India: Foreign Holding Company's Liquidator To Reconstitute Indian Operating Company's Board: Can It Be Done?

In a recent trend in corporate litigation in India, it has been observed that shell foreign companies, controlled by Indians, are floated in tax haven jurisdictions to carry out business activities and to seek loans through such companies for their wholly owned subsidiary companies registered in India. The monies lent to the foreign holding companies are then routed to other jurisdictions, including India. The loan, though given to the foreign holding company, is generally given based on the financial strength of the Indian subsidiary. However, once such foreign holding companies enter into litigation on account of defaults it has been observed that lenders while proceeding against the parent company, also want to take action against the subsidiary company wherein the monies are transferred or lying. Given such a situation, where the receiver/ liquidator is appointed over the assets of the parent company which is declared to be wound up by the concerned foreign Court/ or through other foreign jurisdiction laws, the moot question that arises is whether such foreign liquidator could also exercise its power over the Indian subsidiary company to reconstitute its board and remove its directors?

The said moot question is sought to be debated through this article and a mock situation is taken up considering that the holding company is incorporated in Mauritius while the subsidiary company is in India.

Under the applicable Mauritian law2, a receiver/ liquidator can be appointed by the Lender without resorting to court procedures; however no such corresponding provision exists under Indian Law. Under the Indian Law, the 'Liquidator' is appointed by the court and is under its control and supervision for the purposes of discharging its duties.

Assuming the fact that a liquidator is appointed in Mauritius for the holding company, it is certain that such an appointment would be challenged by the promoters of the Indian subsidiary as the concept of a 'Liquidator' being appointed by the Lender (outside the Court process) is alien to Indian Law. In view of the same, it would be the

Indian Law which would have to be complied with.

Considering the said facts, it is first imperative to set out the modes under which a director can be removed under the Indian Company law provisions.

Mode of Removal of Directors

Under the Company Law provisions3, a director on a company's board can be removed by the shareholders at an Annual or Extraordinary General Meeting by passing an ordinary resolution. It shall be pertinent to define a Shareholder, Annual General Meeting and an Extraordinary General Meeting.:

Share: Section 2(84) of Companies Act, 2013 ("CA13") defines 'share' as a share in the share capital of a company and includes 'stock'.

Although CA 13 or the erstwhile Companies Act of 1956 ("CA56") does not define a 'shareholder' the Supreme

Court through judicial interpretation has propounded that a shareholder is a person who invests in the share of a company and on buying the same becomes entitled to participate in the profits of the company, if and when the profits are declared.4 Further, the term 'member' as laid down by the Supreme Court is used synonymously with 'shareholder' to indicate a person who is recognized by a company as its owner. It has been further held that a member can participate and exercise his vote at the meetings of the company in accordance with the Act and once he becomes a member, he can exercise all the rights of a member until he ceases to be a member which is when he

transfers his share to another person, by operation of law, forfeiture of his share by death or any other reason known to law. Under the rights vesting in him, he has the right to vote at all meetings and the right to requisition an extraordinary general meeting.5

Annual General Meeting: The Annual General Meeting ("AGM") of a company is governed by Section 966 of CA13 which provides that such a meeting has to be called by a company every year, and not more than fifteen months shall elapse between two such AGMs. In an AGM, items of business are discussed.

Extraordinary General Meeting ("EGM") of a company is called by the Board of Directors on request of the members of a company having at least 1/10th of the paid up share capital of the company to set out the matters as made on the requisition. As stated above, the removal of a director can be given effect to in an AGM or EGM by the shareholder, the detailed process of which is set out as below.

Process of Removal of a Director:

The removal of a director by the shareholders of the company is governed by Section 169 of the CA13. According to Section 169 (1) of CA13, the shareholders may, by passing an ordinary resolution at a general meeting remove a director, not being a director appointed by the Tribunal under Section 242 of CA13, before the expiry of the period of his office after giving him a reasonable opportunity of being heard, except any director appointed by the Tribunal for prevention of oppression and mismanagement under Section 242 and a director appointed under principle of proportional representation under Section 163 of CA13. Section 169(2) further states that a special notice shall be required of any resolution, to remove a director under this section, or to appoint somebody in place of a director so removed, at the meeting at which he is removed. As per Section 115 of CA13 only shareholder(s) holding not less than 1% of total voting power or holding share(s)on which an aggregate sum of not less than Rs. Five (5) lakhs has been paid up as on the date of notice, can send a special notice to the company for removal of director by calling an EGM.

In a decision of the apex court in Life Insurance Corporation of India v Escorts Ltd. and Ors,7 it was held that subject to the procedural and numerical requirements of the CA56, every shareholder of a company could exercise the right to call for an EGM for the purpose of removing and appointing new directors. The apex court while considering the effect of appointment of a 'receiver' held that a receiver is merely a custodian of the property under his control by way of a judicial order and thus the privileges of a member of a company, whose names are entered into the Register of members cannot be taken away by mere appointment of a receiver. Thus, the Hon'ble Supreme Court laid down that post the appointment of a receiver, a company has to recognize the call of the registered holder of its shares to call for an EGM, which may be for the purposes of removal

of a director. The above position clarifies that the power to remove the directors from the Board vests with the shareholders alone. Hence, even in a case where a receiver has been appointed over the shares of the company it is the company whose name is entered in the register of Members which remains the shareholder and hence, entitled to participate in an EGM, to effect the process of removal of a director.

Role and Extent of Powers of Official Liquidator

Since we are dealing with the issue as to whether the Liquidator/Receiver would have the powers to reconstitute the Board of Directors of a company, it is important to enumerate the role and powers of the Official Liquidator ("OL") under Indian law. The provisions pertaining to the OL have not been notified under CA13 and are still being governed under CA56. The relevant provisions are as follows:

Section 448 of CA56 provides for appointment of an OL for winding up of a company by a Tribunal and the duties of the OL are laid down by the Tribunal itself. Further, Section 450 of CA56 lays down that a Provisional Liquidator ("PL") may be appointed by a Tribunal after a winding up petition is presented; however the powers of the PL may be restricted, if necessary by the Tribunal or else the PL exercises the same powers as that of the OL. Section 456 of CA56 provides that on an order of winding up, the PL shall be deemed to be the custodian of all the property, effects and actionable claims to which the company under winding up is entitled to from the date of the order of winding up of the company, as an officer of the Court. Further, all other powers of the Liquidator have been stipulated under Section 457 of CA56, which are subject to sanction of the concerned Court. On the appointment of the OL, Section 491 of the CA56 provides that the powers of the board of directors, managing director, whole time directors and manager of the company shall cease to exist; except for giving notice of such appointment of the OL

to the registrar of companies8 or insofar as the company in general meeting or the OL may sanction the continuance thereof.

In a recent judgment of the Supreme Court of India, in "Assistant Commissioner, Ernakulam v Hindustan Urban

Infrastructure9" the role of an OL has been clearly laid down to state that a Liquidator is a mere custodian of the assets of the company in liquidation apart from the power to carry on business of the company for its beneficial winding up, to sell the immovable and movable property and actionable claims of the company, by public auction or private contract, and to do all things as may be necessary for winding up the affairs of the company and distribution of its assets. The apex Court referring to an earlier judgment of the Supreme Court in Hari Prasad Jayantilal & Co. v. V.S. Gupta, Income Tax Officer, Ahmedabad & Anr.10, held that once a liquidatoris appointed, all the powers of the board of directors and of the managing or whole-time directors, managing agents, secretaries and treasurers cease, and the liquidator may exercise the powers mentioned in Section 512 of CA 56 to do such things as may be necessary for winding up the affairs of the company and distributing its assets.

The above judicial decisions and provisions clearly lead to the conclusion that the OL is merely a custodian of the assets of the company subject to the control of the Court/Tribunal and the property does not vest in him but continues to vest in the company. Also, it is pertinent to note that the powers of the OL under Section 457 nowhere explicitly confer in him the power to reconstitute the board of directors.

Further, while the powers of the board cease on the appointment of the liquidator under Section 491 of CA56, the precedents lead to the inescapable conclusion that the board of directors still continue to hold residuary powers, one of them being the power to convene a general meeting under Section 166 of CA56. This has been laid down in the decision of the Bombay High Court in Tata Finance v Chemox Chemical Industries Ltd.11 wherein the issue of whether on appointment of PL, the board becomes defunct was discussed. The Hon'ble Bombay High Court held that on appointment of a PL, the company in question could still defend the proceedings of winding up by way of an appeal, as the board does not become totally defunct and there are still some residuary powers that are left with the board. The bench laid reliance on the judgment of the Kerala High Court of Re: New Era Manufacturing Company Ltd.;12 wherein it was held that in spite of the appointment of a PL, the board of directors could call a general meeting and the board of directors will still have powers in spite of the appointment of a PL which cannot be exercised by the Liquidator

The issue of whether certain residuary powers vest with the board of directors after the appointment of the OL has also been discussed by the Supreme Court in Rishabh Agro Industries Ltd. v. P.N.B. Capital Services Ltd.13 wherein the apex court held that the OL does not possess the power of rehabilitation of the company and the board of directors continue to hold all residuary powers for the benefit of the company, which included the power to take steps for its rehabilitation.

Thus, it is inferred that the role of the liquidator/receiver is limited to the extent of taking charge over the assets of the company being wound up and its distribution amongst the stakeholders.

Position of Foreign Liquidator In Indian Proceedings

Taking in view the moot question here, the status of a foreign liquidator under Indian law is now left to be decided. Indian Courts are bound under the Indian Evidence Act, 1872 to require evidence to be produced on a point of foreign law. Hence, the validity and basis of appointment of a liquidator under Mauritian Law will have to be substantiated by cogent evidence as the Courts in India do not take judicial notice of foreign law.

The apex court in the judgment of Hari Shanker Jain Vs. Sonia Gandhi14 dealing with the interpretation of foreign law by the Indian courts held that under Section 57 (1) of Indian Evidence Act, 1872, the court shall take judicial notice of, inter alia, all laws in force in the territory of India, which does not include foreign laws, and for which the requisite proof and opinion of experts in foreign laws is required.

Further, Section 114(e) of the Indian Evidence Act states that a Court may usually presume that judicial and official acts have been regularly performed. However, dealing with the present issue, the appointment of a liquidator without resorting to court procedures, the presumption as to the validity of a document would not hold good and will have to be substantiated by evidence.

CONCLUSION

In view of the above provisions and the relevant case laws, it is clear that the Liquidator is merely a custodian of the assets of a company under the supervision of the Court and is appointed specifically to carry out such activities as may be necessary for winding up the affairs of the company and distributing its assets.

Thus, merely being a custodian of the assets of a company being wound up does not make the liquidator a shareholder who has the requisite power to reorganize the Board of Directors under the Indian law.

Therefore, the moot question being discussed in this research article that whether a foreign liquidator would have the power to reorganize the Board of Directors of the Indian subsidiary company is answered in the negative.

FOOTNOTES

1 Sanjeev Kumar is a Partner in the Litigation and Dispute Resolution Group at Luthra & Luthra Law Of!ces, New Delhi, India. The views of the author expressed in this article are personal.

2 The Companies Act, 2001 Act No. 15 of 2001

3 The company law provisions in India are contained in the CA 56 and the recent CA 13. CA13 has been enforced with effect from 01.04.2014 and has replaced the erstwhile CA56 except certain provisions which continue to be in force. In view of the same, the corresponding provisions of CA 13 have been footnoted wherever required.

4 Bacha F. Guzdar v. CIT AIR 1955 SC 74

5 Balkrishan Gupta v Swadeshi Polytex Ltd. (1985) 2 SCC 167

6 Corresponding provision is Section 166 of CA56.

7 (1986) 1 SCC 264

8 As provided under Section 493 of CA56

9 (2015) 3 SCC 745

10 AIR 1966 SC 1481

11 AIR 1999 Bom 196

12 (1965) II Comp. LJ 309

13 (2000) 5 SCC 515

14 AIR 2001 SC 3689

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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