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Corporate Legal Battle: TATA vs MISTRY ( PART 1)

Corporate Legal Battle: TATA vs MISTRY ( PART 1)

BRIEF BACKGROUND OF THE CASE

Tata conglomerate is India’s largest business group running businesses in seven sectors in more than eighty countries. Tata Sons is the holding company of the Tata Group. Tata Sons is an unlisted company. Around 66 % of its shares are owned by the various Tata trusts, most importantly Sir Dorabji Tata Trust (27.97%) and Sir Ratan Tata Trust (23.56%). 

The next major chunk of 18% is controlled by Shapoorji Pallonji Group, whose heir apparent is Cyrus Mistry. (“Mistry”). Cyrus Pallonji Mistry  is an Irish businessman of Indian origin . He was the chairman of Tata Group, an Indian business conglomerate, from 2012 to 2016.[He was the sixth chairman of the group, and only the second (after Nowroji Saklatwala) to not bear the surname Tata. In mid-2012, Cyrus Mistrywas chosen by a selection panel to head the Tata Group and took charge in December the same year. 

In 2016, the Board removed Cyrus Mistry from and the Board constituted a Selection Committee comprising Mr. Ratan N. Tata, Mr. Venu Srinivasan, Mr. Amit Chandra, Mr. Ronen Sen and Lord Kumar Bhattacharyya, as per the provisions in the Articles of Association of Tata Sons, to choose a new Chairman within four month.

 

 

BREAKING] Supreme Court to pronounce Judgment tomorrow in Tata Sons v. Cyrus Mistry dispute

STAKES OF TATA SONS 

Cyrus Mistry, son of pallonji Mistry who is the owner of the shapoorji pallonji group and one of the biggest stakeholder in the Tata Group .

He was appointed to the top position in 2012

ShareholderNo. of SharesShareholding percentage (%)
Shapoorji Pallonji Mistry1080.26723
Sterling investment Corp

Shapoorji PAllonji Group

371209.18489
Cyrus Investment

( Shapoorji Pallonji Group)

371209.18489
Ratan Tata33680.83337
Sir Dorabji Tata Trust11306727.97705
Sir Ratan Tata Trust9521123.558

COMPLAINT BY CYRUS MISTRY BEFORE HON’BLE NATIONAL COMPANY LAW TRIBUNAL 

The acts of oppression and mismanagement complaint against Tata Sons revolved around 

  1. alleged abuse of the Articles of Association, particularly Articles 121, 121A, 86, 104B and 118, to enable the trusts and its nominee Directors to exercise control over the Board of Directors; 
  2. alleged illegal removal of Cyrus Mistry as Executive Chairman without any notice and an all out attempt to remove him from the Directorship of all the operating companies of the Tata group; 
  3. alleged dubious transactions in relation to Tata Teleservices Limited, alongwith one Mr. C. Sivasankaran; 
  4.  Ratan Tata allegedly treating Tata Sons as a proprietorship concern with all others acting as puppets, resulting in the Board of Directors failing the test of fairness and probity 
  5. acquisition of Corus Group PLC of UK at an inflated price and then jeopardising the talks for its merger with ThyssenKrupp 
  6. Nano car project becoming a disaster with losses accumulating year after year and the conflict of interest that Ratan Tata had in the supply of Nano gliders to a company where he had stakes; 
  7. providing corporate guarantee to IL & FS Trust Company for the loan sanctioned by Standard Chartered Bank to Sterling 
  8. making Kalimati Investments Ltd, a subsidiary of Tata Steel to provide an inter corporate bridge loan to Sterling; 
  9. the dealings with NTT DoCoMo and Sterling resulting in an arbitration award for a staggering amount; 
  10. leaking information to Siva of Sterling that resulted in Siva issuing legal notices to Tata Teleservices and Tata Sons
  11. Ratan Tata making a personal gain for himself through the sale of a flat owned by a Tata group company to Mehli Mistry; 
  12. companies controlled by Mehli Mistry receiving favours due to the personal relationship that Ratan Tata had with him; and 
  13. fraudulent transactions in the deal with Air Asia which led to financing of terrorism.

 

REPLY OF RATAN TATA TO THE ALLEGATIONS

Tata Sons filed a reply to the company petition contending interalia: 

  1. that Cyrus Mistry, who was removed from the post of Executive Chairman, after having lost the confidence of 7 out of 9 Directors, has sought to use the complainant companies to besmirch the reputation of Tata Group; 
  2.  that even the decisions to which Cyrus Mistry was a party have been questioned in the petition;
  3. that Tata Group founded in 1868 is a global enterprise,headquartered in India, comprising over a hundred operating companies, having presence in more than 100 countries across six continents, collectively employing over 6,60,000 people; 
  4. that Articles 104Band 121 were introduced through a new version of Articles of Association at the Annual General Meeting of Tata Sons held on 13.09.2000 and Article 121 was subsequently amended byResolution dated 09.04.2014;
  5. that though the mail was marked confidential, it was simultaneously leaked to the press;
  6. that Cyrus Mistry also breached his fiduciary and contractual duties by disclosing confidential information and documents pertaining toTata Sons to third parties;
  7. that the complainant companies have cherry picked certain business decisions to launch a vitriolic attack on the Tata Trusts; 
  8. that while the complainant companies have talked about bad business deals, such as Corus acquisition and Nano Project, they have deliberately omitted to talk about Tetley acquisition by Tata Global Beverages Limited, the immensely successful Jaguar Land Rover acquisition by Tata Motors and the phenomenal success of Tata Consultancy Services;
  9. that Corus acquisition, the Nano Project, contracts awarded to the business concerns of Mr. Mehli Mistry and the investment by Mr.C. Sivasankaran have surfaced only after the replacement of Mr. Cyrus Mistry as the Executive Chairman; 
  10. that Cyrus Mistry has been the Director of Tata Sons since the year 2006 and was also the Executive Chairman from December, 2012 to October, 2016 and was fully aware of how the decisions relating to these projects were taken when they were taken;
  11. that courts cannot be called upon to sit in judgment over the commercial decisions of the Board of Directors of companies; and
  12. that even commercial misjudgments of the Board of Directors cannot be branded as instances of oppression and mismanagement.

RELIEF SOUGHT BY CYRUS MISTRY FROM HON’BLE NATIONAL COMPANY LAW TRIBUNAL 

  1. The necessity of an affirmative vote of the majority of directors nominated by the Trusts, which are majority shareholders, be deleted; 
  2. The Petitioners be entitled to proportionate representation on the Board of Directors of Respondent No .1; 
  3. The Petitioners be entitled to representation on all committees formed by the Board of Directors of Respondent No.1; and 
  4. The Articles of Association be amended accordingly

JUDGEMENT OF HON’BLE NATIONAL COMPANY LAW TRIBUNAL  (2016)

  1.  Removal of Mr. Cyrus Mistry as Executive Chairman on 24.10.2016 is because the Board of Directors and Majority of Shareholders, ie., Tata Trusts lost confidence in Mr. Cyrus as Chairman, not because by contemplating that Mr. Cyrus would cause discomfort to Mr. Tata, Mr. Soonawala and other answering Respondents over purported legacy issues. Board of Directors are competent to remove the Executive Chairman; no selection committee recommendation Is required before removing him as Executive Chairman. 
  2. Removal of Mr. Cyrus Mistry from the position of Director is because he admittedly sent the company information to Income Tax Authorities; leaked the company information to Media and openly come out against the Board and the Trusts, which hardly augurs well for smooth functioning of the company, and we have not found any merit to believe that his removal as director falls within the ambit of section 241 of Companies Act 2013. 
  3. We have not found any merit to hold that proportional representation on Board proportionate to the shareholding of the petitioners is possible so long as Articles do not have such mandate as envisaged under section 163 of Companies Act, 2013. 
  4. We have not found any merit in purported legacy issues, such as Siva issue, TISL issue, Nano car issue, Corus issue, Mr. Mehli issue and Air Asia issue to state that those issues fall within the ambit of section 241 and 242 of Companies Act 2013. 
  5. We also have not found any merit to say that the company filing application under section 14 of Companies Act 2013 asking this Tribunal to make it from Public to Private falls for consideration under the jurisdiction of section 241 & 242 of Companies Act 2013. 
  6. We have also found no merit in saying that Mr. Tata & Mr. Soonawala giving advice and suggestions amounted to interference in administering the affairs of the company, so that to consider their conduct as prejudicial to the interest of the company under section 241 of Companies Act 2013. 
  7. We have found no merit in the argument that Mr. Tata and Mr. Soonawala acted as shadow directors superimposing their wish upon the company so that action would be taken under section 241 & 242 of Companies Act 2013. 
  8. We have not found any merit in the argument that Articles 75, 1048, 118, 121 of the Articles of Association per se oppressive against the petitioners. 
  9. We have not found any merit in the argument that Majority Rule has taken a back seat by introduction of corporate governance in Companies Act, 2013, it is like corporate democracy is genesis, and corporate governance is specific. They are never in conflict with each other; the management is rather more accountable to the shareholders under the present regime. Corporate governance is collective responsibility, not based on assumed free-hand rule which is alien to the concept of collective responsibility endowed upon the Board.
  10. We have observed that prejudice remedy has been included in 2013 Act in addition to oppressive remedy already there and also included application of “just and equitable” ground as precondition to pass any relief in mismanagement issues, which was not the case under old Act.

Author: Vinay Sachdev

Editor: Adv. Aditya Bhatt & Adv. Chandni Joshi

Corporate Legal Battle: TATA vs MISTRY (PART 2)

Corporate Legal Battle: TATA vs MISTRY (PART 2)

 

Check Part 1 of Tata vs Mistry Corporate Legal Battle, here

After the judgement of Hon’ble National Company Law Tribunal, Interlocutory Applications have been preferred by the Registrar of Companies, Mumbai for seeking amendment in Judgment.

[BREAKING] Supreme Court to pronounce Judgment tomorrow in Tata Sons v. Cyrus Mistry dispute

 

JUDGEMENT OF HON’BLE NATIONAL COMPANY LAW APPELLATE TRIBUNAL  (2018)

Hon’ble National Company Law Appellate Tribunal  held that the removal of Mistry from his post was neither discussed nor expected as the records show the company under his leadership flourished and hence a case of lack of performance cannot be built. Hence, he was restored as Director of various companies and even the Executive Chairman of Tata Sons but after four weeks of the judgment.

While Hon’ble National Company Law Appellate Tribunal , accepting the consequences of this article in light of the facts, ordered Tata sons to refrain from invoking against Shapoorji Pallonji Group. 7 Hon’ble National Company Law Appellate Tribunal , on the other hand, identified a case of prejudice and oppression by the board against the minority shareholders and the company. It held that the conversion from public to private was hurriedly done amidst a pending litigation and it was illegal and unsustainable as it did not even follow proper procedures under Section 14 clause 8. The verdict asked the Registrar of Companies to make the correction and declared Tata to remain public. . Although Hon’ble National Company Law Appellate Tribunal  accepted this claim, they refused to accept that legitimate expectations, which are a result of mutual trust and confidence, arising from such a partnership can be a factor of oppression. Through a plethora of judgments, the Hon’ble Supreme Courthas established certain principles in order to determine a company as a quasi-partnership but Hon’ble National Company Law Appellate Tribunal  ignored these principles and used its own understanding to back such reasoning. 

IT also held that mismanagement can be easily visible through the losses incurred by Tata Sons and other firms through prejudicial decisions taken by the respective Board of Directors which were essentially filled with a majority of Tata Trust’s representatives. Hon’ble National Company Law Appellate Tribunal  set aside the judgment and ruled in favour of Mistry and Shapoorji Pallonji Group. These are very contrasting judgments with respect to every aspect of law which the case dealt with. 

The same now has been appealed to the Hon’ble Supreme Court by Tata Sons. Post the stay of the Hon’ble National Company Law Appellate Tribunal  order by the Supreme Court, Mistry appealed against this same order seeking judicial protection and Board of Directors representation for his family i.e. the minority shareholders. This new appeal will be heard along with the appeal of Tata Sons before a Hon’ble Supreme Court bench comprising Chief Justice S.A. Bobde, Justice Surya Kant and Justice B.R. Gavai.

RATAN TATA APPEAL IN SUPREME COURT

Tata Sons (Private) Limited has come up with two appeals in Civil Appeal Nos.1314 of 2020, challenging a final order dated 18/12/2019 passed by the National Company Law Appellate Tribunal, which is,

  1. Holding as illegal, the proceedings of the sixth meeting of the Board of Directors of TATA Sons Limited held on 24.10.2016 in so far as it relates to the removal of Shri Cyrus Mistry.  
  2.  Restoring the position of Cyrus Mistry as the Executive Chairman of Tata Sons Limited and consequently as a Director of the Tata Companies for the rest of the tenure; 
  3.  Declaring as illegal the appointment of someone else in the place of Cyrus Mistry as Executive Chairman; 
  4. Restraining Shri Ratan N. Tata and the nominees of Tata Trust from taking any decision in advance; 
  5. Restraining the Company, its Board of Directors and Shareholders from exercising the power under Article 75 of the Articles of Association against the minority members except in exceptional circumstances and in the interest of the Company; and 
  6. Declaring it illegal, the decision of the Registrar of Companies for changing the status of Tata Sons Limited from being a public company into a private company.

QUESTION OF THE LAW ARISES IN THE CASE

  1. Whether the formation of opinion by the Appellate Tribunal that the company’s affairs have been or are being conducted in a manner prejudicial and oppressive to some members and that the facts otherwise justify the winding up of the company on just and equitable ground, is in tune with the well settled principles and parameters, especially in the light of the fact that the findings of Hon’ble National Company Law Tribunal  on facts were not individually and specifically overturned by the Appellate Tribunal ?
  2. Whether the reliefs granted and the directions issued by the Appellate Tribunal, including the reinstatement of Cyrus Mistry into the Board of Tata Sons and other Tata companies, are in consonance with the pleadings made, the reliefs sought and the powers available under Subsection (2) of Section 242 ?
  3.  Whether the Appellate Tribunal could have, in law, muted the power of the Company under Article 75 of the Articles of Association, to demand any member to transfer his ordinary shares, by simply injuncting the company from exercising such a right without setting aside the Article ?
  4. Whether the characterization by the Tribunal, of the affirmative voting rights available under Article 121 to the Directors nominated by the Trusts in terms of Article 104B, as oppressive and prejudicial, is justified especially after the challenge to these Articles have been given up expressly and whether the Tribunal could have granted a direction to Ratan Tata and the Nominee Directors virtually nullifying the effect of these Articles ?
  5. Whether the reconversion of Tata Sons from a public company into a private company, required the necessary approval under section 14 of the Companies Act, 2013 or at least an action under section 43A(4) of the Companies Act, 1956 during the period from 2000 (when Act 53 of 2000 came into force) to 2013 (when the 2013 Act was enacted) as held by Hon’ble National Company Law Appellate Tribunal  ?

ISSUES BEFORE HONOURABLE Hon’ble Supreme Court(2020)

  1. What constitutes oppression and mismanagement at a company? 
  2. How far do a tribunal’s powers go when deciding such a case? 
  3. Should nominee directors of a majority shareholder have substantial affirmative powers? 
  4. The legality of Tata Sons’ conversion from public company to private company. 
  5. The fate of Mistry’s directorship on the Tata Sons board. And, what this 5-year long battle says about India’s foremost conglomerate, the Tata Group – with over $100 billion in revenue.

HON’BLE APEX COURT JUDGEMENT ON CYRUS-MISTRY CASE

The Hon’ble Supreme Court has comprehensively dismissed every charge of oppression and mismanagement made by entities owned by Cyrus Mistry against Tata Sons Pvt. Not just that, the court has gone so far as to suggest there never was a case to begin with. That the original cause of action was Mistry’s dismissal as chairman of Tata Sons. Everything else was a dressing up of that cause. 

“Though the complainant companies padded up their actual grievance with various historical facts to make a deceptive appearance, the causa proxima for the complaint was the removal of Cyrus Mistry (Cyrus Pallonji Mistry) from the office of executive chairman.” But removal of a chairman, or even director of a company is not grounds enough to determine oppression or prejudicial behaviour, the apex court said whilst overturning the decision of the National Company Law Appellate Tribunal that had found oppression and mismanagement and ordered the reinstatement of Mistry. 

While Mistry made several specific charges against Tata Sons in the oppression case, the Hon’ble Supreme Courtexamined only a few. The court’s explanation for this was that the National Company Law Tribunal had dismissed each of the charges whereas the Hon’ble National Company Law Appellate Tribunal  overturned only a few of the tribunal’s dismissals. Since tribunals are courts of fact and the Hon’ble Supreme Court of law, it limited its proceedings to the conclusions arrived at by the Hon’ble National Company Law Appellate Tribunal .

On Mistry’s removal as executive chairman of Tata Sons, the top court noted that it is a well settled position that certain failed business decisions or a removal of a person from directorship cannot be called as acts oppressive to minority shareholders. In such a case (under Section 241, 242 of company law) a tribunal, the court said, cannot ask whether the removal was correct/valid but it has to see whether such removal would tantamount to oppression of the minority shareholders.

Both, with regard to Mistry’s oppression case and the Hon’ble National Company Law Appellate Tribunal ’s findings, the top court examined several aspects of the Articles of Association of Tata Sons, including rights such as affirmative votes, pre-consultation with Tata Trusts. It dismissed each of Mistry’s arguments and stated the Tata Group was guided by corporate governance and had included many practices, such as board committees, etc. even though it was not required by law to have them.

Article 121 of Tata Sons’ Articles of Association grants affirmative voting rights to the nominee directors of the Tata Trusts in certain matters. The top court pointed out that such rights are a global norm and in this case they confer only a limited right on the nominee directors. Going by the shareholding, Tata Trusts with 66% could have packed the board, the court said, while noting it didn’t

Article 75 allows Tata Sons to resolve by special resolution the transfer of any shareholder’s shares. Mistry has termed this as coercive. The Hon’ble Supreme Court viewed it as an exit clause. Besides, it said Article 75 had never been invoked and future action is not covered under oppression. Also, Article 75 has existed for decades and Mistry was himself party to an amendment in the year 2000 which gave article 75 in its present form.

The court opined that given the charitable objectives of the Tata Trusts, their nominee directors on board Tata Sons are not like any other ordinary directors. It also questioned whether the need for having independent directors on the board itself was an acknowledgment that not every director could be expected to exercise completely independent judgment irrespective of who nominated them. A nominee director of the Trusts holds a fiduciary duty towards their beneficiaries.

The top court also detailed the shifting arguments of the Mistry side through the five-year long litigation on seeking certain reliefs. The plea for reinstatement of Mistry was later amended to seek proportionate representation on the board. While challenging the affirmative voting rights of the Tata Trusts’ nominee directors on Tata Sons’ board, Mistry’s case sought the same rights for his SP Group. The court termed the request for the same rights as “quite funny”.

CONCLUSION

Thus in fine, all the questions of law are liable to be answered in favour of the appellants Tata group and the appeals filed by the Tata Group are liable to be allowed and the appeal filed by S.P. Group is liable to be dismissed. But before we do that we should also deal with the application moved by S.P. Group before us during the pendency of these proceedings, praying for the alternative relief of directing Tata Sons and others to cause a separation of ownership interests of the S.P. Group in Tata sons through a scheme of reduction of capital by extinguishing the shares held by the S.P. Group in lieu of fair compensation effected through a transfer of proportionate shares of the underlying listed companies, with the balance value of unlisted companies and intangibles including brand value being settled in cash.

Interestingly, such an application was filed after Tata Group moved an application for restraining S.P. Group from raising money by pledging shares and this court passed an order of status quo on 22.09.2020. For the first time S.P. Group seems to have realized the futility of the litigation and the nature of the order that the Tribunal can pass under Section 242. This is reflected in Paragraph 62 of the application, where S.P. Group has stated that they are seeking such an alternative remedy as a means to put an end to the matters complained of.

As a matter of fact, S.P. Group should have sought such relief from the Tribunal even at the beginning. As we have pointed out elsewhere a divorce without acrimony is what is encouraged both in England and in India under the statutory regime.

But in an appeal under Section 423 of the Companies Act, 2013, this Court is concerned with questions of law arising out of the order of Hon’ble National Company Law Appellate Tribunal . Therefore, we will not decide this prayer. It should be pointed out at this stage that Article 75 of the Articles of Association is nothing but a provision for an exit option (though one may think of it as an expulsion option). After attacking Article 75 before Hon’ble National Company Law Tribunal , the S.P. Group cannot ask this Court to go into the question of fixation of fair value compensation for exercising an exit option. What is pleaded in Paragraph 72 of the application for separation of ownership interests, requires an adjudication on facts,of various items. The valuation of the shares of S.P. Group depends upon the value of the stake of Tata Sons in listed equities, unlisted equities, immovable assets etc., and also perhaps the funds raised by SP group on the security/pledge of these shares. Therefore, at this stage and in this Court, we cannot adjudicate on the fair compensation. We will leave it to the parties to take the Article 75 route or any other legally available route in this regard. In the result, all the appeals except C.A. No.1802 of 2020 is allowed and the order of Hon’ble National Company Law Appellate Tribunal  dated 18.12.2019 is set aside. The Company Petition C.P. No. 82 of 2016 filed before Hon’ble National Company Law Tribunal  by the two Companies belonging to the S.P. Group shall stand dismissed. The appeal C.A. No.1802 of 2020 filed by Cyrus Investments Pvt. Ltd., and Sterling Investments Corporation Pvt. Ltd. is dismissed. There will be no order as to costs. All IAs including the one for causing separation of ownership interests of the S.P. Group in Tata Sons namely IA No.111387 of 2020, are dismissed.

 

Author: Vinay Sachdev

Editor: Adv. Aditya Bhatt & Adv. Chandni Joshi

INTERPRETING LEGISLATIVE INTENT THROUGH EXTERNAL AIDS

INTERPRETING LEGISLATIVE INTENT THROUGH EXTERNAL AIDS

Introduction

The procedure by which the judiciary ascertains or determines the purpose of laws or legal provisions is known as interpretation. It is a procedure through which a court attempts to decide the true sense of an expression, verb, or phrase in question in any statute before it, as well as the true intent of the legislature behind that statutory provision.

The judiciary may use a variety of methods or concepts of statutory interpretation, such as finding assistance from internal or external aids to interpretation and applying primary or secondary rules of interpretation that the court has developed over time.

External aid of Interpretation of Statutes | Interpretation of Statutes | Law Guru - YouTube

External Aids of Interpretation

Where existing resources are insufficient, courts must turn to outside resources. They’re extremely useful for interpreting and constructing regulatory provisions. “Where internal aids are not forthcoming, we should still turn to external aids to discover the purpose of the legislation,” O. Chennappa Reddy J. wrote in B. Prabhakar Rao and others v. State of A.P. and others. External assistance isn’t completely ruled out. This is now a well-established constitutional building concept.”

Furthermore, in District Mining Officer and others v. Tata Iron & Steel Co. and others, the Supreme Court stated: “It is also a cardinal principle of construction that external aids be brought in by broadening the concept of context to include not only other enacting provisions of the same statute, but also its preamble, the existing state of law, other statutes in pari materia, and the judicial record.”

Parliamentary History 

If the wordings are ambiguous, the historical setting may be considered in order to arrive at the proper construction, which covers parliamentary history, historical facts, statement of objects and reasons, report of expert committees.

External Aids

Parliamentary History, Historical Facts and Surrounding Circumstances

  1. a) Parliamentary history means the includes conception of an idea, drafting of the bill, the debates made, the amendments proposed, speech made by mover of the bill, etc. Papers placed before the cabinet which took the decision for the introduction of the bill are not relevant since these papers are not placed before the parliament.
  2. b) Historical facts of the statute are the external circumstances in which it was enacted. The object is to understand whether the statute in question was intended to alter the law or leave it where it stood.
  3. c) Statement of objective and reasons provides why the statute is being brought to enactment. It is permissible to refer to it for understanding the background, the antecedent state of affairs, the surrounding circumstances in relation to the statute and the evil which the statute sought to remedy
  4. d) Reports of Commissions including Law Commission or Committees including Parliamentary Committees preceding the introduction of a Bill can also be referred to in the Court as evidence of historical facts or of surrounding circumstances or of mischief or evil intended to be remedied.

Social, Political and Economic Developments and Scientific Inventions

A Statute must be interpreted to include circumstances or situations which were unknown or did not exist at the time of enactment of the statute. Any relevant changes in the social conditions and technology should be given due weightage.

Reference to Other Statutes

For the purpose of interpretation or construction of a statutory provision, courts can refer to or can take help of other statutes. It is also known as statutory aids. For e.g. the General Clauses Act, 1897.

The application of this rule helped to avoid any contradiction between a series of statutes dealing with the same subject as it allows the use of an earlier statute to throw light on the meaning of a phrase used in a later statute in the same context.

Dictionaries

When a word is not defined in the statute itself, it is permissible to refer to dictionaries to find out the general sense in which that word is understood in common parlance. For e.g. Black’s Law Dictionary.

Judicial Decisions

Decisions by courts on the same manner act as precedents for the interpretation of statutes. Indian judicial pronouncements may have binding value when issued by a higher court, and have persuasive value when issued by a court having same or lower authority. These foreign decisions from countries following the same system of jurisprudence have persuasive value only and cannot be used to contradict binding Indian judgements.

Other materials

Courts also refer passages and materials from eminent text books, articles and papers published in journals.

Judicial Precedents

183Rd Report On General Clauses Act, 1897, Page 34 

https://lawcommissionofindia.nic.in/reports/183rpt.pdf

On the basis of the discussion above, we are of the view; (1) in the event of ambiguity of a provision, for the purpose of interpretation of such a statutory provision, courts can certainly take recourse to material or aids outside the statute, i.e., external aids, and (2) the rules of interpretation specially regarding use of external aids, should not be incorporated in the General Clauses Act, 1897 at all.  

In the present matter, the ambiguity with respect to the provision mentioned in under 225B of Schedule II is disregarding the producer to qualify under the ambit of 5%. The mere ambiguity is affecting his rights to trade freely and thereby leading to an ambit of 18%.

In CIT V. Sodra Devi, the court stated that if the language of the statute is unclear and unambiguous,; consequently the historical facts and surrounding circumstances must give way to the clear language of the statute. 

 ‘It is only when the words used are ambiguous that they would stand to be examined and construed in the light of surrounding circumstances and constitutional principle and practice .’

In the present matter, with the ambiguity in the provision, regarding the taxation charges levied in regard to the production of fly ash bricks with less than 90% content there happens to be violation of the right of the producer. The reasonable interpretation that could be inferred regarding the taxation possibility is that the producer should be charged with 5% bracket. 

Indra Sawhney v. Union of India, the interpretation of the expression ‘backward class of citizen’ used in Article 16(4) was in question before the court. The SC under this case referred to the speech given by B.R. Ambedkar to understand the context, background and object behind its use of the given expression. Page 61

That the debates in Constituent Assembly can be relied upon as an aid to interpretation of a constitutional provision is borne out by a series of decisions of this Court. The relevance of these debates is pointed out, emphasising at the same time, the extent to which and the purpose for which they can be referred to). Since the expression “backward” or “backward class of citizens” is not defined in the Act, reference to such debates is permissible to ascertain, at any rate, the context, background and objective behind them. 

In the present matter, the idea behind referring to the agenda item and meetings can  be a decisive mode to interpret the taxation bracket whereby the producer gets to qualified under 5% GST rate. Also, the imposition of 18% GST rate would be a irregular application on the producer. Merely, judging the provision with the term ‘OR’ creates ambiguity and an unfair disadvantage to the producers of fly ash brick. However, to bring clarity the 23rd meeting stated the agenda item i.e. 

‘6(i) the rate of tax on fly ash bricks was rightly proposed to be reduced from 12% to 5%.’

To bring clarity the 31st meeting further strengthened the aspect that referring to the fly ash blocks it also included fly ash bricks levying 5% GST rate.

M/S. Aakavi Spinning Mills (P) Ltd vs The Authority For Clarification …, Page 4, para 11

The Golden Rule of Interpretation is plain meaning of the plain words and only if there is some confusion or ambiguity in such plain words, then the external aids of interpretation like Dictionaries, Scientific materials, Budget Speeches, etc. can be referred by the Courts for interpretation of such words.

Khandelwal Metal & Engineering … vs Union Of India And Others on 11 June, 1985, Page 19

Certain exemption Notifications, referred to earlier, as affording intrinsic evidence to show the contemporaneous understanding of the framers of such Notifications. True, that such understanding is a legitimate aid to interpretation.

In the present matter, the notif no:41/2017  w.e.f  15.11.2017 and notif no:24/2018 w.e.f   01.01.2019, states the application of 5% GST on fly ash bricks. Interpreting the application of such notification and producing intrinsic evidence it states that the producer of fly ash bricks would be classified to pay GST at 5%. 

In Samantha v State of Andhra Pradesh, in interpreting para 5(2) of the 5th Schedule of the Constitution, reports of drafting committee and sub-committees of the Constituent Assembly, the Draft Constitution and changes made thereafter in giving it the final shape were referred by the Supreme Court.

The recommendations of the two Sub-Committees were not considered by the Constituent Assembly in its Session in July, 1947, when the broad principles of the Constitution were settled since, as explained by Dr. Ambedkar, they were received too late. The Drafting Committee however, considered these proposals at the stage of drafting and suitable provisions including Schedule V & VI were included in the Draft Constitu-tion of February, 1948 in which it was indicated that the transfer of land in Scheduled Area From Tribal to non-Tribal was forbidden; and the State Government was also prohibited from allotting the State land in the Scheduled Area to Non-Tribal except in accordance with the Rules which may be made by the Governor after consulting the Tribes Advisory Council. 

In M Ismail Faruqqui v Union of India, Para 102, it was held by the Supreme Court that white paper issued by the Government detailing the facts leading to enactment of a statute is also admissible for understanding the background when the court is called upon to interpret and decide the validity of the statute.

The historical background, as now set out, is drawn from the White Paper on Ayodhya issued by the Government of India in February, 1993. This was the. basis upon which the Bill to bring the said Act upon the statute book was prepared and the Reference was made.

The Supreme Court in S.R. Chaudhuri v. State of Punjab and others, Page 11.

It is a settled position that debates in the Constituent Assembly may be relied upon as an aid to interpret a constitutional provision because it is the function of the Court to find out the intention of the framers of the Constitution. We must remember that a Constitution is not just a document in solemn form, but a living framework for the Government of the people exhibiting a sufficient degree of cohesion and its successful working depends upon the democratic spirit underlying it being respected in letter and in spirit.

Considering the above application of case laws, it can be concluded that the application of 5% GST rate classifies under the appropriate law. The Schedule 225B authenticates the position of the same. Moreover, with the ambiguity in the provision, it can be derived that following the above chronology of external aid, it is well within the ambit to interpret flying ash brick under the category of 5%GST tax Rate.

Conclusion

Interpretation is the process which is employed by the judiciary to ascertain or to determine the meaning of the statutes or legal provision. It is basically a process by which court seeks to ascertain the true meaning of the expression or word or phrase which is in question in any statute before the court and determine the true intention of the legislature behind such statutory provision.

A process of interpretation employed by the judiciary can be done through various tools or principles of statutory interpretation which include seeking help from internal or external aids to interpretation and applying primary or secondary rule of interpretation which has evolved over a period of time by the court.

Covid 19: Need of Comprehensive Healthcare Law in India (Part 1)

Covid 19: Constitutional and legal framework of the management of epidemics and a need of Comprehensive Health care Law in India 

INTRODUCTION

A new coronavirus that causes acute respiratory disease in humans was identified in Wuhan City, Hubei Province of China (WHO, 2020a) in late 2019 and is most commonly referred to as COVID‐19. Coronaviruses are a large family of viruses that cause respiratory infections ranging from the common cold to severe diseases like the 2003 Severe Acute Respiratory Syndrome (SARS) outbreak and the 2011 Middle East Respiratory Syndrome (MERS) outbreak. The Novel Coronavirus (2019—NCoV), the cause of the current outbreak, is the seventh identified member of the family of coronaviruses that infect humans (Zhu et al., 2020). The outbreak in China has now spread across the globe and was officially declared a pandemic by the WHO on March 11, 2020. As of may 13, 2021, there are more than 2 crore confirmed cases and more than 2.5 lakh  deaths in India.

There are numerous hotspots throughout the country, predominantly in urban areas. While the Government has now sealed the areas in these hotspots, the nation also implemented a 21‐day lockdown as a measure to curb the spread of the virus by breaking its chain on March 25, 2020, which was extended until May 3, 2020 by the Narendra Modi Government. As the virus is highly contagious, many countries have implemented similar lockdowns in an attempt to control the spread of the virus as there is currently no vaccination or approved treatment. India also completely closed all kinds of transportation. The COVID‐19 pandemic is a global medical emergency and requires immediate and stringent action by the Government to control human loss. Apart from medical preparedness, legal provisions play a significant role in managing and controlling the disease.Legal Issues Raised by the COVID-19 Pandemic

It is against this background that this paper focuses on identifying the present constitutional and statutory provisions in India that are available to face a health emergency like the COVID‐19 pandemic and identify possible areas for strengthening the legislative structure to face health emergencies in the future. This paper also stresses the need for comprehensive public health law for effective prevention, control, and management of pandemics. Largely, this paper is based on primary sources like laws, statutes, regulations, notices, and court cases related to health and health emergencies in the country. Various acts and laws that are included in this research are the Epidemic Disease Act, 1897 (EDA), the Disaster Management Act, 2005 (DMA) along with bills introduced in parliament and which have lapsed like the National Health Bill (2009) and the Public Health (Prevention, Control, and Management of epidemics, bio‐terrorism, and disasters) Bill, 2017 along with regulations, notices, and guidelines issued during the COVID‐19 crisis by the Central Government along with state governments. 

Health‐related constitutional provisions

The constitutional and legal framework of the management of epidemics and health emergencies has been at the forefront of discussions and debates throughout and outside of the nation since the nationwide lockdown order. The Indian Constitution ensures the Right to Health for all without any discrimination. Article 21 in the Indian Constitution states explicitly the citizen’s fundamental right to life and personal liberty, which can be argued was violated as the country enacted a complete nationwide lockdown. Provisions related to health are mentioned in Part IV of the Constitution in terms of the Directive Principles of State Policy. Article 39(a) mentions the responsibility of the State to provide security to citizens by ensuring the Right to adequate means of Livelihood. Article 39(e) mentions the State’s responsibility to ensure that “health and strength of workers, men, and women and the tender age of children are not abused.” Article 41 imposes a duty on the State to “provide public assistance in cases of unemployment, old age, sickness, and disablement.” Article 42 makes provision to “protect the health of the infant and mother by maternity benefit.” Article 47 is about “raising the level of nutrition and the standard of living of people and improving public health.”

India is a union of 28 states and 8 Union Territories. There is a constitutional distinction between the working rights and responsibilities of the government bodies of the central government and the states and territories. The seventh schedule under Article 246 of the Indian Constitution deals with the division of powers between the Union and the States, and legislation can be made, respectively. The Seventh Schedule contains three lists: the Union List, the State List, and the Concurrent List. The Parliament can make laws on 97 items that are mentioned in the Union List, whereas the state legislatures can make laws related to the 62 items in the State List. The Concurrent List, on the other hand, has subjects over which both Parliament and state legislatures have jurisdiction on 52 items. However, the Constitution gives federal supremacy to Parliament on the Concurrent List items in case of a conflict. Both the Central Government and the states are empowered to make laws related to public health. Items related to public health are mentioned in all three lists of the Indian Constitution. Quarantine, including all issues related to seamen’s and marine hospitals and medical institutions, are mentioned in numbers 28 and 81 of the Union List. The states can make legislation related to “health care, sanitation, hospitals, dispensaries, and prevention of animal diseases” under item six of the State List. The Union and states can make laws related to the health profession and the prevention of the extension from one state to another of infectious or contagious diseases or pests affecting people, animals, or plants under entries 26 and 29 of the Concurrent List. The High‐Level Group (HLG), formed for the health sector by the 15th Finance Commission, recommended moving health subjects to the Concurrent List. It also recommended mentioning the “Right to Health” as the fundamental right.

The Right to Health is not explicitly mentioned in the Indian Constitution as is the Right to Education, but various judgments—Consumer Education and Resource Centre versus Union of India (1995), State of Punjab and others versus Mohinder Singh Chawala (1997) and Paschim Banga Khet Mazdoor Samity versus State of West Bengal (1996) included the Right to Health as part of Article 21 of the Indian Constitution (i.e., Right to Life, and the Government has a constitutional obligation to provide health facilities to citizens). Hence, the role of government at all three levels—Union, State, and local (panchayats and municipalities) level is crucial in providing healthcare to all citizens. However, “health emergency” is not part of the emergency provisions of the Indian Constitution. The Indian Constitution empowers the President of India to declare three kinds of emergencies: national emergency, state emergency, and financial emergency. A national emergency is imposed if the security of the country is threatened on the grounds of war, external aggression, or armed rebellion. A state emergency is imposed if there is a constitutional breakdown in the respective state. A financial emergency is imposed if the financial stability of the country is threatened. As imposing a lockdown or keeping strict measures to contain the spread of disease will impact citizens’ fundamental rights, there is a need to explore various constitutional methods to include health emergencies in the emergency provisions with proper consultations with various stakeholders.

Existing laws for facing health emergencies in India

1. The Epidemic Diseases Act, 1897 (EDA)

The Epidemic Diseases Act, 1897, which was enacted during the British colonial era, was promulgated to tackle the bubonic plague which broke out in the Bombay State (now Maharashtra State). The Act is 125 years old, with only four sections. The law is described as “extraordinary” but “necessary” by John Woodburn, the Council Member of the Governor‐General of India in Calcutta during the discussion on the bill introduced in 1897 and emphasized that people must “trust the discretion of the executive in the grave and critical circumstances’. Hence, any action taken on the grounds of epidemics must take into consideration all grave and critical circumstances. Such decisions may not be opposed by the general public for the “greater good” for all. The law was vital in containing other outbreaks in the country like Cholera (1910), Spanish Flu (1918–20), Smallpox (1974), Swine flu (2014), and the Nipah Virus (2018). The EDA is the only act that provides legal interventions in the case of a national or sub‐national epidemic. The first section gives the title and the extent of the implementation of the act. The second section deals with the power to take special measures and prescribe regulations during times of dangerous diseases by the central and state governments. Under section 2 of the act, the state government may take or empower any person to issue notices or regulations to be observed by people during the outbreak. Section 2A empowers the Central Government to take precautions and issue regulations for the inspection of ships and vessels and also to regulate any person who intends to sail. Penalties are included in the third section, and the fourth section covers the protection of persons acting under the act. The disobedience to the directions of public servants under the act is considered an offense and punishable under section 188 of the Indian Penal Code 45 of 1860 (i.e., imprisonment of 6 months and/or a fine of 1000 rupees).

On April 22, 2020, using the powers under Article 123, the Modi Cabinet issued an ordinance to amend the EDA, as there had been incidents of attacks on health care workers. The ordinance amended section 3 of the EDA. If anyone causes damage or loss to the property, then they may be punished with “imprisonment for a term of 3 months to 5 years and with a fine of Rs. 50,000/‐ to Rs. 200,000/‐.” In case of violence and physical attack on health care workers, they can be imprisoned “for a term of 6 months to 7 years and with a fine of Rs. 100,000/‐ to Rs. 500,000/.” In addition, “the offender shall also be liable to pay compensation to the victim and twice the fair market value for damage to property.”

Telangana, a south Indian State, invoked the EDA by issuing a regulation called “the Telangana Epidemic Disease (COVID‐19) Regulation 2020”. The regulation empowers the Director of Public Health (DPH), the Director of Medical Education, all the District collectors, Commissioner of Police, District Superintendent of Police, and all Municipal Commissioners of Corporations in the State to take measures to control and contain COVID‐19. The regulation brings all hospitals, both public and private, under the purview of the regulations and directs them to report all cases to the State Integrated Surveillance Units and Collector of the District or the Commissioner of Corporations. The empowered officials can take action on persons who refuse to comply with the regulation under Section 188 of the Indian Penal Code. The regulation also prohibits the spread of misinformation on social media and in print media, and necessary action may be taken on violators. Hence, the State Government of Telangana emphasized keeping the institutional structures strong and powerful to contain COVID‐19.

Another south Indian State promulgated the Karnataka Epidemic Diseases, COVID‐19 Regulations, 2020, using the powers under the EDA. The regulations bar private laboratories from conducting COVID‐19 testing. All samples must be collected by the designated laboratory by the District Nodal Officer of the Department of Health and Family Welfare of the concerned district. The samples are collected according to guidelines issued by the Central Government. The interesting point of the regulation is that it makes the District Disaster Management Committee headed by the Deputy Commissioner the main authority for preparing strategies regarding containment measures at the district level. Similarly, many state governments have issued regulations according to their institutional setup and strategized their plans to counter COVID‐19.

Prior to the COVID‐19 pandemic, some state governments had their own public health acts or had amended the EDA to include certain provisions at the state level. The Madras Public Health Act, 1939 in the State of Tamil Nadu, is one example of comprehensive public health law at the state level. The act includes a Public Health Board being constituted at the state level that includes a Minister of Public Health, other coordination ministers, the surgeon general, Director of Health Services, Sanitary Engineer and other members nominated by the state government. The Board’s role is to advise the state government. The act also includes prevention, notification, and treatment of diseases. There is a similar act in the State of Madhya Pradesh, namely the Madhya Pradesh Public Health Act, 1949. In the State of Kerala, the Travancore‐Cochin Public Health Act, 1955 and the Malabar Public Health Act, 1939 are both in place in the case of any major public health issue. The Madhya Pradesh State Government is planning to combine both acts and bring them into a single act for covering the entire state. Compulsory provision of vaccinations is included by the state government of Himachal Pradesh under the Himachal Pradesh Vaccination Act, 1968. Bihar gave the state governments the power to make requests for vehicles during epidemics .

The EDA is not comprehensive and left to state governments to devise their own public health laws. However, only some state governments like Madhya Pradesh and Bihar have their own laws related to public health. Though the EDA has been invoked during the COVID‐19 pandemic by various state governments after directions from the Central Government, there is a need for an integrated, comprehensive, actionable, and relevant legal provision for the control of outbreaks in India. The EDA in the present form is not sufficient to face health emergencies like COVID‐19 as it is silent on technical and operational mechanisms of the control and management of epidemics.

2. Disaster Management Act, 2005

It was the Disaster Management Act under which the nationwide lockdown of 21 days was declared on March 25, 2020 by the Modi Government and was then extended until May 31, 2020. The DMA was enacted in 2005 with the objective “to provide for the effective management of disasters and for matters connected therewith or incidental there to.” The act consists of 79 sections and covers a wide range of issues like the establishment of the National Disaster Management Authority (NDMA), State Disaster Management Authority (SDMA), District Disaster Management Authority (DDMA), measures to be taken by the Governments during the disaster, penalties, and offenses of the violators. The NDMA was established under the act, and the Prime Minister is the ex‐officio Chairperson along with nine other members. Subsequently, a guideline on the Management of Biological Disaster 2008 was passed and currently the NDMA deals extensively with biological disasters and health emergencies.

There are certain sections in the NDMA that helped the Central Government to impose the lockdown and restrict all kinds of transportation in the country. Section 62 of the DMA gives powers to the Central Government to issue directions to all ministries or departments of the Government of India and state/UT governments. On 11 April 2020, the Central Government invoked section 69 of the DMA, which delegated the powers of the Home Secretary to the Secretary, Ministry of Health and Family Welfare for coordinating various activities among ministries and states/UTs. Unlike the other laws, this act “provides for an exhaustive administration set up for disaster preparedness.” Violators are punishable up to 1 year in jail or a fine or both under Sections 51 to 60 of the Act. The law describes the offense as obstructing any officer or employee from performing their duty or refusing to comply with directions. For the better execution of the national lockdown, numerous states likewise summoned section 144 of the Criminal Procedure Code (CPC).

One of the major issues with the DMA is whether epidemic or pandemic can be considered “disaster” as per its definition. Section 2(d) of the DMA States that: “Disaster means a catastrophe, mishap, calamity or grave occurrence in any area, arising from natural or man‐made causes, or by accident or negligence which results in substantial loss of life or human suffering or damage to, and destruction of, property, or damage to, or degradation of, environment, and is of such a nature or magnitude as to be beyond the coping capacity of the community of the affected area.” One can interpret that a health emergency of the kind created by the COVID‐19 pandemic falls under “grave concerns,” but such interpretation will not serve any purpose in effectively managing the epidemic. There are intricacies and technicalities associated with the health emergency that is not covered by this legislation.

3. Other legislative provisions

Terms like “quarantinable disease” and “isolation,” have been defined under the Indian Aircraft (Public Health) Rules, 1954 as “yellow fever, plague, cholera, smallpox, typhus, and relapsing fever” and “when applied to a person or group of persons means the separation of that person or group of persons from other persons, except the health staff on duty, in such a manner as to prevent the spread of infection.” respectively. Along with these, it provides definitions of various other words such as “Health Officer,” “Infected Aircraft,” “Infected Area,” “Infected Person.” Similar restrictions are found under the Indian Port Health Rules, 1955, framed under the Indian Port Act, 1908, for the quarantining and isolation of passenger ships, cargo ships, and cruise ships. It further provides for the provision, which states that the Central Government has the power of inspection of any ship or vessel leaving or arriving at the port at any point of time which comes under its jurisdiction. Similarly, the provisions in the Livestock Importation Act, 1898, cover the issue of quarantine of animals to protect and maintain their good health. Where the word “Quarantine” means “to separate and restrict the movement of healthy animals which may have been exposed to a communicable disease to see if they become ill” while the word “Isolation” means “to separate the ill having communicable disease from those who are healthy.” Later, under the same act, Animal Quarantine and Certification Service Station was created for the same purpose. While the Drugs and Cosmetics Act, 1940 provides provisions related to public health on the grounds of availability of and distribution of vaccines and drugs during an outbreak of dangerous and infectious disease.

A Public Health Bill was introduced in 2009, but it was not passed because many states objected to it as health is a subject under the State List. The bill was extensively drafted and mandated health as a right and also recommended the establishment of a National Public Health Board. The bill also advocated for the convergence of various national, state, district, block, and village level planning and implementation authorities. The redressal and communication mechanisms were also clearly mentioned in the bill. The bill was introduced during the United Progressive Alliance (UPA)—II regime under Manmohan Singh as Prime Minister. Subsequently, in 2017, during the Modi government’s first term, the Public Health (Prevention, Control, and Management of Epidemics, Bio‐fear based oppression, and Disasters) Bill 2017 was introduced, but the bill ultimately faced the same fate as the previous bill. The 2017 bill clearly defines epidemics, isolation, quarantine, public health emergency, and social distancing. Section 3 of the bill gives powers to state/UT, district, and local authorities, whereas section 4 of the bill defines powers of the Central Government in giving directions. Penalties are also high when compared to other acts and bills. Section 14 (1) of the bill repeals the EDA.

Author: Vinay Sachdev

Editor: Adv. Aditya Bhatt & Adv. Chandni Joshi

Difference Between Operational And Financial Creditors

Difference Between Operational And Financial Creditors

INTRODUCTION.

“creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree holder”

The Insolvency and Bankruptcy Code, 2016 differentiates between financial creditors and operational creditors. Financial Creditors are those whose relationship with the entity is a pure financial contract, such as a loan or a debt security. Operational creditors are those whose liability from the entity comes from a transaction on operations. 

Creditors

The Insolvency and Bankruptcy Code, 2016 (IBC) has consolidated and amended the laws relating to reorganization and insolvency of corporate persons, partnership firms and individual firms. The sole intention of this legislation is to facilitate resolution of corporate bankruptcy in a time bound manner.  The IBC has introduced new and distinct concepts of ‘Financial Creditor’ and ‘Operational Creditor‘ as opposed to the Companies Act, 2013 which merely introduced the term ‘creditor’, without any classification thereof.

Today, the maintainability of applications for initiating corporate insolvency resolution process chiefly depends on the applicant first satisfying the Tribunal that it falls either within the definition of ‘Financial Creditor’ or ‘Operational Creditor’ under the IBC. In this article, we are particularly discussing the Order dated 20th February 2017 passed by the Hon’ble National Company Law Tribunal, Principal Bench, New Delhi in Col. Vinod Awasthy v. AMR Infrastructure Limited1 whereby the Hon’ble Tribunal interpreted the definition of ‘Operational Creditor’ under the IBC to ascertain the applicability of the same to a flat purchaser.

Prior to discussing the aforesaid Order, it is imperative to first understand the definitions of ‘Financial Creditor’ and ‘Operational Creditor’ under the IBC.

A financial creditor is defined under Section 5(7) of the IBC to mean

a person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred“.

An operational creditor is defined under Section 5(20) of the IBC to mean

any person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred“.

In order to ascertain whether a person would fall within the definition of an operational creditor, the debt owed to such a person must fall within the definition of an operational debt as defined under Section 5(21) of the IBC.

Difference by the bankruptcy law 

Distinction between a financial creditor and operational creditor has been drawn by the Bankruptcy Law Reforms Committee in para 5.2.1 of its final report. It states:

Here, the Code differentiates between financial creditors and operational creditors. Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or debt security. Operational creditors are those whose liabilities from the entity comes from a transaction on operations…The Code also provides for cases where a creditor has both a solely financial transaction as well as an operational transaction with the entity. In such a case, the creditor can be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt.”

It is clearly evident that the lawmakers have chalked out distinct definitions of ‘financial creditor’ and ‘operational creditor’ and that they are not to be interpreted as inclusive or exclusive of each other.

Detailed differences between Financial Creditor and Operational Creditor

 

particulars.Financial Creditor.Operational Creditor.
Meaning Section 5 (7) – Financial creditor

means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.

Section 5 (20) – Operational

creditor means a person to whom

an operational debt is owed and includes any person to whom such debt has been legally assigned or

transferred.

Voting shareSection 5 (28) – Voting right of a

financial creditor is based on

the proportion of the financial

debt owed to such a financial creditor. The approval of

committee of creditor shall be

obtained by a vote of not less than

seventy five percent of the voting shares. 

Operational creditor shall not have

any right to vote at the meeting

of committee of creditors. 

Initiation of corporate

insolvency resolution

process

Section 7 (1) – On occurrence of a

default, a financial creditor shall

either by itself or jointly with other

financial creditors may file an

application for initiating corporate

insolvency resolution process

against a corporate debtor before

the Adjudicating Authority

Section 8 (1) – On occurrence of a

default the operational creditor

may, deliver a demand notice of

unpaid operational debtor copy of

an invoice demanding payment of

the amount involved in the default

to the corporate debtor. The

operation creditor may file an

application after the expiry of 10

days from the date of delivery of

the notice or invoice demanding

payment under sub-section (1) of

section 8, if the operational

creditor does not receive payment

from the corporate debtor or

notice of the dispute under subsection (2) of section 8. 

Appointment of IRPSection 7 (3) – The financial

creditor shall along with the

application furnish the name of the

resolution professional proposed

to act as an interim resolution

professional. 

Section 9 (4) – An operational

creditor may propose a resolution

professional to act as an

 interim resolution

professional. 

Constitution of

Committee of Creditors

Section 21 (2) – The committee of

creditors shall consist solely of

financial creditors, and all financial

creditors of the corporate debtor. 

Operational creditors shall not

form part of the committee. 

 

Hon’ble National Company Law Tribunal on ‘Operational Creditors’

In Col. Vinod Awasthy v. AMR Infrastructure Limited, the Hon’ble Tribunal while dismissing the Petition instituted under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) at the admission stage itself, decided the issue of whether a flat purchaser would fall within the definition of an ‘Operational Creditor‘ as defined under Section 5(20) of the IBC to whom an ‘Operational Debt’ as defined under Section 5(21) of the IBC is owed.

The Hon’ble Tribunal observed that the framers of the IBC had not intended to include within the expression of an ‘operation debt’ a debt other than a financial debt. Therefore, an operational debt would be confined only to four categories as specified in Section 5(21) of the IBC like goods, services, employment and Government dues. The Tribunal held that the debt owed to the Petitioner (a flat purchaser in this case) had not arisen from any goods, services, employment or dues which were payable under any statute to the Centre / State Government or local bodies. Rather, the refund sought to be recovered by the Petitioner was associated with the possession of immovable property.

The Hon’ble Tribunal while deciding the question of whether a flat purchaser could be considered an operation creditor considered the observations of the Bankruptcy Law Reforms Committee in paragraph no. 5.2.1 of the Final Report:

“Operational Creditors are those whose liability from the entity comes from a transaction on operations. Thus, the wholesale vendor of spare parts whose spark plugs are kept in inventory by car mechanics and who gets paid only after the spark plugs are sold is an operational creditor. Similarly, the lessor that the entity rents out space from is an operational creditor to whom the entity owes monthly rent on a three-year lease.”

The Hon’ble Tribunal held that the Petitioner had neither supplied goods nor had rendered any services to acquire the status of an ‘Operational Creditor’.

It was further held that it was not possible to construe Section 9 read with Section 5(20) and Section 5(21) of the IBC so widely to include within its scope, cases where dues were on account of advance made to purchase a flat or a commercial site from a construction company like the Respondent especially when the Petitioner had other remedies available under the Consumer Protection Act and the General Law of the land.

Supreme Court’s View

The difference between financial and operational creditors under the Code is not merely surficial – it is fundamental. If the crux of the insolvency regime is priorities, the priorities of the two in the distribution waterfall differ, even if both are unsecured. Is this a differentiation, or discrimination?  The differentiation, along with certain other provisions of the Code, was challenged before the Supreme Court in a bunch of petitions. 

In Swiss Ribbons Ltd. v. Union of India, the Supreme Court observed that :

“A perusal of the definition of ‘financial creditor’’ and ‘financial debt’ makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, an ‘operational debt’ would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local

authority.” And, “financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of business. Financial contracts generally involve large sums of money. By way of contrast, operational contracts have dues whose quantum is generally less.” The difference between operational and financial debt/creditors was thus upheld by the Supreme Court. The most important consideration in determining whether a debt is a financial debt or an operational debt is to “intent of the parties”. Merely because a creditor claims interest for a delayed payment, does not imply that the debt is financial – in such transactions, interest is contemplated as a ‘penalty’ and not ‘returns’. Also, lending for time value of money does not necessarily involve ‘interest’. In order to qualify to be a financial debt, what matters is that the amount was disbursed against time value of money, whether or not expressed in terms of ‘interest’. Besides financial and operational debts, there can be other types of debts too – however, such other creditors are not entitled to initiate an application under the Code, but can file claims in the specified form.

 

Private vehicle not a ‘public place’ : SC

Private vehicle not a ‘public place’ : SC

Introduction

Law is not an exact science. Its shades change depending on the context, differ from statute to statute. Background circumstances, and the expediency of the situation often influence the application of law.Two recent judgments on the issue whether a private car is a public place are examples. While the Delhi High Court held last week that a private car amounts to a public place in order to hold that wearing of a face mask is compulsory even when travelling alone, the Supreme Court held in an NDPS case yesterday that a private vehicle is not a public place.

Is Your Private Vehicle A 'Public Place?' Law Has Different Answers

Delhi High Court Ruling 

In the Saurabh Sharma and others v Sub Divisional Magistrate (East) and others the Delhi High Court held that wearing of face mask is compulsory even while driving alone in a personal car. A single bench of Justice Prathiba M Singh held that a private vehicle will amount to a public place in the context of COVID-19 pandemic regulation. Referring to precedents, the Court said that the meaning of the term ‘public place’ changes from context to context.

The word ‘public place’, has to be interpreted in this case in the context of the COVID pandemic. To determine what constitutes a `public place’ the manner in which the Coronavirus can spread is the crucial part”.

The Court also said that there is a possibility of the droplets released by a person while driving alone in a car infecting others who may enter the vehicle hours later. A vehicle which is moving across the city, even if occupied at a given point in time by one person, would be a public place owing to the immediate risk of exposure to other persons under varying circumstances. Thus, a vehicle even if occupied by only one person would constitute a public place and wearing of a mask there would be compulsory.

Private Vehicle did not become a “public place” under NDPS Act

On April 16, the Supreme Court held that a private vehicle is not a public place as per Section 43 of the Narcotic Drugs and Psychedelic Substances Act in the case Boota Singh v State of Haryana.

In this case, recovery was made from the accused while they were in a jeep at a public place. The high court held that the case of the accused would be covered by Section 43 of NDPS Act and not by Section 42. Section 42 deals with Power of entry, search, seizure and arrest without warrant or authorisation while Section 43 with power of seizure and arrest in public place.

Before the Apex Court, the accused contended that the vehicle in question was a private vehicle belonging to the accused and was not a public conveyance, though parked on a public road and therefore the case would not come under Section 43 but would be governed by the provisions of Section 42 NDPS Act. Since Section 42 having not been complied with at all, they were entitled to acquittal, they contended.

The Explanation to Section 43 stated: For the purposes of this section, the expression public place includes any public conveyance, hotel, shop, or other place intended for use by, or accessible to, the public.

The Supreme Court held that since the explanation only referred to “public conveyance” and not to private vehicles, the jeep involved in the case was not a “public place” coming under Section 43. Hence, the officers had to follow the procedure under Section 42 NDPS with respect to the recovery. The same having not been followed in this case so, the accused were acquitted.

The bench comprising of Justices UU Lalit and KM Joseph held that “The evidence in the present case clearly shows that the vehicle was not a public conveyance but was a vehicle belonging to accused Gurdeep Singh The Registration Certificate of the vehicle, which has been placed on record also does not indicate it to be a Public Transport Vehicle. The explanation to Section 43 shows that a private vehicle would not come within the expression public place as explained in Section 43 of the NDPS Act.” 

Difference between Section 42 & 43 of NDPS Act

Section 42Section 43
Section 42 

1. Power of entry, search, seizure and arrest without warrant or authorisation.

(1) Any such officer (being an officer superior in rank to a peon, sepoy or constable) of the departments of central excise, narcotics, customs, revenue intelligence or any other department of the Central Government including para-military forces or armed forces as is empowered in this behalf by general or special order by the Central Government, or any such officer (being an officer superior in rank to a peon, sepoy or constable) of the revenue, drugs control, excise, police or any other department of a State Government as is empowered in this behalf by general or special order of the State Government, if he has reason to believe from persons knowledge or information given by any person and taken down in writing that any narcotic drug, or psychotropic substance, or controlled substance in respect of which an offence punishable under this Act has been committed or any document or other article which may furnish evidence of the commission of such offence or any illegally acquired property or any document or other article which may furnish evidence of holding any illegally acquired property which is liable for seizure or freezing or forfeiture under Chapter VA of this Act is kept or concealed in any building, conveyance or enclosed place, may between sunrise and sunset,

(a) enter into and search any such building, conveyance or place;

(b) in case of resistance, break open any door and remove any obstacle to such entry;

(c) seize such drug or substance and all materials used in the manufacture thereof and any other article and any animal or conveyance which he has reason to believe to be liable to confiscation under this Act and any document or other article which he has reason to believe may furnish evidence of the commission of any offence punishable under this Act or furnish evidence of holding any illegally acquired property which is liable for seizure or freezing or forfeiture under Chapter VA of this Act; and

(d) detain and search, and, if he thinks proper, arrest any person whom he has reason to believe to have committed any offence punishable under this Act: Provided that if such officer has reason to believe that a search warrant or authorisation cannot be obtained without affording opportunity for the concealment of evidence or facility for the escape of an offender, he may enter and search such building, conveyance or enclosed place at any time between sunset and sunrise after recording the grounds of his belief.

 

2.Where an officer takes down any information in writing under sub-section (1) or records grounds for his belief under the proviso thereto, he shall within seventy-two hours send a copy thereof to his immediate official superior.

Section 43

Power of seizure and arrest in public place.Any officer of any of the departments mentioned in section 42 may

(a) seize in any public place or in transit, any narcotic drug or psychotropic substance or controlled substance in respect of which he has reason to believe an offence punishable under this Act has been committed, and, along with such drug or substance, any animal or conveyance or article liable to confiscation under this Act, any document or other article which he has reason to believe may furnish evidence of the commission of an offence punishable under this Act or any document or other article which may furnish evidence of holding any illegally acquired property which is liable for seizure or freezing or forfeiture under Chapter VA of this Act;

 

(b) detain and search any person whom he has reason to believe to have committed an offence punishable under this Act, and if such person has any narcotic drug or psychotropic substance or controlled substance in his possession and such possession appears to him to be unlawful, arrest him and any other person in his company. Explanation.For the purposes of this section, the expression “public place” includes any public conveyance, hotel, shop, or other place intended for use by, or accessible to, the public

 

Drinking alcohol inside private car amounts to drinking in public place

In 2019, the Supreme Court held that consuming liquor in a private vehicle in a public place will attract the offence under the Bihar Excise Act, which prohibits alcohol. In this case Satvinder Singh Saluja v State of Bihar, the appellant were charge-sheeted under Section 53(a) of the Bihar Excise (Amendment) Act 2016 on the ground that they were found drunk inside a private vehicle. For seeking the quashing of the chargesheet, the appellant argued that Section 53(a), which punishes drinking in a public place, is not applicable as a private car is not a public place.

The SC rejected the first argument on the basis of statutory definitions of ‘public place’ under the Bihar Excise (Amendment) Act 2016 and Bihar Prohibition and Excise Act 2016. As per Section 2(17A) of the Bihar Excise (Amendment) Act “Public Place” means “any place to which the public have access, whether as a matter of right or not and includes all places visited by the general public and also includes any open space”.

According to the Court, the key word in the definition was “access”. Any place to which the public have access, whether as a matter of right or not, is a public place.

It observed that the public can have access to a private vehicle in a road. The Court noted that ‘ access’ has been defined in Black’s Law Dictionary as “A right, opportunity, or ability to enter, approach, pass to and from, or communicate with access to the courts.

As per Section 2(17A) of the Bihar Excise (Amendment) Act “Public Place” means “any place to which the public has access, whether as a matter of right or not and includes all places visited by the general public and also includes any open space”.

According to the Court, the key word in the definition was “access”. Any place to which the public have access, whether as a matter of right or not, is a public place. It observed that the public can have access to a private vehicle on a road. The Court noted that ‘access’ has been defined in Black’s Law Dictionary as “A right, opportunity, or ability to enter, approach, pass to and from, or communicate with access to the courts.” “When a private vehicle is passing through a public road it cannot be accepted that the public has no access. It is true that the public may not have access to a private vehicle as a matter of right but definitely the public have the opportunity to approach the private vehicle while it is on the public road. Hence, we are not able to accept the submission that vehicle in which appellants are travelling is not covered by definition of public place’ as defined in Section 2(17A) of the Bihar Excise (Amendment) Act, 2016, said the judgment authored by Justice Bhushan.

The bench further added that the omission of public conveyance in the definition of Section 2(17A) brought by the Bihar Excise (Amendment) Act, 2016 also indicates that the difference between public conveyance and private conveyance was done away in the statutory amendment. We, thus, cannot accept the submission of the learned counsel for the appellant that private conveyance will be excluded from the definition of public place’ as contained in Section 2(17A)”. The apex court also took into account the fact that the definition of public place’ under Section 2(53) of the Bihar Prohibition and Excise Act 2016 specifically included means of transport, both public and private.

The Kerala High Court has also held that drinking inside a private car at a public place will amount to an offence(Rajendran Pilai and others v State of Kerala This is because after the 2010 amendment to the Kerala Abkari Act, private vehicles parked in any public place were also treated as public places for the purpose of Section 15C of the Act, which prohibits drinking in public places.

Conclusion

Thus it can be concluded that the private vehicle is not a public place under the NDPS Act, but as far as other laws are concerned and the Covid Guidelines are concerned, it can be said that a private vehicle is a public place. Depending on the context, differ from statute to statute. Background circumstances, various deferred judgements have been given by the courts.