In a significant judgment, the Supreme Court of India granted bail to the appellant, who was charged under the Prevention of Money Laundering Act, 2002 (PMLA).
The appellant was charged under Sections 7, 11, and 12 of the PMLA. The allegations stemmed from a predicate offense involving illegal transportation of cattle across the border and subsequent bribery of officials. The Enforcement Directorate (ED) accused the appellant of using the proceeds from these activities for money laundering.
The appellant's counsel presented three key arguments for bail. Firstly, they pointed out that the co-accused in the case had already been granted bail, arguing for parity in treatment. Secondly, they highlighted the prolonged incarceration of the appellant, which, including the period in the predicate offense, amounted to nearly four years. Lastly, they emphasized that the trial was yet to commence, suggesting an undue delay in the judicial process.
The prosecution strongly opposed the bail application. They contended that the charges were extremely serious and that the period of incarceration should not be considered as grounds for bail in this case. The ED also argued that the delay in trial commencement was due to the appellant's request for additional documents.
After considering the arguments from both sides, the Supreme Court decided to grant bail to the appellant.
The Court noted that the appellant had been incarcerated for more than 2½ years in the present case alone. It also considered the complexity of the trial, with 85 witnesses to be examined. The bench observed that even if the period of incarceration in the predicate offense was excluded, the continued detention of the appellant, who was not entirely at fault for the trial delay, warranted consideration for bail.
Importantly, the Court emphasized that the appellant could not be solely blamed for the non-commencement of the trial. It recognized that the delay did not benefit the accused in any way.
This case serves as a significant precedent in matters relating to bail in cases under the Prevention of Money Laundering Act. The judgment is likely to influence future bail decisions in similar cases, particularly where there are substantial delays in trial commencement and prolonged periods of pre-trial detention.
It must be noted that the Supreme Court has recently made significant rulings that potentially ease the stringent bail provisions under the Prevention of Money Laundering Act (PMLA). In cases like Manish Sisodia v. Directorate of Enforcement SLP(Crl) No. 8781/2024 and SLP(Crl) No. 8772/2024 and Prem Prakash v. Union of India through the Directorate of Enforcement SLP(Crl) No. 5416/2024, the Court has emphasized that the principle "bail is the rule, jail is the exception" applies even to PMLA cases. The Court stated that in situations of delayed trials coupled with prolonged incarceration, the right to bail should be read into Section 45 of PMLA, depending on the nature of the allegations. The twin conditions are:
These conditions make it difficult for the accused to secure bail, emphasizing the severity of money laundering offenses and ensuring that bail is granted only in exceptional cases. However, there has been a shift from the Court's earlier stance in Vijay Madanlal Choudhary v Union of India (2022), where it had upheld the stringent bail conditions of PMLA. The Court has now stressed the importance of constitutional rights under Article 21, balancing them against the powers of the Enforcement Directorate under PMLA. These judgments indicate a trend towards fostering safeguards for individual liberty within the PMLA framework, potentially making it easier for accused persons to obtain bail in money laundering cases, especially when trials are delayed.
This case, adjudicated by the High Court of Madhya Pradesh, revisited the critical question of whether secured creditors such as banks, under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), have precedence over dues claimed by government departments like the Customs and Central Excise Department when both parties seek to recover dues from the borrower’s mortgaged property.
M/s Maya Spinners Ltd., is a 100% export-oriented unit engaged in manufacturing cotton, synthetic, and blended yarn. The company, along with other respondents, availed various credit facilities from institutions such as the Madhya Pradesh State Industrial Development Corporation (MPSIDC) and Dena Bank (which later merged with Bank of Baroda). To secure these loans, Maya Spinners Ltd. mortgaged its immovable properties, including its land, buildings, and machinery.
In the course of their business, Maya Spinners Ltd. imported machinery without paying customs duties, as they were classified as an export-oriented unit eligible for duty exemption. However, the company defaulted on customs duty payments amounting to ₹51,00,988 and excise duties of ₹10,14,099. Consequently, the Central Excise and Customs Department initiated proceedings against the company, confiscating machinery and seeking to recover the unpaid dues.
Simultaneously, the financial institutions involved, including MPSIDC and Bank of Baroda, moved to recover their outstanding loans by enforcing their security interests over the mortgaged property, initiating debt recovery proceedings under the SARFAESI Act through the Debt Recovery Tribunal (DRT).
The Customs Department argued that the machinery seized from Maya Spinners Ltd. was lawfully confiscated to recover unpaid customs and excise duties. They asserted that the government’s dues, particularly in relation to customs duties, had priority over all other claims, including those of secured creditors.
To support their position, the Customs Department cited the State Tax Officer v. Rainbow Papers Ltd. (2023) case, where the Supreme Court ruled that the definition of secured creditor in IBC does not exclude any Government or Government Authority on the ground that the financial creditors cannot secure their dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter, any other dues.
The banks and financial institutions argued that as secured creditors, they held a superior claim to the mortgaged property under the SARFAESI Act. They contended that their security interests over the property should take precedence over any dues owed to the government, as provided by Section 35 of the SARFAESI Act, which explicitly states that the Act’s provisions override any other laws.
The respondents further relied on the Punjab National Bank v. Union of India (2022) case, where the Supreme Court ruled that the claims of secured creditors under the SARFAESI Act took precedence over statutory dues, even after the inclusion of Section 11-E in the Central Excise Act.
The Madhya Pradesh High Court ruled in favor of the secured creditors, dismissing the petitions filed by the Customs and Central Excise Department. The court reaffirmed the precedence of secured creditors over government dues, citing the Punjab National Bank decision. The court emphasized that Section 35 of the SARFAESI Act grants secured creditors a first charge on the property, which supersedes any claims of statutory dues. The Court agreed with MPSIDC's reliance on Industrial Development Bank of India v. Superintendent of Central Excise and Customs and others, (2023) in which the Apex Court held that the Customs Act does not override payments due to overriding preferential creditors covered under Section 529-A of the Companies Act 1956. The court held that the customs authorities’ confiscation of the mortgaged machinery was invalid, as the property had already been hypothecated to the secured creditors.
The above ruling aligns with various similar judgments passed in other jurisdictions that have upheld the precedence of secured creditors' rights over the government’s statutory dues.
One of the significant cases reaffirming this principle is the Ronak Industries vs. Assistant Commissioner Central Excise & Customs & Ors. (2023), decided by the Bombay High Court wherein the court upheld that dues of secured creditors would take priority over government dues under Section 26E of the SARFAESI Act. This decision reinforced earlier rulings, such as ICICI Bank Ltd. vs. SIDCO Leathers Ltd., which clearly established that after registration of security interest, secured creditors enjoy precedence over the government’s claims.
Moreover, the Gujarat High Court’s ruling in the case of Madhaviben Jitendrabhai Rupareliya v. State of Gujarat, (Special Civil Application No. 9565 of 2023), further cemented this principle. Here, the court dealt with issues arising from the auction of properties previously owned by defaulters and held that the rights of secured creditors under Section 26E of the SARFAESI Act take precedence over any dues owed to the state, such as sales tax. This judgment was in line with other decisions of the Gujarat High Court, including M/s Mahadev Cotton Industries v. Department of Central Sales Tax and Vinod Realties Private Limited v. State of Gujarat.
The case of Coaster Shoes Company Pvt. Ltd. v. Registrar of Trade Marks & Anr. brings into focus critical questions about the procedural obligations in trademark opposition proceedings, and the rights of parties under the Trade Marks Act, 1999 and the Trade Marks Rules, 2002.
Coaster Shoes Company Pvt. Ltd. is engaged in the manufacturing, marketing, and sale of footwear and has been in the business for several decades. The dispute began when Coaster Shoes Company sought to protect its trademark "TRAVEL FOX," which was first adopted by its predecessor, Apex Shoes Co. Pvt. Ltd., in 1999 and used since 2000. Over time, this trademark built substantial goodwill and recognition in the Indian market.
The central issue arose in 2007 when Respondent No. 2 filed applications for trademarks proposing the use of a mark similar to "TRAVEL FOX." The petitioner promptly filed opposition proceedings on 8th March 2010 against these applications, claiming that the impugned mark was deceptively similar to its registered and widely used trademark, thus creating confusion in the market.
Petitioner alleged non-receipt of the counter-statement from Respondent No. 2, which is essential for the progression of opposition proceedings.
The most significant issue in this case was whether the Registrar of Trade Marks fulfilled its statutory duty by properly serving the counter-statement filed by Respondent No. 2 to the Petitioner.
Section 21(3) of the Trade Marks Act, 1999 stipulates that the Registrar of Trade Marks must serve a copy of the counter-statement filed by the applicant (Respondent No. 2) on the opponent (the Petitioner, in this case) within a reasonable period. The service of the counter-statement triggers the next stage in opposition proceedings. Rule 50 of the Trade Marks Rules, 2002 requires the opponent (Petitioner) to file evidence in support of the opposition within two months from the date of service of the counter-statement. Failure to do so leads to the abandonment of the opposition. Section 27 of the General Clauses Act, 1897 establishes a presumption of service when a document is properly addressed, prepaid, and sent by post. However, this presumption is rebuttable if the party can provide evidence showing non-receipt.
The Petitioner emphasized that it had never received the counter-statement from Respondent No. 2 or from the Registrar of Trade Marks. They contended that under Section 21(3) of the Act, it is the statutory duty of the Registrar to serve the counter-statement. As no evidence of service was provided, the timeline for filing evidence under Rule 50 never started. Even though Section 27 of the General Clauses Act allows for the presumption of service once a document is dispatched, the Petitioner argued that they successfully rebutted this presumption by presenting evidence (such as written follow-ups and affidavits from their legal representatives) proving that the counter-statement was never received. Respondent No. 1, the Registrar of Trade Marks claimed that the counter-statement was dispatched on 30th March 2012 via speed post to the Petitioner’s address. He provided dispatch records from their system as proof of service. He argued that under Section 27 of the General Clauses Act, service is deemed complete once the document is dispatched by post, irrespective of whether it was received or not.
In its judgment, the court found that the Registrar of Trade Marks failed to provide conclusive evidence proving that the counter-statement had been received by the Petitioner. The court noted that while dispatch may have occurred, no proof of delivery was furnished, which is crucial in cases where statutory rights are impacted. The court accepted the Petitioner’s argument that the presumption of service under Section 27 of the General Clauses Act had been successfully rebutted.
This case highlights how procedural technicalities should not overshadow the substantive rights of parties, especially in matters involving the protection of intellectual property.
The Delhi High Court recently in the case of Blackberry Limited v. Controller Patents and Designs (2024:DHC:6572) declined an appeal by BlackBerry Limited (“Appellant”) against the decision of the Assistant Controller of Patent rejecting the patent application of the Appellant in wireless communication. The appellant has applied for the patent for "Administration of Wireless Systems," which proposed a method for managing wireless systems by configuring client devices using primary and secondary wireless servers. The Assistant Controller of Patents and Designs rejected this application under Section 3(k) of the Indian Patents Act of 1970 stating that the application for the patent was directed towards a set of instructions that were purely functional and lacked any inventive hardware features.
Appellant is a corporation specializing in telecommunication products and solutions. It filed a patent application in India in 2009 for a method titled "Auto-Selection of Media Files". The patent aimed to address challenges related to the management of media content in digital devices. The invention involved automatically selecting media files based on a confidence level that measures the user’s preferences (likability), thereby optimizing storage use on a given device.
As per the appellant, their invention addressed the technical problem of conflicts between multiple wireless servers, ensuring proper device operation. They contended that the process prioritized servers and resolved conflicts between instructions from different servers. BlackBerry claimed this demonstrated a technical effect and practical application, thus avoiding the Section 3(k) objection.
It was further the argument of the appellant that the subject patent was not merely a computer program or algorithm but a technical invention that solved a significant technical problem. It allows for the automatic selection of media files based on the available storage space and user preferences, a solution that is technical in nature and involves more than just software. This optimizes media file management in devices, significantly improving the device's functionality. This enhancement of device capability constitutes a technical effect and should be eligible for patent protection.
The appellant’s application was initially refused by the Indian Patent Office on the ground that it violates Section 3(k) of the Patents Act, which prohibits the patenting of computer programs and algorithms. The company appealed to the Intellectual Property Appellate Board (IPAB) which was transferred to the Delhi High Court after the Tribunals Reforms Act, 2021, abolished the IPAB.
In evaluating the appeal, the Court examined the claims, nature, scope, and substance of the invention by reviewing the complete specification. The Court found that the invention primarily organized information flow between wireless systems and servers. The patent application essentially described a structured approach to managing operations within wireless systems, based fundamentally on algorithmic processes.
The Court determined that the claims pertained to the general concept of managing mobile wireless clients using primary and secondary servers.
In its analysis, the Court referred to previous judgments, including Ferid Allani v. Union of India & Ors. (2019) and Raytheon Company v. Controller General of Patents and Designs (2023) wherein it was clarified that computer-related inventions should not be evaluated based on hardware requirement alone, but on their technical contribution or effect.
The Court found that despite being technical, the core functionality relied on logical instructions and reflected an instructional nature. The Court held that to overcome Section 3(k) limitations, a patent must demonstrate a specific and credible technical effect beyond general computer functioning. Inventions integrating elements to enhance system functionality could be patentable if meeting all criteria. This means there is a necessity to demonstrate a further technical effect through the incorporation of algorithms within a system in order to qualify for patent protection. Mere algorithms, sets of instructions, and mathematical or business methods cannot be patentable.
The Court concluded that while the application made a technical contribution, it primarily arose from an algorithmic process regulating information flow through a sequence of instructions, without demonstrating a further technical effect upon implementation. The claims and specification indicated that the invention's core functionality relied on conditional logic and procedural steps, falling under the exclusion criteria of Section 3(k) of the Indian Patents Act. Consequently, the Court dismissed the appeal, upholding the refusal of the patent application.
The Supreme Court of India recently in a judgment, addressed a criminal appeal arising from SLP (Criminal) No. 4370 of 2023 wherein the case involved a complaint filed under Section 138 of the Negotiable Instruments Act, 1881. Initially, the trial court convicted the appellant. However, on appeal, this conviction was overturned, and the accused was acquitted. The matter then reached the High Court through a revision petition, where the High Court reversed the appellate court's acquittal and convicted the appellant.
The primary legal issue in this case involved the scope of the High Court's revisional powers under Section 401 of the Code of Criminal Procedure, 1973 (CrPC). The appellant argued that under sub-section (3) of Section 401, the High Court lacks the authority to convert a finding of acquittal into a conviction while exercising its revisional jurisdiction. The respondent, on the other hand, argued for the merits of the conviction.
The Supreme Court, in its decision, focused on the procedural aspect rather than the merits of conviction. It emphasized that Section 401(3) of the CrPC explicitly prohibits the High Court from converting an acquittal into a conviction in its revisional capacity. The court found that the High Court had overstepped its authority in doing so in its judgment.
As a result, the Supreme Court deemed the decision of the High Court unsustainable. It noted that if the High Court was convinced of a wrongful acquittal, the proper course of action would have been to remit the matter back to the appellate court for re-appreciation, rather than directly ordering a conviction.
Hence, the Supreme Court remitted the case back to the appellate court which was the Additional District and Sessions Judge, and ordered both parties to appear before this court within four weeks from the date of the order. The appellate court was instructed to render an appropriate decision after considering the contentions of both parties.
This judgment underscores the importance of procedural correctness in the criminal justice system, particularly regarding the limits of revisional powers of higher courts. It reaffirms the principle that even if a higher court disagrees with an acquittal, it must follow the proper legal procedure rather than exceeding its powers.
Delhi High Court has recently brought closure to a 23-year legal battle between two global fashion powerhouses in its judgment titled Lacoste & Anr. v. Crocodile International Pte Ltd & Anr. [2024: DHC: 6150]. The case involved Lacoste S.A. (Plaintiff), a French luxury sportswear brand, and Crocodile International Pte Ltd (Defendants), a Hong Kong-based company. The dispute involved the use of a crocodile logo trademark.
The dispute dates back to the early 1980s wherein Lacoste applied to register its crocodile device mark and logo trademark in India for Class 25 products in 1983. In 1993 Lacoste began using its trademark in India. In the year 1952, the founder of Crocodile International brand applied for trademark registration in India which was assigned to it the next year. In 1997, Crocodile International launched products and advertisements in India using the logo which led to the controversy between the parties.
In the instant dispute, the court examined several critical aspects including Trademark infringement, Copyright infringement, passing off, and validity of a 1983 co-existence agreement between the parties.
Regarding the jurisdiction of the court to try the dispute, the court affirmed its jurisdiction based on Section 62(2) of the Copyright Act, 1957, on the ground that Defendant offered apparel displaying the logo trademark mark in retail outlets across India and the Plaintiff owns a valid copyright, subsisting the world over, including India.
To analyse the issues involved in the dispute, the court focused on two main factors: the distinctiveness of Lacoste's logo and the similarity between the two logos and potential for consumer confusion. The court found substantial similarities between the marks, supporting Lacoste's claim of trademark infringement.
As far as the claims of passing off are concerned, while the court acknowledged similarities in the logos, it did not find sufficient grounds for claims of passing off or copyright infringement. The court noted that Lacoste's reputation was not well-established when Crocodile International began using its similar mark. Similarly, the Court did not find merits in the issue of copyright infringement by the Defendant, stating that both logos are derived from a common abstract concept i.e., a crocodile which has limited variations possible.
The court further took note of a 1983 international agreement between the parties which became a significant point of contention. The court's analysis revealed that the agreement had specific geographical limitations and tt did not explicitly include India in its scope. The court further explained the importance of concept of territoriality stating that it is pertinent to consider the principles of trademark law, particularly the concept of territoriality, which plays a decisive role in determining the scope of trademark agreements. Trademark rights are inherently territorial which means they are confined to the jurisdictions in which they are granted and enforced and this principle of territoriality ensures that a trademark registered in one country does not automatically confer rights to the holder in another, unless explicitly stated through international agreements or treaties. Since the 1983 Agreement explicitly listed certain countries which do not include India, it is clear that the parties intended to limit the scope of the Agreement to those territories only. Hence, obligations cannot be presumed to extend beyond the territories for which they were specifically negotiated.
While the court did not find grounds for passing off or copyright infringement, it ruled that the similarity between the logos constituted trademark infringement. As a result, a permanent injunction was issued against Crocodile International, and the company is barred from producing, marketing, or selling goods with the disputed trademark. It was further ruled that Crocodile International must account for profits from sales of goods with the infringing mark since August 1998. This ruling marks a significant victory for Lacoste in protecting its iconic crocodile trademark and underscores the importance of distinctive branding in the global fashion industry.
In the case of Mahesh Gupta v. Assistant Controller of Patents and Designs, the Delhi High Court upheld the decision of the Respondent- Assistant Controller of Patents and Designs to refuse the appellant’s patent application for a Portable Vehicle Management System. The Assistant Controller of Patents and Designs reused the patent stating that it does not meet the inventive step requirement under Section 2(1)(ja) of the Indian Patent Act, 1970, and fails to qualify as an invention under Section 2(1)(j) of the Act.
The Appellant contended that the Respondent failed to apply widely accepted tests for evaluating the inventive step, as outlined in the Manual of Patent Office Practice and Procedure. The Appellant further emphasized the invention's portability which is a key feature that was overlooked by the Respondent. Additionally, the Appellant argued that the Respondent did not properly establish the standard of a Person Having Ordinary Skill in the Art (“PHOSITA”) and instead assessed the prior art from the perspective of an overly skilled and innovative researcher.
As per the Appellant, the Patent allowed vehicle owners to monitor their vehicle’s operation remotely, a problem not addressed by the prior art, which mainly focused on warning nearby drivers of reckless driving or assessing risks related to using portable devices while driving. The Appellant also claimed that the Respondent's conclusion of obviousness based on prior art documents D4 and D5 was not communicated to them which basically means they were denied a fair opportunity to respond. They also cited Hoffmann-La Roche Ltd. & Anr. v. Cipla Ltd. and Enercon (India) Limited v. Aloys Wobben concerning hindsight bias.
The central issue before the Court was whether the claims of the Subject Patent demonstrated an inventive step in light of the teachings of prior art documents D4 and D5. Upon comparing the technical advancements of the Subject Patent with those disclosed in D4 and D5, the Court found that the invention did not reveal any substantial improvements over the prior art. It noted that the features and functionalities claimed in the Subject Patent, such as real-time monitoring, anomaly detection, alert generation, emergency response, and sensor integration, were comprehensively covered by D4 and D5. While face detection and masking weren't explicitly mentioned in the prior art, the court deemed this an obvious addition for a Person Skilled in the Art (PSITA) given the widespread use of such technology.
The court discussed the concept of "mosaicking" which is combining multiple prior art references and concluded that integrating the teachings of D4 and D5 would lead a PSITA to a solution very similar to the subject patent, representing a natural progression rather than a significant leap in technology.
Addressing non-obviousness, the court defined a PSITA in this context as someone proficient in on-board diagnostics design and current with the latest developments. It determined that such a person would likely arrive at the claimed invention given the existing technologies and industry needs.
The court also considered the issue of hindsight bias, emphasizing the importance of evaluating prior art from the perspective of a PSITA at the time of invention. It concluded that D4 and D5 provided a clear path to the claimed invention without relying on hindsight.
Ultimately, the court upheld the rejection of the patent application, holding that the claimed invention lacked an inventive step as required under Section 2(1)(ja) of the Indian Patent Act and the features of portability, comprehensive monitoring, and anomaly detection were either disclosed in or could be inferred from the prior art. The Court concluded that the claimed invention lacked an inventive step. The features of portability, comprehensive monitoring, and anomaly detection were either disclosed or could be reasonably inferred from prior art. Consequently, the Court upheld the rejection of the Subject Patent application under Section 2(1)(ja) for failing to demonstrate an inventive step.
[WP (C) No. 115/2004]
The supreme court’s division bench comprising Justices BV Nagarathna and Sanjay Karol delivered a split verdict in a batch of public interest litigation challenging the 2022 decision of the Genetic Engineering Appraisal Committee (GEAC) which granted conditional approval for the environmental release of transgenic mustard hybrid, ‘Dhara Mustard Hybrid-11 (DMH-11)’ to the Centre.
Justice Nagarathna has delivered the judgment against the GEAC's approval, thereby quashing the same and Justice Karol gave judgment in favor of the approval for the field trials of DMH-11. However, both the judges agreed upon some points and issued directions in that regard, and the matter is now placed before the Chief Justice of India to constitute a larger bench.
The Genetic Engineering Appraisal Committee (GEAC) granted conditional approval for the environmental release of DMH-11 based on the views of various committees, sub-committees, and expert reviews. The primary legal issues revolve around the regulatory framework, public participation, environmental and health safety, and the application of the precautionary principle. The petitioners, including Gene Campaign, contended the approval process for the environmental release of DMH-11, citing deficiencies in the regulatory framework, lack of public participation, and potential environmental and health risks. It was the case of the petitioners that the Rules for Manufacture, Use, Import, Export and the Storage of Hazardous Micro-organisations, Genetically Engineered Organisms or Cells, 1989 under the Environment (Protection) Act, 1986 are not in conformity with the Articles 14, 19, 21, 38, 47, 48, 48A read with 51A(g) of the Indian Constitution and India's international obligations under the 1992 UN Convention on Biological Diversity and the Cartagena Protocol on Biosafety in terms of health safeguards, precautionary principles, sustainable development, polluter pay principle and intergenerational equity doctrine.
Moreover, concerns were raised regarding the lack of public consent and participation since the 1989 Rules do not allow the public to access information despite the technology of Genetically Modified Organisms (GMOs) having possible adverse effects on human and animal health, socio-economic conditions, and the environment. The trial of GMOs has been going on in the Supreme Court since 2004. The court has issued directions from time to time and in 2006, it permitted planting DMH-11 for environmental purposes in specifically identified fields. A Technical Expert Committee (TEC) was also instituted in 2012, which submitted its report highlighting various concerns on GMOs and suggesting more field trials to address the issues related to tests. Based on the report and the concerns raised, the Union Government halted the release of GMOs in 2016 and sought public opinion. The court was subsequently informed that no decision on the plantation of GM Mustard had been taken. However, in 2022, the GEAC granted conditional approval for conducting trials of DMH-11 which led to the present proceedings.
Justice Nagarathna in her opinion opined that that the biosafety dossier for the DMH-11 was not available for public inspection. This was contrary to the earlier process, wherein the biosafety dossier regarding Bt cotton and Bt brinjal was put in the public domain after the Court’s directions. This allowed critical examination of the same by national and international experts. This led to the approval given by GEAC having to be put on hold by the Ministry, as it became apparent that GEAC had not complied with the regulatory mechanism. However, by not making the DMH-11 dossier available violated the court's direction issued in 2008.
After taking note of the flaws in the procedure adopted by GEAC for DMH-11 and the approval by MoEF&CC, she held that the MoEF&CC has no role to play in approving the decision of GEAC. Moreover, the approval was made without consulting States which is mandatory since agriculture is a State subject under Entry 4, List II. Further, she has pointed out the lack of involvement of health experts. Justice Nagarathna emphasized that requisite environmental information formed a part of the right to information in the instant case which was denied to the citizens since it was not disclosed. Given the fact that the unanticipated consequences of the environmental release of DMH-11 remain in the sphere of uncertainty, she took the decision not to allow the release of DMH-11. On precautionary principles, she observed that the apprehensions of the petitioners that HT crops would exert a highly adverse impact over time on sustainable agriculture, rural livelihoods, and the environment are not unfounded. It is reasonable to infer that there is a potential of loss of species of Indigenous mustard crop, as India is the center of origin and diversity. The precautionary principle was upheld by the Supreme Court as an essential feature of sustainable development in Vellore Citizens Welfare Forum vs UOI 1996 5 SCR 241. Justice Nagarathna ultimately issued certain directions for the future environmental release of the DMH-11. She stated that they should take a decision on whether transgenic mustard hybrid DMH-11 is an HT crop or not, by having a wide and meaningful consultation on the report of TEC submitted to this Court with all stakeholders. For that, MoEF&CC must publish an official report, with adequate publicity. She directed GEAC to upload the biosafety dossier on the website. After concluding that that transgenic mustard hybrid DMH-11 is a HT crop, the nature of risk that would be caused by the said plant must be researched and deliberated upon by GEAC and MoEF&CC.
Justice Karol took the opposite opinion and held that the decision of GEAC does not suffer from the non-application of mind since it was based on multiple documents, not on the comments of the expert committee alone. He further denied the contention raised by the petitioners that the 1989 Rules, under which the GEAC is constituted, is unconstitutional primarily because the GEAC consists of executive members stating that members were made to sign a declaration of independence by the government. On the issue of the precautionary principle, Justice Karol held that the balance between environmental protection and developmental activities could only be maintained by strictly following the principle of “sustainable development”. The approval of DHM-11 is in line with a developmental approach of a scientific temper. However, he refused to issue directions on whether DMH-11 is an HT crop or not, expressing the court's lack of expertise.
The division bench agreed on the necessity of National Policy with regard to GM crops in the realm of research, cultivation, trade, and commerce in the country and directed the respondent-Union of India to evolve the same. The respondents were directed to ensure that the said National Policy shall be formulated in consultation with all stakeholders, such as, experts in the field of agriculture, biotechnology, State Governments, representatives of the farmers, etc. The decision reinforces the application of the precautionary principle in environmental decision-making, ensuring that potential risks are adequately assessed and mitigated.
The Supreme Court recently settled significant issues relating to the interplay between corporate guarantees, the Insolvency and Bankruptcy Code, 2016 (for short, 'the IBC'), and the Indian Contract Act, 1872 (for short, 'the Contract Act'). The Court clarified the legal position on the liability of corporate debtors and guarantors in insolvency proceedings.
The facts of the case which led to the dispute involved a loan of Rs. 100 crores which was granted by SREI Infrastructure Finance Ltd. (financial creditor) to Gujarat Hydrocarbon and Power SEZ Limited (corporate debtor). This loan was secured by a corporate guarantee from Assam Company India Limited (ACIL) which is the holding company of the corporate debtor. After several defaults, insolvency proceedings were initiated against ACIL. The appellant, BRS Ventures Investments Ltd., became the successful resolution applicant for ACIL and paid Rs. 38.87 crores to the financial creditor as per the approved resolution plan. Subsequently, the financial creditor initiated insolvency proceedings against the corporate debtor for the remaining loan amount.
The Supreme Court, after analyzing rival submissions by the parties, dismissed the appeal. The Apex Court placed reliance on the judgment of Lalit Kumar Jain v. Union of India & Ors (2021) 9 SCC 321 and held that the approval of a resolution plan for a corporate guarantor does not ipso facto discharge the liability of the principal borrower. After placing reliance on Laxmi Pat Surana v. Union of India & Anr. (2021) 8 SCC, the Court emphasized that the liability of the principal borrower and the guarantor is co-extensive, and the creditor can proceed against either or both simultaneously under the IBC. In other words, it was clarified that as per Section 128 of the Contract Act, seeking repayment from either party will not exhaust remedies against the other.
The Apex Court further clarified that the assets of a subsidiary company cannot be included in the resolution plan of the holding company and The financial creditor can always file separate applications under Section 7 of the IBC against the corporate debtor and the corporate guarantor. The applications can be filed simultaneously as well. This interpretation was based on Sections 18 and 36 of the IBC, which explicitly exclude the assets of Indian subsidiaries from the definition of 'assets' in insolvency proceedings.
Further, the court noted that under Section 140 of the Contract Act, when a guarantor pays a part payment for the entire outstanding amount payable to the creditor, the equitable right of subrogation is limited to the extent of the debt cleared. In this case, the appellant's right of subrogation was limited to the Rs. 38.87 crores paid on behalf of the corporate guarantor. The subrogation will be only to the extent of the amount recovered by the creditor from the surety. Even after the subrogation to the extent of the amount paid on behalf of the corporate guarantor by the resolution applicant, the right of the financial creditor to recover the balance debt payable by the corporate debtor is in no way extinguished.
The Apex Court reaffirmed that a holding company and its subsidiary are always distinct legal entities. The holding company would own shares of the subsidiary company. In the case of Vodafone International Holdings BV v. Union of India & Anr (2012) 6 SCC 613, this Court took the view that if a subsidiary company is wound up, its assets do not belong to the holding company but to the liquidator. That does not make the holding company the owner of the subsidiary's assets. On this basis, the court rejected the appellant's argument that the corporate debtor's assets were part of ACIL's insolvency proceedings.
The Supreme Court's ruling provides clarity on several critical aspects of insolvency law and corporate guarantees. It upholds the principle of co-extensive liability of the principal borrower and guarantor while maintaining the separation of corporate entities. The judgment also offers a nuanced interpretation of the right of subrogation, balancing equitable principles with the literal interpretation of the Contract Act.
This decision will have significant implications for future insolvency proceedings involving corporate guarantees and holding subsidiary relationships. It reinforces the rights of creditors to pursue claims against both principal borrowers and guarantors, even after the resolution of one entity's insolvency. The judgment also provides valuable guidance on the interpretation of key provisions of the IBC and the Contract Act in the context of corporate insolvencies.
In the intricate tapestry of corporate law, where the threads of individual responsibility and corporate liability intertwine, the Supreme Court of India has once again provided a clarifying stitch. The recent judgment in the present case marks a significant development in the interpretation of Section 141 of the Negotiable Instruments Act of 1881. This case, arising from the quashing of criminal proceedings against a company director, delves into vicarious liability in cases of dishonored cheques. The Court's decision addresses a perennial issue in corporate criminal jurisprudence, to what extent can directors be held personally liable for the financial misdeeds of their companies?
The Supreme Court, after carefully considering the arguments presented by both parties and examining the relevant legal precedents, allowed the appeals reaffirmed the principle that merely being a director of a company does not automatically make one liable under Section 141 of the Negotiable Instruments Act. Relying on State of Haryana vs. Brij Lal Mittal and others (1998) 5 SCC 343, the Court emphasized that vicarious liability arises only if, at the material time, the person was in charge of and responsible for the conduct of the company's business. The Court relied on the judgment in S.M.S. Pharmaceuticals Ltd. vs Neeta Bhalla and another (2007) 9 SCC 481, which established that there must be clear and specific averments showing how a director was responsible for the company's conduct. The Court noted that simply reproducing the words of Section 141 without supporting facts is insufficient to establish vicarious liability. Further, the Court found that the only specific allegation against the appellant was that she, along with the second accused, had no intention to pay the dues owed to the complainant. The complaint stated that both were directors and promoters of the company, but crucially, it specified that only the second accused was the authorized signatory in charge of day-to-day affairs. The Court determined that these averments were not sufficient to invoke Section 141 against the appellant. It noted the absence of any specific allegation that the appellant was in charge of or responsible for the day-to-day affairs of the company. The Court also observed that it was not the complainant's case that the appellant was either the Managing Director or Joint Managing Director of the company.
The Court referred to a series of its own judgments, including Pooja Ravinder Devidasani vs. State of Maharashtra and another (2014) 16 SCC 1, Ashoke Mal Bafna vs. Upper India Steel Manufacturing and Engineering Company Limited (2005) 8 SCC 89, and Lalankumar Singh and others vs. State of Maharashtra 2022 SCC OnLine SC 1383. These cases consistently held that for making a director liable under Section 141, there must be specific averments showing how and in what manner the director was responsible for the conduct of the company's business. The Supreme Court found that the High Court had erred in dismissing the appellant's petition for quashing the criminal complaints. It held that given the lack of specific allegations against the appellant regarding her role in the company's affairs, the continuation of criminal proceedings against her was not justified.
Consequently, the Supreme Court allowed the appeals and set aside the judgment of the High Court, It further quashed and set aside the under Section 138 read with Section 142 of the Negotiable Instruments Act, but only insofar as they pertained to the appellant.
The Court's decision serves as a significant precedent, offering protection to directors who are not actively involved in a company's daily affairs from being automatically implicated in criminal proceedings related to the company's financial transactions. The judgment reiterated the position upheld in various judgments. Earlier, in National Small Industries Corporation Limited v. Harmeet Singh Paintal & Anr. (2010) 3 SCC 330, the Supreme Court reiterated the principle laid down in S.M.S. Pharmaceuticals Ltd., emphasizing that specific allegations against the directors regarding their role in the day-to-day management of the company are necessary for their liability under Section 141 of the Negotiable Instruments Act, 1881. In Ashoke Mal Bafna v. M/s. Upper India Steel Manufacturing And Engineering Company Ltd. the Supreme Court reiterated that to hold a director liable under Section 138, it must be shown that the director was in charge of and responsible for the conduct of the business of the company. Vague and general allegations without specific details are not sufficient.
In the present case, a Petition was filed before the Hon’ble Gujarat High Court challenging the actions/measures taken by the Bank under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”).
The Petitioner contended that the Notice under section 13(2) of the SARFAESI Act issued by the Respondent Bank did not mention the break up of the principal amount and the interest amount and hence, the Notice was defective and in contravention of the provisions of the SARFAESI Act.
In view of the above facts and circumstances, the Hon’ble High Court relied upon the judgment of Punjab National Bank Vs. Mithilanchal Industries Pvt. Ltd., wherein it was held:
“29. The words used in Section 13(3) of the SARFAESI Act are “details of the amount payable by the borrower as also the details of the secured assets intended to be enforced by the Secured Creditor.” So, the notice under Section 13(2) of the SARFAESI Act has to necessarily contain the details on the above two counts.”
In view the aforesaid, it was held that in accordance with section 13(3) of the SARFAESI Act, providing of the principal amount and interest amount was necessary for the purpose of making demand in the Notice issued under section 13(2) of the SARFAESI Act. In was held that Section 13 (3A) of the SARFAESI Act gave right to the borrower to make a representation or raise an objection against the notice under section 13(2). Therefore, it was observed that unless the borrower knew the details of the amounts being demanded under a notice under section 13(2), the borrower would not be in a position to make any representation or raise any objection.
Thus, the petition was allowed by the Hon’ble Court, and the Bank was restrained from taking any possession of the secured assets of the Petitioners pursuant to the notice issued under section 13(2) of the SARFAESI Act and the actions under sections 13(4) and 14 of the SARFAESI Act till the final disposal of the Securitization Application pending before the Debt Recovery Tribunal.
The present case was looked after, thoroughly researched and argued by our firm, White and Brief, Advocates and Solicitors. In the present case, we were representing Mr. Rahul Visaria. The issue arising for consideration in the present case was a dispute over alleged fraudulent shares transfer leading to the dilution of Mr. Visara’s share in the company, prompting legal action under section 241-242 of the Companies Act, 2013.
The factual basis of the present case was such that Mr. Rahul Hemchandra Visaria (“Applicant”) was originally a holder of 51.67% of shares in the company. However, the Respondents herein fraudulently changed the address of the company and subsequently, removed the Applicant from the directorship of the company. Being aggrieved, the Applicant approached the Hon’ble National Consumer Law Tribunal (“NCLT”) under Section 241-242 of the Companies Act, 2013.
However, at the time when the Respondents filed its reply challenging the maintainability of the said Company Petition, the Applicant learnt that the Applicant’s shares in the company had been diluted by the Respondents herein, without any knowledge of the Applicant. Hence, the Applicant approached the NCLT seeking waiver of the requirement specified under Section 244(1)(a), which came to be allowed, thereby granting an opportunity to the Applicant to proceed with the Company Petition, despite being disqualified as a member of the company, on account of the fraudulent shares transfer.
Therefore, the Tribunal held that the alleged fraudulent transfer of the shares itself has disentitled the Applicant from maintaining the Company Petition on account of him becoming a non-member, therefore, such fraudulent transfer itself would constitute a case of oppression qua a member, who ceased to be a member on account of such fraudulent transfer. Therefore, the Hon’ble Tribunal found it appropriate to waive the conditions stipulated under Section 244(1)(a) of the Companies Act, 2013.
This decision highlights the importance of addressing fraudulent activities that impact shareholding and demonstrates the Tribunal’s commitment to enabling individuals to seek redress for such actions.
Section 109A(3) Of the Companies Act 1956 was inserted by the Companies (Amendment) Act, 1999 w.r.e.f. 31-10-1998. As per this section, any shareholder or debenture holder can nominate a person to receive their shares or debentures in the event of their death but the nomination must be made in a prescribed manner. In cases where the shares or debentures are held jointly by more than one person, they can collectively nominate a person to receive all rights to the shares or debentures if all joint holders die. This nomination must also be made in the prescribed manner. Clause 3 of this section is more like a Supremacy of Nomination clause. It states that the nomination supersedes any other law or testamentary disposition regarding the shares or debentures and Upon the death of the shareholder or all joint holders, the nominee gains all rights to the shares or debentures, excluding all other persons unless the nomination is varied or canceled as prescribed. In case the nominee is a minor, the shareholder or debenture holder can appoint another person to be entitled to the shares or debentures until the nominee reaches adulthood. However, this appointment must also follow the prescribed manner.
Clause 3 provides Supremacy Over Other Laws and Wills. This clause mandates that the nomination made according to the prescribed manner takes precedence over any other laws or dispositions (including wills and other testamentary documents). It confers rights on the Nominee by granting the right to receive the shares or debentures of the company upon the death of the shareholder or the death of all joint holders. After the death of the shareholder or all joint holders, the nominee automatically becomes entitled to all the rights in those shares or debentures. This means no one else can claim those shares or debentures, regardless of what other legal documents (like a will) might say. This exclusive right of the nominee can only be changed if the nomination is varied or canceled.
However, all this is subject to one requirement- nomination or cancellation has to be properly made.
A similar issue came to the Supreme Court in Shakti Yezdani & Anr. v. Jayanand Jayant Salgaonkar & Ors. The facts that have risen to the instant dispute were, that oneJayant Shivram Salgaonkar executed a will on 27.06.2011, making provisions for the devolution of his estates upon successors. Apart from properties mentioned in the will, he had fixed deposits (FDs) worth Rs. 4,14,73,994/- where respondents 2, 4, and appellant 2 were nominees.
He also had mutual fund investments (MFs) worth Rs. 3,79,03,207/- where appellants and a trust (respondent 9) were nominees. After Salgaonkar's death on 20.08.2013, respondent 1 filed a suit seeking the administration of properties under court supervision. Appellants claimed they were sole nominees to MFs and FDs, and nomination vested absolute ownership in them under Section 109A of the Companies Act, 1956.
The issue before the court was whether the nominee under Section 109A of the Companies Act, 1956, becomes the absolute owner of the shares/securities, superseding testamentary or intestate succession laws.
Appellants argued that Section 109A uses terms like 'vest' and 'to the exclusion of others,' along with a non-obstante clause, all of which intends to grant absolute ownership to nominees. They further argued that nomination under the Companies Act is different from other legislations and cannot be interpreted based on judgments pertaining to those laws. As far as the non-obstante clause is concerned, according to the appellants, it overrides any other disposition, including testamentary, and hence confers absolute rights on the nominee. Consequently, nomination under Section 109A constitutes a 'statutory testament' overriding laws of succession.
Respondents contended that a plethora of judicial pronouncements hold that nomination does not make the nominee an absolute owner, excluding legal heirs. With regard to the Companies Act, as per the respondents, it does not deal with succession laws and cannot be interpreted to create a third mode of succession. The non-obstante clause is limited to enabling the company to deal with securities after the shareholder's death, not granting ownership to the nominee to the exclusion of the successors. Consequently, the nomination cannot be equated with a 'statutory testament' or a will, which requires rigorous formalities under succession laws.
After considering the rival submission of the parries, the court concluded in favor of successors. While dismissing the appeal, the court held that the nominee under Section 109A of the Companies Act, 1956, does not become the absolute owner of the shares/securities, overriding the laws of succession.
Even if the widest possible interpretation of the provision of nomination within the Companies Act, of 1956 is taken, it will not be possible to hold that the same deals with the matter of succession in any manner. In absence of any material evidence, it cannot be interpreted that the intent of the legislature behind introducing a method of nomination through the Companies (Amendment) Act, 1999 was to confer absolute title of ownership of property/shares, on the said nominee.
The provision of nomination begins with a non-obstante clause and/or is armed with the term ‘vest’ in the Banking Regulation Act, 1949, the Government Savings Certificate Act, 1959, and/or the Employees Provident Fund Act, 1952 wherein multiple courts have rejected the argument that the nominee would become the absolute owner to the exclusion of the legal heirs. If this court holds otherwise it would exceed the scope and extent of S. 109A of the Companies Act, 1956.
The court placed reliance on judgments like Sarbati Devi v. Usha Devi, Vishin N. Khanchandani v. Vidya Khanchandani, and Ram Chander Talwar v. Devendra Kumar Talwar, to conclude that the nomination does not exclude legal heirs or create a third mode of succession.
Consequently, the Court rejected the argument that nomination under Section 109A constitutes a 'statutory testament' which overrides laws of succession and held that the said deposit is a part of the deceased depositor’s estate and is subject to the
laws of succession, that govern the depositor. It further added that, unlike a will, the nomination is not subject to the rigors and formalities under succession laws for making and validating a will. Therefore, the argument by the appellants of nomination as a ‘statutory testament’ cannot be countenanced because the Companies Act, 1956 does not deal with succession nor does it override the laws of succession. It is beyond the scope of the company’s affairs to facilitate succession planning of the shareholder. In the case of a will, it is upon the administrator or executor under the Indian Succession Act, 1925, or in case of intestate succession, the laws of succession to determine the line of succession.
Companies drive economic growth for the country which leads to societal progress and development by contributing significantly to various sectors like employment, logistics, raw material etc. A healthy economy is often attributed to the number of successful businesses in a country. Their existence maintains regular flow of funds in various sectors including the sector in which they operate and also the other sectors which directly or indirectly work with these companies. In these circumstances, it becomes pertinent that these companies must act responsibly. They must have efficient management and fair practices. Directors have big responsibilities in this setup.
India being one of the developing nations is a home to various national as well as multinational companies. It has taken various steps to ease the way of doing business for these companies. India has various laws to guide good company governance and director duties. The Companies Act of 2013 is the primary law which prescribes responsible corporate governance practices. It sets clear rules for governance and duties of the director in a company.
Directors form the backbone of the company. It is the decisions of the directors that impact the company significantly. Any wrong decisions may lead the company to invite onerous legal scrutiny and penalties or force the winding up of its operations. Hence, directors must work with due care and diligence. They must act in the company's best interests.
Directors must put the company first. This basically means that they should try their best to protect the interest of the company. When their own interest and the interest of the company is at stake, they must prioritize company interest over their own.
They should avoid conflicts of interest. As per Section 166 of the Companies Act, 2013, every Director of a Company is duty bound to act in good faith in order to promote the objects of the company for the benefits of its members and in the best interests of all the stakeholders as well as the environment and also exercise independent judgment.
A director of a company shall exercise his duties with due and reasonable care, skill and diligence. He must not be involved in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company. A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
A director of a company shall not assign his office and any assignment so made shall be void. If a director of the company contravenes the provisions of this section, such director shall be punishable with fine which shall not be less than INR 1 lakh but which may extend to INR 5 lakhs.
Directors are presumed to be officers in default and may be tried for any company law, foreign exchange or tax related violations by regulatory authorities such as Ministry of Corporate Affairs, SEBI, RBI, Income-tax Authorities etc.
Existing laws and regulations have improved to promote good corporate governance, but challenges remain. Recent scams like Punjab National Bank fraud case and IL&FS crisis have highlighted the need for continuous monitoring and enforcement to comply with corporate governance rules and obligations. Considering this situation, aligning the interests of various stakeholders such as shareholders, employees, customers and vendors play an important role. By engaging with stakeholders and encouraging activism, companies and their directors can be held accountable, transparency can be increased and positive changes can be made in corporate governance.
For businesses to thrive, it is essential to have strong corporate governance and directors to diligently carry out their duties. By following the law and creating a stable and ethical work environment, companies can establish trust, create value over the long term, and help advance economic and social development.
Artificial intelligence (AI) has recently become a transformative force across various industries, from automated entertainment to advanced chatbot technologies. However, the Indian legal sector has been relatively slow in embracing technological innovations. Lawyers often rely on traditional methods and solutions. The potential for AI to reshape how lawyers operate and integrate the law into their practice is immense.
One of the significant disruptions AI can bring to the legal field is in the domain of legal research. The Indian legal system is extensive and continually evolving, challenging lawyers to keep up with changes. AI can provide unparalleled insights into the legal domain within seconds, offering a game-changing solution. Traditional legal research methods demand substantial human hours, impacting the productivity of law firms. AI, on the other hand, can balance the scales for the entire legal fraternity. By employing AI platforms for research, tasks that once took hours can now be completed in minutes, making the quality of research more uniform.
Several Indian legal tech startups are at the forefront of incorporating Natural Language Processing (NLP)[1] into applications. These startups are introducing next-generation legal research platforms beyond simple, keyword-based research, making the process less time-consuming. Some of them have even established their own AI research labs, showcasing a commitment to pushing the boundaries of innovation in the legal tech sector.
AI's potential disruption extends beyond legal research. It has the power to revolutionize how lawyers work, handle data, and operate. While the legal profession in India has been slow to adopt technological advancements, the ease of collecting, managing, and storing data has improved. AI can play a pivotal role in changing the traditional approaches lawyers use, making their workflows more efficient.
There is a common concern among lawyers and law firms that AI might replace human roles. However, the reality is different. AI is positioned to enhance productivity and efficiency for lawyers and law firms. Tasks like legal research, document review, and contract drafting can be automated, allowing legal professionals to focus on more strategic and complex aspects of their work, such as building relationships with clients and arguing cases in court.
The adoption of AI is not limited to law firms; it has also made its way into the Indian judiciary. The Supreme Court has been utilizing AI-controlled tools since 2021 to process information and make it available to judges for decision-making [2]. While these tools do not participate directly in the decision-making process, they serve as valuable aids in handling the vast amount of information involved in legal proceedings.
SUVAS (Supreme Court Vidhik Anuvaad Software) is one of the tools used by the Supreme Court of India [3]. It translates legal papers from English into vernacular languages and vice versa, facilitating a more accessible and efficient legal process.
For law firms, the development of AI technology offers an opportunity to improve efficiency, reduce costs, and focus on more strategic work. AI can handle mechanical and routine tasks such as document and contract review, legal research, and data analysis. This can lead to increased productivity and profitability. However, the implementation of AI may also decrease billable hours, especially for tasks that AI can handle effectively. This will give way to more transparent alternative fee arrangements.
While larger law firms may have the resources to implement AI systems, smaller firms might face challenges in keeping up with the costs of technology. Striking a balance between the benefits of AI and its financial implications will be crucial for law firms of all sizes.
As the legal sector in India begins to embrace AI, it is essential to consider the evolving role of lawyers, the impact on billable hours, and the potential for increased efficiency.
The integration of AI into legal processes holds the promise of transforming the sector, making legal services more accessible, efficient, and responsive to the dynamic needs of the community. While challenges exist, the ongoing efforts by legal tech startups and the judiciary indicate that the Indian legal sector is poised for significant growth and innovation in the coming years. As AI continues to evolve, its role in shaping the future of the legal sector in India will likely become even more pronounced.
Also Read on - https://bwlegalworld.businessworld.in/amp/article/Transforming-Effects-Of-AI-In-Legal-Sector-What-Experts-Say-/23-01-2024-507229/
In the last quarter, the global economic market witnessed a manifestation of the effect digital assets and Web 3.0 have had on the overall market cash flow.
Venture capital investments in fintech and crypto projects native to the metaverse and Web 3.0 have already touched USD 10 billion globally.[1] The majority of the investments were made in crypto and non-fungible token (NFT) exchanges, decentralized financial applications, and token issuers.[2]
Currently, Indian stakeholders are grappling with the issue of inadequate regulation in the Web 3.0 space. Indian policymakers have not developed a law for regulating Web 3.0 despite it being in the pipeline for more than two years. Although tax implications and advertising standards have been deliberated upon and decided, the lacuna in the Indian legal regime needs the attention of stakeholders and lawmakers. During the Web 2.0 phase, India was unable to participate in policy making for internet governance due to limited consumption heft and foreign innovation.
Today, India is striving to position itself as an authority in the blockchain space by leveraging the local brainpower and consumer base. While NFTs indeed emerged as an extension of celebrity identities in India, today its presence is felt across industries. Entities such as GaurdianLink, MakeMyTrip and Lakme Fashion Week are also dabbling into NFT collectibles. However, the prevailing regulatory grey zones in the intellectual property laws, finance rules, securities laws and cybercrime laws call for the immediate action of Indian policymakers to implement enabling and safeguarding provisions. Given the lack of regulations and policy grey zones, investing in digital assets such as NFT is fraught with challenges, requiring careful consideration and due diligence.
NFT are cryptographic assets on a blockchain. Creators in the Web 3.0 space can attain a license for recreation and use from the copyright owner of the original artwork. However, the original NFT owner retains the copyright in the original digital asset. Essentially, the license enables an NFT license to manipulate and capitalize on the artwork digitally. On the other hand, the original NFT owner can invest and capitalize on the growth of the NFT through existing brand identities such as trademarks, logos, characters, books, movies, music, illustrations, etc.
In layman’s terms, even if you manage to buy an NFT license, you are still not automatically permitted to manipulate the artwork licensed or sell anything related to the said NFT. The original owner’s consent plays a key role in establishing the scope and nature of the rights enjoyed by an NFT license owner.
It is pertinent to design an NFT license agreement to fit your specific needs despite there being certain boilerplate smart contracts being used by key industry players. In exercising the IP rights by NFT owners, any transfer, sub-licensing or assignment and terms for such transfer, sub-license or assignment must be chalked out with specific attention to the terms of the original license. In certain cases, original owners may limit the scope of control over modification of the original digital asset and what may be combined with the said digital asset.
For instance, NFTs can be created in multiple layers within the same artwork, where each layer is made by different artists and then individually tokenized. Furthermore, it can also be programmed to change its layers based on certain triggers. These characteristic features of NFTs may lead to some undesired usage of the original owner’s IP that can only be prevented by explicit limitations in the smart contract which governs the digital asset’s usage.
Under the Copyright Act, 1957, for any assignment of copyright to be valid, such assignment will have to necessarily be in writing and signed by the assignor or his/her duly authorized agent, specifying the rights, duration and territorial extent of such assignment. NFT owners can, in addition to ownership rights, include terms on how subsequent purchasers may attain ownership of the subject matter NFT and select the marketplaces (open, curated or proprietary) on which their NFT can be resold.
The NFT license can prescribe specify the rights and restrictions on displaying, copying and usage of the NFTs. A general use license usually assigns a worldwide, non-exclusive, non-transferable, royalty-free license to use, copy and display the same, whereas a commercial use license can be crafted to allow the purchaser to commercially exploit the NFT. NFT owners and creators can also opt to include terms prescribing fees and royalties associated with the initial and subsequent sale of the NFT.
Decentralized finance (De-Fi) is under threat of fraudulent and money laundering activities due to the nature of blockchain technologies. De-Fi-related hacks have hiked 2.7 times in 2021 from 2020.[3] From human trafficking and terrorist financing to drug trading, cryptographic money laundering has harrowing effects. The highly lucrative market for NFTs coupled with anonymity could potentially become an avenue for money laundering and other illegal funds transfers, if not already. At present, there is no generally accepted standard for monitoring the flow of assets in the digital space despite the potentially catastrophic risks it may result in.
The Prevention of Money Laundering Act, 2002 prohibits all forms of private cryptocurrencies. However, it fails to prescribe the technologies that fall under the scope of the term “cryptocurrencies” and what aspects of the same will constitute a violation of the law. However, the Ministry of Corporate Affairs as of 24 March 2021 mandated all listed and unlisted companies to declare all cryptographic transactions in their balance sheets effective 01 April 2021 by inserting item (xi) in Paragraph 5 of Schedule III, Part II of the Companies Act, 2013. On the other hand, policymakers need to notify virtual asset providers as “Reporting Entities” under the Prevention of Money Laundering Act, 2002 and stipulations to upgrade reporting requirements needs to be prescribed.
In a recent case of Hitesh Bhatia v. Mr. Kumar Vivekanand[4], the Delhi High Court, in dealing with cryptocurrency transactions, held that cryptocurrency transactions shall comply with the general laws in India such as Prevention of Money Laundering Act, 2002, Indian Penal Code, Narcotic Drugs and Psychotropic Substances Act, 1985, Foreign Exchange Management Act, 1999, Tax laws and all RBI regulations relating to Know Your Customer, Combating of Financing of Terrorism compliance guidelines[5], and Anti-Money Laundering requirements. While the Court did not adjudicate on the issue of the legality of cryptocurrencies, the observations made in the instant case pave a path for effective navigation of regulatory discourse associated with such complex technologies and will by extension apply to NFT transactions as well.
It is reported that cryptocurrencies worth USD 5.2 billion could be stolen in 2022.[6] Hackers use stolen private keys and passwords attained through security breaches caused by software bugs to access crypto funds. While establishment of identity will create more secure platforms for virtual interactions, private players face uncertainty due to the ever-evolving data privacy regulations and their enforcement owing to the nascent stage at which the law currently. Another concern that arises is the loss of data since all data is stored virtually. A blockchain may be operated anonymously, thereby increasing the risk of compromised and hacked accounts resulting in long-lasting damage and loss of data for account-holders. In such a situation, the ability to anonymously operate the blockchain becomes a problematic feature.
Industry stakeholders will need to conduct background checks to verify the integrity of the seller’s ownership rights and the authenticity of the online marketplace. Players are advised to conduct transactions only with verified sellers on reputed platforms.
At the moment, from a regulatory perspective, policymakers are split-minded, but it is clear more policies to incentivize digital assets are needed. The first step toward a novel framework to regulate NFTs is the creation of a definition. The definition needs to be wide enough to accommodate the various sub-classes of virtual assets that currently exist and may be invented in the future.
It is at this juncture that Indian entities such as the RBI, SEBI and the Ministry of Finance can undertake joint regulation of the NFT space and position India as an industry standard-setting nation. A coordinated approach will also ensure that the convoluted issues relating to crypto-assets are adequately addressed. These entities, in consultation with the legislature and industry experts, can deliberate regulatory concerns and introduce forward-thinking policies and protocols.
Until the implementation of appropriate NFT regulations and policies in India, stakeholders will do well to be mindful of potential pitfalls in transacting in NFTs and should consider taking adequate protective steps, such as conducting thorough client / customer due diligence to ensure the legitimacy of the transacting party and title in NFT assets and ensuring detailed contractual terms tailored to their unique needs instead of solely relying on boilerplate smart contracts available on mainstream platforms.
[1] Venture Capitalists Catch Crypto Fever, Stampeding Towards Web 3.0, NDTC Profit.
[2] Ibid.
[3] “DeFi Has Accounted for Over 75% of Crypto Hacks in 2021”, CoinDesk.
[4] Hitesh Bhatia v. Mr. Kumar Vivekanand, Case No. 3207/2020.
[5] Master circular of RBI dated July 1, 2013.
[6] “DeFi-fo-fum: hackers find new ways to gobble up crypto”, Economic Times.
The Limited Liability Partnership (Amendment) Act, 2021 (“LLP Amendment Act”) received the assent of the President of India on August 13, 2021. The LLP Amendment Act will now come into effect from April 1, 2022, vide notification issued by the Ministry of Corporate Affairs (“MCA”) bearing no. S.O. 621 (E) dated February 11, 2022 (“Notification”). The LLP Amendment Act aims to improve ease of doing business for limited liability partnerships (“LLPs”) by decriminalizing offences, introducing small LLPs and start-up LLPs, enabling compounding of offences, establishing special courts and appointing adjudicating officers, amongst other amendments. Another pertinent aim of the LLP Amendment Act is to incentivize unorganized business enterprises to an organized incorporated structure, while creating ‘congenial business climate based on trust and compliances’, as stated in the Report of the Company Law Committee on Decriminalization of the Limited Liability Partnership Act 2008 (“Report”), issued in January 2021.
An analysis of the changes brought by the LLP Amendment Act was published by us on November 16, 2021, which can be accessed here.
Pursuant to the Notification and as an update to our previous post on the subject, we have placed hereunder the key changes brought about by the LLP Amendment Act and the Limited Liability Partnership (Second Amendment) Rules, 2022 (“LLP Amendment Rules”):
The Limited Liability Partnership Act, 2008 (“LLP Act”), contained 24 (twenty-four) penal provisions, which has now been reduced to 22 (twenty-two) penal provisions while also reducing the maximum penalty from Rs. 5,00,000/- (Rupees Five Lakhs only) to Rs. 1,00,000/- (Rupees One Lakh only). These changes were made to remove criminality and prosecution for any technical or procedural omission or non-compliance in the ordinary course of business. Additionally, Section 76A has been introduced by the LLP Amendment Act for the appointment of officers not below the rank of registrar, as adjudicating officers for adjudication of penalties, and laying down the provision for appeal against the order of such adjudicating officers and also to provide procedures for such adjudications and appeal. The decriminalization of offences and appointment of adjudicating officers while providing ease of doing business, will ensure more flexibility to LLPs, improved corporate compliance and faster adjudication of penalties.
Further, out of the 22 (twenty-two) penal provisions: (i) 12 (twelve) offences will be adjudicated by an in-house adjudication mechanism, (ii) 7 (seven) will be compoundable offences and (iii) 3 (three) will be non-compoundable offences. The 12 (twelve) offences brought under the in-house adjudication mechanism is as follows:
Introduction of Small LLPsThe LLP Amendment Act introduced the concept of small LLPs in line with the concept of small companies under the Companies Act, 2013 (“Companies Act”) for the creation of a class of LLPs which would be subject to lesser compliances, fees and penalties, helping reduce the burden of compliance and associated costs for start-up LLPs and small businesses. Small LLPs have been defined as LLPs having contribution not exceeding Rs. 25,00,000/- (Rupees Twenty-Five Lakhs only) and a turnover for the immediately preceding financial year not exceeding Rs. 40,00,000/- (Rupees Forty Lakhs only). Pursuant to the Section 76A (3) introduced by the LLP Amendment Act, small LLPs will be liable to lesser penalties i.e., half the penalty specified under the relevant provision, subject to a maximum penalty of Rs. 1,00,000/- (Rupees One Lakh only) for such small LLPs and Rs. 50,000/- (Rupees Fifty Thousand only) for every partner or designated partner or any other person, as the case may be. The introduction of small LLPs will be a lucrative model for smaller unregulated businesses providing greater flexibility and equal opportunity, while also providing such entrepreneurs with greater flexibility and protection from compliances and penalties under the LLP Act.
Section 39 of the LLP Act has been amended to provide the principles for compounding of offences, manner, procedure, and effect of compounding on pending prosecutions in the trial courts, in line with Section 441 of the Companies Act. Accordingly, offences under the LLP Act which is punishable with ‘fine only’, will shift to the in-house adjudication mechanism (IAM) instead of being treated as criminal offences and the Regional Directors (“RDs”) or any other officer not below the rank of a RD, duly authorised by the Central Government, have been authorized to compound such offences for a sum not exceeding the maximum fine prescribed for such offences and not less than the minimum fine prescribed for such offences.
The LLP Amendment Act has introduced Sections 67A enabling the Central Government to establish special courts for the purpose of providing speedy trial of offences and has introduced Sections 67B and 67C to deal with procedure and powers of the Special Courts along with appeals and revisions.
The special court will consist of a single judge:
Further Section 77 has been amended and the powers of Judicial Magistrate of the first class or Metropolitan Magistrate have been transferred to special court which will have the power to impose punishment under Section 30 of the LLP Act. Also, all the criminal cases pending against the LLPs, its partners, designated partners, and any person concerned will be transferred to the Special Court under Section 67A. The LLP Amendment Act has introduced Section 77A empowering special courts to take cognizance of any offence punishable under the Act on a complaint in writing made by registrar or any officer not below the rank of registrar duly authorized for such purpose. Until such time the special courts are designated and established, special courts in terms of Section 435 of the Companies Act have been designated as special courts for the purpose of trial of offences punishable under the LLP Act and a Court of Sessions or the Court of Metropolitan Magistrate or a Judicial Magistrate of the first class, as the case may be, exercising jurisdiction over the area has been designated as special courts for criminal offences. Such special courts will be instrumental in reducing the burden of pending cases in courts and faster disposal of cases.
Since more and more companies are converting to LLPs and with a view to augment the financial reporting and disclosure standards of LLPs, the LLP Amendment Act now empowers the Central Government to prescribe accounting and auditing standards for certain classes of LLPs in consultation with the National Financial Reporting Authority. While LLPs already enjoy reduced compliance requirements, the aforesaid amendment will bring better transparency in the financial affairs of LLPs.
The MCA recently notified the LLP Amendment Rules vide notification dated March 4, 2022, whereby several clerical and procedural amendments were made for easing compliances for LLPs. The major amendments prescribed therein are detailed below:
Apart from the aforementioned amendments, various forms given below have been substituted / updated for easy usage:
Final TakeawaysRegulatory stance regarding LLPs is a mix of strict and soft touch. On one hand, the government extended certain stern company law provisions to LLPs on February 17, 2021, such as disqualification of partners / designated partners on failure to file Annual Returns for 3 (three) years; identification of significant beneficial owner of the LLP; restricted limit of maximum number of partnerships for partners / designated partners and enabling of regulatory power to inspect books and documents and undertake investigation. On the other hand, the government is also keen to make the LLP structure lucrative for stakeholders and with the amendments introduced vide the LLP Amendment Act and the LLP Amendment Rules, it is clear that the government’s intent is to enable ease of doing business for LLPs. The introduction of small LLPs and start-up LLPs, decriminalization, relaxed penalty regime, compounding of contraventions, as well as prescribed procedural efficiencies will attract more entrepreneurs and investors from the unorganized sector into the fold of LLPs and allow them to work in a business-friendly environment with lesser compliance requirements and greater flexibility.
Industry stakeholders need to evaluate the ideal structure for incorporation based on their needs as the LLP structure personifies both simplification and even standardization of compliances vis-à-vis companies. That said, only time will tell the efficacy of LLPs, in line with the evolving business environment, changing regulatory stance and different stakeholder interests.
DISCLAIMER:
The views and opinions expressed in this article are those of the author alone. This article is for general information purposes only and should not be construed as legal advice or be a substitute for legal counsel on any subject matter. No reader should act or rely on any information contained in this article, without first seeking appropriate legal or other professional advice.
On August 13, 2021, the Limited Liability Partnership (Amendment) Act, 2021 (“LLP Amendment Act”) received the assent of the President of India. The LLP Amendment Act aims to improve ease of doing business for limited liability partnerships (“LLPs”) by decriminalizing several minor, technical or procedural violations under the Limited Liability Partnership Act, 2008 (“LLP Act”). The Ministry of Corporate Affairs ("MCA”) has, vide its notification bearing no. S.O. 621 (E) dated February 11, 2022, notified April 1, 2022 as the effective date for the provisions of the LLP Amendment Act.
Further, in exercise of the powers conferred under Section 76A of the LLP Act, the MCA has, vide notification bearing no. S.O. 622 (E) dated February 11, 2022, appointed registrar of companies (“ROCs”) as adjudicating officers for adjudication of penalties under the LLP Act with effect from April 1, 2022. It was also clarified that appeals, if any, is to be filed before the regional directors (“RDs”) having jurisdiction over the ROCs and such appeal is to be disposed off by the RDs in accordance with notification published by the MCA vide: (i) G.S.R. 887(E) dated December 16, 2011, (ii) G.S.R. 763(E) dated October 15, 2012, (iii) G.S.R. 832(E) dated November 3, 2015 and (iv) S.O. 2652(E) dated July 25, 2019.
The LLP Amendment Act reduces the total number of penal provisions from 24 (twenty four) to 22 (twenty two), out of which: (i) the newly introduced in-house adjudication mechanism will adjudicate upon 12 (twelve) offences by imposing only monetary penalties, (ii) 7 (seven) offences will be compoundable and (iii) 3 (three) offences will be non-compoundable. The LLP Amendment Act also introduces the concept of small LLPs and start-up LLPs in order to incentivize such class of LLPs by making them liable to pay lesser penalties in the event of default, subject to a maximum of Rs. 1,00,000/- (Rupees One Lakh only) for such LLPs and Rs. 50,000/- (Rupees Fifty Thousand only) for every partner or designated partner or any other person, as the case may be.