INTRODUCTION
An organization’s incorporation and operation are governed by corporate law. Legal entities are governed by corporate law. All parties involved in forming, owning, operating, and managing a corporation are governed by the laws.
Due to the laws and norms that govern corporations, corporations operate on a level playing field. Corporate law is intended to benefit companies. Rather than making business more difficult, it is intended to simplify it. Companies can do business with less paperwork and more ease. Corporate formation and corporate activity rules are designed to help businesses function and to ensure that all stakeholders are treated fairly. The rules ensure predictable behaviour by businesses.
Corporate law practice has undergone several changes recently. For example, The Securities and Exchange Board of India (“SEBI”) announced its intention to make Application Supported by Blocked Amount (ASBA) the only payment option in IPOs and rights offerings on December 8, 2020, to protect investors’ interests and eliminate investor complaints.
Another major development in the corporate field is the allowance of online KYC by SEBI. S&EB of India has led the way in enabling users to use eSign, Digilocker, and electronic signature in line with the Information Technology Act, 2000 by releasing a press release dated 29th April 2020. This would enable investors to obtain KYC information without the need for a physical visit to the intermediary’s office.
Apart from the developments, there are several judgements in the corporate/company field, which you should be aware of. In pursuance of this, the article discusses the top 20 company/corporate case laws of which you should be aware.
1. RAMSGATE VICTORIA HOTEL V MONTEFIORE (1866)
A specific performance suit was filed by the plaintiff against the defendant. After six months of the original offer being accepted, the question was whether or not a contract existed between the parties.
Mr Montefiore, the defendant, sought to purchase shares in the hotel owned by the complainant, and an offer for the same and then a deposit was paid to his bank to purchase the properties. A letter of acceptance was received from the complainant six months after the offer was accepted. However, the defendant was no longer interested in the shares after the value of the shares had dropped. The offer of Mr Montefiore had not been withdrawn, but the sale did not take place.
It was ruled that the Ramsgate Victoria Hotel’s specific performance action failed. The court held that a contract could not be formed based on the offer made in June by the defendant and there had been a reasonable period since the offer was made and it had expired. Depending on the subject matter, an offer would be deemed to have expired within a reasonable time.
It was decided in this case that six months would be a reasonable amount of time to allow the offer to automatically expire. For other properties, a court will decide in each case.
2. DURGA PRASAD V. BALDEO (1881)
The following were the underlying issues in the case:
- If the contract was valid?
- If the contract was legitimate?
The number of outlets was requested by Durga Prasad, the plaintiff, to be constructed in the city to the district collector. The defendant rented these outlets to conduct business. As compensation for the building of the outlets, the defendant offered to pay a 5% commission on all commodities he sold from the rented outlets. This commission was, however, not submitted. Accordingly, the plaintiff filed suit.
The court held that, according to Section 25(iii) of the Indian Contract Act 1872, “an agreement without consideration is void”, and thus, the court cancelled the contract due to the lack of consideration necessary to create a contract.
3. SALOMON V. SALOMON AND CO. LTD. (1897)
This case demonstrated that a validly formed company under the Companies Act becomes an independent legal entity separate from its members, regardless of how many shares a member possesses, beneficially or in a mere trustee capacity, and as a result, the company is an independent legal entity separate from its members for all practical purposes.
The company founded by Aaron Salomon in 1892 was formed with Aaron’s wife, daughter, four sons, and himself as shareholders. As director of the company, Mr Salomon sold it for £39,000 and took out a debt of £10,000. Mr Salomon received a £5000 advance on the debentures from Edmund Broderip. In the wake of the drop in sales, strike action followed, resulting in a business slowdown. Mr Edmund sued Mr Salomon for breach of security because of his position and duties at the company.
The House of Lords observed as follows:
The firm’s founder, Mr Salomon, is protected from personal liability to creditors since the company exists separately from its members. Lordships upheld the concept of corporate personality which had been introduced by the Companies Act of 1862. Consequently, creditors of a bankrupt company cannot sue its shareholders for the payment of outstanding debts.
4. BALFOUR V. BALFOUR (1919)
Here, the question was: was the contract between Mr and Mrs Balfour valid?
While working for the government as a civil engineer in Ceylon (Sri Lanka), Mr and Mrs Balfour lived together. They both suffer from rheumatoid arthritis. The unfavourable climatic conditions in Ceylon prompted Mrs Balfour’s doctor to advise her to return to England. Mr Balfour offered to pay her £30.00 each month until she returned. The offer was not kept. Consequently, Mrs Balfour filed suit against Mr Balfour for his failure to fulfil his promise.
According to the court, a promise made between husband and wife cannot be regarded as a contract. Promises cannot be considered contracts.
5. LEE V. LEE’S AIR FARMING LTD. (1961)
Salomon’s case illustrates how these concepts are applied in this case. A company specializing in aerial top-dressing was established in this case. Besides one share, Lee (a licensed pilot) owned all of the company’s shares. He was appointed chief pilot at a pay under the articles and elected himself managing director.
During his work for the company, he was killed in an aeroplane crash. After her husband died in the course of his employment, his widow sought remuneration. Objecting to the claim, the corporation argued that Lee was not an employee since an employer and employee cannot be the same person.
JUDGEMENT:
Lee and his company were recognized as separate legal entities under the Privy Council, which determined that Lee was the company’s principal pilot and an employee. As a pilot and a managing director, he could issue orders for the company on behalf of himself, and his relationship with the company was something like servant and master.
The settlement was awarded to Lee’s widow since he was considered a separate person from the corporation he founded. Consequently, Lee was both the master and the servant at the same time, benefitting from both at the same time. (corporate personality).
6. THE STATE TRADING CORPORATION OF INDIA LTD. & ORS V. THE COMMERCIAL TAX OFFICER, VISAKHAPATNAM & ORS. (1963)
This case involved two issues:
- Is State Trading Corporation, a listed, registered company under the Indian Companies Act, 1956, a citizen and entitled to citizenship and to fulfil the fundamental rights of citizens?
- If STO is a government entity, does it have the authority to request the implementation of citizens’ rights against the state as outlined in Part III of the Indian Constitution?
It (State Trading Corporation) appealed to the court for special writs against the state government agencies based on sales tax imposed on the corporation. In the petition, the Supreme Court was asked to determine whether Article 32 of the Constitution permits it to pass special orders relevant to the implementation of citizen rights.
On the 26th of July 1963, the Supreme Court dismissed the appeal relying on the principle of company law that all citizens are citizens, but all citizens cannot be companies or corporations. A company becomes a corporation once it is incorporated, and a corporation ceases to be a person upon incorporation. Despite performing the functions of a commercial entity, this corporation cannot be considered to be an Indian government department or an organ.
7. SETH MOHANLAL V. GRAIN CHAMBERS LTD (1967)
The respondent company was set up specifically to carry out commodities trading, including the exchange of jaggery. It was the Articles of Association (AOA) of the company that made participation in the business transactions of the company mandatory for all members.
In these transactions, the director was free to enter into transactions with the company based on the 1913 Companies Act. A later amendment to the Act prohibited company directors from conducting business with companies. But the Company continued to operate as usual.
In connection with the transaction, the appellant company made huge monetary deposits in the respondent’s account. As of February 15, 1950, the Indian government prohibited entry into future transactions in jaggery or the making or receiving of payments relating to futures.
According to the appellant court, any outstanding guts or futures transactions were voided by the notification. The company was closed, and the notice against the futures transactions in the gut should act in the perspective.
8. BENNETT COLEMAN & CO. V. UNION OF INDIA (1973)
According to the Supreme Court of India, certain restrictions and regulations on newspapers affect the right to free expression and speech. In their petitions, the petitioners challenge the restrictions on newsprint imports under the Import Order of 1955, the sale, acquisition, and use of newsprint under the Newsprint Order of 1962, as well as the direct regulation of newspaper sizes and circulation under the Newsprint Policy of 1972-73.
Considering that the freedom of the press involves both qualitative and quantitative dimensions, the Court found the Newsprint Policy unconstitutional as its quantitative restrictions were not justified by a shortage of newsprint; the Newsprint Order and Import Control Order remained in place.
The Apex Court stated that it has now been established that the rights of shareholders as citizens are not infringed when shareholders form a corporation. As shareholders, their Fundamental Rights are protected when State action impairs them. If a company’s rights are affected, the shareholders’ rights are affected equally and necessarily.
9. BATES V. STANDARD OIL CO. (1979)
The underlying issue: When bringing a company to court, is there a distinction between the personality of the company and the personality of the person?
It was held that the board of directors is thought to be the corporation’s only brain, and the corporation is only able to act through them. The corporation, however, is treated as a natural person for many purposes. Contracts can be concluded with it and it can sue or be sued in its name by its members or by outside parties. In any case, it is not a citizen and does not enjoy the Fundamental Rights protected by our Constitution.
10. NEW HORIZONS LTD. V. UNION OF INDIA (1994)
It is possible to consider the experience of a shareholder of a company as the experience of the company as well. The Tender Evaluation Committee rejected the tender for publication of telephone directories of New Horizons Ltd. because the company had not submitted any documentation indicating that it possessed the technical expertise to qualify.
On appeal, the Delhi High Court affirmed the rejection of the tender. In reversing the Delhi High Court’s judgment, the Supreme Court observed:
“TPI (Thomson Press India Ltd.), LMI (Living Media India Ltd.), WML (World Media Ltd.) and IIPL (Integrated Information Pvt. Ltd.) are constituent companies and the experience of their respective companies should be considered, even if NHL (New Horizons Ltd.) is a joint venture, as stated in the tender”.
11. UNION BANK OF INDIA V. KHADER INTERNATIONAL CONSTRUCTION AND OTHER (2001)
Under Order 33, Rule 1 of the Civil Procedure Code of 1908 (“Code”), is a corporation entitled to sue as an indigent (poor) person? That was the question the court addressed in this case.
As a pauper or an indigent person, an individual can file a lawsuit under the Code if they cannot afford to pay for litigation. Appellant disputed that the company was a corporation and thus qualified to sue as an indigent person. It was argued that because the appellant was a public limited company, it did not qualify as a ‘person’ under Order 33, Rule 1 of the Code and that a ‘person’ only applies to natural individuals.
It was held by the Supreme Court that the term “person” used in Order 33, Rule 1 of the Code encompassed all corporations, associations, or groups of individuals, whether or not they were incorporated. Moreover, due to the regulation being benevolent, the term “person” should be interpreted broadly. A corporation, therefore, can sue as though it were an indigent person.
12. SRIDHAR SUNDARARAJAN (‘SS’) V. ULTRAMARINE & PIGMENTS LTD. & RANGASWAMY SAMPATH (‘RS’) (2015)
Section 196(3)(a) of the Companies Act, 2013:
An organization may not appoint or keep employed any Managing Director (MD), Whole-Time-Director (WTD), or manager who:
Has attained the age of 70 years or is under 21 years old:
Provided: In the case of an appointment of someone over 70 years of age, by passing a special resolution, an Explanatory Statement shall be attached to the notice when making such an appointment to explain why such a person was appointed.
The following were the facts of the case:
- On August 13, 1990, RS became chief executive officer of a listed company. SS was appointed director on May 21, 1998.
- RS was reappointed as Chief Managing Director (CMD) on August 1, 2012, for a term of five years, until 2017. Additionally, SS also took over as Joint-MD on that date.
- As of April 1, 2014, the Companies Act, 2013 took effect, and RS turned 70 years old on November 11, 2014.
- “RS earned himself statutory disqualification on his 70th birthday,” SS asserted.
The following were the key observations of the judge of the Bombay High Court:
- A director’s appointment made before the 2013 Act came into force will not be interrupted by Section 196(3), even in a case where the Managing Director turns 70 during his term in office.
- In addition, it does not affect MDs appointed after 1st April 2014 if they crossed the age of 70 during their tenure and were below that age at the time they were appointed or re-appointed.
- The Managing Directorship is not terminated mid-tenure under Section 196(3)(a);
- When a person who already has passed the age of 70 at the time of the appointment or re-appointment is proposed for appointment or reappointment, Section 196(3)(a) serves only to sound a note of caution in the public interest and to demand the company to adopt a special resolution. This requires that the word ‘continue’ be read in context
13. INNOVENTIVE INDUSTRIES V. ICICI BANK (2017)
There were three main concerns:
- Can Innoventive’s appeal be continued since the company has an insolvency lawyer managing the company?
- Is there any repulsion against the Insolvency and Bankruptcy Code, 2016 (IBC) and the Maharashtra Act?
- Will the non-nevertheless clause in section 238 of the IBC prevail over the non-nevertheless clause in section 4 of the Maharashtra Act?
As a result of the company’s default under the IBC, Innovative Industries applied with the National Company Law Tribunal (NCLT) in Mumbai, requesting that the insolvency resolution process begin. As a result of notifications issued under the Maharashtra Relief Undertaking (Special Provisions) Act 1958, Innoventive’s requirements and remedies were temporarily suspended for two years.
In its judgment issued on January 17, 2017, the NCLT ruled that the Maharashtra Relief Undertaking (Special Provisions Act), 1958, will prevail over the non-however provision contained in Section 238 of the IBC, 2016. Since the Maharashtra Relief Undertaking (Special Provisions) Act, 1958 is a state statute, it takes precedence over the IBC, which is a federal statute.
In addition, the NCLT decision was affirmed by the National Company Law Appellate Tribunal (NCLAT).
14. MACK SOFT-TECH PVT. LIMITED &ANR. V. QUINN LOGISTICS INDIA PVT. LIMITED (2017)
The underlying issue in the case:
Does a financial creditor have the right to claim its dues and to file an action under the Insolvency and Bankruptcy Code, 2016 (IBC) if it lacks supporting documents or is past the limitation period?
It was held that, for claiming amounts under the IBC, the Limitation Act of 1963 is invalid, however, claims filed under Section 7 are time-barred for three years. An application under Section 7 can, however, be made in this situation since the cause of action is still ongoing.
15. INTERNET AND MOBILE ASSOCIATION OF INDIA V. RESERVE BANK OF INDIA (2020)
By quashing the Reserve Bank of India’s circular dated April 6, 2018, a three-judge bench of the Supreme Court lifted restrictions on dealing in cryptocurrencies.
A circular issued by the Reserve Bank on April 6, 2018, directed all regulated entities to cease dealing in virtual currencies and to cease providing services to facilitate the settlement of virtual currencies by any person or entity and to end their relationship with them if already providing that service.
The Supreme Court challenged this circular. A special industry body for the online and digital services industry, the Internet and Mobile Association of India (IMAI) filed the petition in this case. As a result, there was no proper assessment of whether the Reserve Bank had banned cryptocurrency dealing.
The Supreme Court ruled on proportionality and granted the petition. In a ruling that will have far-reaching implications, the court said that-
“since RBI has consistently stated that virtual currencies are not banned, and the government of India has failed to take a stand despite several committees proposing several measures, including two draft bills that advocated opposite positions, we cannot hold that the impugned measure is proportionate.”
16. TATA SONS V. CYRUS MISTRY (2020)
In this important ruling, the Supreme Court reinstated Cyrus Mistry as executive chairman of Tata Sons following a stay of the National Company Law Appellate Tribunal’s (NCLAT) decision. The Supreme Court of India granted a stay in the high-profile Tata Sons (P.) Limited v. Cyrus Investments (P.) Limited case on January 10, 2020.
In 2016, a boardroom coup resulted in Mistry’s ouster from Tata Sons and company directorships. The Shapporji Pallonji Group, whose shares in Tata Group were 18%, filed a complaint under section 241-242 of the Companies Act, 2013 alleging prejudicial and oppressive acts on the part of majority shareholders, of the Tata Group. This application was dismissed by National Company Law Tribunal (NCLT).
According to the NCLAT, the October 24, 2016 resolution of the Tata Sons Board of Directors to terminate the appointment of Mistry as Executive Chairman was invalid. Mistry, as Executive Chairman of Tata Sons during its remaining tenure, was reinstated as a director of the Tata firms by the NCLAT.
This resulted in the nomination of the person to replace Mistry as ‘Executive Chairman’ being declared invalid. On behalf of Tata Sons, Abhishek Manu Singhvi, Senior Counsel, prayed to suspend that part of the NCLAT’s decision that related to Mistry’s re-appointment as Executive Chairman and Director of Tata Sons.
By suspending its order for four weeks, the NCLAT gave Tata Sons a chance to appeal to the higher authority.
The ruling of the Supreme Court: NCLAT’s order was stayed by the Supreme Court after the litigants moved there.
Finally, on March 27, 2021, Supreme Court upholds the Tata Sons board’s decision to remove Cyrus Mistry from office as well as its board.
The judgement of the Supreme Court, which was 282-page long, overturned the NCLAT’s order of December 2019, which had re-instated Mistry to the Tata Sons board and declared the appointment of N Chandrasekaran illegal.
Mistry’s Group’s plea challenging Tata Sons’ conversion from a public limited company to a private limited company was rejected by the Supreme Court bench led by Chief Justice S A Bobde without going into the issue of the stake’s value.
17. VISHAL VIJAY KALANTRI V. DBM GEOTECHNICS & CONSTRUCTIONS (P.) LTD. (2020)
In this case, the Committee of Creditors (CoC) rejected a settlement proposal by a majority of voters of 99.68%, and the Supreme Court refused to intervene during an Insolvency and Bankruptcy Code (IBC) proceeding in which such settlement was rejected.
In its ruling, the Supreme Court stated that the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) are not allowed to hear appeals based on the commercial wisdom of the Committee of Creditors.
The Resolution Professional created a resolution plan under the IBC for APSEZ in this case, and by a vote of 99.68%, the CoC approved the resolution plan. Furthermore, the Appellant submitted a settlement proposal which, however, was rejected by a vote of 99.68% CoC. An appeal was filed with the NCLAT, but no relief was granted. An appeal was then filed with the Supreme Court.
Accordingly, the Apex Court upheld the NCLAT’s order, saying:
“In the circumstances, there is no reason for us to interfere with the NCLAT’s proceedings. Thus, we dismiss the appeal”.
18. ARUNA OSWAL V. PANKAJ OSWAL (2020)
According to the Supreme Court, inheritance disputes fall under civil law and cannot be resolved through procedures under Section 241/242 of the Companies Act, 2013.
Since the respondent sought relief in the civil suit, the filing of an application under Sections 241 and 242 of the Companies Act was no more than an afterthought, the Apex Court ruled.
Several months before his death, Abhey Kumar Oswal transferred to his wife Aruna Oswal the shares of Oswal Agro Mills Limited he owned. A partition suit was filed by Pankaj Oswal, Abhey Oswal’s son, claiming one-fourth of his late father’s shareholdings in the company. The company petition came before the National Company Law Tribunal (NCLT), Chandigarh bench before Pankaj Oswal could be heard on his civil suit against Oswal Agro Mills.
The NCLT found that Pankaj Oswal was eligible for a fourth interest in the property/shares as a legal heir. The National Company Law Appellate Tribunal (NCLAT) received three appeals by aggrieved parties. However, by judgment and order in 2019 of NCLAT, all of them were dismissed.
Subsequently, the appellant petitioned the Supreme Court for relief. Due to the pending civil dispute and the respondent’s tiny holding of 0.03% in the company, the Apex Court ruled that the proceedings before the NCLT should not have been entertained. According to the Apex Court, the respondent should have waited for the outcome of the civil suit concerning his shares in question-based on the facts and circumstances of the case.
19. BAJULAL VARDHARJI GURJAR V. VEER GURJAR ALUMINUM INDUSTRIES (P) LIMITED (2020)
It has been held by the Supreme Court in this landmark case that the limitation period of three years will apply even to loans for which default occurred before the Insolvency and Bankruptcy Code (IBC), 2016.
The Corporate debtor defaulted in making payments on loans, so the accounts with Corporation Bank and Indian Overseas Bank were classified as Non-Performing Assets (NPAs) in July 2011 and August 2011 respectively.
An action was brought in the Debt Recovery Tribunal against the corporate debtor. JM Financial Assets Reconstruction Company (P.) Limited, which was Respondent No. 2, started the corporate insolvency resolution process under the IBC against the debtor company.
As a result, the National Company Law Tribunal (NCLT) accepted the application and appointed the interim resolution professional. An appeal was filed before the National Company Law Appellate Tribunal (NCLAT) after the appellant was aggrieved by the decision. Following upholding the NCLT’s ruling, the appellant filed a case with the Supreme Court.
In this case, the limitation period was the main issue. As a result, the appellant argued that the application was barred by limitation under Section 137 of the Limitation Act since it was filed after three years of the date of default.
According to the Respondent, despite the initial date of default mentioned therein being August 8, 2011, the application for relief under Section 7 of the Code is not barred by limitation.
20. MAHARASHTRA SEAMLESS LTD. V. PADMANABHAN VENKATESH (2020)
Supreme Court ruling made it clear that it was not necessary for bids made by resolution applicants to match liquidation values of assets in a landmark judgment concerning Insolvency and Bankruptcy Code (IBC), 2016 (“Code“). Assets can have a higher liquidation value than their bid under the corporate insolvency resolution process under the IBC.
A corporate insolvency resolution process was commenced by Indian Bank against United Seamless Tubulaar Private Limited. As a result of the process, Maharashtra Seamless Limited (MSL) was declared to be a successful resolution applicant.
National Company Law Tribunal (NCLT)-Himachal Pradesh Bench, the Adjudicating Authority, approved MSL’s resolution plan on January 21, 2019, that included an upfront payment of Rs 477 crores. NCLT stated that it had approved the resolution plan following Section 30(2) of the Code, which primarily deals with payments to creditors.
Indian Bank and Padmanabhan Venkatesh did not agree with the order, and hence, filed a complaint with the National Company Law Appellate Tribunal (NCLAT). The appellants requested that MSL increase the upfront payment to creditors to Rs 597.4 crore, which was the liquidation value. In its decision, the NCLAT upheld the appeal and requested that the MSL deposit an additional sum to keep the resolution plan in effect.
MSL appealed to the Supreme Court against the NCLAT’s decision. The Apex Court stated that when the CoC approves a resolution plan, a statutory mandate is placed on the Adjudicating Authority under Section 31(1) to verify that the resolution plan complies with Section 30(2) and Section 30(4).
In approving the resolution plan, the Adjudicating Authority did not violate the said provisions, the Supreme Court stated in allowing the appeal.
YLCC would like to thank Nikunj Arora for his valuable insights in this article.
