Law Relating to Debt Recovery - I

Law relating to debt recovery has gained more significance in the recent past.  When lenders were not able to recover the dues from its borrowers, they found lot of difficulties in take recourse from complicated litigations piled up before the Civil Court.

In order to ensure speedy recovery of debts due to these banks and financial institutions, the specific enactment called the Recovery of debts Due to banks and financial institutions Act, 1993 (Debt Recovery Act) was passed.

ESTABLISHMENT OF DRT AND DRAT:

The act provides for establishment of special Tribunals called “Debt Recovery Tribunals” (DRT) and the “Debt Recovery Appellate Tribunals”(DRAT) exclusively for the speedy disposal of complaints under this enactment.

Debt Recovery Tribunals are established all over the country based on the volume of cases registered in a particular state. For instance a state may have more than one DRTs and on the other hand two states may have a same DRT. In India there are totally 33 Debt Recovery Tribunals and 6 Debt Recovery Appellate Tribunals.

COMPOSITION OF DRTS AND DRATS:

Every Debt Recovery Tribunal shall have a presiding officer who is or is qualified to be a Dirstrict Judge. The Presiding officer shall have such other officers as he may require for his assistance. Also the Presiding officer shall appoint Recovery officers who will discharge their duties assigned to them under this Act.

Similarly every Debt Recovery Appellate Tribunal Appellate shall have a Chairperson who is or is   qualified to be a Judge of High court. The Chairperson shall have such other officers as he may require for his assistance.

JURISDICTION AND LIMITATION:

Section 17 of the Act confers Jurisdiction on the DRTs and DRATs to entertain cases filed by the banks and the financial institutions. Further Section 18 of the Act Bars Jurisdiction of other Courts in hearing matters falling under Section 17 (except the Supreme Court, and a High Court exercising jurisdiction under Articles 226 and 227 of the Constitution)  

According to section 24, the provisions of the Limitation Act, 1963, (36 of l963) shall, as far as may be, apply to an application made to a Tribunal.

PROCEDURE:

Section 19 of the Act provides for the procedure pertaining to the Tribunals. Section 19 of the Act provides the following stages with respect to the proceedings before the Tribunal:

a)      Filing of Application before DRT - Bank / Financial Institution has to make an Application in prescribed form along with prescribed fee (based on the claim amount) to the Tribunal having competent Jurisdiction.

b)      Two or more banks against one Borrower : When a Bank / Financial Institution files an Application against a same person against whom an Application has already been filed by another bank, then the later bank may join the Applicant bank at any stage of the proceedings before the final order is passed.

c)      Issue of Summons : Summons will be issued upon filing of the Application requiring the Defendants to show cause within 30 days , as to why such prayers shall not be granted against the Defendants

d)     Filing of Written Statement : The Defendants inturn will have to file a Written Statement within the time prescribed by the Tribunal

e)      Set off : When the Defendant claims to set off any sum legally recoverable by him from the Applicant, against the Applicant’s claim, then the Defendant may file a Written statement containing particulars of set off. Such particulars of Set off cannot be filed after Written Statement. Such Written statement shall have the same effect as a plaint in a cross suit so as to enable the Tribunal to pass Orders in respect of both the claims.

f)       Counter Claim: The Defendant in addition to his right of pleading set off, may set Counter Claim against the Claim of the Applicant, any right or a claim of a cause of action accruing either before or after filing of the Application but not after filing of the Defence by the Defendant. Such Written statement shall have the same effect as a plaint in a cross suit so as to enable the Tribunal to pass Orders in respect of both the claims. The Applicant may file a Written statement to the Counter Claim within the time stipulated by the Tribunal

g)      Attachment of the property : At any stage of the proceeding, the Tribunal may Order for attachment of the whole or such portion of the properties claimed by the applicant as the properties secured in his favor or otherwise owned by the borrower to the extent that satisfies the recovery of debt, if the Tribunal is satisfied that the Defendant with intent to obstruct or delay or frustrate the execution of any order for the recovery of debt that may be passed against him, is about to dispose of, remove the property from the Jurisdiction of the tribunal or if he is likely to cause any damage or mischief to the property or affect its value by misuse or creating third party interest. The Defendant will be given an opurtunity of being heard before passing any such Order.

h)      Orders passed by the Tribunal :

a) Appointment of a receiver

(b) remove any person from the possession or custody of the property;

(c) commit the same to the possession, custody or management of the receiver;

(d) confer upon the receiver all such powers, as to bringing and defending suits in the courts or filing and defending applications before the Tribunal and for the realization, management, protection, preservation and improvement of the property, the collection of the rents and profits thereof, the application and disposal of such rents and profits, and the execution of documents as the owner himself has, or such of those powers as the Tribunal thinks fit; and

(e) appoint a Commissioner for preparation of an inventory of the properties of the defendant or for the sale thereof.

APPEAL:

Any person aggrieved by the Order of the Tribunal may prefer an appeal to an Appellate Tribunal having jurisdiction in the matter, in such form and manner as may be prescribed. Such Appeal has to be filed within forty-five days from the date on which a copy of the order made, or deemed to have been made, by the Tribunal is received by him

The Tribunal may entertain an appeal after the expiry of the said period of forty five days if it is satisfied that there was sufficient cause for not filing it, within that period. No appeal shall lie to the Appellate Tribunal from an order made by a Tribunal with the consent of the parties.

The Appellate Tribunal may, after hearing the parties, pass such orders confirming, modifying or setting aside the order appealed against.

It is pertinent to note that, the Act prescribes time limit of 6 months for the Appellate Tribunal and it shall try and dispose of the Appeal within such time.

Section 21 of the Act mandates that an Appeal under Section 20 shall not be entertained by the Appellate Tribunal unless such person has deposited with the Appellate Tribunal seventy-five per cent of the amount of debt so due from him as determined by the Tribunal under section 19.

Provided that the Appellate Tribunal may, for reasons to be recorded in writing, waive or reduce the amount to be deposited under this section.

MODE OF RECOVERY OF DEBTS:

The Recovery officer shall proceed to recover the amount of debt specified in the certificate of recovery by one or more of the following modes, namely,- 

(a) Attachment and sale of the movable or immovable property of the defendant; 

(b) Arrest of the defendant and his detention in prison; 

(c) Appointing a receiver for the management of the movable or immovable properties of the defendant.

Tax implications on Amalgamations in India - An overview

Corporate Restructuring has gained its significance in the recent Indian Corporate scenario. Amalgamations, mergers, demergers, reverse mergers etc take place in various levels ranging from small companies to corporate giants in India. These corporate actions take place both horizontally (between companies having similar line of businesses) as well as vertically (between companies having different areas of businesses).

At present sections 391 to 396 of the Companies Act 1956, deals with law relating to Amalgamations / demergers / Arrangements.

Companies considering one of these corporate actions take into consideration various “pre and post scheme” implications both positive and negative before entering into such a huge initiative. As in many cases, one of the Companies (The transferee company in most cases) loses its existence post the arrangement, dozens of factors were considered before entering into a corporate action.

One of the major concerns of the companies involved is the Tax implications involved in the Corporate Action.

Income Tax Act 1961 and Amalgamation – An overview:

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1.          Section 72A – Set off / Carry forward of  losses / depreciation:

·         Applicability - Industrial undertaking,  or a ship or a hotel with other Company / banking Company as defined under the Banking Regulations Act1949 with a Bank / public sector company or companies engaged in the business of operation of aircraft with similar public sector Company

·         Provision for set off / carry forward - The accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of the Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.

·         Conditions prescribed for Amalgamating Company-

a)      Must have been engaged in the business in which such losses / depreciation occurred for atleast 3 years.

b)      Must hold 3/4^th of book value of its fixed assets on the date of Amalgamation which was held 2 years prior to the Amalgamation

·         Conditions prescribed for Amalgamated Company-

a)      Must hold at least 3/4^th of the fixed assets of the Amalgamating Company for minimum 5 years after the date Amalgmation.

b)      Must continue the business of the Amalgamating Company for minimum 5 years.

c)      Must fulfill such other conditions as may be notified to ensure the revival of business of the Amalgamating Company or to ensure that the amalgamation is genuine.

·         Failure to fulfill any of the conditions prescribed-  The set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with.

·         Meaning of “Accumulated losses” - under the head “Profits and gains of business or profession” (not being a loss sustained in a speculation business), which the amalgamating Company would have been entitled to carry forward and set off under the provisions of section 72, if the amalgamation had not taken place.

·         Meaning of “Industrial undertaking”- Any Industry engaged in any of the following business.

·         Meaning of “unabsorbed depreciation”- Such amount allowed to the amalgamating company if the amalgamation had not taken place.

           2.  Section 47 (vi) & (vii) – Capital Gains Tax on Transfer:

·         Section 2 (47) defines transfer as a sale or relinquishment of the asset / extinguishment of right / compulsory acquisition / act involving transfer of possession of immovable propery.

·         Section 47 (vi) provides that, any transfer, in a scheme of amalgamation , of a capital asset by the amalgamating company to the amalgamated company is not a transfer under Section 2 (47) if the amalgamated company is an Indian company

·         Section 47 (via) provides that any transfer, in a scheme of amalgamation  of a capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, is not a transfer under Section 2 (7) if

a)      At least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and

b)      such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated.

·         Section 47 (vii) provides that any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company is not a transfer under Section 2 (47), if

a)      the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and

b)      the amalgamated company is an Indian company;

       3.    Section 35(5) – Expenditure on Scientific research:

·         In a scheme of amalgamation, the amalgamating company sells or otherwise transfers to the amalgamated company (being an Indian company) any asset representing expenditure of a capital nature on scientific research, then the provisions of this section is applicable

·          2 (ii) and 2 (iii) of this Section is not applicable.

1    4.    Section 35A(6) – Expenditure on Scientific research:

·         In a scheme of amalgamation, the amalgamating company sells or otherwise transfers the rights to the amalgamated company (being an Indian company), the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not so sold or otherwise transferred the rights

·         sub- sections (3) and (4) shall not apply in the case of the amalgamating company

1   5.  Section 35AB – Expenditure on Know how:

•      In case of lump sum consideration paid in any previous year for acquiring any know- how for use for the purposes of business, one- sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years

2   6.  Section 35ABB – Expenditure on obtaining license to operate telecommunication services:

•          In case of such expenditure, a deduction equal to the appropriate fraction of the amount of such expenditure is allowed.
•          The provisions of sub-sections (2), (3) and (4) shall not apply in the case of the amalgamating company.
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    7.   Section 35ABB – Amortisation of expenditure in case of amalgamation :

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•    If an Indian Company incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation of an undertaking, then a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place is allowed.
•     No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act.

Enforcement of Foreign Decree in India

                                                                                                

Today, in the era of globalization, there is a huge increase in transnational operations. As there is an increase cross border transactions, there is also increase in cross border dispute resolution. In some cases law governs the  territorial jurisdiction and in some cases such jurisdiction is restricted by agreement between parties. It is pertinent to note that, a decree obtained from a court needs to go through execution procedure in the Domestic Court for its enforcement. Every country has its own procedure for enforcement of a foriegn Decree.

In India, the Indian Code of Civil Procedure, 1908  governs the execution of judgments by foreign courts in India.

Definitions of "Foreign Court" and "Foreign Judgment"under CPC

Section 2(5) of CPC defines the term 'foreign court' to mean a Court outside India and not established or continued by the authority of the Government of India

Section 2(6) of CPC defines the term "foreign judgment" to mean any judgment of a foreign Court.

Section 13 of CPC – Conclusiveness of a foreign Decree:

Section 13 of the Code providing that a foreign judgment shall be conclusive between the parties  as to any matter thereby directly adjudicated upon.

Therefore once a Foreign Judgment is passed, according to section 13 of CPC, Res Judicata operates between the parties on account of the said judgment.

 When a foreign Decree is not conclusive?

According to Section 13 of CPC, a Foreign Judgment is not conclusive, if it falls under any of the category mentioned below:

a)      where it has not been pronounced by a Court of competent jurisdiction;

b)      where it has not been given on the merits of the case;

c)      where it appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognise the law of India in cases in which such law is applicable;

d)       where the proceedings in which the judgment was obtained are opposed to natural justice;

e)      where it has been obtained by fraud;

f)       Where it sustains a claim founded on a breach of any law in force in India.

Therefore a foreign Judgment is not conclusive between the parties in terms of Section 13, if the same falls under any of the category mentioned above.

Section -14 – Presumption as to Foreign Judgments:

Section 14 of CPC provides that, upon the production of any document purporting to be a certified copy of a Foreign Judgment, the Court shall presume that the same was pronounced by a Court of competent jurisdiction, unless the contrary appears on the record or proved before the Court by a separate proceeding.

It is pertinent to note that such presumption shall arise only on production of a certified copy. Hence mere production of a photocopy is not sufficient.

Enforcement of a foreign Decree in India:

       I.            Decree from a Reciprocating Country – Section 44A

Section 44A deals with the procedure relating to execution of a Foreign Decree passed by the Courts in “Reciprocating Territory”. The procedure laid down by Section 44A is as follows:

                                                              i         Certified copy of decree of the superior Court of any reciprocating territory has to be filed in a District Court. Once the same is filed, the decree may be executed in India as if it had been passed by the District Court.

                                                                 ii.            Along with the certified copy of the decree, a certificate from such superior Court stating the extent, if any, to which the decree has been satisfied or adjusted shall be filed. Such certificate shall, for the purposes of proceedings under this section, be conclusive proof of the extent of such satisfaction or adjustment.

                                                       iii.             Once the Certified Copy is filed, the provisions of section 47 of the CPC shall apply to the proceedings of a District Court executing a decree under section 44A.

                                              iv.      The District Court shall refuse execution of any such decree, if it is shown to the satisfaction of the Court that the decree falls within any of the exceptions specified in Clauses (a) to (f) of Section 13.

Explanation to Section 44A defines the term "Reciprocating territory" as meaning any country or territory outside India which the Central Government may, by notification in the Official Gazette, declare to be a reciprocating territory for the purposes of this section.

Explanation to Section 44A defines the term "Decree" with reference to a superior Court means any decree or judgment of such Court under which a sum of money is payable, not being a sum payable in respect of taxes or other charges of a like nature or in respect to a fine or other penalty, but shall in no case include an arbitration award, even if such an award is enforceable as a decree or judgment.

    II.            Decree from any other country

If a foreign Decree is passed by a Foreign Court in any country other than a reciprocating country, the enforcement of such foreign decree would have to be made by filing a suit in this regard before the Indian court of Competent jurisdiction in said matter.

Snapshot of MCA Circulars - Jan to May 2014

The Ministry of Corporate Affairs has issued several Circulars on Companies Act 2013 and Rules thereof. The following is the consolidated list of Circulars from January to May 2014 issued by the MCA. The following is just a summary of the subject matter of the Circular.  For those Circulars which are not required to be explained as on date, the same lines contained in the MCA website are kept as it is. The rest I have managed to put the subject in crisp.

The link of the Circular number lead to the respective page in MCA website for more information on the same. 

S.No	Circular No.	Date	Essence of the Circular
1	General Circular No. 1/2014	15/01/2014	Regional directors should invite for the comments of IT Department before producing a Report on a Scheme of Amalgamation / Arrangement. RDs should take into account the comments/ inputs provided by the Income Tax Department and other sectoral Regulators if any while filing their  Report u/s 394A of the Companies Act, 1956.
2	General Circular No. 2/2014	11/02/2014	No Company or LLP shall have the word “National” in it unless the same is a Govt. Company or unless any Govt Company holds a stake in it. No Company shall use the word “bank” in its name without obtaining NOC from RBI No Company shall use the word “Stock exchange ” “Exchange” in its name without obtaining NOC from SEBI
3	General Circular No. 3/2014	14/02/2014	Clarification on Section 372 A of the Companies Act 1956 –  Provisions of 372A shall be applicable to guarantee given by the holding company for the loans of the subsidiary company, till the date of effect of Section 186 of the Companies Act 2013
4	General Circular No. 4/2014	25/03/2014	Resolutions passed under section 293 of the Companies Act, 1956 prior to12.09.2013 with reference to borrowings (subject to the limits prescribed) and / or creation of security on assets of the company will be regarded as sufficient compliance section 180 of the Companies Act, 2013 for aperiod of one year from the date of notification of section 180 of the Act.
5	General Circular No. 05/2014	28/03/2014	Court Fee required to be paid at the time of obtaining Certified Copies of documents filed with ROCs. Court Fee shall be added to the MCA fee and the same shall be filed online. Corresponding Court Fee stamp is  affixed on the document on its dispatch.
6	General Circular No. 06/2014	29/03/2014	Roll out plan of various forms under the Companies Act, 2013 and continuance of forms under the provisions of Companies Act, 1956
7	Table of Fees	01/04/2014	Table of Fees
8	General Circular No. 07/2014	01/04/2014	This Circular gives an elaborate table of sections of 2013 Act that are notified and the corresponding provisions in 1956 Act.
9	General Circular No. 08/2014	04/04/2014	Provisions of Companies Act 2013 relating to Financial Statements, Auditors Report and Directors Report shall Apply from Financial year commencing from 31.03.2014
10	General Circular No. 09/2014	25/04/2014	Availability of E-forms/non-e-forms under the companies act 2013
11	General Circular No. 10/2014	07/05/2014	This Circular lays down the procedure to be followed by the Regional Directors , E Governance Cell etc in dealing with Certification of documents by professionals containing false, misleading information or omission of material facts.
12	General Circular No. 11/2014	07/05/2014	One time opportunity for extension of period of Reservation of Name.
13	General Circular No. 12/2014	22/05/2014	Mandatory submission of PAN details by Foreign nationals are applicable only for those foreign nationals, who are required to mandatorily posess PAN as per Income Tax Act 1961. In case of other foreign nationals, who need not posess PAN as stated above, it will be sufficient to furnish their Passport number along with an undertaking in the format prescribed in this Circular
14	General Circular No. 13/2014	23/05/2014	Extension of validity period for names reserved as on 31st March, 2014