Role of Courts in Protection of Shareholders and Creditors

This article is written by Gaurav Purohit, a 3rd Year student of Amity University, Rajasthan

INTRODUCTION

An investor is an individual who allots capital with the desire for a financial return. There are various types of investors, for example, sweat equity investors, angel investors, venture capital, etc

Sweat equity has been utilized to depict a party’s contribution to a venture as efforts, instead of financial equity which is a contribution as capital. The parties contributing to his efforts are known as Sweat Equity Investors. In a partnership, a few partners may add to the firm just capital, and others just sweat equity.

An angel investor and also known as a business angel is a person with huge monetary assets or financial resources who gives capital to a business start-up. Generally, such investors give capital in exchange for a percentage of return on his investment or for ownership in the management decisions of the company. Angels ordinarily contribute their assets, not at all like venture capitalists who deal with the pooled money of others in a professionally managed store.

Different provisions have been specified under the Companies Act, 2013 for the security and protection of the Investors. Since the Companies Bill, 2012 got the consent of the President of India on the 29th August 2013 and was published in the Gazette on 30th August 2013, the Companies Act, 2013 came into power from 30th August 2013. Accordingly, the Companies Act, 1956 is abrogated by the Companies Act, 2013, and hence the provisions under the Companies Act, 2013 will apply to all the Companies.

Investors are generally known as shareholders or members of the company. They contribute to the equity share capital, have the right of voting in each issue, and are qualified for getting the dividend. The security of investors implies the protection and enforcement of the rights and claims of an individual in his role as an investor.640

 Investors or Speculators are the insiders of the organization. They are known as investors or the members of the company. It is to be noticed that all individuals may not be investors, however, all investors are members of the company. Section 41 of the Companies Act, 1956 gives that member incorporates the subscriber of the memorandum of a company, each other individual who agrees recorded as a hard copy to turn into a member of a company and whose name is entered in its register of members, and each individual holding equity share capital of an organization and whose name is registered as a beneficial owner in the records of the depository. Section 2(55) of the Companies Act, 2013 accommodates the meaning of member which is the same as that given under S. 41 of the Companies Act, 1956.

Provisions for Protection of Creditors and Shareholders

  1. Section 62 of the Companies Act, 1956 sets down civil liability for error or misstatement in the prospectus. Where a prospectus welcomes people to buy shares in or debentures of a company, the director, promoter ( and individual who has approved the issue of the prospectus, will be obligated to pay to each individual who buys any share or debentures on the faith of the prospectus for any losses or damage he may have supported because of any false statement included in that. Any individual who has bought in for shares against the public issue and sustained losses or damage because of such error is qualified for relief under this particular section.
  2. Section 63 of the Companies Act, 1956 sets down criminal liability for fraud or misrepresentation in the prospectus. Each individual who has approved the issue of the prospectus containing any false statements will be punishable with imprisonment which may extend out to two years, or with a fine which may extend out to Rs. 50,000 or both.
  3. Section 34 of the Companies Act, 2013 gives that where a prospectus contains any explanation which is false or misleading in structure or context in which it is incorporated or where any consideration or exclusion of any issue is probably going to mislead, then each individual who approves the issue of such prospectus will be punished with imprisonment for a term which will be at least 6 months however which may extend out to 10 years and will likewise be subject to a fine which will not be not exactly the amount associated with the fraud, yet which may extend out to 3  times the amount involved in the fraud.[1]
  4. Section 88(1)(a) of the Companies Act, 2013 gives that each organization will keep a register of individuals showing independently for each class of equity and preference shares held by every member living in or outside India.
  5. Section 88 (5) gives punishment to default in maintaining such Register. if an organization doesn’t keep a register of members, the organization and each official of the organization who is in default will be punished with a fine which will be a minimum of Rs. 50,000 however which may extend out to Rs. 3 lakh and where the failure is a continuing one, with a further fine which may extend out to Rs. 1,000 per day afterward.
  6. The corresponding section of the Companies Act, 1956 in Section 150. If there should be an occurrence of default in keeping up the register of its members, the organization and each official of the organization who is in default will be punishable with a fine which may be extended out to Rs. 500 for every day during which the default proceeds.

Other Key Provisions for Protection of Investors

  • Restriction on forwarding dealings in Securities of the organization by a key managerial personnel
  • Restriction or Prohibition on insider trading of securities of 
  • Casting a vote through electronic methods
  • No mid-night Annual regular meeting – The hour of calling of AGM has been determined to be in  hours of business,
  • A quorum of Meetings – fixed according to the membership base of the Company rather than determined number regardless of size.
  • Minutes of procedures of meeting, a meeting of Board of Directors and other meetings and resolutions passed  postal ballot
  • Maintenance and examination of documents in electronic form

Role of Courts in Protection of Shareholders and Creditors

  • The official courtroom ensures the interests of creditors and investors under the creditor protection law.
  • The Court utilizes the process of the enactment by the legislation to assist the creditors with the clearing of the amount of debt through the insurance agencies.
  • The investors are additionally secured by the court of law for maintaining the standard of living.
  • There are different strategies by which the investors can return the money to the creditors as given by the courts.

Case Laws

  • In R. v. Lord Kylsant[2], a table was set out in the prospectus indicating that the organization had paid dividends fluctuating from 8 to 10 percent in the former years, aside from two years where no dividend was paid. The announcement indicated that the organization was in a sound financial position yet the fact of the matter was that the organization had generous trading losses during the seven years going before the date of a prospectus and the dividend had been paid, not out of the current income, yet out of the assets which had been acquired during the abnormal time of war. The prospectus was held to be false because of the oversight of the reality which was important to appreciate the statement made in the prospectus.
  • In Glass v. Atkin[3] an organization was controlled similarly by two plaintiffs and defendants. The two plaintiffs brought an action against the defendants charging that they had fraudulently converted the resources of the organization for their advantage. The court permitted the action and saw that ordinarily, it is for the organization itself to bring an action where its advantage is unfavorably influenced, however in the case the two plaintiffs were justified in bringing the action for the benefit of the organization since the two defendants being in equal control would effortlessly prevent the organization from suing. 
  • In Bajaj Auto Ltd. v. Company Law Board[4] the Supreme Court saw that regardless of whether the appellants have attempted to buy shares to get a controlling interest in the Company, that itself can’t be a ground for declining to transfer the shares except if and until it tends to be proved that the buyers are undesirable persons and after overseeing the Company, they will act against the Company and interest of shareholders. 
  • In Reliance Industries Ltd. v. Securities And Exchange Board of India[5] Reliance Industries Limited, had been holding more than 5 percent shares in the target company, Larsen and Toubro Limited since 1988-89 and had been having two of its agents working as Non-Executive Directors on the Board of Directors of L&T. Securities and Exchange Board of India informed the  Substantial Acquisition of Shares and Takeovers Regulations, 1994 requiring disclosure of holdings over 5 percent. RIL kept on buying the portions of L&T in the securities market because its shareholding came to as high as 10.98 percent. The Court held that the appealing party RIL was under a duty or an obligation under Regulation 7 to inform the target company about its shareholding having exceeded 5 percent.
  • In Bharat Insurance Co. v. Kanhaiya Lal[6], one of the objects of the company was to advance money at interest on the security of land, houses, machinery, and other property located in India”. One investor brought an action on the ground that few ventures had been made by the organization without satisfactory security and in opposition to the provisions of the memorandum. The Court held that he could sue because as it was ultra vires act, the majority rule doesn’t come into operation.
  • In Brown v. English Abrasive Wheel Co[7] the articles were altered to empower the nine-tenths of the investors to compel any investor to sell his shares to them at a reasonable value. The goal of modifying the articles was not upheld because it was in the interest of the majority and not in the interest of the organization in general. The object of such resolution was just to empower the majority to obtain the shares of the minority.
  • The Apex Court in Life Insurance Cooperation of India V. Escorts Ltd. and others[8] observe certain essential rights of investors which are as per the following:
  • To choose directors and to participate in the administration through them.
  • To enjoy the profit of the company in form of dividends.
  • To apply to the court for relief in the event of abuse and mismanagement.
  • To apply to the court for winding up of the organization.
  • To share the surplus on winding up of the organization.
  • In H.V. Jayaram v. Industrial Credit and Investment Corporation of India Ltd[9]. [xviii], where the certificate of shares was sent to the buyer of shares by post as mentioned by him, the Supreme Court has decided that where an offense punishable under Section 113 (2) of the Companies Act, 1956 has been committed, the cause for action emerges where the head office of the organization is situated and not where the buyer resides. A complaint can be recorded only where the registered office of the company is situated. The Court held that since the organization had dispatched the certificate of shares to the buyer by post, there was no default on its part as respects compliance of the provisions of Section 113(1) and in this manner, there was no merit in appeal and appeal was dismissed by the apex court.

CONCLUSION

Although few provisions were given under the Companies Act, 1956 for protection of the interests of the investors, it didn’t stay up with the dynamic business environment. The new Companies Act tends to a few speculators or investors’ concerns and seeks to give a more hospitable climate to minority investors particularly in the wake of different scandals and scams.

 After analysis of different provisions of the Companies Act, 2013, it tends to be inferred that Legislation has made effective and affirmative steps to secure the interest of the shareholders. Since investor’s commitment is fundamental in raising funds by the company care must be taken to address their needs and necessities. Notwithstanding, the investor’s onus of proof of their dependence on the prospectus, and the damage or loss being brought about by the false statements which were included in the prospectus, are obstructions to the recovery of compensation for their interests in an IPO. But such provisions are fundamental to adjust the interest of the Company and the shareholders.

REFERENCES

  • http://www.legalservicesindia.com/article/1560/Protection-of-the-interest-of-the-investor.html
  • Companies Act 1956
  • Companies Act 2013
  • https://www.lawctopus.com/academike/investors-protection/.
  • https://taxguru.in/sebi/investor-protection-role-of-the-securities-appellate-tribunal.html.

[1] Section 447 of the Companies Act, 2013.

[2] In R. v. Lord Kylsant (1932) K.B. 442.

[3] Glass v. Atkin (1967) 65 DLR 501

[4] Bajaj Auto Ltd. v. Company Law Board AIR 1999 SC 345.

[5] Reliance Industries Ltd. v. Securities And Exchange Board of India 2004 55 SCL 81 SAT.

[6] Bharat Insurance Co. v. Kanhaiya Lal AIR 1935 Lah. 792.

[7] Brown v. English Abrasive Wheel Co (1919) 1 Ch. 290

[8] Life Insurance Cooperation of India V. Escorts Ltd. and others (1986)1 SCC 264.

[9] H .V. Jayaram v. Industrial Credit and Investment Corporation of India Ltd AIR 2000 SC 579.

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