Equity shares:
Equity shares are the ordinary shares in the share capital of the company. It may represent equity share capital with voting rights or with differential rights as to dividend, voting or otherwise in accordance with the Act.

Preference shares:
Preference shares are those shares that carry preferential rights as to the payment of dividend at a fixed rate and as to repayment of capital in case of winding up of the company. They carry voting rights only in matters directly affecting their interests. They may be convertible and/or redeemable.

Debenture:
A debenture is an instrument of debt issued by the company acknowledging its obligation to repay the sum at a specified rate with a specified rate of interest. Debentures may be secured or unsecured and may also be convertible. They do not carry any voting rights.

Under the FDI Policy, equity shares, fully and mandatorily convertible preference shares & debentures are to be issued subject to pricing guidelines and valuation norms prescribed under FEMA Regulations. The pricing of such capital instruments is decided upfront at the time of the issue. Issue of other types of preference shares and debentures i.e. non-convertible, optionally convertible or partially convertible etc. require compliance with the guidelines applicable for External Commercial Borrowings (ECBs).

The ECB Guidelines provide that ECB can be accessed under either the automatic route or the approval route subject to certain restrictions provided therein. Under the automatic route, an Indian company may raise ECBs only up to a limit of USD 500 million per company per year. For this purpose, the Indian company must be an eligible borrower and the foreign investor must be a recognized lender. In addition to this, restrictions are also imposed on the end-uses, parking of the proceeds overseas and refinancing.

Indian Companies can also raise foreign currency resource abroad through issuance of Foreign Currency Convertible Bonds(FCCB) or depository receipts such as ADRs and GDRs. The inward remittance received by the Indian company through issuance of such instruments is treated as FDI. The company has to comply with the provisions of the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India thereunder from time to time.

An Indian company can issue ADRs / GDRs if it is eligible to issue shares to persons resident outside India under the FDI Policy. However, an Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company, which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI), is not eligible to issue ADRs/GDRs.

Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital in the international market, require prior or simultaneous listing in the domestic market, while seeking to issue such overseas instruments. On the other hand unlisted companies, which have already issued ADRs/GDRs in the international market, have to list in the domestic market on making profit or within three years of such issue of ADRs/GDRs, whichever is earlier. ADRs / GDRs are issued on the basis of the ratio worked out by the Indian company in consultation with the Lead Manager to the issue. The proceeds so raised have to be kept abroad till actually required in India. Pending repatriation or utilization of the proceeds, the Indian company can invest the funds in:-
(a) Deposits, Certificate of Deposits or other instruments offered by banks rated by Standard and Poor, Fitch, IBCA ,Moody's, etc. with rating not below the rating stipulated by Reserve Bank from time to time for the purpose;
(b) Deposits with branches of Indian Authorized Dealers outside India; and
(c) Treasury bills and other monetary instruments with a maturity or unexpired maturity of one year or less.

There are no end-use restrictions in such cases except for a ban on deployment / investment of such funds in real estate or the stock market. There is no monetary limit up to which an Indian company can raise ADRs / GDRs. The ADR / GDR proceeds can be utilized for first stage acquisition of shares in the disinvestment process of Public Sector Undertakings / Enterprises and also in the mandatory second stage offer to the public in view of their strategic importance. Voting rights on shares issued under the Scheme are as per the provisions of Companies Act, 1956 and in a manner in which restrictions on voting rights imposed on ADR/GDR issues are consistent with the Company Law provisions. Voting rights in the case of banking companies are in terms of the provisions of the Banking Regulation Act, 1949 and the instructions issued by the Reserve Bank from time to time, as applicable to all shareholders exercising voting rights. The pricing of ADR / GDR issues is made at a price determined under the provisions of the Scheme and guidelines issued by the Government of India and directions issued by the Reserve Bank, from time to time.

A limited two-way Fungibility scheme has been put in place by the Government of India for ADRs / GDRs. Under this Scheme, a stock broker in India, registered with SEBI, can purchase shares of an Indian company from the market for conversion into ADRs/GDRs based on instructions received from overseas investors. Re-issuance of ADRs / GDRs is permitted to the extent of ADRs / GDRs which have been redeemed into underlying shares and sold in the Indian market.

An Indian company can also sponsor an issue of ADR / GDR. Under this mechanism, the company offers its resident shareholders a choice to submit their shares back to the company so that on the basis of such shares, ADRs / GDRs can be issued abroad. The proceeds of the ADR / GDR issue are remitted back to India and distributed among the resident investors who had offered their Rupee denominated shares for conversion. These proceeds can be kept in Resident Foreign Currency (Domestic) accounts in India by the resident shareholders who have tendered such shares for conversion into ADRs / GDRs.

It is true that adjudicating a company dispute requires specialization and the Civil Court may not effectively adjudicate a Company dispute. We are all aware of the inevitable complications under Company Law. Laudably, an effort has been made to bar the Civil Court’s jurisdiction to entertain company matters in the Companies Bill, 2009 or in the proposed new Companies Act replacing Companies Act, 1956.

Section 391 of the Companies Bill, 2009 dealing with the Civil Court’s Jurisdiction is extracted below:

“391. No Civil Court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Tribunal or the Appellate Tribunal is empowered to determine by or under this Act or any other law for the time being in force and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or any other law for the time being in force by the Tribunal or the Appellate Tribunal”.

The object of section 391 in the proposed Companies Act is to exclude the Civil Courts in entertaining company disputes and to avoid the jurisdictional ambiguity. Under the existing Companies Act, 1956, shareholders who are qualified to approach the Company Law Board under section 397/398 may choose to approach the Civil Court rather the Company Law Board.

In CDS Financial Services (Mauritius) Limited Vs. BPL Communications Limited and others, (2004) 121 Comp Cases 375, it was held that “when there is no express provision excluding the jurisdiction of the Civil Courts, such exclusion can be implied only in cases where a right itself is created and the machinery of enforcement of such right is also provided by the statute. If the right is traceable to the general law of contracts or it is a common law right, it can be enforced through the Civil Court, even though the forum under the statute also will have jurisdiction to enforce that right. Sections 397, 398 and 408 of the Companies Act, 1956, do not confer exclusive jurisdiction on the company court to grant reliefs against oppression and mismanagement. The scope of these sections is to provide a convenient remedy for minority shareholders under certain conditions and the provisions therein are not intended to exclude all other remedies”.

Now, with the express bar under section 391 of the proposed act, if a remedy is available before the National Company Law Tribunal etc. then, no Civil Court can entertain a suit.

But we need to address an issue as to what is the situation if a particular relief is not available to the shareholders before the National Company Law Tribunal or under the new Companies Act?

Under such circumstances, despite section 391 in the proposed Companies Act, it may be very difficult to bar the Civil Courts in entertaining Company Disputes or it may be difficult to lay down a proposition that no shareholder can approach the Civil Court against the managerial personnel, the management or the Company.

It is true that the Civil Court may not be effective like the proposed National Company Law Tribunal, but, when a remedy is not provided before the Tribunal, the shareholders will obviously be approaching the Civil Courts and it may even be supported by the Constitutional Courts in future.

It is true that the Civil Courts jurisdiction is effectively barred under certain enactments like Securitization Law and it is not usual to see a Civil Court to entertain a dispute under Securitization Act upon which the Debt Recovery Tribunal shall have jurisdiction. It is possible under the Securitization Law in view of the limited scope of the subject matter. Under Securitization Law, it is only about the determination of debt or the legality of the action taken by the Bank under the Act. Only the Bank, the borrowers, the guarantors and in some cases a third party, is interested in a securitization case, but, that is not the case with a Company litigation. The Company Law Board, Company Court or the National Company Law Tribunal as the case may be should consider many issues before passing an order in a Company dispute.

In my opinion, it is very difficult to bar the Civil Court’s jurisdiction as intended with section 391 of the proposed Company’s bill or the new act.

In order to achieve the objective of barring the Civil Court’s Jurisdiction effectively, we need a detailed provision barring the Civil Court’s Jurisdiction and there should be a provision similar to section 151 of C.P.C in the proposed Companies Act giving liberty to the shareholders or the members to approach the Tribunal for the relief which is not specifically provided under the Act. If there is such an arrangement under the proposed Act, the National Company Law Tribunal shall decide the maintainability of the applications or the petitions and can pass appropriate orders.

I am sure that it is very difficult to bar the Civil Court’s Jurisdiction as intended with section 391 of the proposed bill or the proposed new Companies Act. There tend to be lot of litigation on the issue of Civil Court’s Jurisdiction even after the new Companies Act coming into force replacing Companies Act, 1956.

Note:
I have expressed my opinion on the issue and I am aware of the complications in Company Law.

If the Company is a sick company, is in the process of revival and rehabilitation or if some liquidation proceedings are pending, then, the delay in the process is tolerated in most of the cases as I have seen. But, where there are disputes in the Company or between the groups when the Company is doing well and holds valuable properties, then, obviously, there will be lot of urgency in getting the required relief from the adjudicatory authority or forum. The disputes between the groups in the Company can result in filing the winding-up petition before the Company Court on the ground that there exist “just and equitable ground” to wind-up the Company or it will result in filing of a petition before the Company Law Board under section 397/398 of the Companies Act, 1956, seeking preventive measures alleging oppression and mismanagement by the majority in the Company.

In many cases, the minority group or the group of shareholders who approaches the Company Law Board under section 397/398 of the Companies Act, 1956, may not be able to visit the premises of the Company even and may not be able to know as to how the day-to-day affairs of the Company are being conducted. The situation will be different in listed Public Companies in view of the shareholding pattern as per the SEBI (DIP) regulations and also the requirements of listing agreement with the concerned stock exchanges. Despite the disputes between or among groups in the Company, a listed public company proceeds to function as if there exist no disputes between or among the groups in the Company.

The disputes between the groups in a Private Limited Company will be of serious in nature in many cases. The Company might not have recorded all its properties in the Books or might not have shown the true values of the properties of the Company in its books and it happens practically. That is why, even when the financial position of a Company is not good on paper, the group which approaches the Company Law Board will press for some relief or orders as if they are approaching the Board to put an end to the oppression and mis-management in the Company rather preferring to wind-up the Company. Under the circumstances narrated above, the group can press for winding-up of the Company on the ground that there exist “just and reasonable ground” and even on the ground that the Company is financially sick. But, it will not happen practically. As we see, practically, rather the shareholders or the group of shareholders in the Company, an outsider gets a Company wound-up and the liquidation proceeds.

In view of the reasons stated above, a group or the shareholders who approaches the Board under section 397/398 of the Companies Act, 1956, seek urgent orders and they expose urgency in the matter at each and every hearing. In fact, as everybody knows, only for the speedy disposal of matters and to support the corporate word, a separate adjudicatory forum like Company Law Board is constituted now and it is proposed to constitute a National Company Law Tribunal and Appellate Tribunal as everybody knows. Despite the constitution of Company Law Board, a company dispute and especially the disposal of disputes under section 397/398 of the Companies Act, 1956 gets delayed. It can be attributed to the attitude of the shareholders or the people involved in the case, the complications in deciding a company dispute and also work load before the Company Law Board.

As I have heard, many corporates expresses their unhappiness over the compulsory procedures to be followed. For example, if the Company Law Board decides to hear the opposite party in an application or the petition before passing orders, then, notice is to be served on the opposite party and ensuring the service of notice will be the responsibility of the applicant or the petitioner who approaches the Board seeking relief. The address available for service of notice may not be correct in some cases and it leads to delay. When the first notice and the second notice as the case may be, can not be served on the opposite party, then, there is an alternative way of serving the notice by giving a public notice in New Papers at the locality. This procedure certainly consumes time and it is inevitable and based on logical footing. While deciding matters under section 397/398 of the Companies Act, 1956, the Company Law Board is conferred with enormous powers subject to express limitations as stated under section 402 and as settled judicially and as such Company Law Board can pass orders ex-parte or even without the presence of opposite party if the situation demands. But, once the Company Law Board has decided to listen the opposite party on a particular issue, then, the applicant or the Petitioner is supposed comply with the procedure as contained in Company Law Board Regulations and settled practice.

I do strongly believe that the Company Law Board does not insist on technicalities on each and every issue as is the case before the Civil Courts for right or wrong. Despite the procedural relaxations before the Company Law Board to a great extent, there are certain procedures based on logical footing which can not be ignored.

Thus, it may appear to the corporates or the petitioners who approach the Company Law Board seeking urgent relief in matters like oppression and mismanagement that delay caused in passing the orders as prayed for due to procedural requirements, but, there is no option in many cases.

Note:
• I have expressed my opinion on an interesting area based on my experience, my knowledge of law and based on the views expressed by some of the corporates in the course.
• I am aware of the complications under Company Law.

I have written many articles on few issues touching the issue of oppression and mismanagement and the relief as provided under section 397/398 of the Companies Act, 1956. I just want to again reiterate the complications in dealing with a proceeding under section 397/398 of the Companies Act, 1956 by the Company Law Board now and the National Company Law Tribunal in future if the Tribunal is established. Barring very few things, I don’t think that the complications under section 397/398 will go away with the establishment of National Company Law Tribunal and it is to be seen as to how the National Company Law Tribunal deals with the issues like winding-up, amalgamation, oppression and mismanagement and other connected issues. It is a complicated responsibility of Company Law Board to ensure that the object of section 397/398 is met when a petition is presented to it alleging oppression and mismanagement. I had the privilege of observing so many proceedings before the Company Law Board and heard the majority share holders in the company as to how they are harassed by the minority and heard from the minority from the company as to how majority has siphoned of company’s funds and as to how they could do nothing to recover their due or in getting their rights protected.

Firstly, when shareholders present a petition to the Company Law Board under section 397/398 of the Companies Act, 1956, it will take so much time to understand the case and that is why, it is seen very often that a Board passing an interim order giving liberty to the other party to apply for the order getting vacated when the Board is satisfied that there exist a prima facie case. Reading hundreds and thousands of papers will be a difficult job for the Company Law Board unless there exist two competent counsels who stick to their point and assist the Board in arriving at a conclusion. The technicalities, the complications, the attitude, the transfer of presiding officers etc. will contribute for a long delay in getting petitions under section 397/398 disposed of despite the fact that the constitution of special tribunal like Company Law Board is expected to deal with the issues speedily as compared to traditional courts. Some cases under section 397/398 will be very complicated to deal with and ultimately an exit option may be provided to a group at the valuation done by the independent auditors. There is problem with exist option too when the Board found that it is impossible to ensure that the both groups in a Company go smoothly. Many applications under section 397/398 are filed in respect of private limited companies or closely held public companies as listed public companies are well regulated in view of SEBI regulations, the listing agreement and plethora of other requirements and shareholding pattern. Many private limited companies will not even maintain books of account properly and there tend to be under valuations, overvaluations and concealment of certain transactions in order to evade tax payments basically. As the true transactions of the Company are not recorded in many cases, there will be difficult in availing the exist option. That is why, the petitioners before the Company Law Board under section 397/398 of the Companies Act, 1956 presses for orders and corrective steps in the Company. Again, we all know the practical difficulties in getting the orders of the court executed. Even the orders of the High Court are floated at times leaving only an option to move for contempt and many litigants know the loopholes in contempt proceedings. Many reforms are actually needed to make the law really effective.

I just want to give a brief of two cases which I have personally seen and listened to the people concerned.

Promoter is thrown-out:

I have seen a case where a promoter holding 100% is thrown-out from the company. In the case I am referring to, the promoter is a technocrat and established a company. While he was looking for investors, one individual has approached him that he will bring in money and also raise substantial debt and equity for the company’s expansion. Accordingly, an MOU and Share Purchase Agreements are entered into between the Company and the outsider and the outsider has not been allotted any shares, but, been made as an additional director as provided under Company’s Articles. The outsider who has promised to bring in so much investment into the Company has done nothing as agreed in the MOU and Share Purchase Agreements and when the promoter questions the same, the outsider has filed fictitious forms with the ROC as if there were Board Meetings and decisions were taken to mortgage all Company’s properties and as if a decision was taken to make further allotment of shares. With the filing of fictitious forms with the ROC, the promoter could do nothing for the company and he could not concentrate on expansion of the Company and he had to run from pillar to post. The promoter had to approach the Company Law Board for getting the fictitious charge set-aside and the case is going on for months now and fortunately, it may get disposed of soon. Time is very valuable for the Companies and the stakes are high in many cases. As such, every case under section 397/398 is different and seen on a different footing. Some cases can be disposed of very soon and even within days if possible and some cases tend to proceed for months and years.

Apparent Mismanagement:

In another case, a closely held private company consists of family members as its shareholders. One Mr.A held some 50% of the shareholding while his brother and his group held the remaining 50% shareholding in the Company. Mr.A was not concentrating on the affairs of the Company thinking that his rights and interest are secured to mandatory corporate regulations to be followed. Mr.A was living in abroad and had to travel abroad very frequently due to health problems. Suddenly, Mr.A has found that the very valuable property of the Company is sold for a throw away price to a third party. Mr.A had challenged the sale transaction, but, the third party who has purchased the property has started even developmental activity as there was no restraint from the Board or as Mr.A could not convince the Board for getting a restraint order like injunction. The case is pending before the Board for years and the majority group engages competent and costly lawyers and they keep on filing applications and now it is really difficult for the Hon’ble Company Law Board to read all the papers, find-out all the proceedings and passing final orders in the matter. Mr.A has a clear case to prove that the property is sold illegality and in violation of Articles of Association and the provisions of Law, but, still he could not get his rights secured and hoping that his rights will be preserved and protected when the Company Petition under section 397/398 is finally disposed of.

Complications:

Now, I want to just list-out few important issues and complications under section 397/398 of the Companies Act, 1956 as under:

1. Nature of remedy under sections 397/398. Basically, the provisions are meant to prevent the continuing oppression and mismanagement by the majority against the minority. But, who remedies the wrong doing and powers of the Company Law under section 397/398 read with section 402 and other provisions are interesting to know and dealwith.

2. Who all can approach the Tribunal under section 397/398?

3. Can the majority approach the Tribunal under sections 397/398?

4. How to entertain the plea questioning the maintainability of the applications.

5. How to deal with the dispute with regard to membership?

6. Conditions precedent for maintaining an application under the sections?

7. How to construe the world ‘oppression’?

8. What usually constitutes oppression?

9. How to construe the ‘mismanagement’?

10. What usually constitutes ‘mismanagement’?

11. Whether mere irregularity or non-compliance of the provisions of the Act be taken as oppression and mismanagement?

12. How to construe ‘public interest’ under the section?

13. Need of giving full particulars in an application under sections 397/398.

14. Whether the composite petition is maintainable under the section?

15. Whether the events subsequent to filing the application be considered?

16. Principles of Res subjudice and Res judicata?

17. Whether the rules under the Code of Civil Procedure applies to an application under section 397/398.

18. Is it correct to say that the Tribunal can not decide the disputed facts?

19. Construing the issue of proceeding against the legal representatives or impleading the legal representatives of the applicant.

20. Whether the affairs of the subsidiary be questioned by the members of the holding company via a via?

21. Difference between the proceedings under section 433 and section 397/398?

22. Whether the arbitration clause can oust the jurisdiction of Tribunal under the section?

23. Application of law of limitation?

24. The proper approach while entertaining an application under section.

25. The proper approach under the section in respect of s.25 companies.

26. Essentials to be looked into while entertaining the application.

27. The role of precedents while entertaining an application under section 397/398.

29. Dealing with the issue of membership and prima facie proof.

30. Powers enumerated under section 402 and need of providing section 402 as section 397/398 itself is elaborative when it comes to dealing with the powers of Company Law Board.

Note: I have just given the complications under section 397/398 of the Companies Act, 1956 once again and the opinions expressed are my personal.

While I do completely agree with the reason behind constituting a special tribunal like Company Law Board and the National Company Law Appellate Tribunal, I am really worried at "effective and speedy redressel". Looking at the manner in which a winding-up petition is being adjudicated given the complications and limitations by the High Court or the Company Court, and looking at the manner in which the petitions under section 397/398 of the Companies Act, 1956, are being dealtwith by the Company Law Board now, I feel that the High Court or the Company Court provides effective and speedy reddressel. Liquidation is a complicated affair and we know the functioning of the office of Official Liquidator and the difficulties. Liquidation is a very complicated affair and it is not like exercising powers by the Company Law Board under section 397/398 of the Companies Act, 1956. There can be many reasons for this and many of the orders or the directions of the Company Court are being implemented without much difficulty. The High Court and the Supreme Court, being the constitutional courts, can interpret law and the interpretation becomes law binding on all the courts and tribunals in India and indirectly it binds all the citizens and entities.

Section 397/398 of the Companies Act, 1956 confers a very valuable right and redressel to the shareholders of the Company and especially for minority shareholders against oppression and mismanagement. The sections as referred to basically meant to provide preventive measures preventing the continuous acts of oppression and mismanagement. While preventing the majority in the company in committing the acts of oppression and mismanagement, the Company Law Board, under section 397/398, will certainly look into the validity of certain acts of the Company and will set-aside those. The Company Law Board can set-aside the illegal allotment of shares, declare the appointment of a director etc. as illegal and do all such acts as provided specifically under section 397/398 and also under section 402 of the Companies Act, 1956.

I do strongly feel that the Company Law Board should exercise all the powers needed while entertaining a petition under section 397/398 of the Companies Act, 1956 as otherwise, the Petitioners at times are confused as to the protection of their rights in the Company. The objective of the Company Law Board under section 397/398 is obviously to put an end to the matters complained of.

I have seen some adjudication where certain allegations in a Petition under section 397/398 of the Companies Act, 1956 are not looked-into on the ground that the disputed facts can not be decided by the Company Law Board which follows a summary procedure. With great respect, I believe that the proposition may not be right as the Debt Recovery Tribunal decides all disputed facts through a well laid summary procedure and the discretion is exercised by the Debt Recovery Tribunal to have a trial on a particular issue if required.

The specific issue I want to deal with is about the exercise of powers by the Company Law Board to set-aside agreements, contracts and charges etc. which gives rise to the Petitioners to allege mismanagement. This is very interesting and complicated issue too.

There can be an agreement, contract or a transaction between the Company and a third party. Its true that an agreement, contract or a transaction can give rise to a shareholder to allege mismanagement of funds and he can seek for the prevention of future mismanagement. But, how to get those illegal agreements, contracts or charges etc. to be set-aside.? If Company Law Board has no power to set-aside illegal agreements, contracts or the charges, then, obviously one has to go to Civil Court challenging those transactions. But, what happens if the Company Law Board entertains the prayer initially and disposes of the matter after few years stating that the Company Law Board has no power to deal with a particular transaction entered into between the Company and a third party. There will be issues of law of limitation and also equity will come and the disposal of a Civil dispute will take few years as everybody knows. These issues have troubled many companies and many companies and the shareholders are still being troubled with the ambiguous situation the powers of Company Law Board to deal with transactions, contracts and the agreements etc.

I do agree that there is a specific reference on the powers of Company Law Board to set-aside agreements etc. under section 402 of the Act. Even if we keep the required reforms and clarifications on the powers of Company Law Board apart, what about the related party transactions and its validity. I do strongly feel that the Company Law Board can straight away deal with related party transactions and there is no impediment under section 402 of the Act. In my opinion, a related party transaction can not be seen at par with a transaction entered into between the Company and a third party.

I am of the opinion that we need a clarification in law and Company Law Board and the National Company Law Tribunal should exercise even remedial measures if required and there should not be any impediment on the powers of CLB.

Even in the proposed companies’ bill, there is no reference on the issue under discussion though there is a specific reference to the jurisdiction of Civil Court and there is a specific bar.

It is also true that many facts are to be taken into consideration while the Company Law Board exercises its power under section 397/398 of the Companies Act, 1956.

I believe that we need a law or the regulation in the proposed companies bill that the Company Law Board can take-up the reliefs suo motu upon which the Board feels that it has no jurisdiction initially and so that the parties are at liberty to approach other forums or to get an order in Appeal on the jurisdiction of the Company Law Board.

Section 397/398 of the Companies Act, 1956 deals with the issues which are of serious in nature and as such, there should be clarity on the law and the powers of Company Law Board.

The issue can still be elaborated and made clear and I will do it in the course.

Note: the views expressed are my personal.

I have seen cases where the MCA scheme or the portal was misused and halting the very functioning of the Company. There exist many technical issues in this. I have focused on the issue earlier when I have written a small brief on "corporate filing". The issue is really serious. A fictitious form filed with the MCA portal will change the destiny of Company and it is more so when the Company is a Private Limited Company and vigorously planning for expansions. Fictitious filing of Forms with the MCA scheme is very frequently seen in the recent past in Private Limited Companies and Public Limited Companies are guarded well in this regard and also it is very rare to see internal disturbances and groupism in Public limited or the Listed Public Limited Companies.

I want to present a case study referring to fictitious filing of From with MCA portal, the implication of fictitious filing and the corporate complications in general.

The facts are as follows:

1. A Private Limited Company is incorporated with three promoters and the promoter named "A" has taken all the risk in establishing the Company.

2. The Company has flourished within a year due to work done by the promoter "Mr.A".

3. Two other outsiders have evinced interest in acquiring the shares of the Company and these two shareholders can be referred to as "B" and "C".

4. "Mr.A", being the majority in the Company, has processed the issue of induction of new shareholders "B" and "C" in the Company.

5. Apart form other directors, "Mr.A" and newly inducted shareholders "Mr.B" and "C" were also made as directors of the Company.

6. At one of point of time, all other directors barring "Mr.A", "Mr.B" and "C" have expressed their interest in exist from the Company.

7. "Mr.A" could ensure investors to acquire the shares of out-going shareholders.

8. At this point of time, "Mr.A" and "Mr.B" and "Mrs.C" were the directors of the Company. "Mr.A" and "Mrs.C" are husband and wife.

9. There were difference of opinions between "Mr.A" on one part and "Mr.B & C" on the other hand.

10. While "Mr.B & C" constitute majority of the Board, they have appointed many of his relatives as his directors and uploaded forms with the MCA portal.

11. "Mr.A" was in actual control of the Company and he could ensure uploading of few other forms with the MCA portal as if the Board has appointed some of his men as "Directors".

12. While the things stand at this, as "Mr.A" is in actual control of the Company, "Mr.B & C" have approached Company Law Board under section 397/398 of the Companies Act, 1956 seeking drastic measure against the Company including the investigation under section 237.

13. The Company Law Board has passed certain interim orders in favour of "Mr.B & C".

14. While "Mr.B & C" press for orders against the Company which is in actual control of "Mr.A", "Mr.A" too has a grievance with the presence of fictitious forms with the "ROC".

15. "Mr.A" wants the fictitious forms to be removed form the MCA portal, however, he can not allege oppression and mismanagement against "Mr.B & C" as technically this can lead to winding-up the Company or appoint an independent Board and people to take care of the Company.

Analysis:

1. Facts of the case referred to above, exposes the seriousness in availability of easy uploading of forms with the MCA portal.

2. Once a Form is uploaded, and brought to the knowledge of the Company Law Board, then, it is really difficult to get the Form removed unless the Company Law Board passes an order.

3. Many Petitions under section 397/398 of the Act involves disputed facts and as such it will definitely take time for the adjudication before the Company Law Board.

4. The shareholders, the majority or the minority will be in trouble with the presence of Forms with the MCA portal as those Forms have visibility.

5. The very functioning of the company can be brought to a grinding halt with these fictitious forms and with fictitious resolutions.

6. These are happening in real time and its real problem.

7. The technological advancements like MCA scheme further complicates the proceedings under section 397/398 of the Companies Act, 1956 and people will very easily criticize the role of Company Law Board on one ground or other.

8. But, the Company Law Board has to think of many issues, the procedure, the settled principles and it is not easy to give an instant order based on some version.

9. In many cases before the Company Law Board under section 397/398 of the Companies Act, 1956, there can be illegality on the part of both contesting groups and as such everyone lacks the confidence to confidently get their case represented before the Company Law Board.

Conclusion:

This issue of illegal uploading of Forms with the MCA portal of ROC is a bigger challenge for the corporate functioning and also it doubles the responsibility of the Company Law Board which already discharges complicated responsibilities given the limitations.

Note: I do not refer the facts of any case and the facts narrated in the case are of imaginative and given as example and the views expressed are my personal.

It is a fact that it is very rare to see a petition by a group of minority or majority under section 397/398 of the Companies Act, 1956 in listed Public Companies. As everybody knows a Company needs to get qualified as per SEBI (DIP) regulations and should satisfy other requirements before getting its shares listed over a stock exchange. There can not be a listed public company where the entire shareholding is held by a single person or entity. The allotment shares are to be in accordance with the SEBI (DIP) regulations and there will be many stake holders holding shares in a Company. As such, normally it is very rare to see a petition by the minority or the majority in a listed public company under section 397/398 of the Companies Act, 1956.

Why many petitions are in respect of family companies?

Most of the petitions under section 397/398 of the Companies Act, 1956 come from family companies or closely held companies. Maintaining a petition by a minority or the majority under section 397/398 of the Companies Act, 1956 pertaining to a family company is very easy and it is logical. In spite of plethora of corporate regulations and encouragement to the companies to adhere to corporate governance, family companies are still run as proprietorship concerns. In some cases, we can not even find the books of account in family companies and all this issues will come to light when there comes serious dispute between or among the groups in the Company. Its true that a procedural irregularity will not give rise to filing a petition under section 397/398 of the Companies Act, 1956 and the section should never be misused. It is also true that a procedural irregularity may lead to a conclusion, at times, that it can be linked to oppression and mismanagement. There can not be a permanent rule as to whether a procedural irregularity can lead to a conclusion that there exist an oppression and mismanagement in the Company.

Point under discussion:

Thus, as many family companies do not maintain proper books of accounts and neglect filing the returns etc. with the authorities, it is so easy to allege oppression and mismanagement in respect of family companies and thus, most of the petitions under section 397/398 of the Companies Act, 1956 are maintained.

The point I want to discuss is about approaching various forums other than Company Law Board raising a Company Dispute. The jurisdiction of a civil court to entertain a company dispute is a complicated issue to dealwith and there is no express bar under the Companies Act, 1956 on Civil Court's jurisdiction. This issue is sought to be addressed in the new Companies Bill which contain a specific bar on the Civil Court's Jurisdiction.

Though, there is no bar in entertaining a Company Dispute unless an alternative and specific remedy is provided though Civil Courts do not encourage such litigation and advice the parties to approach the Company Law Board and its my personal opinion. The Civil Courts may lack the needed expertise in dealing with Company matters and it will lead the Civil Courts at times to hold that the proper forum is Company Law Board.

I have seen few cases where the minority shareholders or a director in a Family Company files a suit before a Civil Court alleging or challenging something in the Company. As the Civil Courts are bit cautious in granting an immediate relief and entertaining a Company Dispute even, a party who has approached the Civil Court may not get any relief and ultimately, after few years, he may be advised to approach the Company Law Board under section 397/398 of the Companies Act, 1956 and other provisions of law.

Complications:

When a party who has filed a Civil Suit alleging something and who has failed to get the intended relief by the Civil Court may be opposed very strongly when he files a petition under section 397/398 of the Companies Act, 1956 highlighting the same issue which he has raised in the suit. It is really a complicated issue to dealwith.

A shareholder might not have been advised well initially and will the same bar his corporal right to approach the Company Law Board under section 3976/398 of the Companies Act, 1956?

Whether a shareholder or a minority group is allowed to abuse the process of court by filing many petitions and approaching various forums causing vexation to the clear majority in the Company?

Whether the Company Law Board can look into the issue which is pending before the Civil Court?

Whether the Company Law Board can re-look into the issue upon which there was a finding by the Civil Court?

These are few questions and these are very complicated without having a straight answer as I feel. But, certainly, the rule is to be barring to do forum shopping causing a serious trouble to the majority as they should concentrate on their routine business without any hindrance. This is one type of issue pertaining to approaching different forums and finally approaching the Company Law Board under the provisions of Companies Act, 1956.

There are cases where in a petition under section 397/398 of the Companies Act, 1956, there will be a serious allegation and counter allegation on a particular thing and it will be the basis for filing and maintaining the petition under section 397/398 of the Companies Act, 1956. What happens is that a majority will initiate a counter proceeding against the petitioner/minority in the application under section 397/398 of the Companies Act, 1956, before some other forum and will stall the proceeding. The majority will contend that they have taken appropriate steps and other proceeding is initiated and pending and as such there is no need of keeping a petition under section 397/398 of the Companies Act, 1956 pending. This is another situation where normally a simultaneous proceeding is resorted to. There are many complicated issues and questions in the course and there can not be a straight jacket rule and it depends upon the facts and circumstances of each case.

Thus, the Company Law Board is burdened with discharging very complicated responsibilities under the Companies Act, 1956 and many will also criticize the Board for the delay and for not granting the relief immediately and for the delay caused due to the insistence on the procedural compliance.

Note: the views expressed are my personal.

Constituting Tribunals with the intention of providing a specialist mechanism aiming at speedier justice is not a new phenomenon in India and it has started even before independence as pointed out in the Judgment of Madras High Court while disposing of the Writ Petition filed by the Madras Bar.

All issues connected to constitution of Tribunals were looked into and the constitution and functioning of Tax Tribunals and Debt Recovery Tribunals etc. have also been discussed at length by the Constitutional Courts while looking into the issue of validity of constitution of National Company Law Tribunal and Appellate Tribunal.

I am of the strong opinion that the functioning of the proposed NCLT and NCLAT can not be seen at par with other Tribunals like Tax Tribunals and the Debt Recovery Tribunals. Tax law and interpretation of provisions dealing with payment of tax are always complicated and there are many authorities to look into the challenge by the assesses and we are also observing the functioning and the aim of Settlement Commission now. A finding on a Tax dispute may not, in many cases, threaten the functioning of the Company or the assesses. When it comes to the adjudication by the Debt Recovery Tribunals, Banks are supposed to be very careful while granting loans and they will get all the required documents and security from the borrower. Usually, the borrower tries to prolong a dispute before the Debt Recovery Tribunal while it is also true that there can be a genuine litigation before the Debt Recovery Tribunals at times.

When it comes to the functioning of the NCLT and NCLAT under the Companies Act, 1956, the proposed Tribunal discharges very complicated responsibilities. Despite the Complications, the High Court while exercising Company Jurisdiction could deal with the Winding-up Petitions and the Petitions for grant of sanction under section 391 and 394 of the Companies Act etc. well. The Company Law Board too discharges very complicated responsibilities under the Companies Act, 1956 and especially the Petitions under section 397/398 of the Companies Act, 1956.

A Company dispute can not be seen at par with a civil dispute and Company Law is very complicated. Many corporates feel that they lack an effective redressel mechanism to get their corporate rights protected under the Companies Act, 1956. When we look at the functioning of the Company Law Board and especially the proceedings under section 397/398 of the Companies Act, 1956, we can find lot of interesting things. There are propositions like “disputed facts can not be decided by the Company Law Board” and the Company Law Board has certain limitations on its power under section 397/398 of the Act and it makes a corporate or a shareholders to be in dilemma as to where they should go to get their corporate rights protected. The corporates really scare to approach a Civil Court for getting their corporate rights protected as it will take lot of time and also as the Civil Court lacks the needed expertise in understanding the complications and the subject of Company Law. These are all practical problems and the proposed NCLT and NCLAT should address all these issues, as otherwise, the object constituting a single specialistic forum under the Companies Act, 1956 will get defeated and turning the clock back will definitely be a difficult thing to think of.

With a logical analysis, we can find the glaring difference between the functioning of Company Court and the Company Law Board now. While the litigants or the corporates effectively implement the orders of the Company Court, the Company Law Board is taken for granted and the power of contempt of the orders of the Board has been a complicated issue to deal with. Again, High Court, while exercising the powers under the Companies Act, 1956, used to be very effective and speedy given the complications and I am not exaggerating the situation and my opinion is based on my personal observation and facts which can not be denied as I feel.

But, it can be seen from the express bar on the jurisdiction of the Company Law Board in the proposed Companies Bill, that the legislature is committed to establish a single and effective forum to deal with all issues under the Companies Act, 1956 and we are also aware of the background of constituting a special tribunal called National Company Law Tribunal and everyone is aware of the report of the Committees.

Nobody can deny the merits of the constitution of National Company Law Tribunal provided that it functions well as intended by the legislature.

I am of the view that the proposed National Company Law Tribunal and Appellate Tribunal can not be seen at par with other Tribunals and it would be really interesting to look into the functioning of the National Company Law Tribunal and the Appellate Tribunal. The constitution of National Company Law Tribunal and the Appellate Tribunal should provide speedy and effective redressel to the corporates under the Companies Act, 1956 as otherwise, turning the clock back will definitely be difficult and it will also affect the corporate growth to a great extent.

Note: The views expressed are my personal and I have dealtwith the issue in brief and I am aware of many other issues touching the subject.

The five-judge Bench of the Supreme Court of India comprising Justice KG Balakrishnan, Justice RV Raveendran, Justice DK Jain, Justice P Sathasivam and Justice JM Panchal has delivered its judgment on the legality of the constitution of National Company Law Tribunal and National Company Law Appellate Tribunal under the Companies Act, 1956 through Companies (Second Amendment) Act, 2002.

With the intention of establishing a Separate Tribunal to deal with all issues or disputes under the Companies Act, 1956, a Special Tribunal and Appellate Tribunal called National Company Law Tribunal and National Company Law Appellate Tribunal were sought to be established through the Companies (Second Amendment) Act, 2002. As per the said amendment, as soon as the Tribunal and the Appellate Tribunal is constituted, almost all powers exercised by the High Court under the Companies Act, 1956 sought to be transferred to the NCLT and NCLAT except the judicial review powers exercised under Article 226 and 227 of Constitution of India.

Madras Bar Association, represented by Shri R.Gandhi, has challenged the Companies (Second Amendment) Act, 2002 and especially the constitution of National Company Law Tribunal and National Company Appellate Tribunal before the Madras High Court initially.

The conclusion of Madras High Court:

Justice Jayasimha Babu of Madras High Court has delivered a considered and landmark judgment on the issue of legality of constitution of National Company Law Tribunal and National Company Law Appellate Tribunal. The background of the constitution of Tribunals in India as referred in the Judgment is as follows:

“The Tribunals which are largely a twentieth century phenomenon existed in this country even before the Constitution was framed. The oldest and best known Tribunal is the Income-tax Appellate Tribunal which had been functioning from the year 1941. Industrial Tribunals had also been established prior to 1950. Articles 136 and 227 of the Constitution refer to Tribunals, and make their orders subject to judicial review by the High Court, and with leave, to the Appellate jurisdiction of the Supreme Court. Numerous Tribunals have been created subsequent to 1950 by Parliamentary as well as State legislation. Their exact number however is not easily ascertainable. The Law Commission of India in its 162nd Report submitted in 1998 reviewed the working of the major tribunals in the country – the Income-tax Appellate Tribunal, Customs, Central Excise and Gold (Control) Appellate Tribunal and the Administrative Tribunals, and suggested certain changes to improve their functioning.
The object of constituting Tribunals is to provide a simpler, speedier and more accessible justice than ordinary courts are able to provide, as stated in Wade on Administrative Law. Yet another object of constituting Tribunals is to create specialist Tribunals which would include specialists in the filed, to adjudicate more efficiently and speedily the matters requiring adjudication in that field, and thus command the confidence of all concerned in the quality and reliability of the result of such adjudication.”

The Operative portion of the Judgment of the Madras High Court is as follows:

“In the light of foregoing discussions it is declared that until the provisions in Parts 1B and 1C of the Companies Act introduced by the Companies (Amendment) Act, 2002, which have been found to be defective in as much as they are in breach of the basic constitutional scheme of separation of powers and independence of the judicial function, are duly amended, by removing the defects that have been pointed out, it would be unconstitutional to constitute a Tribunal and Appellate Tribunal exercise the jurisdiction now exercised by the High Courts or the Company Law Board.
The petitioners have also challenged the validity of certain provisions of the Companies (Amendment) Act, 2002, whereby certain powers currently exercised by the Company Law Board, some of which were earlier exercised by the court, were transferred to the Central Government. Most of those powers are only tangentially judicial and are primarily administrative. There is no illegality in such transfer.”

The Judgment of the Madras High Court was a very detailed, considered and reasoned judgment. The Apprehension of the Petitioners who challenged the Companies (Second Amendment) Act, 2002 and the conclusion of the Court on the issue is summed up in one para of the Judgment as follows:

“The constitution of the National Company Law Tribunal and the Appellate Tribunal in the manner now provided, when considered along with the provisions concerning the Competition Commission under the Competition Act 2002, seems to indicate a pattern of an aggressive executive seeking to take over gradually the judicial power traditionally exercised by the courts under safeguards which ensure the competence, independence and impartiality of the judges, and replacing them by persons who have neither a judicial background nor specialized knowledge of the subject for which the Tribunal is created, and by persons now serving the executive who will continue to retain their lien and loyalty to the executive branch, and be amenable to the influence of executive superiors and their political masters.”

The doyens of the Madras Bar Association Shri Aravind P.Datar, Senior Advocate and Shri V.T.Gopalan, the then Additional Solicitor-General has rendered exceptional assistance to the Court in the matter before Madras High Court and the same is acknowledged by the Madras High Court in its judgment as follows:

“We place on record our appreciation to Mr.Arvind Datar, learned senior counsel of petitioner, whose research and cogent presentation has helped to clarify and bring out the significance of the issues involved, and to Mr.V.T.Gopalan, learned Additional Solicitor-General who, with his usual fairness presented the case for the respondent with great vigour, and also placed before the court all the relevant materials.”

Appeal to the Supreme Court:

The Judgment of the Madras High Court on the issue of constitution of National Company Law Tribunal and National Company Law Appellate Tribunal was appealed before the Supreme Court and the Supreme Court has now delivered a land-mark judgment on the issue and the judgment has further strengthened the conclusion of Madras High Court and the apprehensions expressed. The Madras High Court has never questioned the legislative competency in establishing National Company Law Tribunal, but, expressed its concern over the independence of the mechanism and its effectiveness. It’s really laudable.

Further process:

Now, the entire Companies Act, 1956 sought to be reorganized with some inclusions and deletions through Companies Bill, 2009. I don’t know as to how the Government has proceeded with the Companies Bill when an important issue on the Constitution of National Company Law Tribunal and National Company Law Appellate Tribunal was pending before the Apex Court. Now, the concerned ministry has to take note of the judgment of the Apex Court and should make needed changes to the proposed bill and then, the Companies Bill can be introduced in the Parliament and it needs to be passed. It will take some time, but, the entire issue can be quicken as the needed infrastructure for the establishment of National Company Law Tribunal and National Company Law Appellate Tribunal was already in place as I believe.

My opinion on the Tribunal:

Many feel that there is lot of difference between a Tribunal and the Court, but, I disagree with the notion. The Tribunal is also a Court intended to resolve the disputes, but, it is constituted under a special enactment and may follow different procedure as enshrined in the enactment.

A constitution Bench of the Supreme Court in the case of Associated Cement Companies Ltd. V. P.N.Sharma, AIR 1965SC1595, speaking through our great justice Gajendragadkar, C.J., while holding that the appellate authority under the Punjab Welfare Officers Recruitment and Conditions of Service Rules, 1952, is a Tribunal, observed:

“…Special matter and questions are entrusted to them for their decision and in that sense, they share with the courts one common characteristic; both the courts and the Tribunals are ‘constituted by the State and are invested with judicial as distinguished from purely administrative or executive functions…’ They are both adjudicated bodies and they deal with and finally determine disputes between parties which are entrusted to the jurisdiction….As in the case of courts, so in the case of Tribunals, it is the State’s inherent judicial power which has been transferred and by virtue of the said power, it is the State’s inherent judicial function which hey discharge. Judicial functions and judicial powers are one of the essential attributes of a sovereign State, and on considerations of policy, the state transfers its judicial functions and powers mainly to the courts established by the Constitution; but that does not affect the competence of the State, by appropriate measures, to transfer a part of its judicial powers and functions to Tribunals by entrusting to them the task of adjudicated upon special matters and disputes between parties. It is really not possible or even expedient to attempt to describe exhaustively the features which are common to the Tribunals and the courts, and features which are distinct and separate. The basis and the fundamental feature which is common to both the courts and the Tribunals is that they discharge judicial functions and exercise judicial powers which inherently vest in a sovereign state.”

The observations of Justice Gajedragadkar were also referred in the Judgment of Madras High Court.

Thus, there is no much difference logically between the Court and the Tribunal and both are meant to resolve the disputes.

My apprehension:

I have the privilege of observing the proceedings of High Court in Company matters and also the proceedings of Company Law Board. At present, the High Court discharges very complicated functions under Companies Act, 1956 like entertaining winding-up petitions and entertaining applications seeking sanction of the Court for a scheme of amalgamation etc. The Company Law Board also discharges complicated responsibilities under section 397/398 of the Companies Act, 1956 and other provisions.

There are many limitations and we know the functioning of the office of the Official Liquidator at present and we also aware of the proposed move to get the services of Advocates and Experts as liquidators. It’s a serious issue to deal with and requires serious consideration by the Government and also Courts. In my personal opinion, the High Court was able to discharge its functions under Companies Act, 1956 very well and the proceedings of Company Court were effective to a great extent. Instant orders were passed if the situation demands and most of the orders passed by the High Court while exercising Company Jurisdiction were obeyed and implemented by the parties concerned.

But, when it comes to the proceedings of the Company Law Board, many express their dissatisfaction that they are being unnecessarily troubled and many feel that they are not able to get justice though they could establish a clear case before the Board. It is also frequently seen as to the respect given to the orders of the Company Law Board. Again, the powers of the Company Law Board were limited by the express language used in the Act and also due to the ruling on its own competence and jurisdiction. These issues are taken note of by the Legislature and sought to be addressed in the proposed Companies Bill, 2009.

We have seen tremendous corporate growth in the recent past and with the technological revolution and its adoption in governance like MCA scheme, the incorporation and management of Companies have become so easy though there are complications in the Course.

We need to provide an effective and speedy redressel to the Corporate and they can not be waiting for months and years for a redressel. Handling a Company dispute is a complicated thing and requires lot of care, concentration and specialization. It is to be seen as to how the proposed National Company Law Tribunal and the National Company Law Appellate Tribunal functions in future.

Note: I have only given a brief of the issue and I am aware of the fact that a lot can be said on the issue.

Contrary to the functioning of listed public companies, private companies or the closely held companies ignore the regulatory framework of Company Law and they think that they are the proprietors of the Company. Though, we very frequently use the word "family company", there is no such description of a Company under the provisions of Companies Act, 1956. It is also true that the private companies are given liberty to have their own internal regulations through Articles of Association and Share Transfers are regulated. While there is no problem with a private company where the entire shareholding is held by a family or a group of persons without any difference of opinion, practically, every company tends to think about expansion of the Company and attraction of more investment into the Company which results in the change in the shareholding pattern of a private company very frequently. In many cases, the change in the shareholding pattern of a company is preceded by an agreement between the Company and the investors. As everybody is a human being with natural emotions and greed, there tend to be some difference of opinion among the members which will end up with drastic consequences. When the trust is lost among the shareholders or between two groups in the Company, then, the consequences of breach of trust would be disastrous. With the disbelief, one group tries to dominate the affairs in the Company and serious differences thus erupt. It is a reality in corporate sector that there tend to be some business secrets, and concealment etc.

Though there is no oppression or mismanagement in the Company, taking advantage of the knowledge of business secrets and concealment, a group of shareholders who qualify under section 399 of the Companies Act, 1956 approach the Company Law Board under section 397/398 of the Companies Act, 1956. As everybody knows, section 397/398 of the Companies Act, 1956 meant to provide a preventive measure for the protection of the rights of the minority shareholders. Company Law Board has been conferred with elaborate powers under section 397/398 of the Companies Act, 1956 in order to put an end to the matters complained of while it is also true that there are express limitations on the powers of Company Law Board under section 397/398 of the Act. There are so many lengthy judgments on section 397/398 of the Companies Act, 1956 in view of complications and the stakes involved. It will never be an easy task to understand a company dispute and pass orders and naturally there will be delay in getting the required orders under section 397/398 of the Companies Act, 1956. The general opinion of shareholders in a private company when they approach the Company Law Board under section 397/398 of the Companies Act, 1956 is that the protection to their rights as envisaged under section 397/398 is not effective.

Few concerns of various shareholders who approach the Company Law Board and who require a remedial measure, as I perceive, are as follows.

Concerns or the feelings of Majority Shareholders or group:

1. Majority tends to rely on majority rule and they will never be happy when a minority tries to trouble the majority by leveling allegations.

2. Majority feels that though they have not committed any act of oppression and mismanagement, the minority shareholders who were privy to business secrets take advantage of those things and tries to trouble the majority.

3. Majority feels that they never want a minority group who intends to trouble the Company; however, acquiring the shares of the minority will be a difficult exercise as there will be unreasonable bargaining and financial difficulties.

4. Majority feels that it has become so easy for a group of shareholders or a minority group in the Company to trouble the majority as a mere allegation can do all the damage.

5. Majority truly feels that they are not provided with any remedy under the provisions of the Companies Act, 1956 thinking that majority rule prevails in the Company and the majority can take any decision in the AGM.

6. Majority never wants to expose themselves as powerless and a group which is not able to deal with the minority and as such they may have to face the obstructions by the minority continually.

7. Though the majority in a Company too can approach the Company Law Board under section 397/398 of the Companies Act, 1956, they may not be able to do so when already a minority group has approached the Board seeking some measures under section 397/398 of the Act. When both the majority and the minority allege something, naturally, the conclusion will be that there exist a deadlock in the Company and consequences will follow. Majority never wants such a situation.

8. Majority group always gets troubled with the filing of fictitious forms with the Registrar of Companies (ROC) and they are still not aware of the remedies to get the fictitious forms removed from the MCA portal. This has become a serious issue in most of the Companies and the issue requires a careful consideration for suitable reforms in law and the practice.

9. Majority feels that the applications under section 397/398 of the Act are loosely entertained and pendency of a petition under section 397/398 of the Act has its own consequences on the functioning of the Company.

Concerns or the feelings of minority:

1. Minority shareholders too have many grievances at the preventive and remedial measures available to them when they are oppressed and the company is mismanaged.

2. Minority shareholders were of the opinion that the remedial and preventive measures provided under section 397/398 of the Companies Act, 1956 are not effective.

3. Minority shareholders feel that there is so much delay in getting the required orders from the Board under section 397/398 of the Act.

4. Minority shareholders feel that the orders of the Company Law Board are read between lines by the majority and getting the orders implemented has become a bigger issue.

5. Minority shareholders feel that there are express limitations on the powers of the Company Law Board under section 397/398 and as such they have to approach many forums on the same issue simultaneously.

6. Minority shareholders are scared to approach the Civil Court as they feel that the procedure before civil court is hectic and prolonged.

7. Minority shareholders feel that though they were willing to disassociate from the Company, the exist option is not reasonable with all undervaluation in most of the cases.

Reforms required:

Than ever before, the issue of filing fictitious forms or uploading fictitious forms with MCA portal has become a very serious issue now. The ROC is advising the Company to approach the Company Law Board or the Court and get an order even when an apparent illegality with regard to filing is pointed-out. The majority is hesitant to say that they are being oppressed by the minority though it can happen practically. With the existing legal position, in many cases, the shareholders are forced to approach simultaneous forums and the issue needs to be effectively addressed. The issue of simultaneous proceedings is sought to be addressed in the proposed Companies Bill which contain a specific bar on the Civil Courts to entertain company disputes or matters. There are complications in course even with the specific bar on the jurisdiction of Civil Courts. Such a bar under other special legislations like SARFAECI Act, 2002 can be effective, but, I don’t think that the bar on Civil Courts can be effective under the proposed Companies Bill. The issue of removing fictitious forms is to be addressed on urgent basis. The proceedings of the Company Law Board now and the National Company Law Tribunal in future should be really effective. With many directives of the Supreme Court now on the constitution of National Company Law Tribunal, we hope that the situation will change. We need to have active and knowledgeable presiding officers who are independent in discharge of their functions. A difference between the proceedings of the Company Law Board and the High Court is apparent now and we can see shouting in Company Law Board and it is very rare to see shouting before the High Court. All these issues appear to be very small, but, a lot to convey. The proposed National Company Law Tribunal can never be a High Court, but, in reality, the National Company Law Tribunal discharges the functions of High Court as most of the powers now exercised by the High Court under the Companies Act, 1956 are sought to be transferred to the proposed National Company Law Tribunal.

Note: the views expressed are my personal and I have no intention to insult any institution.

“An Overview”

Synopsis:

- FEMA Outline

- Non Resident Indian (NRI)

- Person of Indian Origin (PIO)

- Legal Counseling Issues

- Acquisition of property by NRI in India

- Transfer of Property by NRI in India

- Acquisition through Permitted Activity

- Matters Which Requires Prior Permission of RBI

v For Citizen of India residing outside India (i.e. NRI)

v For the Person of Indian origin Resident outside India(PIO)

Conclusion.

FEMA Outline:

Reg. 3:

i. It deals with acquisition and transfer of immovable property in India by an Indian citizen Resident outside in India(NRI)

ii. It grants general permission to him to acquire and transfer an immovable property in India other than agricultural or plantation property or a farm house.

Reg.4:

i. It deals with acquisition and transfer of immovable property in India by PIO

ii. It grants a general permission to him to acquire and transfer of immovable property in India other than Agricultural or plantation property.

Reg.5:

It grants general permission to a person resident outside India who has secured RBI permission To establish a branch, office or other place of business in India (excluding a liaison Office) to acquire an immovable property in India which is necessary for or incidental to carrying on the permitted activity.

Reg. 6:

It deals with the repatriation of the sale proceeds by an NRI or a PIO, of an immovable Property (other than agricultural land or plantation property or a farm house) in India subject to the satisfaction of certain stipulated conditions

Reg.7:

It prohibits the acquisition or transfer of immovable property in India by citizens of certain neighboring countries, whether such individual is a resident Of India or not.

Reg.8:

It prohibits the transfer of an immovable property in India by a person resident outside India (other than an NRI or a PIO); i.e., a foreigner, without prior permission of RBI.

Non Resident Indian (NRI):

If we Read section 2(w) r.t.w. section 2(v) of FEMA 1999

And

Para (VI) of F.E.M (Deposit Regulation 2000) together, it can be summarized as under:

- An Indian Citizen residing outside in India also

- A foreign Citizen of Indian Origin residing India is defined as Non-Resident Indians.

Person of Indian Origin (PIO):

A PIO has been broadly defined as a citizen of any country other than Bangladesh or Pakistan [certain Regulations also include Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan] if:

- At anytime he has held an Indian passport; or

- If he or either of his parents or grand parents was a citizen of India by virtue of Constitution of India of the Citizenship Act 1955; or

- The person is a spouse of an Indian citizen or a person referred to in sub-clause (a) or (b) above.

Legal Counseling Issues:

- Opening of a Bank Account: Foreign national’s resident but not permanently resident in India are permitted to maintain and operate bank accounts in India only with authorised dealers.

- Acquisition, Management & Transfer of Immovable Property: Section 6(5) of FEMA 1999, provides that a person resident outside India can hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was a resident in India or inherited from a person who was a resident in India.

- Issues Relating to Borrowing & Lending: The Issues and Limitations relating to borrowings and Lending has been regulated by Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 issued by the RBI

Acquisition of property by NRI in India:

1.No special permission is required for an Indian citizen residing outside India to acquire (by purchase or gift) any immovable property in India other than agricultural land, plantation property or a farmhouse (Reg. 3(a)).

2. However, the restriction on acquiring agricultural land, plantation or farmhouses is applicable to all nonresidents. The restriction on ‘agricultural properties’ continues from the time of FERA. The RBI does not approve such collectively.

3. Under the old FERA, a declaration had to be filed giving details of the property. Now this process has been dispensed with. However the Bank should be informed about full details of the property and costs incurred. This can, in a way, help at the time of repatriation repatriation of sale proceeds of the property.

4. It is notable that only non-residents who are Indian citizens, or who are of Indian origin (referred to as NRI) have been permitted to invest in immovable properties in India. In other words, foreigners are by and large not allowed to buy immovable properties in India.

5. Further, the non-residents who are Indian citizens or persons of Indian origin can also acquire any property (including agricultural properties, etc.) by way of inheritance. This is because to bequeath a property is a natural right. It cannot be “given” by a law. As a corollary, the heir can acquire a property as inheritance. However once having acquired the property, restrictions on use or holding can be imposed under the law. Thus, even if agricultural property etc. is inherited, the agricultural activities cannot be conducted. A person may have natural plants, trees etc. on the land. However, he cannot grow the same with the intention of earning income.

Transfer of Property by NRI in India:

For an Indian citizen residing outside India, there is no permission required to transfer (whether by sale or gift) immovable property in India.

2. However, in case of agricultural properties, etc., the same can be sold only if the acquirer is an Indian resident.

3. If the proposed acquirer is a non-resident (whether Indian citizen or a person of India Origin), the property can not be sold. This is a corollary to the restriction on acquiring the agricultural land, etc. (Though not specified no property- whether agricultural or otherwise- can be sold to outright foreigners (non ONR) as they are not allowed to buy property in India (Reg. 3(b) and 3(c)).

Acquisition through Permitted Activity:

A person resident outside India who has been permitted by The RBI to establish a branch or an office or a place of business in India (excluding a Liaison Office), has a general permission of the RBI to acquire any immovable property in India who is necessary for or incidental to carrying on such an activity.

2. However, such an acquisition is subject to the due compliance with all other applicable laws, rules, regulations or directions for the time being in force.

3. Further, in all such cases, a Declaration in the prescribed Form IPI is required to be filed with The RBI within 90 days of the acquisition of the immovable property (Reg.5(a)).

4. The form IPI is a simple form which requires very simple and general information such as name and address of the acquirer, description and full details of the location, of the property, purpose of acquisition, name and address of the seller/lesser, date and cost of acquisition and details about the sources of funds etc.

5. Further such a person is also permitted to mortgage such an immovable property to an authorized dealer as a security for any borrowing (Reg. 5(b)).

6. However, such a person requires the prior permission of The RBI to transfer such a property by way of a sale or otherwise.

Matters Which Requires Prior Permission of RBI:

v For Citizen of India residing outside India(i.e. NRI):

a) To acquire agricultural or Plantation property or a farm house in India.

b) To Transfer of agriculture or plantation property or a farm house in India to another NRI or PIO.

c) To transfer any Immovable property in India to a person resident outside India (other than to another NRI or PIO).

v For the Person of Indian origin Resident outside India(PIO):

a) To acquire any Immovable property in India (other than agricultural or plantation property or a farm house) by the way of purchase.

b) To acquire Agricultural or Plantation Property or a farm House in India by way of purchase or gift (other than by way of Inheritance).

c) To acquire any Immovable property in India (other than agricultural or plantation property or a farm house) by the way of a gift from a foreign national resident out side India (other than another NRI or PIO).

d) To transfer any Residential or commercial Property in India by way of Gift to a person Resident outside India(other than NRI or PIO)

e) To Transfer any immovable property in India by way of sale to another NRI or PIO.

Conclusion:

Although the FERA act is been repealed and FEMA came into the existence but rights of Nri’s are still limited. If we talk about their Investment rights especially in Immovable property they looks very compact and vague its needs to be amended just by looking the changing approach of NRIs towards our country and needs to give more privileges to them regarding the Investment Policies.

I- The Veil Doctrine in Company Law

A corporation under Company law or corporate law is specifically referred to as a “legal person”- as a subject of rights and duties that is capable of owning real property, entering into contracts, and having the ability to sue and be sued in its own name.[1] In other words, a corporation is a juristic person that in most instances is legally treated as a person, and empowered with he attributes to own its own property, execute contracts, as well as ability to sue and be sued.

One of the main motivations for forming a corporation or company is the limited liability it offers its shareholders. By this doctrine (limited liability), a shareholder can only lose only what he or she has contributed as shares to the corporate entity and nothing more.

Nevertheless, there is a major exception to the general concept of limited liability. There are certain circumstances in which courts will have to look through the corporation, that is, lift the veil of incorporation, otherwise known as piercing the veil, and hold the shareholders of the company directly and personally liable for the obligations of the corporation.

The veil doctrine is invoked when shareholders blur the distinction between the corporation and the shareholders. It is worthy of note that although a separate legal entity, a company or corporation can only act through human agents that compose it. [2]As a result, there are two main ways through which a company becomes liable in company or corporate law to wit: through direct liability (for direct infringement) and through secondary liability (for acts of its human agents acting in the course of their employment).[3]

The doctrine of piercing the corporate veil varies from country to country. In the opinion of two Corporate law scholars, apparently, there is a general consensus that the whole area of limited liability, and conversely of piercing the corporate veil, is among the most confusing in corporate law.”[4]

There are two existing theories for the lifting of the corporate veil. The first is the “alter-ego” or other self theory, and the other is the “instrumentality” theory.[5]

The alter-ego theory considers if there is in distinctive nature of the boundaries between the corporation and its shareholders. [6]

The instrumentality theory on the other hand examines the use of a corporation by its owners in ways that benefit the owner rather than the corporation. It is up to the court to decide on which theory to apply or make a melange of the two doctrines.[7]

Courts are generally reluctant to pierce the corporate veil, and this is only done when liability is imposed to reach an equitable result.

1.2: Meaning of Corporation in Company Law

To begin with, the word company will be used in this paper to refer to a legal entity with an identity different from that of its owners. It goes without saying that the owners in such an entity are not held liable for the firm’s obligations in excess of the value of their investment therein.[8] In fact, a company is equal in law to a natural person.

In different legal systems, corporate law and company law mean the same thing. In either circumstance, the term is used to denote the field of law concerning the creation and regulation of companies or corporations and other business organizations.

The important thing to note however is that although a separate legal entity, a company or corporation can only act through human agents that compose it. As a result, there are two main ways through which a company becomes liable in company or corporate law to wit: through direct liability (for direct infringement) and through secondary liability (for acts of it's human agents acting in the course of their employment).

1.3: Veil Doctrine as derivative from Separate legal personality concept

As aforementioned, a company once incorporated becomes a legal personality or a juristic entity that has a separate and distinct identity from that of it's owners or members, shareholder; and it's further empowered with it's own rights, duties and obligations, can sue and be sued in it's own name, etc, etc

The most important ingredient that flows from the separate legal personality clause is that of limited liability. It is aimed at giving investors minimum insurance in their business over their own private lives. Hence, the most a member in the company can lose is the amount paid for the shares themselves and thus the value of his/her investment.[9] Thus, creditors who have claims against the company may look only to the corporate assets for the satisfaction of their claims as creditors and generally cannot proceed against the personal or separate assets of the members. This has the potential effect of capping the investors’ risk whilst, consequently, their potential for gain is unlimited.[10] Evidently, corporations exist in part, in the first place to shield their shareholders from personal liabilities for the debts of that corporation.[11]

The concept of limited liability was invented in England in the 17th century, and prior to this period, people were scared to invest in companies because any partner in a general partnership could be held responsible for all the debts of the corporation. As the capital needed to finance the largest projects grew, and along with it the necessity of raising money, investors were reluctant to invest because of the risk involved in essentially guaranteeing the entire debt of the business entity.

In fact, the concept of separate legal personality goes hand in hand with the doctrine of limited liability. The main importance of the limited liability concept is that it protects the company and its members, as well as to facilitate commercial ventures in which the company may be interested.[12] The principle further act to attract and encourage corporate investment, much needed in any society to speed up development. It is believed to be the springboard to raise managerial standards in a corporate organization. It goes without saying that it facilitates better investment strategies by the company question.

Farrar has described the concept of separate legal personality as "...essentially a metaphorical use of language, clothing the formal group with a single separate legal entity by analogy with a with a natural person"[13]

In fact, corporate law requires that company owners respond to organisational realities of the corporation as well as conforming with and making intelligible the treatment of organisations as legal actors.[14] In this sense, the conception of a corporation is analytical and ideological, descriptive and prescriptive.[15]

One scholar in the person of Blumberg has pointed out that the law’s conception that the company is at law a different person- in some ways seems proper and satisfying,[16] but then, the problem is far more complex. He argues that “in the law, concepts have a life of their own because their ability ex ante to influence the thinking of judges and ex post to be invoked by judges to justify their conclusion."[17]

1.4: The Concept of Limited Liability

The main idea behind that the legal personality of a company is separate from that of it's members. The most important ingredient that flows from he separate legal personality clause is that of limited liability. It is aimed at giving investors minimum insurance in their business over their own private lives. Thus, the most a member in the company can lose is the amount paid for the shares themselves and thus the value of his/her investment.[18] Thus, creditors who have claims against the company may look only to the corporate assets for the satisfaction of their claims as creditors and generally cannot proceed against the personal or separate assets of the members. This has the potential effect of capping the investors’ risk whilst, consequently, their potential for gain is unlimited.[19]

It is obvious that corporations exist in part, in the first place to shield their shareholders from personal liabilities for the debts of that corporation.

The concepts was invented in the 17th century, and prior to this date, people were scared to invest in companies because any partner in a general partnership could be held responsible for all the debts of the corporation. As the capital needed to finance the largest projects grew, and along with it the necessity of raising money, investors were reluctant to invest because of the risk involved in essentially guaranteeing the entire debt of the business entity.

In fact, the concept of separate legal personality goes hand in hand with the doctrine of limited liability. The main importance of the limited liability concept is that it protects the company and its members, as well as to facilitate commercial ventures in which the company may be interested.[20] The principle further act to attract and encourage corporate investment, much needed in any society to speed up development. It is believed to be the springboard to raise managerial standards in a corporate organization. It goes without saying that it facilitates better investment strategies by the company question.

1.5.1: The Courts' treatment of Separate Legal Personality under Anglo-Saxon Jurisdictions

Under Anglo- Saxon jurisdictions, the doctrine of piercing the veil remains one of the primary method through which the courts mitigate the strenuous demands of the logical fulfilment of the separate legal personality concept.

The problems with finding some thread of principle through all the various court decisions basically stem from the false unity of the cases which, while involving vastly different underlying issues, are still linked under the metaphor of the ’veil’ concept.

Blumberg has written that the conceptual standards of entity law are frequently regarded as Anglo-Saxon principles and applied indiscriminately across the entire range of the law. [21]In other words, the application of the doctrine of separate personality in Anglo-Saxon jurisdictions is at the discretion of the judges and the courts. This is no surprising, given that Anglo-Saxon law is basically Judge-made law. [22]

The function of much of the Anglo-Saxon courts’ work in this area is to delineate the legitimate uses of the corporate form.

1.5.2: An Illustration of the Conceptual interpretation of Limited Liability versus lifting the veil: The decision in Salomon V. Salomon & Co. [23

The case of Salomon V. Salomon & Co., commonly referred to as the Salomon case, is both the foundational case and precedence for the doctrine of corporate personality and the judicial guide to lifting the corporate veil.

The House of Lords in the Salomon case affirmed the legal principle that, upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders. The court did this in relation to what was essentially a one person Company, which is Mr Salomon.

1..5.2.a: Facts and decision of the Salomon Case

Mr Aron Salomon was a British leader merchant who for many years operated a sole proprietor business, specialized in manufacturing leather boots. In 1892, his son, also expressed interest in the businesses. Salomon then decided to incorporate his businesses into a limited company, which is Salomon & Co. Ltd.

However, there was a requirement at the time that for a company to incorporate into a limited company, at least seven persons must subscribe as shareholders or members. Salomon honored he clause by including his wife, four sons and daughter into the businesses, making two of his sons directors, and he himself managing director. Interestingly, Mr. Salomon owned 20,001 of the company's 20,007 shares - the remaining six were shared individually between the other six shareholders. Mr. Salomon sold his business to the new corporation for almost Ј39,000, of which Ј10,000 was a debt to him. He was thus simultaneously the company's principal shareholder and its principal creditor.

At the time of liquidation of the company, the liquidators argued that the debentures used by Mr. Salomon as security for the debt were invalid, and that they were based on fraud. Vaughan Williams J. accepted this argument, ruling that since Mr. Salomon had created the company solely to transfer his business to it, the company was in reality his agent and he as principal was liable for debts to unsecured creditors.

The lord justices of appeal variously described the company as a myth and a fiction and said that the incorporation of the business by Mr. Salomon had been a mere scheme to enable him to carry on as before but with limited liability.

However, the House of Lords later quashed that Court of Appeal (CA) ruling, upon critical interpretation of the 1862 Companies Act.

The court unanimously ruled that there was nothing in the Act about whether the subscribers (i.e. the shareholders) should be independent of the majority shareholder. The company was duly constituted in law, the court ruled, and it was not the function of judges to read into the statute limitations they themselves considered expedient. The 1862 Act created limited liability companies as legal persons separate and distinct from the shareholders.

In other words, by the terms of the Salomon case, members of a company would not automatically, in their personal capacity, be entitled to the benefits nor would they be liable for the responsibilities or the obligations of the company. It thus had the effect that members’ rights and/or obligations were restricted to their share of the profits and capital invested.[24]

1.5.2.b: Significance of the Salomon Case

The rule in the Salomon case that upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders has continued till these days to be the law in Anglo-Saxon courts, or common law jurisdictions. The case is of particular significance in company law thus:

Firstly, it established the canon that when a company acts, it does so in it’s own name and right, and not merely as an alias or agent of it’s owners. For instance, in the later case of Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners, [25]Lord Sumner said the following:

“Between the investor, who participates as a shareholder, and the undertaking carried on, the law interposes another person, real though artificial, the company itself, and the business carried on is the business of that company, and the capital employed is its capital and not in either case the business or the capital of the shareholders. Assuming, of course, that the company is duly formed and is not a sham...the idea that it is mere machinery for effecting the purposes of the shareholders is a layman’s fallacy. It is a figure of speech, which cannot alter the legal aspect of the facts.”[26]

Secondly, it established the important doctrine that shareholders under common law are not liable the company’s debts beyond their initial capital investment, and have no proprietary interest in the property of the company. This has been affirmed in later cases, such as in The King v Portus; ex parte Federated Clerks Union of Australia[27], where Latham CJ while deciding whether or not employees of a company owned by the Federal Government were not employed by the Federal Government ruled that:

“The company…is a distinct person from its shareholders. The shareholders are not liable to creditors for the debts of the company. The shareholders do not own the property of the company…”[28]

II-The piercing of the veil by Common Law Courts

2.1 How do Common Law courts pierce the veil?

Lifting the veil of incorporation or better still; “Piercing the corporate veil” means that a court disregards the existence of the corporation because the owners failed to keep one or more corporate requirements and formalities. The lifting or piercing of the corporate veil is more or less a judicial act, hence it’s most concise meaning has been given by various judges. Staughton LJ, for example, in Atlas Maritime Co SA v Avalon Maritime Ltd (No 1)[29] defined the term thus:

“To pierce the corporate veil is an expression that I would reserve for treating the rights and liabilities or activities of a company as the rights or liabilities or activities of its shareholders. To lift the corporate veil or look behind it, therefore should mean to have regard to the shareholding in a company for some legal purpose.”[30]

Young J, in Pioneer Concrete Services Ltd v Yelnah Pty Ltd,[31] on his part defined the expression “lifting the corporate veil” thus:

“That although whenever each individual company is formed a separate legal personality is created, courts will on occasions, look behind the legal personality to the real controllers.”[32]

The simplest way to summarize the veil principle is that it is the direct opposite of the limited liability concept. Despite the merits of the limited liability concept, there is the problematic that it can lead to the problem of over inclusion, to the disadvantage of the creditors. That is to say the concept is over protected by the law. When the veil is lifted, the owners’ personal assets are exposed to the litigation, just as if the business had been a sole proprietorship or general partnership.

Common law courts have the lassitude or exclusive jurisdiction “lift” or “look beyond” the corporate veil at any time they want to examine the operating mechanism behind a company. [33]

This wide margin of interference given common law judges has led to the piercing of the corporate veil becoming one of the most litigated issues in corporate law.[34]

But it should be worthy of note that a rigid application of the piercing doctrine in common law jurisdictions has been widely criticized as sacrificing substance for form. Hence, Windeyer J, in the case of Gorton v Federal Commissioner of Taxation, remarked that this approach had led the law into “unreality and formalism.”[35]

As aforementioned, when the judges pierce the veil of incorporation, they accordingly proceed to treat the company’s members as if they were the owners of the company’s assets and as if they were conducting the companies business in their personal capacities, or the court may attribute rights and/or obligations of the members on to the company. The doctrine is also known as "disregarding the corporate entity".

In his 1990 article, Fraud, Fairness and Piercing the Corporate Veil, Professor Farrar remarked that the Commonwealth authority on piercing the corporate veil as “incoherent and unprincipled”. [36] That claim has been earlier backed up by Rogers AJA, a year ago in the case of Briggs v James Hardie & Co Pty[37] thus:

“There is no common, unifying principle, which underlies the occasional decision of the courts to pierce the corporate veil. Although an ad hoc explanation may be offered by a court which so decides, there is no principled approach to be derived from the authorities.”[38]

Another scholar in the person of M. Whincop in his own piece: ‘Overcoming Corporate Law: Instrumentalism, Pragmatism and the Separate Legal Entity Concept’[39], argued that the main problem with the Salomon case was not so much the argument for the separate legal entity, but rather the failure by the English House of Lords to give any indication of “What the courts should consider in applying the separate legal entity concept and the circumstances in which one should refuse to enforce contracts associated with the corporate structure.”[40]

2.2: Basis for court lifting of the veil of incorporation under Anglo-Saxon Jurisdictions

As aforementioned, common law courts are empowered to; under limited circumstances ignore the limited liability rule, and “pierce the corporate veil”, so that the members of the company in question may become liable for the actions of the company, in spite of the limited liability rule that the two have separate identities. [41]

It’s worth re-iterating that the piercing of the corporate veil remains one of the most litigated issues in English company law.[42] There are however a number of general factors that Anglo-Saxon would normally take into considering before piercing the veil, since as much as possible, the courts will like to maintain the preserve of companies to keep separate identity from its owners.

By and large, the separate legal personality of a company will be disregarded only if the court deems that there is, in fact or in law, a partnership between companies in a group, or that there is a mere sham or facade in which that company is playing a role, or that the creation or use of the company was designed to enable a legal or fiduciary obligation to be evaded or a fraud to be perpetrated.[43]

In a nutshell, common law courts have ever since the Salomon case recognized a number of discrete factors that would prompt them to piercing the corporate veil. The most outstanding factors would be examined hereunder:

2.2.1Fraud

English courts would allege fraud where its owners of a corporation merely used it as a window dressing to evade either fiduciary or legal obligations. This will most notably be the case where the company owner intentionally used it to deny the creditors pre-existing legal rights.[44] These were the facts in issue in the case of Re Edelsten ex parte Donnelly,[45] even though the court could not ascertain fraud on a company owner who had apparently denied his obligations towards his creditors on the grounds of limited liability. The court was faced with the question of ascertaining whether the company was incorporated and then used for the purpose of evading a legal obligation or perpetrating a fraud, as argued by the trustee. The court ruled thus.

“The argument of fraud is, of course circular. It can only succeed if the argument of sham succeeds, because if no property was acquired by, or devolved upon, Edelsten, no duty capable of being evaded could arise under the Act…The submission that the VIP Group had been used to perpetrate a fraud was coincident, and stood, or fell, with the submissions which sought to have the transactions, by which the VIP Group

Undoubtedly, the influences of IT (‘Information Technology’) have already invaded every corner of our daily lives. Nowadays, it is unimaginable if one determines not to relevant with this new technology at all. We take cash from the automated teller machines (ATMs or cash point dispensers outside banks); we order train or coach tickets from their homepages; we pay with credit cards in store to avoid taking large amount of notes or coins. Not only the individuals, but the activities of organizations are also deeply affected. Electronic fund transfers (EFTs) transactions are made between financial institutions, including the employers paying salaries to our accounts; and a large manufacturing company may order components automatically and electronically from its suppliers when stock levels reach a predetermined lower limit. Traditional management is already out of date. It cannot compare with E-commerce, which is able to ‘maximize efficiency by reducing repetition and delays, increasing accuracy and permitting the maintenance of minimum stock levels by placing orders for ‘just-in-time’ delivery.’[1] As the U.S. ex-president Clinton said that, ‘[t]he invention of the stream engine two centuries ago and the harnessing of electricity ushered in an industrial revolution that fundamentally altered the way we work, brought the world’s people closer together in space and time, and brought us greater prosperity. Today, the invention of the integrated circuit and computer and the harnessing of light for communications have made possible the creation of the global Internet and an electronic revolution that will once again transform our lives.’[2]

Among the countless achievements of Information Technology, agent technology is one of those most important inventions which invoked increasing attentions. ‘[I]t should be clear now that we live in an ‘agent’ world. All the time, where we are, we are surrounded by agents. Nobody is able to deal with all necessary tasks personally.’[3] The development of IT created a brand new type of agents: ‘electronic agents’. This sort of agents ‘can autonomously perform certain tasks in a network setting’. They ‘are autonomous, they are reactive and pro-active, they can adapt to their environment, they can learn and they may be creative.’ Although ‘[t]his does not imply that an electronic agent will possess all these characteristics, but it will possess some’.[4]

The appearance of this new type of electronic agents is doubtlessly changing the existed legal opinions in agent law. Lots of arguments have been brought forward around this new business. Here is a sound that ‘electronic agents are helpful and without risks for business as well as consumers’. But it is still not clear that to what extent the electronic agents can take the place of human agents and what are the legal effects of the activities completed by electronic agents. Obviously the electronic agents are more efficient than human agents, but are they reliable? The task of this essay is to discuss the legal risks accompanied with electronic agents and to suggest the suitable reactions of law.

PART II Structure of this Article

To illustrate the legal problems caused by electronic agents, obviously, we should begin with the topic we are discussing, the definition of electronic agents and their principium. Therefore, the first part of the article will try to give out a definition via comparing three widely accepted definitions. Then, I will introduce the working principle of agent technology through analyzing how electronic agents work. Certainly, only when we make sure the basic principle of electronic agents, we can analyze the reliability and potential risks of this new business.

The following part aims to illustrate the possible risks of electronic agents and the challenges to our existed legal rules. Apparently, no one can deny that the emergence of electronic agents has brought us lots of benefits, such as less cost, more efficient, and so on. ‘The economic potential of the Internet is as difficult to predict at the beginning of the twenty-first century as the economic potential of the motor car was at the beginning of the twentieth century.’[5] But, generally, science and technology is a coin with two sides, for instance, the power of nuclear, which can be used for peaceful purposes and, on the other side, can be used for massacre. So the law should not hamper the development of this new technology, but at the same time it should encourage this new business and induce it towards a brilliant future via avoiding its potential risks.

As to the drawbacks of the electronic agents, the risks normally came from two origins: agents and agent platforms. Because of the limits of technology, the potential damages cannot be avoided in the agents themselves and also in the platform on which electronic agents base and communicate data and information with each other. Those risks include modifications of the task of agents, the security of confidential information, and the improper managements from agent platform, attacks to agent platform from malicious or faulty agents, and other numberless possible risks. All in all, ‘it became clear that the use of technologies like agents may cause legal problems’ and ‘[i]t is our belief that these legal issues are especially important when agents are developed to perform certain legal tasks or to support legal practice.’[6] Therefore, the opinion, which believes electronic agents are totally not risky for business as well as consumers, is obviously too optimistically. In fact, there are too many risky factors for this essay to discuss all the legal problems caused by them. In all of those legal problems, the most important one is the legal status of electronic agents. If the legal status of electronic agents can be accepted as same as the human agents, then the legal rules for human agents can be implied to electronic agents.

There are several totally different opinions about the legal status of electronic agents. I agree that although ‘the method of execution is case-specific’, the electronic agents have ‘no principal differences’[7] with human agents. We can see the electronic agent as an independent ‘electronic person’ and allocate the rights and duties between them, their principals and third parties as what we have done for the human agents.

Finally, the conclusion part will repeat the author’s attitude towards electronic agents. The technology of electronic agents is a skean, and there is no necessary to be optimistic blindly or to be pessimistic blindly as well. ‘Agent technology is progressing at a fairly steady pace neglecting reflections on legal aspects.’ [8] Law should not, and also cannot, stop the steps of science and technology. What we can do is to predict the influences of new businesses, then try to limit those drawbacks and induce they develop healthily towards a correct direction.

PART III Electronic Agents and Their Working Principles

3.1 What is an Electronic Agent?

In fact, ‘electronic agents’ is not a strange thing for us. Even if we haven’t realized, we contact with electronic agents regularly. There is a wide variety of electronic agent types, ‘ranging from the more simplistic search engines, to personal assistants, to buyer and seller agents which respectively assist buyers and sellers in identifying and comparing the characteristics of goods and services in the electronic marketplace, to the more autonomous, intelligent agents.’[9] The most often seen sort of electronic agents is the search engines, such as google.com, openfind.com, wisenut.com and others. With the help of search engines, the users do not need to browse every website one by one. All they have to do is to input the keywords, and then search engines will present the result links which include the keywords users required. In this case, search engines represent the user to do the job of searching web-pages one by one. So, search engines serve as the users’ electronic agents.

However, although we are familiar with electronic agents, ‘[t]here is no generally accepted definition of an ‘electronic agent’.’[10] Not only no generally accepted definition, but also no a uniform term is use to refer this new business. Normally, they are known as ‘electronic agents’, but sometimes they are called ‘software agents’,[11] and when compared with robots (hardware agents)[12], they are also named ‘intelligent agents’.[13]

Though no generally accepted definition exists, it is unavoidable to mention three widely noticed definitions. The first one is the definition of the U.S Uniform Electronic Transaction Act (UETA). In section 2(6) of UETA (1999), it defined ‘‘Electronic agent’ means a computer program or an electronic or other automated means used independently to initiate an action or respond to electronic records or performances in whole or in part, without review or action by an individual.’[14] Another definition is given by the U.S. Uniform Computer Information Transaction Act (UCITA), which provides: ‘‘Electronic agent’ means a computer program, or electronic or other automated means, used independently to initiate an action, or to respond to electronic message or performances, on the person’s behalf without review or action by an individual at the time of the action or response to the message or performance.’[15] Except the regulations in U.S.A, in 1999, the Uniform Electronic Commerce Act (UECA) adopted in Canada gave its own definition: ‘‘electronic agent’ means a computer program or any electronic means used to initiate an action or to respond to electronic documents or actions in whole or in part without review by a natural person at the time of the response or action.’[16]

According to those three widely known definitions, we can find there are no substantial differences. All of the three definitions declared ‘the electronic agent means a computer program or other electronic means’ which can be used to initiate an action or to respond to electronic records or actions and meanwhile review by human is not necessary for electronic agents. The differences are only that UETA did not require clearly no human interferences at the time of action or response but UCITA and UECA required, and UETA and UECA expressed explicitly that the automatism of electronic agents may ‘in whole or in part’ but UCITA did not mention that.

All in all, electronic agents are those electronic methods which can represent another person to complete certain tasks. The most important feature of electronic agents is automatism; therefore they can be separated with human management partly or totally. The extent of electronic agents’ automatism is determined by the technology. ‘[T]here is much ongoing research to develop autonomous, intelligent agents that would be capable of initiating action, negotiating and concluding contracts without the knowledge or oversight of the human being who deployed such agents. Furthermore, nowadays it is not only possible for agents to assist in the negotiation and conclusion of contract on behalf of a party, but also to perform part or, in some cases, even all of that party’s obligations in the contract.’[17] No mater to what extent the automatism of the electronic methods is, those programs with the feature belong to electronic agents. To sum up, ‘electronic agents’ refers to ‘programs that react autonomously to changes in their environment and solve their tasks without any intervention of the user.’[18]

3.2 How Electronic Agents Works?

It is a problem for one without particular IT knowledge, such as me, to explain the working principle of electronic agents. In brief, electronic agents can be divided into two categories according to their different working methods: stationary agents and mobile agents. Meanwhile, both stationary agents and mobile ones have the similar working procedure, i.e. the program as an agent must be developed and then be transferred to a platform to achieve its tasks. So, agents and agent platforms are indispensable components in agent technology.

At first, we can divide electronic agents into two categories to analyze their different working methods: stationary agents and mobile agents. As their names express out that, ‘stationary agents are not able to leave their original environment, whereas mobile agents are software programs that move around (migrate) independently in heterogeneous computer networks.’ [19] It’s not hard to understand the working method of stationary agents. In fact, the electronic calculator we regularly use is one of the examples of the simplest stationary agents. The task of the program installed in electronic calculator is to deal with the data input. This process stays in a limited platform, and calculates the data passively. Obviously, the advantage of stationary agents is the stability. Since that the work of stationary agents is limited into a platform, they are not easily affected by other environments. And even if they are attacked by hostile programs, such as the computer viruses, it is easy for the users to handle that. After all, the stationary agents are stationary and under the control of the user at any moment. But things are quite different with mobile agents. After being allocated tasks, mobile agents will migrate to other platforms to collect data and continue their jobs. Mobile agents ‘are autonomous and pro-active, can autonomously roam the Internet, perform transactions, and gather information.’[20] And ‘[m]obile code is executed in environments that may be completely unknown to the owner of the agent or where they possibly can have little influence.’[21] Some mobile agents even have the functions to clone themselves and allocate tasks to cloned agents, and then those new agents migrate to other environments else. After they completed their tasks, the mobile agents then move back to the user’s platform with the data they have collected. ‘Therefore an infrastructure of agent servers is necessary, which can dispatch, receive, and implement these agents.’[22] Compared with stationary agents, the mobile ones are more efficient and, certainly, harder to be regulated. Mobile agents have a lot of incompatible advantages, which include ‘decreasing network traffic by performing computational intensive processing near the server that provides the source of information, easing transportability of services across providers, increasing the network availability by autonomy and asynchronous agent operations, reducing time and effort for installation, operation and management, enabling ‘on demand’ provision of special services, and allowing for a more decentralized realization of management and service control and therefore reduce the dependence on network availability resulting in a more robust system.’[23] But because of its migration, it’s also hard to manage the behaviors of mobile agents. After being injected into the network, mobile agents are nearly out of control from the owner. They will wander across from sever to server and eventually return to the user when their task has been completed. Because ‘the code and data of a mobile agent do not reside on the computer system of the agent’s owner, but on another computer’[24], it is nearly impossible for the owner to influence its activities. If the mobile agents can clone themselves or work anonymously, things will be more complicated.

From another view, both the stationary electronic agents and mobile electronic agents cannot work without two essential bases: the electronic agents and the agent platform. ‘Agent technology refers to not only software agents, but also agent platforms: supportive middleware which enables the functioning of software agents.’[25] Or in other words, agents are ‘usually envisioned as ‘active entities’, while agent platforms constitute a technical (software) infrastructure to support agents. Their responsibilities differ: agents pursue goals for user applications, while agent platforms manage agents and their needs for resources.’[26] Electronic agents are autonomous and pro-active programmes, which can communicate with other agents, e.g. negotiate on prices and quantities for goods, and can interact with their environments, e.g. achieve the task of collecting data from the environments. Meanwhile, electronic agents can act only stay in an environment: the agent platform. For a stationary agent, the agent platform normally is the user’s computer system; while for a mobile agent, the agent platforms are the different systems which moved to. The agent platforms generally have some functions of managing agents, providing communication and interaction services and offering migration services, and so on. For instance, ‘[a]n agent platform manages the allocation of resources to agent, e.g. such as which agent ‘runs’ on which computer (if a choice exists) with what speed and which services (e.g. http-access to remote web-site, or access to a local database).’[27] And ‘[a]n agent platform provides mechanisms for security, including access control for migrating agent as well as defence against possible malicious, or faulty, agents.’[28] Also, an agent platform provides communication services, e.g. reliable and secure communication protocols only between particular agents.

Therefore, all the potential risks emerge out either from the stationary agents or mobile agents. Or from another perspective, all the risks are relevant either with the electronic agents themselves or with their agent platforms.

PART IV Potential Risks and Challenges to Legal Rules

4.1 Possible Risks of Electronic Agents

There is no necessary to list out the benefits electronic agent technology has brought to us. Just image the burdens which our ancestors have suffered when they tried to solve some complex mathematical problems. And how boring will it be if we must search a keyword via browsing every homepages by ourselves? Apparently, no body can deny that electronic agents are quite helpful. After all, there are lots of specific tasks which humans are either not able, nor willing, or even not authorized to implement on their own.

However, ‘[a]pplication of any technology has consequences, some of which are foreseen and wanted, others may be unwanted. Agent technology is not different in this respect: its application may involve certain risks.’[29] Compared with human agents, the possible risks of electronic agents are also relatively obvious. We can divide the risks into two categories based on the working principle of electronic agents: risks in agents and risks in agent platforms.

As to the agents, the risks may emerge out at two main periods: agent may be corrupted during agent storage and may be corrupted during transfer.[30] During these periods the agents are stored or transferred, they may suffer possible attack and finally bring to an unwanted result. As we mentioned before, mobile agents suffer more potential risks than stationary agents. ‘Agents are expected to function ‘autonomously’, without a user’s constant supervision. Agents run on an agent platform, communicate with multiple agents on the Internet and interact with numerous objects and services are involved. Mobility increases the risks an agent faces: agents may be hosted by a potentially malicious agent platform, outside the control of their user and thus become more vulnerable…the other parties, such as agent platform, other software agents, humans, virus applications, etc., can change or copy the code and/or data of an agent, either intentionally or accidentally…..For example, an unwanted modification of an agent’s code and/or data may influence an agent’s behavior significantly. Changing data especially confidential information or data with an economic value may be sufficient to cause significant damage. In addition, instructions and goals of an agent can be modified.’[31] Apart from the risk of modification, ‘[a]nother issue is stealing information, including private information such as addresses, bank accounts, credit card numbers, and an agent’s internal (strategic) aims and instructions.’[32] More incredible thing is that ‘an agent may disappear temporarily or permanently, possibly representing a loss of investments in training and acquisition of the agent as well as frustrating the acquisition of results from the agent.’[33] In spite that the development of technology already makes electronic agents today more reliable, we still cannot say the agent technology is stead enough to worry about potential risks. At the same time the computer hikers’ technology are developing as well, and generally, hikers are smarter than well-educated computer engineers.

As to the agent platforms, they also face possible risks. ‘An agent platform hosts an agent: the code and data of which validity, reliability and trustworthiness cannot be easily determined automatically.’ As a result, ‘[c]ode and/or data of an agent platform can be modified or stolen, by mistake or by design. Possible consequences include modifying or stealing information on agents or conditions for (dis)allowing access to migrating agents, or management policies, etc.’[34] Not only the potential attack from hostile agents or viruses outside, the agent platform itself cannot promise no risks exists. Agent platform is a computer system in essence. The reliability and stability of platforms are also problems deserve to be considered. We can feel this easily just from the situation we often suffered when sending some e-mails. The servers for e-mails are also platform. And because of the instability of the servers, we usually find the letters to inform us ‘the delivery is failed’. To date, from the technological perspective, the potential risks are unavoidable in agent platforms.

Since the risks always exist, both in the agents themselves and in the agent platforms, the applications of electronic agents are not without risk. On the contrary, electronic agents may face more and new risks that human agents face. Therefore, a lot of brand new legal issues are caused.

4.2 The Suitable Attitude of Law

Regarding to the risks accompanied with electronic agents, numerous legal issues are caused. Such as the criminal obligations and civil obligations of illegal modification of electronic agent, the legal relationship between electronic agents’ users and providers, the protection for private information involved during the use of electronic agents, the patent rights of the electronic agents, the response of the damages caused by potential risks, and so on.

It is impossible for this essay to discuss all the legal issues above. As I see that, in all of those legal problems, the most important one is the legal status of electronic agents. Because the legal status of electronic agents is not clear, it is also not clear whether the existed agent-principal legal principles can be implied to electronic agents. And also it is a puzzle who should take responsible for the legal results caused by the behaviors of electronic agents. There are several totally different opinions about the legal status of electronic agents. One is called ‘traditional approach’, which regards the electronic agents as only tool or methods of users. The shortcoming of this opinion is very obviously. Since electronic agents are autonomous to some extent, they do not simply follow the determinations of users. After all, an agent should be a person having power to act on behalf of another and affect that other’s legal rights and liabilities.[35] The traditional approach equals electronic agents with tool; then the electronic agents are not ‘agent’ any more. The second opinion is called ‘modern approach’, which supports ascribing the electronic agent as a legal person. But, to date, ‘no legal system regards electronic agents as separate legal persons distinct from their users.’[36] It is still a question that can program be independent legal person? If we admit electronic agent’s legal personality, lots of problems will follow, e.g. when this legal person begins and what are the rights and obligations of this legal person. Another thought claim to regard electronic agent as a person with limited capacity, viz. they have contractual capacity but without legal capacity. This attitude is not reasonable with the development of agent technology. Nowadays, the functions of agent are not limited into the scope of negotiations or collecting information and data. Sometimes, both sides are electronic agents and they negotiate and perform the contract even with out interference of human users. In that case, the electronic agents are not methods with only contractual capacity. The fourth attitude is ‘the progressive approach’. This approach protests an independent ‘electronic person’, who is not a natural person and not legal person as well. There could be an agent register. ‘The owner of an agent could grant a certain amount of money to the agent by enrolling it into this register. The result would be a kind of agent with limited liability.’[37]

I agree with the fourth approach. Since that the electronic agents are autonomous agents, they are not simple tool of users, to some extent. As an agent, an electronic agent can have its intention and, as a result, should take relative legal responsibilities. It’s not suitable for them to have legal personality at this moment, but we can let them have some responsible capacity via registration. Undoubted, the implement of electronic agents must face lots of potential risks. However, the requirements of registration granting a mount of money to register can reduce the risks efficiently. Even if the possible risks happened, the amount of money can be used to redeem the damages. All in all, although ‘the method of execution is case-specific’, the electronic agents have ‘no principal differences’[38] with human agents. Through registration, the electronic agents can be seen as independent ‘electronic person’ and we can allocate the rights and duties between them, their principals and third parties as what we have already done for the human agents

[BIBLIOGRAPHY]

[1] David I Bainbridge, Introduction to Computer Law, 4th edn. (Person Education Limited, 2000) p.263

[2] William J. Clinton, The White House, Office of the Press Secretary, ‘Text of the President’s Message to Internet Users’, 1 July 1997, http://www.whitehouse.gov/WH/News/Commerce/message.html

[3] Artificial Intelligence and Law (2004) 12: 111-135, Steffen Wettig and Eberhard Zehendner, A Legal Analysis of Human and Electronic Agents, p.131

[4] Artificial Intelligence and Law (2004) 12: 1-3, Foreword, p1

[5] Yaman Akdeniz, Clive Walker and David Wall, The Internet, Law and Society, (Person Education Limited, 2000) p.369

[6] Artificial Intelligence and Law (2004) 12: 1-3, Foreword, p1

[7] Steffen Wettig and Eberhard Zehendner, op. cit., p.115

[8] Artificial Intelligence and Law (2004) 12: 5-37, Frances Brazier et al., Law-abiding and Integrity on the Internet: A case for Agents, p.32

[9] Artificial Intelligence and Law (2004) 12: 83-110, Emily M. Weitzenbock, Good Faith and Fair Dealing in Contracts Formed and Performed by Electronic Agents, p.83

[10] Steffen Wettig and Eberhard Zehendner, op. cit., p.112

[11] See Frances Brazier et al., op. cit.

[12] Brenner,W., Zarnekow,R., and Wittig,H., Intelligent Software Agents: Foundations and Applications, (Springer, 1998)

[13] See Artificial Intelligence and Law (2004) 12: 1-3, Foreword, p1

[14] S. 2(6), The U.S Uniform Electronic Transaction Act (1999)

[15] S. 102(27), The U.S. Uniform Computer Information Transaction Act (1999)

[16] Part II, paragraph 19, the Uniform Electronic Commerce Act (1999)

[17] Emily M. Weitzenbock, op. cit., p.84

[18] Steffen Wettig and Eberhard Zehendner, op. cit., p.112

[19] ACM Operating System Review, (1999) 33(3): 7-13, Kotz, D. and Gray, R.S., Mobile Agents and the Future of the Internet.

[20] Frances Brazier et al., op. cit., p.6

[21] Steffen Wettig and Eberhard Zehendner, op. cit., p.123

[22] Ibid., p.112

[23] Netnomics 2 (2000): 171-189, Larry Korba, Towards an Agent Middleware Framework for E-commerce, p.171-172

[24] Steffen Wettig and Eberhard Zehendner, op. cit., p.132

[25] Frances Brazier et al., op. cit., p.7

[26] Ibid., p.7-8

[27] Ibid., p.11

[28] Ibid., p.12

[29] Ibid., p.17

[30] Larry Korba, op. cit., p.174

[31] Frances Brazier et al., op. cit., p.17

[32] Ibid., p.18

[33] Loc cit.

[34] Ibid., p.18-19

[35] Robert Bradgagte, Commercial Law, 3rd edn., (Reed Elsevier (UK) Ltd, 2000) p.128

[36] Emily M. Weitzenbock, op. cit., p.89

[37] Steffen Wettig and Eberhard Zehendner, op. cit., p.123-128

[38] Artificial Intelligence and Law (2004) 12: 111-135, Steffen Wettig and Eberhard Zehendner, A Legal Analysis of Human and Electronic Agents, p.115