Case Notes – Summer 2010

A technical member of the National Company Law Tribunal and National Company Appellate Tribunal should have expertise in company law.

A constitutional bench of the Supreme Court of India in Union of India vs. R.Gandhi, President, Madras Bar Association, 2010 (5) SCALE 514, upheld the creation of the National Company Law Tribunal and the National Company Appellate Tribunal, and vested in them the powers and jurisdiction exercised by the High Court with regard to company matters that are constitutional in nature. Moreover, the Court held that members of these tribunals should be persons of rank, capacity, and status as nearly equal as possible to the rank, capacity, and status of High Court judges. While deciding this case, the Supreme Court endorsed the view of the Eradi Committee that company law jurisdiction should be transferred from High Courts to tribunals on account of inordinate delay in the disposal of cases by the High Courts. The Companies (Second Amendment) Act, 2002 had provided for appointment of members from the bureaucracy as technical members of the tribunal. The Supreme Court held that merely because a person has served in the cadre of the Indian Company Law Service, he cannot be considered an expert qualified to be appointed as a technical member, unless he has expertise in corporate law.

The Supreme Court emphasized that persons having ability, integrity standing, special knowledge, and professional experience in industrial finance, industrial reconstruction, investment, and accountancy may be considered as persons having expertise and may be appointed as technical members. The Supreme Court further stated that the selection committee should be comprised of the Chief Justice of India or his nominee as its chairperson, a senior judge of the Supreme Court or a Chief Justice of a High Court as member, and a secretary from the Ministry of Finance and Company Affairs, or Ministry of Law and Justice as members. The Supreme Court noted that, to function effectively, tribunals should appoint younger members who have a reasonable period of service rather than persons who have retired. The Supreme Court mandates that every bench shall have a judicial member. The Government of India has agreed before the Supreme Court to implement the order effecting the necessary amendments.

May a member of the public, on the basis of a letter of authorization, appear on behalf of a party before the National Tax Tribunal?

The Supreme Court of India addressed this question in Madras Bar Association vs. Union of India, [2010] 324 ITR 166 (SC). The Madras Bar Association had challenged the constitutional validity of the National Tax Tribunal Act, 2005 (Act) before the Supreme Court of India on the basis that:

(i) Section 13 of the Act permitted “any person” duly authorized to appear before the National Tax Tribunal. The Bar Association claimed that the right to appear should be exclusively restricted to advocates.

(ii) Section 5(5) of the Act provides for the Central Government to transfer a member (the presiding officer of the tribunal) from one bench in one state to another bench in another state. This was challenged on the ground that it would restrict the independence of the tribunal.

(iii) Section 7 of the Act provides for a selection committee comprised of the Chief Justice of India, or a judge of the Supreme Court nominated by him, a Secretary from the Ministry of Law and Justice, and a Secretary from the Ministry of Finance, and that the secretaries forming the majority may override the selection of the Chief Justice or of his nominee.

Initially, this matter had come up before a three judge bench, wherein the Government of India agreed to implement an amendment that would ensure that only lawyers, chartered accountants, and the parties themselves would be permitted to appear before the National Tax Tribunal, and that the opinion of the Chief Justice or his nominee would prevail in the selection of members to the tribunal or the transfer of members from one state to another. However, the case was referred to a constitutional bench, which determined that the matter should be addressed separately because the petitioner also had challenged Article 323B of the Constitution of India.

Art. 323B was added to the Indian Constitution under the Constitution (75th Amendment) Act, 1963. It authorizes the legislature to create and constitute tribunals, and supplements Art. 323A, which empowers the parliament to create tribunals for matters relating to the Union list.

By this case, the court will determine whether the exclusivity granted to advocates to appear before any court prevails over legislation diluting such rights.

May the Central Government seek the removal of managerial personnel of a company who conduct the affairs of the company in a manner prejudicial to the interest of the members, creditors, the company and the general public?

In Union of India vs. Design Auto Systems Ltd., [2010] 156 Comp cas 272 (CLB), the Principal Bench of the Company Law Board ruled that the power of the Board to remove managerial personnel of a company under Sec. 408 of the Companies Act was wide enough to cover present and past acts of mismanagement. In this petition by the Central Government under Sections 388B, 397, 398, along with Sections 401, 406 and 408 against the Company and its managerial personnel, the Company Law Board held that the language “being conducted” in Section 408 of the Act, cannot be interpreted so as to restrict its scope to the present acts of the managerial personnel. Rather the expression is wide enough to cover enquiries related to past conduct whose impact continued or would reasonably be assumed to continue to operate in a manner prejudicial to the interest of the company or the public interest. The Court further observed that the power of the Central Government under Section 408 is preventive in nature, exercised to ensure that the affairs of the Company are conducted in a manner that is not prejudicial to the interests of the company, its members, or to the public interest.

ADDITIONAL CASE NOTES

By Ranjan Jha, Bhasin & Co., Advocates

Arbitration Agreement Not Enforceable By Party Where It Was Not Incorporated At Time Agreement Executed.

In Andhra Pradesh Tourism Development Corporation vs Pampa Hotels Ltd., the Supreme Court held that an arbitration agreement executed before a company is formally registered under the Companies Act, 1956 may not be enforced by the company. Andhra Pradesh Tourism Development Corpn. (APTDC) and Pampa Hotels Ltd (Pampa) entered into two agreements, a Lease Agreement and a Development & Management Agreement on 30 March, 2002. Both agreements contained arbitration clauses. Pampa was incorporated under the Companies Act, 1956 on 9 April, 2003. In April 2004, disputes arose between the parties and APTDC terminated the agreement and took possession of the property that formed the subject of the transaction. Pampa filed an application before the Andhra Pradesh High Court under the Arbitration and Conciliation Act, 1996 (“Act”) for appointment of arbitrators. APTDC objected asserting, inter alia, on the ground that there was no contract, and therefore no arbitration agreement, between the parties because Pampa had not come into existence as of the date of the two agreements. The Chief Justice of the Andhra Pradesh High Court appointed an arbitrator to the case, referring all disputes between the parties, including the existence of the agreement, under Section 11 of the Act.

Shortly thereafter, the Supreme Court, in SBP & Co. v. Patel Engineering, held that issues regarding the validity of an arbitration agreement raised in an application for appointment of arbitrator under Section 11 are to be decided by the Chief Justice, or his designee, under Section 11 of the Act. Accordingly, APTDC filed a Special Leave Petition challenging the decision of the appointment of the arbitrator. The main questions before the Supreme Court were whether: (a) an arbitration agreement is enforceable where the party seeking arbitration was a not a company in existence at the time the contract containing the arbitration agreement was executed, and (b) the question of the enforceability of the arbitration agreement must be decided by the Chief Justice or his designee, or by the Arbitrator.

The Supreme Court concluded that if one of the two parties to the arbitration agreement was not in existence when the contract was made, then there was no valid contract. If the agreements had been entered into by the promoters of the company, stating that the agreements were entered into by the promoters on behalf of a company to be incorporated, and that the terms of the incorporation authorized such action, the agreements would have been valid, and the arbitration clause would have been enforceable. On the second issue, the Court held that whether there is an arbitration agreement and whether the party who has applied under section 11 of the Act is a party to such an agreement, is an issue that must be decided by the Chief Justice or his Designate under Section 11 of the Act before appointing an arbitrator. However, because the arbitral tribunal already had been appointed in this case, the Court did not interfere with the appointment of the arbitral tribunal, and left the issue for the arbitrator to decide.

This judgment has a wide range of implications for companies that enter into pre-incorporation contracts – in particular, contracts providing for arbitration. In light of this judgment, a pre-incorporation contract must be entered into by the promoters of a company on behalf of the company proposed to be incorporated and such contract should be specifically provided for in the terms of the company’s incorporation to fall within the ambit of Section 15(h) of Specific Relief Act, 1963. The contract entered into by the promoter must also be duly ratified by the company upon its incorporation to avoid ambiguity and legal scrutiny in the future.

Delhi High Court Comes to the Rescue of Low Priced Books

The Delhi High Court analyzed issues of infringement of copyright and the applicability of the first sale doctrine in John Wiley & Sons Inc. & Ors v. Prabhat Chander & Ors. The court had to decide whether exporting books whose sale and distribution was subject to territorial restrictions could amount to copyright infringement. The Delhi High Court answered in the affirmative, and rejected an application by the defendants to set aside an earlier ex-parte injunction operating in favour of the copyright owner. The court held that India follows the principle of national exhaustion and not international exhaustion.

The plaintiffs, international publishing houses, published special low price editions of text books for school and college students in India. These low price editions (LPEs) were published with the rider that they were meant for sale/re-sale only in the Indian sub-continent and not in any other parts of the world. The plaintiffs contended that they published LPEs so that the same international level books that otherwise are quite costly might be made available to Indian and other Asian students at prices befitting the Asian markets. The defendants, a company and its directors, were engaged in the business of selling books online. The defendants were offering LPEs for sale worldwide in breach of the territorial notice. The plaintiffs filed suit before the Delhi High Court to restrain the defendants from infringing the copyright of the plaintiffs by exporting the books of the plaintiffs to the countries outside of prescribed territories. The plaintiffs also filed an application seeking temporary injunction against the defendants, which came up for hearing with the main suit when the court entered an ex parte order against defendants.

Arguing that the earlier ex-parte injunction was erroneous, the defendants contended that the nature of its activities, i.e., export of the books outside the Indian sub-continent, was not tantamount to infringement of copyright. The defendants invoked the first sale doctrine as a defense, arguing that once the plaintiffs sold a particular copy of the LPE, they could not control its further re-sale. The defendants also submitted that their act of exporting LPE’s was not prohibited by the Indian Copyright Act, 1957 (the Act). They submitted that the Act only prohibited the import of infringing articles into India, the Act was silent about exports, and the court should not add words to the legislation.

The Delhi High Court, examining various provisions of the Act, stated that the Act gives a copyright owner the right to exploit his copyright by assignment and licensing. Such an assignment or license could be limited by way of time period or territory, and could be exclusive or non-exclusive. Therefore, a copyright owner could exhaust its rights in some territories while protecting its right in others. Accordingly, the plaintiffs could prevent the defendants from re-selling and exporting their LPEs to territories where their right of distribution and sale had not been exhausted. The court held that the defendants’ acts were prima facie infringing in nature and the defenses put forth by the defendants to defend their usage were not tenable. Thus, a temporary injunction was warranted until the case was resolved.

The importance of this decision arises from the fact that the Indian courts have now begun to recognize and protect the right of copyright owners to control the distribution channels of their copyrighted articles in order to obtain maximum royalties. The courts are respecting the divisions of rights along territorial lines by publishers – a form of division which is supported by Sections 19(2), 19(6) and 30A of the Act – and have held that as far as literary works are concerned, the exhaustion of rights occurs on the first legal sale of a copy of a work only within the territory in which the copyright owner intended the work to be sold. Thus, the copyright owner would continue to enjoy the right of resale in all other territories.

ICICI Bank Ordered to Pay Rs. 13 Lakh to NRI in Phishing Scam

Believed to be India’s first legal adjudication of a dispute raised by a victim of a cyber crime in phishing case, the adjudicating officer at Chennai, Govt. of Tamil Nadu (“TN”), in Umashankar Sivasubramanian vs. Branch Manager, ICICI Bank and others, recently directed ICICI Bank to pay Rs 12.85 lakh to an Abu Dhabi-based non-resident Indian (“NRI”) within 60 days for the loss suffered by him due to a phishing fraud. Phishing is a form of internet fraud through which sensitive information such as usernames, passwords, and credit card details are obtained by masquerading as a trustworthy entity.

The ruling was passed under the Cyber Regulations Appellate Tribunal Rules, 2000, with TN IT secretary PWC Davidar acting as the adjudicator under the Information Technology Act, 2000. The application was filed before Adjudication Officer for the State for adjudication under Section 43 read alongwith section 46 of the Information Technology Act, 2000. Sivasubramanian, an NRI employed in Abu Dhabi, maintained a bank account with ICICI Bank, and had Internet banking access for his savings bank account. The Bank sent him periodic statements. In September 2007, Sivasubramanian received an email from “customercare@icicibank.com” asking him to reply with his internet banking username and password or else his account would become non-existent. Assuming it to be a routine mail, he complied with the request. Later, he found that Rs 6.46 lakh were transferred from his account to Uday Enterprises, an account holder in the same bank in Mumbai, which withdrew Rs 4.6 lakh by self cheque from an ICICI branch in Mumbai and retained the balance in its account. When ICICI Bank tried to contact the firm, it found that Uday Enterprises had moved on from the address it had provided two years earlier.

Sivasubramanian contended that the bank had violated the “know your customer” (KYC) norms. When he didn’t get his money back, Sivasubramanian filed a criminal complaint and also appealed to the State Government’s IT Secretary, Mr. P.W.C. Davidar, the Adjudicating Officer under the IT Act. The bank claimed that Sivasubramanian had negligently disclosed his confidential information, such as his password, and as a result became a victim of phishing fraud.

Mr. Davidar stated in his order that a list of instructions the bank had put up on its Web site and which it sends to customers were of a “routine nature” and did not help a customer distinguish between an e-mail from the bank and an e-mail sent by a fraudster. He observed that the bank had not provided additional layers of safeguard such as due diligence, KYC norms, and automatic SMS alerts. He rejected the bank’s effort to take shelter behind routine instructions on phishing and stated that the bank failed to take steps to prevent unauthorized access to its customers’ accounts. Mr. Davidar also observed that the bank’s actions indicated it had “washed its hands” of the customer and that the bank’s branch had been indifferent to the customer’s plight.

The judgment, though likely to be appealed, is significant as it is apparently the first verdict in a case filed under the IT Act awarding damages in a phishing case.

 

by B.C. Thiruvengadam, Thiru & Thiru, Advocates

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