Why a Charge has to be registered with ROC under Section 125 of the Companies Act ,1956

INDUSTRIAL DEVELOPMENT BANK OF INDIA v. THAPAR AGRO MILLS LTD [DEL]

– No charge has been registeredUnder section 125 in favour of IDBI by the Creditor Thapar Agro Mills – IDBI obtaining decree from DRT.  Whether the decree creates a charge in the assets of the company – Held, No.Sections 125 and 460(6) – Companies Act, 1956 –

Facts:

IDBI had advanced loan of Rs. 200 lacs to the company in liquidation in August, 1992. As per loan agreement, the company in liquidation ( Thapar Agro Mills Ltd) was to allot Non Convertible Debentures (in short “NCDs”) after complying with the SEB I guidelines and other pre-requisites like appointment of trustees, creation of security etc.

However, despite various reminders, the company in liquidation neither issued NCDs to the appellant nor paid interest or other charges in accordance with the agreement. The company also failed to create security as required. Consequently, the appellant filed an application under Section 19 of the Recovery of  Debts Due to Banks and Financial Institutions Act, 1993 for recovery of Rs.2,96,22,963.00 along with pendente lite and future interest and costs of litigation, which was decreed in favour of IDBI.

However, the Official Liquidator vide order dated 06th May, 2005 rejected the appellant’s claim as secured creditor on the ground that the appellant’s charge was not registered under Section 125 of the Companies Act, 1956. In this case, neither a charge was created by the company in liquidation nor by operation of any law or by the decree of the DRT.

The order of the DRT, Chandigarh amply proves that no NCD was ever issued and hence no charge/security was created by the company. The DRT did not declare petitioner to be a secured creditor. But merely because appellant is in possession of a decree for recovery, does not mean that appellant becomes a secured creditor. In fact, every decree holder is entitled to seek sale of assets of the defendant, in the event the decree is not satisfied.

High Court is of the view that if appellant’s submissions were to be accepted, then every sundry/unsecured creditor after obtaining a decree from the Civil Court would have to be treated as a secured creditor - which is untenable in law. Consequently, as there is no charge in favour of the appellant, the appellant cannot be considered as a secured creditor.

This decision emphasizes the need to register the charge with ROC under section 125 to become a secured creditor in the case of insolvency or winding up of a company. It is not also not understandable why IDBI has not insisted to register the charge with ROC under section 125 of the Companies Act 1956.

Whether Stamp Duty is Payable when there is an increase in the Authorised Share Capital of a Company ?

Whether Stamp Duty is Payable when there is an increase in the Authorised Share Capital of a Company ?

The recent decision by High Court of New Delhi in S.E. Investments Ltd v. Union of India & Others ( Delhi) is thought provoking and mind blowing .

Increase in authorised capital – Whether stamp duty is payable on the increased quantum – Supreme Court held in negative .

The petitioner S.E Investments Ltd filed E-Form 5 for the increase of Authorised Share Capital from Rs 8.50 Crores to Rs 125 Crores. The petitioner had not paid any stamp duty for this claiming that that there exists no provision in the Delhi Stamp Act to pay stamp duty on increase in the authorised share capital . However , Delhi ROC insisted that if no stamp duty is paid by the petitioner ,then the amount of Rs 58,25,000/= deposited with ROC would be forfeited.

Opposing this , the petitioner filed a suit in the High  Court. It was held by the High Court , Delhi that the AOA and MOA are needed to be submitted at the juncture of registration of a company. At that time , stamp duty is payable in terms of either Article 10 or the Article 39 of the Schedule IA to the Act.

High Court further viewed that neither the Article 10 or Article 39 connotes to “ Increase” in the authroised share capital of the company as a basis of levy of stamp duty . It the absence of such specific provision , that permits the levy of the stamp duty on the increase in Authorised share capital , it would not be right on the part of respondent ( ROC , Delhi) to insist upon the petitioner to pay the stamp duty for the increase in authorised share capital.

High Court was of the view that the fact the petitioner earlier paid stamp duty when authorised capital was increased earlier by them cannot act as an estoppel against the Petitioner.  Further ,the announcement in the MCA site that the stamp duty of 0.05% is payable on the increase in the authorised share capital does not lend a legal acumen for such levy in the absence of any amendment to the Act to that effect.

The High Court cited the following Supreme Court verdict 

Commissioner of Wealth Tax v. Ellis Bridge Gymkhana (1998)  held that
 

“ the rule of construction of a charging section is that before taxing any person , it must be demonstrated that such person falls within the ambit of the charging section without any ambiguity used in the section. No one can be taxed by implication.  A Charging Section has to be construed strictly . If a person has not been brought within the ambit of the charging section by clear words , he cannot be taxed at all.

High Court of Delhi directed the respondent to accept the form 5 and to record the increase in share capital without insisting on the petitioner paying stamp duty thereon.  The High Court also held that petitioner is not entitled to claim the refund of stamp duty paid earlier.

CAN A PARENT COMPANY IN EUROPE CAN BE HELD LIABLE FOR LIABILITIES OF A SUBSIDIARY ?

CAN A PARENT COMPANY IN EUROPE CAN BE HELD LIABLE FOR LIABILITIES OF A SUBSIDIARY ?

A limited liability company's shareholders are nevertheless not automatically held liable for the liabilities of the subsidiary. For instance , in Kodak Ltd v Clark ,it was held that even-though parent is having about 98% stake in its subsidiary , it does not give rise to give an agency type of relationship under English law.

A particular risk arises when a parent company is being sued for the actions of the board members of the its subsidiary. If parent company has appointed majority of the directors of subsidiary to look after the interest of parent company , and if a third party sustains loss due to actions of board of subsidiary , then in such scenarios , a parent company may be sued to recover the losses sustained with their subsidiary as described in Grantham R , " Liability of Parent Companies for the Actions of the Directors of the Subsidiaries , Company Lawyer , 18 (5) (1997) p.138.

Thus , if the majority of subsidiary company's board consists of the parent company's nominee directors and if loss is sustained by a third party , then in such scenario , a third party can sue the parent company for the actions of a subsidiary company.

Further ,Italy , Germany and France are now the members of the EU and they are bound by the European Company law now.

In Akzo Nobel v European Commission ( C-97 /08 ) , it was held by ECJ that there is a rebuttable liability resumption of parent companies for their subsidiary's cartel offenses in the case of 100 % shareholding.

Further , piercing of corporate veil, under EU law , ECJ can consider subsidiary companies as a single unit for competition objectives. If the parent is a monopoly which set up ten different subsidiaries to deem it to demonstrate as if there is a competition , then ECJ could consider all companies to be a single economic unit.

Hence , ECJ would never hesitate to pierce the corporate veil when a third party sustains a loss in a subsidiary due to actions of parent company in EU.

As now Italy , France , Germany is the member nations of the EU and falls under EU Single Market , any appeal( even court in Italy or Germany may held that parent company is not liable) on query relating to Parent company liable to subsidiary debts goes to ECJ , then ECJ will give such views given by it earlier in Akzo Nobel v European Commission ( C-97 /08 ) and in Wibru / Swissair and such decisions will be binding on the member nations of EU like Italy or France.

For instance , there has been a lot of controversies in UK as regards to Human rights violation under UK law as some provisions were inconsistent with the EU Human Rights Law. There were conflicts of opinion by UK courts and ECJ.

Later , UK has completed installed the ECJ Human Rights Regulations in its Act ( now UK Human Rights Act ) so as to avoid conflict with ECJ Human Rights Act.

Whether Subsidiary company can become member in its Holding Company ?

As per section 42 , the subsidiary company is not allowed to hold shares in its holding company.
A Subsidiary Company cannot become member of a holding Company except two cases mentioned in the Section 42 of the Companies. Hence, a subsidiary  cannot invest in the shares of holding company.

However , in Himachal Telematics Ltd & Himachal Futristic Communication Ltd , it was held in the case of merger of two group companies ,the application of section 42 of the Companies Act and section 77 of the Companies Act ( buy-back of shares) will not be applicable if an order is passed by the competent court under section 391 to 394 of the Companies Act . In such cases , a court order can override any statutory violation  i.e. under section 42.

Further , the section 42 will not be applicable if the shares are held by the subsidiary's legal representative of deceased member or by any trustee .
   
One another way to hold shares is that a director of a subsidiary company can hold the shares in the Holding company by declaring a beneficial interest under section 187 C.

One another way , to allot shares to the proposed subsidiary before there exists any holding and subsidiary relations.

SAT UPHELD ORAL UNDERSTANDING TO ISSUE RIGHT SHARES AGAINST UNSECURED LOANS BY PROMOTERS

The SAT (Securities Appellate Tribunal) upheld  that unsecured loans advanced by a promoter group could be adjusted against allotment of shares to them in the rights issue. 

The SAT tribunal thus annulled the restriction placed on SRM Energy Ltd by SEBI (Securities and Exchange Board of India) .The company wanted to mobilize funds for a power project and therefore came out with a rights issue. According to the company, there was an oral understanding between it and the promoter, Spice Energy (SEPL), at the time of providing funds that if and when it came out with a rights issue, the unsecured loans would be adjusted against the share price. “Such payment by adjustment in the books of account is a well recognized mode by all accounting standards and we find no fault with this mode being adopted,” the judgment said. 

“All that SEPL has done is that it received shares in the rights issue and made payment by adjustment of the unsecured loans which were payable on demand. In the strict sense of the term, it is not a conversion of a loan into equity.” 

The tribunal therefore set aside SEBI’s order demanding SRM not to adjust the unsecured loans advanced by the promoter towards the price of the shares allotted in the rights issue.