The Insolvency and Bankruptcy Code (Second Amendment) Act 2018: HOME BUYERS as FINANCIAL CREDITORS

The insolvency and bankruptcy code has been formulated with the objective of consolidating and amending the laws in relation to insolvency proceedings against corporate persons, partnership firms and individuals. Section 2 of the code enumerates the entities on which the bankruptcy code shall apply.

Part II of the insolvency and bankruptcy code applies to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees. A corporate debtor for the purpose of the code is a corporate person who owes a debt. A corporate person for the purpose of the code includes a company incorporated under the companies act; limited liability partnership firms; any other person incorporated with limited liability. The code specifically excludes financial service provider from the definition of “corporate person”.

The insolvency resolution process under the code can be initiated on the commission of a default by the corporate debtor. Such insolvency proceedings can be initiated by a financial creditor, an operational creditor or the corporate debtor himself.

Section 7 of the code guides the steps which need to be taken by a financial creditor while initiating an insolvency resolution process against the corporate debtor. For the purpose of the code financial creditor shall be such person to whom a financial debt is owed and also includes a person to whom such debt has been legally assigned or transferred.

Section 5 (8) elaborately defines the term “financial debt”. Recently the definition of financial debt has been widened in order to incorporate home buyers within the scope of the definition of “financial creditors” vide an amendment to the code. The amendment of 2018 has added an explanation to the section 5(8).  The amendment has introduced the amount contributed by an allottee under a real estate project as financial debt and being financial creditors, they are entitled to be represented in the Committee of Creditors by authorized representatives. Also In Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Ltd., NCLAT had held that amounts raised by developers under assured return schemes had the “commercial effect of a borrowing”, as the real estate developer’s annual returns in which the amount raised is shown categorizes it as “commitment charges” under the head “financial costs”. As a result, such allottees were held to be “financial creditors” within the meaning of Section 5(7) of the Code. Hence arose the present batch of petitions by real estate developers.

The amendment was challenged before the honorable supreme court in the matter of Pioneer Urban Land and Infrastructure Limited and Anr. Vs. Union of India & Ors. WP (C) No. 43/2019, the decision in the matter was passed on 9.8.2019. In an elaborate decision by three judge bench of the honorable supreme court, the amendment to the code has been upheld.

In the present article, an attempt has been made to summarize the decision of the honorable court

  1. ARGUMENTS OF THE REAL ESTATE DEVELOPERS
  1. Violation of article 14 of the constitution of India: It was argued that the amendments created discrimination against the real estate developers. It was argued that recognizing them as operational debtor or financial debtors is totally not in consonance of the definition of the code and is discriminatory.

In the case of real estate developers, all that an allottee would have to show is that a debt is due to him, whereas in the cases of persons supplying goods or services if there exists any preexisting dispute between the operational debtor and the person who purchases the goods or avails of the services, the operational debtor would be outside the clutches of the Code. It was also argued that unequals are treated as equals as banks and financial institutions are completely different from real estate developers to treat these unequals as equals by making real estate developers financial debtors, infracts Article 14

  • While citing several judgments it was argued by the counsel of the real estate developers that a claim for unliquidated damages becomes a debt only on adjudication, which does not take place when a Section 7 application is heard. The NCLT can only go into “default” and the definition of “default” is vague and ambiguous.
  • It was also that argued that an explanation can not enlarge the scope of the original provision (S. Sundaram Pillai v. V.R. Pattabiraman (1985) 1 SCC 591).
  • Accounting standards were analyzed to show that the advances received from home buyers by developers cannot, from an accounting perspective, be treated as financial liabilities and the amendments in doing so, violate the accounting standards and become manifestly arbitrary.
  • “Financial debt” and “Operational debt”, are different. Financial debt is a crystallized claim which is due, as opposed to an operational debt which may simply be a claim upon breach of contract that may be disputed and therefore not due. The home buyers may be regarded as operational creditors rather than financial creditors. It was also suggested that home buyers should only be covered under the scope of RERA as RERA is a special Act as opposed to the Code, which is a general Act.
  • Sine qua non of a “financial debt” is a loan of money made with or without interest, which must then be returned as money. This was argued to be the meaning interpreted out of section 5(8)f. By no stretch of imagination, could an allottee under a real estate project fall within Section 5(8)(f), as it originally stood and the explanation must then be read prospectively i.e. only on and from the date of the Amendment Act.
  • The challenge to Section 21(6A) and 25A of the Code: Different instructions may be given by different allottees making it difficult for the authorised representatives to vote on the Committee of Creditors and that in any case, the collegiality of the secured creditors will be disturbed
  1. JUDGMENT

1. The Amendment Act to the Code does not infringe Articles 14 while upholding so the honorable court held the following that various decisions of the honorable supreme court has firmly established that— (a) a law may be constitutional even though it relates to a single individual if, on account of some special circumstances or reasons applicable to him and not applicable to others, that single individual may be treated as a class by himself;

(b) that there is always a presumption in favour of the constitutionality of an enactment and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles;

 (c) that it must be presumed that the legislature understands and directed to problems made manifest by experience and that its discriminations are based on adequate grounds.

 (d) that the legislature is free to recognise degrees of harm and may confine its restrictions to those cases where the need is deemed to be the clearest;

 (e) that in order to sustain the presumption of constitutionality the court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation; and

(f) that while good faith and knowledge of the existing conditions on the part of a legislature are to be presumed, if there is nothing on the face of the law or the surrounding circumstances brought to the notice of the court on which the classification may reasonably be regarded as based, the presumption of constitutionality cannot be carried to the extent of always holding that there must be some undisclosed and unknown reasons for subjecting certain individuals or corporations to hostile or discriminating legislation.

2. The Procedure under RERA and Code to co-exist

  1. The Code and RERA operate in completely different spheres. The Code deals with a proceeding in rem. RERA on the other hand protects the interests of the individual investor in real estate projects
  2. It relation to the perceived conflict between provision of RERA and the code it was opined by the honorable court that the Code is not meant to be a debt recovery mechanism. It is a proceeding in rem which, after being triggered, goes completely outside the control of the allottee who triggers it. Thus, any allottee/home buyer who prefers an application under Section 7 of the Code takes certain risks of either the flat/apartment not being completed in the near future or the allottee may never get a refund of the entire principal. The procedure of rederessal under the Real Estate Regulatory Authority is more likely to aid the allottee in getting the refund or the house as compared to the code. Thus, given the bona fides of the allottee who moves an application under Section 7 of the Code, it is only such allottee who has completely lost faith in the management of the real estate developer would take recourse under the code to NCLT.
  • Why allottees cannot be classified as operational debtors under the code

What is unique to real estate developers vis-à-vis operational debts, is the fact that, in operational debts, when a person supplies goods and services, such person is the creditor and the person who has to pay for such goods and services is the debtor.

  1. In the case of real estate developers, the developer who is the supplier of the flat/apartment is the debtor inasmuch as the allottee funds his own apartment by paying amounts in advance to the developer for construction of the building in which his apartment is to be found.
  2.  Another vital difference between operational debts and allottees of real estate projects is that an operational creditor has no interest in or stake in the corporate debtor, unlike the case of an allottee of a real estate project, who is vitally concerned with the financial health of the corporate debtor, for otherwise, the real estate project may not be brought to fruition. Also, in such event, no compensation, nor refund together with interest, which is the other option, will be recoverable from the corporate debtor.
  3. In an operational debt, there is no consideration for the time value of money – the consideration of the debt is the goods or services that are either sold or availed of from the operational creditor. Payments made in advance for goods and services are not made to fund manufacture of such goods or provision of such services. In real estate projects, money is raised from the allottee, against consideration for the time value of money. Even the total consideration agreed at a time when the flat/apartment is non-existent or incomplete, is significantly less than the price the buyer would have to pay for a ready/complete flat/apartment, and therefore, he gains the time value of money. Likewise, the developer who benefits from the amounts disbursed also gains from the time value of money.
  4. One other vital difference with operational debts is that the documentary evidence for amounts due and payable by the real estate developer is in the form of the information provided by the real estate developer compulsorily under RERA. It is these fundamental differences between the real estate developer and the supplier of goods and services that the legislature has focused upon and included real estate developers as financial debtors. This being the case, it is clear that there cannot be said to be any infraction of equal protection of the laws.
  5. The argument that home buyers can be categorized as “other creditors” was also rejected by the court.
  • Advances By Allottees Is “Financial Debt”

Section 3(11) of the code states that “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;  Section 3(6) defines the term “claim”

  1.  as a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;
  2. right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;

“default” means non-payment of debt when whole or any part of the installment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be;

The definition of “financial debt” in Section 5(8) of the code then goes on to state that a “debt” must be “disbursed” against the consideration for the time value of money. Section 5(8)(f) of the code is described as a sub-clause which appears to be a residuary provision as it refers to the words “any amount” and “any other transaction” which means that amounts that are “raised” under “transactions” not covered by any of the other clauses, would amount to a financial debt if they had the commercial effect of a borrowing. The expression “transaction” is defined by Section 3(33) of the Code as an agreement or arrangement in writing for the transfer of assets, or funds, goods or services, from or to the corporate debtor;

the expression “any other transaction” would include an arrangement in writing for the transfer of funds to the corporate debtor and would thus clearly include the kind of financing arrangement by allottees to real estate developers when they pay installments at various stages of construction, so that they themselves then fund the project either partially or completely

  • Voting By The Allottees On The Committee Of Creditors: The honorable court held that although the allottees may not be a homogenous group, yet there are only two ways in which they can vote on the Committee of Creditors – either to approve or to disapprove of a proposed resolution plan. Sub-section 25A (3A) introduced vide amendment 2019 to the code ( the decision was passed while it was still a bill) irons out all creases that may have been felt in the working of Section 25A in that the authorized representative casts his vote on behalf of all financial creditors that he represents. A vote of more than 50% of the voting share of the financial creditors will bind all the financial creditors represented by the authorized representative.
  • Explanation Cannot Enlarge The Scope Of The Section: The honorable court held that, the explanation was added by the amendment act only to clarify doubts that had arisen, as to whether home buyers/allottees were subsumed within Section 5(8)(f). The explanation added to Section 5(8)(f) of the Code by the Amendment Act does not in fact enlarge the scope of the original Section as home buyers/allottees could be clearly subsumed within Section 5(8)(f) as it originally stood i.e. the allottees/home buyers were included in the main provision, i.e. Section 5(8)(f) with effect from the inception of the Code, the explanation being  merely to clarify doubts that had arisen.

THE HONORABLE COURT HAS ALSO PROVIDED THE FOLLOWING DIRECTIONS UNDER THE JUDGMENT

  1. States/Union Territories shall appoint permanent adjudicating officers, a Real Estate Regulatory Authority and Appellate Tribunal within a period of three months from the date of the judgment, if they have not yet appointed.
  2.  b. The NCLT and the NCLAT shall be manned with sufficient members to deal with litigation that may arise under the Code generally, and from the real estate sector in particular, by the second week of January, 2020.
  3. c. Stay orders granted shall continue until the NCLT takes up each application filed by an allottee/ home buyer to decide the same in light of this judgment.

— Advocate Ravindra Vikram, Ph: +91-94100-22521

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Withholding of gratuity vide an undertaking

Payment of gratuity in India is regulated by the provisions of Payment of Gratuity Act, 1972 (“Act“). The Act is applicable to all factories, mine, oilfield, plantation, port, railway companies and also to every shop and establishment within the meaning of law in which ten (10) or more persons are employed, or were employed, on any day of the preceding twelve months.

Section 4 (6) of the Act permits an employer to forfeit gratuity payable to an employee in certain circumstances. As per the said provision:

The gratuity of an employee, whose services have been terminated for any act, willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer’ shall be forfeited to the extent of the damage or loss so caused;
The gratuity payable to an employee may be wholly or partially forfeited (i) if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or (ii) if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.

As regards the waiver of rights in employment agreements or any other form of an agreement it is permissible for an employee to waive off contractual rights to potential employment claims. However, an employee is not permitted to waive off statutory rights by way of a contractual agreement with an employer. There are specific provisions in the labour legislation in India which state that the provisions of the respective legislation shall supersede and have an overriding effect over anything contained in any instrument or contract which is inconsistent with provisions of such legislation

Section 14 of the Payment of Gratuity Act 1972 states that “the provisions of this Act or any rule made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any enactment other than this Act or in any instrument or contract to have an effect by virtue of any enactment other than this Act.” The judiciary also dealt with the said subject in Jaswant Singh Gill v. Bharat Cooking Coal Limited and Others [2007 (1) SCC 663], wherein it has observed that the rules framed under the Coal India Executives’ Conduct Discipline and Appeal Rules, 1978 (“Rules“) which provided a clause on forfeiture of gratuity were not statutory rules and thus the provisions of the Act must, therefore, prevail over the said Rules.

In Krishna Bahadur-vs.-M/s. Purna Theatre, in support of his submission that a statutory right can be waived by a party for whose benefit the statute has been enacted. In that case, the Hon’ble Apex Court clarified that a right can be waived by the party for whose benefit certain requirements or conditions have been provided by the statute subject to the condition that no public interest is involved therein. In that case, it was held that the requirement to comply with the provisions of Sec. 25F(b) of the Industrial Disputes Act, 1947 is mandatory before retrenchment of a workman is given effect to and such right/protection cannot be waived. In United Bank of India v. B B Haldar High Court At Calcutta CAN No. 8857 of 2017 the court while relying on the above-stated decision recorded that the Payment of Gratuity Act 1972 has been enacted in public interest and the right/protection granted to a retired employee by the said Act cannot be waived.

Supreme Court of India in R. Kapur v. Director of Inspection (Painting and Publication) Income Tax and Anr.1994] while dealing with forfeiture of gratuity on account of a pending civil dispute imposed a penalty of 18 (eighteen) percent on the employer and observed that death cum retirement gratuity cannot be withheld merely because the claim for damages is pending. In the said case damages were claimed by the employer for unauthorized occupation (by the employee) of official occupation.

In Radhey Shyam Gupta-vs.-Punjab National Bank, the Apex Court held that retiral benefits such as pension and gratuity even when received by the retiree, do not lose their character and continue to be covered by proviso (g) to Sec. 60 (1) of the CPC and continue to enjoy immunity against attachment.

In-State of Jharkhand-vs.-Jitendra Kumar Srivastava, the Apex Court reiterated that gratuity and pension are not bounties. An employee earns these benefits by dint of his long, continuous and faithful service. It is a hard-earned benefit that accrues to an employee and is in the nature of ‘property’. Such a right to property cannot be taken away without due process of law as per the provisions of Article 300A of the Constitution of India.

In the unreported judgment of a Division Bench of the Kerala High Court in WA 1628 of 2014 in WP (C) 923 of 2014 the employer Bank sought to adjust alleged dues from the deceased employee against the gratuity payable to his legal heirs. The Division Bench upheld the learned Single Judge’s order striking down such action on the part of the Bank holding that the gratuity due to an employee could not be withheld except under Sec. 4(6) of the 1972 Act.

The contrary stand taken by courts

In Secretary, O.N.G.C. Ltd. & Anr. v. V.U. Warrier (2005) 5 SCC 245, the Hon’ble Supreme Court sanctioned the action of the employer appropriating Rs. 53,632/- from the gratuity amount payable to the employee on account of unauthorized occupation charges of official accommodation mainly for the reason that the ONGC has framed the Oil and Natural Gas Commission (Death Retirement and Terminal Gratuity) Regulations, 1969, and the regulations framed by the ONGC were statutory in nature

In the said case it was held by the court that “it is no doubt true that pensionary benefits, such as gratuity, cannot be said to be ‘bounty’. Ordinarily, payment of benefit of gratuity cannot be withheld by an employer. In the instant case, however, it is the specific case of the ONGC that the ONGC is having a statutory status. In exercise of statutory powers under Section 32(1) of the Oil and Natural Gas Commission Act ,1959 regulations known as the Oil and Natural Gas Commission (Death. Retirement and Terminal Gratuity) Regulations, 1969 have been framed by the ONGC. In Sukhdev Singh v. Bhagatram Sardar Singh Raghuvanshi and Anr. (1975)ILLJ399SC the Constitution Bench of this Court held that regulations framed by the ONGC under Section 32 of the Oil and Natural Gas Commission Act ,1959 are statutory in nature and they are enforceable in a court of law.”

The case discussed the ratio of R. Kapoor v. Director of Inspection (Painting and Publication) Income and held the same as not applicable, as in that case, the claim for damages for unauthorized occupation against the appellant-retired employee was “pending” and the proceedings were not finally disposed of. In the present case, the facts clearly reveal that the last day of lawful occupation of quarter by the respondent was June 30, 1990, and before that date, the appellant Commission had informed the respondent that his prayer for extension or retention of quarter had not been accepted and he should vacate by June 30, 1990. If he would not vacate the quarter, penal rent would be recovered from him. He did not challenge the action of not extending the period nor the recovery of penal rent. He, therefore, cannot make a grievance against the action of the Commission. In the line with the above-stated case laws, and legal provisions it is opined that “payment of gratuity”, can be forfeited only in accordance with Section 4(6) of the Payment of Gratuity Act 1972. Also since it is a right involving public interest it cannot be waived through an undertaking it is opined that such an undertaking shall not be valid in law. The only exception was found in Secretary, O.N.G.C. Ltd. & Anr. v. V.U. Warrier, where the action is taken, was in accordance with certain regulations and the regulations had statutory backing.

— Advocate Ravindra Vikram, Ph: +91-94100-22521

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One person company (OPC) – Registering in India

The Companies Act 2013 has introduced a new concept of “One person company”. One person company (OPC) provides an avenue for a person who wants to venture into a business under the guise of organized business structure. Such a company will be in the nature of a private company. This article shall focus on the formation of a “One Person Company”.

In the case of a one-person company at the time of registration, a second person’s name is also required to be registered who shall become the member of the company if the first member dies or become incapacitated to contract. The second member in this respect is required to give written consent of his willingness.

The “One Person Company” may, by intimation in writing to the company, change the name of the person nominated by him at any time for any reason. (Form No INC.3 is required to be filed).

Requirements of a One person company:

1. Only Indian citizen and resident* in India (for both the member and the nominee). (*resident refers to a person who has resided for 180 days or more in the country in the preceding year.)

2.  A person can incorporate more than 1 “one person company”. The same relaxation is available for a nominee as well.

3. Such a “one person company” cannot be formed for a charitable purpose, neither can such a company carry out Non-Banking Financial Investment activities (including investment in securities).

4. Such “one person company” can be converted into any other kind of company. However such conversion is not possible unless two years have expired from the date of incorporation of “One Person Company.”

Application For Incorporation Of “One Person Company”.

The Name Reservation, Allotment of Director Identification Number (DIN), Incorporation of New Company, Allotment of PAN and Allotment of TAN by in one form by applying for Incorporation of a new company through SPICe (Simplified Proforma for Incorporating Company electronically) form (INC-32; 33;34) in addition the name of the nominee as mentioned above is also required to be filed.

When Ceases To Operate As “One Person Company”

When the paid-up share capital of a One Person Company exceeds fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees, it shall cease to be entitled to continue as a One Person Company.

The company then within 6 months from the date the threshold was crossed has to mandatorily convert itself into a public company (minimum of 7 members and 3 directors) or a private company (2 members and 2 directors).  The “one person company” is also required to reflect such a change in its MoA and AoA.

Notice to Registrar of Companies in Form No.INC.5 informing that it has ceased to be a One Person Company

Penalty

  1. Failure to mention the name of the nominee or re-nominate a nominee: Fine which may extend to Rs.10,000 and with a further fine which may extend to Rs. 1000 for every day after the first during which such contravention continues.
  2. Failure to convert to a public company or private company: Fine which may extend to Rs.10,000 and with a further fine which may extend to Rs. 1000 for every day after the first during which such contravention continues. 

— Advocate Ravindra Vikram, Ph: +91-94100-22521

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Registering a Business in India

How To Form A Business Establishment.

A business establishment can be incorporated in the form of a company, partnership firm, limited liability partnership, one person company, and proprietorship. Though it is not mandatory to register a company before starting a business in India however, the nature of the business establishment depends upon the requirement of the individual, such as tax exemption, funding requirements, liability assessment, membership, etc.

Formation of a Company

The incorporation of a company in India is primarily governed by the Companies Act 2013.  A company formed under the companies act can be either

  1. A company limited by shares; or
  2. a company limited by guarantee; or
  3. an unlimited company

The companies can further be divided into public companies; private companies; one-person company. For a public limited company, the act prescribes in section 3 of the act that the minimum number of members should be 7 or more. Two or more persons are required for making a private limited company.

Other modes of registering the business in India:

  1. Proprietorship: A sole proprietorship firm is an entity that is owned by a single individual.
  2. Partnership Firm: The Partnership Act, 1932 defines partnership in Section 4 of the Act as – “An agreement between persons who have agreed to share profits of the business carried on by all or any one of them acting for all.”
  3. Limited Liability Partnership (LLP): A LLP is a partnership that allows the partners to have limited liabilities. An LLP has a legal entity separate from its partners and perpetual succession. The LLP Act, 2008 is separate legislation, and the provisions of the Indian Partnership Act, 1932 are not applicable.
  4. One Person Company (OPC): OPC provides an avenue for a person who wants to venture into a business under the guise of an organized business structure.
  5. Section 8 Company (Non-Profit Company): The Companies Act allows an association of persons to register under this Act a limited company for purpose of fulfilling objectives promote fields of arts, commerce, science, research, education, sports, charity, social welfare, religion, environment protection, or other similar objectives.

Establishing a new business is always a challenging and exciting process in India. To build the business and gradually to upgrade is a continuous process and one must be familiar advantages and disadvantages of the available options before starting your business in India.

— Advocate Ravindra Vikram, Ph: +91-94100-22521

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Withholding of gratuity of an employee, after superannuation from service, pending disciplinary proceedings

Section 4 of the Payment of Gratuity Act 1972 entitles an employee to gratuity after he has rendered continuous service for not less than five years inter alia on his superannuation. Sub- Section (6) of Section 4 contains a non-obstante clause stating:

(a) the gratuity of an employee, whose services have been terminated for any act, willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer, shall be forfeited to the extent of the damage or loss so caused;

(b) the gratuity payable to an employee may be wholly or partially forfeited

(i) if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or

(ii) if the services of such employees have been terminated for any act which constitutes an offense involving moral turpitude, provided that such offense is committed by him in the course of his employment.

MARCH OF LAW

  1. In Jaswant Singh Gill vs. Bharat Coking Coal Ltd. & Ors. (2007) 1 SCC 663. The case pertained to ECDA rules of Coal India Ltd. The High Court held that the power to withhold payment of gratuity as contained in Rule 34(3) of the Rules of Coal India 1978 shall be subject to the provisions of the Payment of Gratuity Act, 1972 and the statutory right accrued to the employee to get gratuity cannot be impaired by reason of the Rules framed by the Coal India Ltd. which do not have the force of a statute.

The principles which are laid down in the aforesaid judgment are recapitulated below:-

(i) Rule 34.2 of CDA Rules provides for continuation of disciplinary proceedings despite the retirement of an employee if the same was initiated before his retirement, However, after his retirement, a major penalty in terms of Rule 27 cannot be imposed. Major penalties that are prescribed under Rule 27 are a reduction to a lower grade, compulsory retirement, removal from service and dismissal. The Court thus, held that these major penalties cannot be imposed upon a retired employee.

(ii) Gratuity Act gives the right to an employee to receive gratuity on the rendition of 5 years of continuous service. Gratuity becomes payable as soon as the employee retires. This statutory right which accrues to an employee cannot be impaired by reason of a rule which does not have the force of a statute. Therefore, Rule 34.3 of the CDA Rules, which is nonstatutory in nature, is contrary to the provisions of the Gratuity Act. As such, gratuity cannot be withheld on the retirement of an employee even if departmental proceedings were initiated against him before his retirement and are pending at the time of retirement.

  • However in State Bank of India vs. Ram lal Bhaskar and Anr, 2011(10)SCC249. the issue raised was whether inquiry could continue after the retirement of the respondent from service. This question was answered in the affirmative having regard to Rule 19(3) of the SBI Officers Service Rules. In that case, the chargesheet was served upon the respondent before his retirement. The proceedings continued after his retirement and were conducted in accordance with relevant rules wherein charges were proved. On that basis punishment of dismissal was imposed. 
  • The Madras High Court Special Officer, in Suthamalli Primary Agriculture Co-op Bank Limited v. Joint Commissioner of Labour & Ors Under Section 4(6), if any order is passed and contingency for payment of gratuity under Section 4(1) arises, it is necessary that the employer will have to pay gratuity. It is not as if the employer has no remedy in recovering the amount from the employee. They can always file a civil suit claiming the amount misappropriated by him. There is no legal bar in recovering the amount in case the petitioner proves that there was actual embezzlement. But, having allowed the employee to retire, the petitioner was bound to pay gratuity. And order of forfeiture will also have to be passed along with order of termination for withholding gratuity.
  • However in Ch. cum Man. Director Mahanadi Coalfield Ltd. v. Rabindranath Choubey, SLP No. 31583 OF 2013 a two-judge bench has interpreted the above case and stated that the matter primarily answers whether the inquiry would continue after the retirement of the respondent from service, which was answered in affirmative by the court. The court states however as an inference, one can deduce the principle that when the Rules, by creating fiction, treat the officer still in service, albeit for the limited purpose of the continuance and conclusion of such proceedings, then any of the prescribed penalties, including dismissal, can be imposed.
  • The court has recorded that such a supposition, however, goes against the dicta laid down in Jaswant Singh Gill.

On the issue of, whether in the scheme of Gratuity Act, gratuity has to be necessarily released to the concerned employee on his retirement even if departmental proceedings are pending against him the court has opined that Jaswant Singh Gill’s case directly answers this question, but the said judgment proceeds on the premise that after the retirement of an employee, penalty of dismissal cannot be imposed upon the retired employee., which if is not right stand and the imposition of penalty of dismissal is still  permissible, employer will get the right to forfeit the gratuity of such an employee in the eventualities provided under Sections 4(1) & 4 (6).

For invoking Clause (a) or (b) of sub-section 6 of Section 4 necessary pre-condition is the termination of service on the basis of departmental inquiry or conviction in a criminal case.

The court in Ch. cum Man. Director Mahanadi Coalfield Ltd. v. Rabindranath Choubey has stated that owing to the conflict between the cases of State Bank of India v. Ram lal Bhaskar and Anr and Jaswant Singh Gill vs. Bharat Coking Coal Ltd. & Ors, the bench, in this case, has referred the matter to larger bench of three judges to decide this issue.

In State of Jharkhand & Ors v. Jitendra Kumar Shrivastav and Ors. Interpreting Rule 43(b) (Bihar Pension Rules) The SC held that even after the conclusion of the departmental inquiry, it is permissible for the Government to withhold pension etc. ONLY when a finding is recorded either in departmental inquiry or judicial proceedings that the employee had committed grave misconduct in the discharge of his duty while in his office. There is no provision in the rules for withholding of the pension/ gratuity when such departmental proceedings or judicial proceedings are still pending. The honorable court also held that other that the Rules framed under law, no other administrative order of the employer can withhold the pension, gratuity and Provident fund.

— Advocate Ravindra Vikram, Ph: +91-94100-22521

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Nature of presumption drawn for Negotiable Instrument

Nature of presumption drawn under Section 139 of Negotiable Instrument Act : Basalingappa v. Mudibasappa SLP (Crl.) No. 8641/2018

Facts:

  1. The Complainant gave a notice to the accused( the appellant in the present matter) complaining of dishonour of cheque dated 27.02.2012 for an amount of Rs. 6,00,000 for want of sufficient funds.
  2. On non-payment of the amount, a complaint was filed by complainant under Section 138 of Act, 1881. Trial court held that, if accused was able to raise a probable defense which created doubts about existence of a legally enforceable debt or liability, prosecution could fail.
  3. Trial court acquitted the accused for offence under Section 138.
  4. Complainant aggrieved by said judgment filed a Criminal Appeal under Section 378(4) of Code of Criminal Procedure, 1973 (CrPC). High Court set aside judgment of trial court and convicted the accused for offence under Section 138.
  5. The accused being aggrieved by the decision of the High Court filed the SLP before the Supreme Court.

The present case notes the legal principles regarding nature of presumptions to be drawn Under Section 139 of the Act and the manner in which it can be rebutted by an Accused.

  • Section 139. Presumption in favour of holder.—It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability.
  • Section 118 of the Negotiabel Instrument Act 1881 provides for presumptions as to negotiable instruments. Section 118 is as follows:

Section 118. Presumptions as to negotiable instruments. –Until the contrary is proved, the following presumptions shall be made:

(a) of consideration –that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred for consideration;

(b) as to date –that every negotiable instrument bearing a date was made or drawn on such date;

The complainant being holder of cheque and the signature on the cheque having not been denied by the Accused, presumption shall be drawn that cheque was issued for the discharge of any debt or other liability. The presumption under Section 139 is a rebuttable presumption.

The honorable court relied on the following decisions of the court:

  1. Bharat Barrel & Drum Manufacturing Co. v. Amin Chand Pyarelal, (1999) 3 SCC 35. The honorable Supreme Court held that once the execution of the promissory note is admitted, the presumption Under Section 118(a) would arise that it is supported by a consideration. Such a presumption is rebuttable and defendant can prove the non-existence of a consideration by raising a probable defence.
  2. Kumar Exports v. Sharma Carpets, (2009) 2 SCC While relying on the aid decision the relevant paragraphs are quoted as follows. In paragraph Nos. 18 to 20 of this decision it has been laid down that:

Quote …… Applying the definition of the word “proved” in Section 3 of the Evidence Act to the provisions of Sections 118 and 139 of the Act, it becomes evident that in a trial Under Section 138 of the Act a presumption will have to be made that every negotiable instrument was made or drawn for consideration and that it was executed for discharge of debt or liability once the execution of negotiable instrument is either proved or admitted. As soon as the complainant discharges the burden to prove that the instrument, say a note, was executed by the Accused, the Rules of presumptions Under Sections 118 and 139 of the Act help him shift the burden on the Accused. The presumptions will live, exist and survive and shall end only when the contrary is proved by the Accused, that is, the cheque was not issued for consideration and in discharge of any debt or liability. A presumption is not in itself evidence, but only makes a prima facie case for a party for whose benefit it exists.

……The use of the phrase “until the contrary is proved” in Section 118 of the Act and use of the words “unless the contrary is proved” in Section 139 of the Act read with definitions of “may presume” and “shall presume” as given in Section 4 of the Evidence Act, makes it at once clear that presumptions to be raised under both the provisions are rebuttable. When a presumption is rebuttable, it only points out that the party on whom lies the duty of going forward with evidence, on the fact presumed and when that party has produced evidence fairly and reasonably tending to show that the real fact is not as presumed, the purpose of the presumption is over.

 ……The Accused may adduce direct evidence to prove that the note in question was not supported by consideration and that there was no debt or liability to be discharged by him. However, the court need not insist in every case that the accused should disprove the non-existence of consideration and debt by leading direct evidence because the existence of negative evidence is neither possible nor contemplated. At the same time, it is clear that bare denial of the passing of the consideration and existence of debt, apparently would not serve the purpose of the Accused. Something which is probable has to be brought on record for getting the burden of proof shifted to the complainant. To disprove the presumptions, the accused should bring on record such facts and circumstances, upon consideration of which, the court may either believe that the consideration and debt did not exist or their non-existence was so probable that a prudent man would under the circumstances of the case, act upon the plea that they did not exist. Unquote

The Honorable Supreme Court has laid down the following principles in the present matter:

(i) Once the execution of cheque is admitted Section 139 of the Act mandates a presumption that the cheque was for the discharge of any debt or other liability.

 (ii) The presumption Under Section 139 is a rebuttable presumption and the onus is on the accused to raise the probable defence. The standard of proof for rebutting the presumption is that of preponderance of probabilities.

(iii) To rebut the presumption, it is open for the accused to rely on evidence led by him or accused can also rely on the materials submitted by the complainant in order to raise a probable defence. Inference of preponderance of probabilities can be drawn not only from the materials brought on record by the parties but also by reference to the circumstances upon which they rely.

(iv) That it is not necessary for the accused to come in the witness box in support of his defense, Section 139 imposed an evidentiary burden and not a persuasive burden. (v) It is not necessary for the accused to come in the witness box to support his defense.

— Advocate Ravindra Vikram, Ph: +91-94100-22521

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