexpired period of the fixed deposits. 

    Dividend 

    Under Rule 18 of Nidhi Rules, a Nidhi shall not declare dividend exceeding twenty five per cent or such higher amount as may be specifically approved by the Regional Director for reasons to be recorded in writing and further subject to the following conditions, namely:— (a) an equal amount is transferred to General Reserve; (b) there has been no default in repayment of matured deposits and interest; and (c) it has complied with all the rules as applicable to Nidhis.  

    Role of Company Secretary 

    Company Secretaries create an enabling environment for Nidhis that stimulates their effectiveness, safeguards their autonomy and assist them in legitimately mobilizing necessary financial resources from their members. In addition, they also have a role to play in advising and guiding the Board on the regulatory requirements and compliances such as adherence to prudential norms, filing of necessary returns, Directors appointment, acceptance of deposits, share capital and allotment etc. Nidhi Rules, 2014, too authorises Company Secretaries in Practice (in addition to other professionals) to certify half yearly return and return of statutory compliances. Also, the Registrar of companies may utilize services of Company Secretaries in Practice while discharging his functions under the Rule.