The Asset Tracing and Recovery Review: India
Globalisation coupled with digitisation in today's era offer the perfect launchpad for organisations to kickstart their global aspirations. Organisations, accordingly, are now looking at the deployment of their assets and funds both within and outside their jurisdictions. While this presents a plethora of opportunities and benefits that organisations can legitimately avail of, it also exposes organisations to the lacunae that exist in individual jurisdictions. Wilful defaulters with a criminal bent of mind are adept at creating a framework of their own to exploit these gaps for their personal gain and to the detriment of organisations. Asset recovery teams should accordingly focus on some of these jurisdictions, which are of substantial relevance, while searching for concealed assets of wilful defaulters or fraudulent borrowers from India.
In India, there are a variety of remedies under various pieces of legislation to aid in tracing efforts and in dealing with fraud. However, there are impending roadblocks in terms of time periods that derail the process of efficient recovery. It is therefore important for organisations to understand the risks and evaluate their options carefully while initiating the process of asset tracking and recovery.
Legal rights and remedies
i Civil and criminal remedies
Civil law remedies
The procedural law with respect to civil remedies in India is captured under the Civil Procedure Code, 1908 (Civil Procedure Code). In addition, the Limitation Act, 1963 provides for the period within which a claim can be brought before the courts for adjudication. Any suits filed beyond the limitation period shall be dismissed irrespective of any claim on the merits.2 In certain exceptional circumstances, a party may seek to sustain a claim by demonstrating bona fide reasons. In the case of fraud, the limitation period shall be computed from the time a party discovers the fraud or from the period when the party theoretically, with due diligence, could have discovered the fraud.3 Subject to the framework under the Civil Procedure Code and Limitation Act, remedies for tracing and fraud can be pursued under certain specific statutes elaborated below.
Contracts in India are governed by the principles enshrined in the Indian Contract Act, 1872 (Contract Act). In addition, certain contracts, including contracts for transfers of immovable property and lease or rent agreements, are compulsorily required to be registered4 and duly stamped.5 A record of registered contracts and details of stamp certificates are maintained by the authorities as mandated under law and are subject to certain procedural limitations. Accordingly, the veracity and authenticity of contracts can be established by seeking certified copies from the registration authority or verifying the details of a stamp certificate. Such mechanism can be immensely helpful in tracing efforts and in asset discovery with respect to a target.
Further, fraud has been defined in the Contract Act as any act committed by a contracting party or his or her agent with an intention to deceive a party or to induce him or her to enter into a contract. The various natures of actions covered within the ambit of fraud include:
- suggesting false facts;
- suppression of a fact;
- making a promise without the intention of performing it;
- undertaking any action to deceive; or
- any action that is considered to be fraudulent under the law.
However, it must be kept in mind that mere silence is not construed as fraud unless the circumstances require that it is the duty of a person keeping silent to speak, or if the person's silence in itself is equivalent to speech. 6
A party that has been the subject of fraud and whose consent may have been obtained by coercion or misrepresentation has an option to void or nullify the fraudulent agreement. An exception to this rule is that when the party had the means of discovering the truth with ordinary diligence, the contract, nevertheless, is not voidable.7 Further, if the party does not choose to void the contract, then he or she may insist that the contract be performed, and that he or she be put in the position in which he or she should have been had the representations been true. Additionally, a suit for damages can be brought by a party suffering fraud, although damages are usually awarded based on actual loss suffered. The judgment or decree obtained may be relied upon for execution for the recovery of any assets acquired fraudulently or the examination of a person concealing any asset.8
The Companies Act, 2013 (Companies Act) is the principal legislation governing the conduct of the affairs of a company. It is administered by the Ministry of Corporate Affairs. The Ministry also maintains a publicly accessible online central database of the details of a company, including:
- the names of the directors of the company;
- its authorised share capital;
- the date of incorporation; and
- details of any charges.
The database may be instrumental in tracing efforts as it also co-relates the director of a specific company to other entities where he or she also occupies the position of a director.
The Companies Act also defines fraud, which it defines as including any act or omission, or the concealment of any fact or the abuse of a position, with the intent to deceive, gain undue advantage from or injure the interests of a company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.9 Further, if a false statement is made in the financial statements, prospectus or reports of a company, this would also be considered as a fraud against the company.10
Liability for fraud in India extends to both the company as well as the individuals involved in a fraud. However, liability in relation to individuals is usually confined to those individuals who may be said to be a person in charge of the affairs of a company or who have had direct knowledge of an offence.
The Companies Act also deals with the aspect of beneficial owners of shares in a company and provides for their details to be maintained by the company. Recently, the Companies (Significant Beneficial Owners) Rules, 2018 were also introduced to provide for a framework to identify the ultimate beneficial owners exercising control or ownership of a company.11
In addition to recourse to the police authorities, to deal with offences in relation to companies the Companies Act also provides for the establishment of the Serious Fraud Investigation Office. The Office is mandated with detecting and prosecuting white-collar crimes and fraud, and draws on the experience of experts from various fields for its functions.12
In India, instances of trusts being utilised to hold assets are being observed. Accordingly, such a trust has the potential to be utilised to evade creditors and regulatory authorities. Therefore, the identification of trusts and their undertaking of due diligence may prove to be key in asset tracing efforts.
A trust deed is not required to be compulsorily registered under the Indian Trust Act, 1882 (Trust Act), but in certain cases a trust deed is required to be registered. A trust deed involving the transfer of immovable property is compulsorily required to be registered, and thus a copy of the trust deed would need to be maintained as per the Registration Act, 1908.13 Thus, subject to certain limitations, due diligence of a trust connected to a target can yield information on significant assets.
The Trust Act also mandates that any trust that is created for an unlawful purpose, including a fraudulent purpose, is void.14 Further, the beneficiaries of a trust can also bring an action against a trustee for breach of trust (i.e., breach of a trustee's duties towards the beneficiary).15
In cases where a trust property reaches the hands of a third party inconsistent with the aims of the trust, beneficiaries may institute a suit to declare that the property in question is part of the trust.16 Where a trustee has disposed of trust property and money or other property received can be traced into his or her hands, or into the hands of his or her legal representative or legatee, beneficiaries have the same rights as they would to the original trust property. However, an exception to this rule exists where a beneficiary of a trust through fraud induced a trustee to commit the breach him or herself.17
Criminal law remedies
The Indian Penal Code, 1860 (IPC), which is the principal legislation for criminal offences in India, defines fraudulently to mean a thing done by a person with an intent to defraud and 'not otherwise'.18 Courts in India have examined the meaning of not otherwise to mean that an act will be considered to be fraudulent only if it was done with an intent to defraud.19 Even the abetment of an offence by an individual shall render him or her punishable for the offence as if the offence was committed by said abettor.20
The offence of cheating, which is, in principle, an offence in cases of fraud, is defined to include circumstances where a person:
- cheats or dishonestly induces another person to deliver any property to any person;
- grants his or her consent for that property to be retained by any person; or
- commits an act or omission that causes or is likely to cause damage to the property.21
The offence of cheating is punishable with imprisonment for a period of up to seven years and a fine.22
Apart from the offence of cheating, the IPC provides separately for other offences of fraud related to property. It punishes fraudulent withdrawal or concealment, or the transfer or removal of property so as to defeat the just claims of those who have or may have a right over it.23 It also seeks to punish fraudulent transfers of properties and fraudulent claims, as well as the person who seeks to practice any deception touching any right to any property, or any interest therein. Even the receipt24 and retention of stolen property constitute offences. However, there is a limitation period of three years for filing a complaint against an offence related to fraud, although the same applies only for offences where the punishment prescribed is imprisonment for a period of up to three years only.25
Seizure and evidence
In situations where an organisation has reasonable grounds to believe that a borrower is resorting to fraudulent means, an investigation can be carried out to assess the existence of any foul play. This can involve extensive searches on various local and international databases, comprehensive public domain checks and checks on local government websites with a view to collating information and correlating it with financial data. In addition, a combination of strategies can be used to trace an asset. For instance, a money trail could be followed to trace the flow of an asset to its conclusion. In a reverse approach, discreet checks can be conducted on an individual who is the target of an asset recovery enquiry to gather intelligence on his or her lifestyle with an objective of understanding the source of funds for maintaining this lifestyle and tying it back to the asset under investigation. These strategies can be further extended to identify friends and relatives of the target and their corresponding holdings and directorships in other entities or companies. A correct blend of such strategies can yield excellent results even in cases where round-tripping is suspected. For multijurisdictional cases, a discreet multijurisdiction asset discovery investigation can be performed.
i Securing assets and proceeds
The most common method in relation to securing assets is to seek a temporary injunction through the court. The law in relation to the same is captured in Order 39 Rules 1 and 2 of the Civil Procedure Code. Broadly stated, the court relies on a three-principle test of a prima facie case, a balance of convenience and irreparable harm or injury26 to determine whether a party seeking a temporary injunction should be granted the injunction.
Further, the parties to a civil action may also seek attachment of a property27 before judgment or the appointment of a receiver28 for the protection or preservation of a property. It may be kept in mind that attachment of a property before judgment or the appointment of a receiver is an uncommon relief resorted to only in rare circumstances where a party is able to establish that the defendant is about to dispose of or remove the property from the jurisdiction of the court to evade the execution of any decree that may be passed against him or her. Further, such attachment does not protect the attached property from the right of a third party to seek liquidation of an asset to recover his or her debts.
It must be kept in mind that the onus for the production of evidence or the burden of proof in support of a claim, including fraud, is upon the party bringing an action to court.29 Further, a foreign party seeking relief in India may have to establish the cause of action or its locus to seek relief before the concerned court. Accordingly, a party seeking relief under any civil law must discharge the burden based on the information available to it and that it may secure through the aid of a court process.
The process under criminal law generally empowers the investigation authorities to seize and attach property during an investigation under the Code of Criminal Procedure, 1973 (Code of Criminal Procedure). It is also relevant to note that certain special statutes also empower the investigation authorities to seize and attach properties pending an investigation.30 Broadly, the investigating authorities are empowered to undertake search without notice and to take possession of any property that is suspected to be stolen property.31 The courts are also empowered after the conclusion of a trial to order the delivery of property to the person entitled to possession thereof.32
ii Obtaining evidence
The Civil Procedure Code provides for the rights of parties in securing information from private individuals in an adjudication before the courts. It provides various rights to seek information from individuals including:
- issuing interrogatories;33
- serving notice upon any other person to produce any document or record proved to be within his or her possession;34 and
- serving notice to an individual to appear as a witness and disclose information within his or her knowledge.35
In cases where a party to a civil action fails to produce a document or disclose information that is reasonably believed to be in his or her knowledge or possession, an adverse inference36 may be drawn by the courts in relation to said document or information.
However, in practical terms it may be difficult to secure the presence of a third-party witness, as the service of summons upon him or her may be time-consuming, and the witness may even successfully evade service. Further, the party is required to discharge the burden of relevancy of the witness to justify the co-related time delay in the adjudication of the matter. Notwithstanding the same, the tools can be effectively used along with private efforts for a successful judgment or execution.
The rules for obtaining evidence are encapsulated within the Code of Criminal Procedure. The investigation authorities have been given vast powers to, inter alia, compel the production of persons37 and documents38 before the Investigation Officer, and search premises and persons without notice.39 However, it should be kept in mind that statements given before the investigation authorities are not admissible as evidence, and witnesses are required to testify in court for their testimony to be treated as evidence.40
Fraud in specific contexts
There has been a significant increase in non-performing assets (NPAs) in the Indian banking sector during the past three years. The Reserve Bank of India (RBI) defines an NPA as an asset that ceases to generate income for a bank. Banks classify an account as an NPA if the interest due and charged on that account during a quarter is not serviced fully within 90 days from the end of the quarter. India's gross NPAs as at 31 March 2019 as reported by RBI stood at 93,647 billion rupees for Indian banks, with public sector banks accounting for nearly 79 per cent of the NPAs. RBI reported a total of 6,801 frauds in the financial year ending on 31 March 2019, with public sector banks accounting for nearly 55 per cent of the frauds.41
Considering the increase of financial frauds and public interest in banking, RBI (which is the regulator of the banking sector in India) issued the Master Directions on Frauds – Classification and Reporting by commercial banks and select financial institutions (FIs) on 1 July 2016.
The Directions also provide for regular fraud reporting by banks using a prescribed form referred to as a fraud monitoring return (FMR) and the constitution of a Central Fraud Registry, which is an online searchable database containing all accounts of frauds reported using an FMR. This Registry is, however, only accessible by banks.42
Further, with recent cases of bank fraud, including the Punjab National Bank case, banks and RBI are continuously seeking ways to improve the mechanism for fraud reporting and also improved coordination with investigation agencies such as the Central Bureau of Investigation and the Enforcement Directorate. The increasing importance of organisations such as the Indian Bank Association and the Department of Finance in this regard is noteworthy.
ii Securities laws
Fraud in relation to dealing in securities
The SEBI Act, 1992 and regulations thereunder provide for remedial actions by the Securities and Exchange Board of India (SEBI) against any fraudulent action concerning the securities markets. Such actions are restricted to matters relating to or in connection with dealing in securities.43 Section 12A of the SEBI Act provides a broad legislative mandate to prohibit fraudulent practices, while the SEBI Prohibition of Fraudulent Unfair Trade Practices Regulations, 2003 (PFUTP) provide some detail as to what constitutes fraud in relation to the securities market. The definition of fraud is broadly phrased in Regulation 2(1) of the PFUTP, and the common law requirements of intention, deception, damages and so forth to prove fraud is expressly done away with under the PFUTP. Some cases of fraud with respect to dealing in securities recognised by the Supreme Court of India include aspects such as front running44 and synchronised trading.45 It is to be noted that no private action is permissible, and only SEBI is empowered to take remedial actions relating to fraud in the securities markets.
Powers and enforcement remedies
SEBI has broad powers to investigate, including powers to summon, inspect records and direct the production of documents, and if an investigation officer believes that evidence or documents, or both, may be destroyed, he or she may carry out search and seize operations (subject to the satisfaction of a judge).
SEBI, under Section 11B of the Act, is empowered to take a broad array of remedial actions that include:
- asset and share freezes;
- debarring access to the securities markets and dealing in securities;
- mandatory divestment of shares;
- freezing of voting rights of shares.
Further, SEBI is empowered to impose administrative penalties under Sections 15A to 15HB, with the most recent addition of Section 15HAA providing it with the power to penalise any person found to have tampered with or altered or destroyed documents, including electronic evidence and regulatory data.
It is also empowered to issue ex parte interim orders under Section 11(4) and 11B as long as such orders are followed up by a post-decisional hearing confirming or revoking such orders. This power is, however, expected to be utilised sparingly where urgent action is warranted.46
iii Prevention of Money Laundering Act, 2002
Certain statutes targeting the misutilisation of banking channels and attempting to conceal assets outside India have been introduced in recent years, including the Prevention of Money Laundering Act, 2002 (PMLA), the Black Money Act, 2015 and the Fugitive Economic Offenders Act, 2018. Through these acts, the government is attempting to prevent money laundering, concealment of undisclosed income and evasion of the due process of law in India.
Further, PMLA has a stringent framework to deal with the offence of money laundering, including:
- attachment of property before conviction;47
- mandatory reporting requirements with respect to financial transactions;48
- search and seizure without notice;49 and
Further, the Financial Intelligence Unit has been established to ensure the collection and sharing of information between state agencies. The Director acting under the Financial Intelligence Unit and PMLA has been further empowered to ensure reporting requirements are complied with by the reporting entities, including banks and FIs.
PMLA has also uniquely introduced a reverse burden of proof whereby the courts shall presume in cases where a person is charged with an offence of money laundering that the proceeds of crime are involved in money laundering.51 The Constitution challenge to the provision is still open before the Supreme Court, although certain high courts have already upheld the same.52
As per the Insolvency and Bankruptcy Board of India (IBBI), the number of cases admitted to insolvency courts stood at 3,312 until December 2019, which was a 123 per cent increase over the previous year.53 Of these, certain cases are complicated by the fact that the insolvency of the company in question is proceeding in parallel with investigations of various white-collar offences already underway concerning such company and its personnel. This has resulted in a tussle between creditors and the investigating authorities regarding the assets of a corporate debtor, with the investigating authorities claiming that these assets are proceeds of crime by adopting a rather broad definition of the term.
The recent introduction of Section 32A54 of the Insolvency and Bankruptcy Code, 2016 (IBC) has somewhat relaxed this tussle by exempting the new management of a corporate debtor following a successful resolution from prosecution for legacy offences committed by the previous management. The inserted provision also protects the assets of the corporate debtor against actions of attachment, seizure or confiscation in relation to an offence committed prior to the commencement of insolvency proceedings where the asset is covered under an approved resolution plan under the IBC. However, none of the exemptions under Section 32A of the IBC shall apply where the new management or controller of the corporate debtor was a promoter, manager or related party of the corporate debtor prior to the insolvency proceedings. Furthermore, the exemption will also not apply to the individuals in respect of whom the investigating authorities have reason to believe abetted or conspired in the commission of an offence. The applicability of said provision, especially in relation to attachment by the Enforcement Directorate under the Prevention of Money Laundering, Act 2002, has been upheld by the Honourable National Company Law Appellate Tribunal in the insolvency of Bhushan Steel & Power Ltd in the case of JSW Steel v. Mahendar Kumar Khadelwal & Ors,55 which matter is still sub judice before the Supreme Court.56
Section 66 of the IBC also provides creditors with an avenue for recovery against rogue promoters who have engaged in fraudulent activity. Under this provision, the adjudicating authority may direct contributions to a corporate debtor's estate from persons or parties who were knowingly involved in the conduct of business of the corporate debtor with the intent to defraud creditors or for any other fraudulent purpose. Further, the adjudicating authority may also direct contributions to the corporate debtor's estate from a director who knew or ought to have known that the commencement of insolvency proceedings was inevitable and did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor.
As per Section 236 of the IBC, the offences identified under Chapter VI are to be tried by special courts established under the provisions of the Companies Act that may take cognisance of an offence under the IBC on a complaint made by the IBBI or the central government. Some of the offences proscribed under Chapter VI are:
- concealment of property;
- transactions defrauding creditors;
- falsification of books of the corporate debtor;
- wilful and material omissions from statements relating to the affairs of the corporate debtor; and
- false representations to creditors.
Thus, where the adjudicating authority, on an application made to it by the insolvency professional appointed to manage the corporate debtor, believes that circumstances exist that require an investigation, it may pass an order under Section 213 of the Companies Act referring the matter to central government to investigate the affairs of the corporate debtor. However, such an order may only be made after the persons accused are given a due hearing before the adjudicating authority.57
The issue of arbitrability of claims of fraud has not been addressed in the principle statute, that is, the Arbitration & Conciliation Act, 1996 (Arbitration Act). However, the Supreme Court of India through judicial interpretation initially held that fraud cannot be the subject matter of an arbitration as it requires the adducing and elaborate examination of evidence, and is therefore beyond the competence of an arbitrator.58
However, the position changed in 2014, and subsequently the Supreme Court, in A Ayyasamy v. A Paramasivam & Ors,59 differentiated between cases where a mere allegation of fraud has been made as opposed to cases where the allegations of fraud are complex and serious enough that they could only be decided by evidence.60 The Supreme Court has also, while examining the issue of arbitrability of fraud, held that fraud as the basis of non-arbitrability of claim can only be accepted when:
- the allegations of fraud were serious enough to constitute a criminal offence;
- the allegations of fraud and resulting issues were so complex that they could only be decided by a civil court upon a review of voluminous evidence; and
- fraud is alleged against the arbitration provision itself or the parent contract.
vi Fraud's effect on evidentiary rules and legal privilege
The Indian Evidence Act, 1872 (Evidence Act) is the principal legislation governing the rules of evidence that can be adduced before courts. Principally, documents proved before the court in the ordinary course of a hearing cannot be rebutted by oral evidence. However, the exception to the same is when a party alleges fraud as an element in the execution of the document itself such that the same invalidates the document itself.61
Professional communications, including any communications with lawyers, are also privileged and protected under the Evidence Act. The only exception to said rule is when such communication is made for the furtherance of an illegal purpose or when knowledge of any fraud or crime committed after the engagement of a professional comes to notice.62
i Conflict of law and choice of law in fraud claims
While undertaking multijurisdictional investigations, it is important that organisations collect and analyse information to ensure that it is actionable. Analysis of this information can help in supporting legal actions and identifying avenues of investigation such as non-public information sources, for example informants and witnesses who have insights into the lifestyle of key subjects, their activities and ultimately their assets. This, combined with a paper trail, can be of significant assistance in gathering more evidence and further formulating a legal strategy for tracing the assets at hand. Based on our preliminary research, there appear to be several English common law-based jurisdictions that may be relevant to a global investigation involving any large-scale 'missing' or misappropriated loan capital taken from a bank in India. These include the British Virgin Islands, Hong Kong, Singapore, the United States, the United Kingdom, Dubai (Dubai international financial centre courts), Mauritius, the Seychelles, Australia, the Cayman Islands and Cyprus.
Further, no express rules have been laid down with respect to the choice of law in fraud claims in India. However, as a matter of general practice, the Indian courts respect any express choice of law by a party to an agreement subject to such choice being made in a bona fide manner and the choice not being opposed to public policy.63 In practice, evidence may need to be led on the applicability of a foreign law to an agreement to determine whether Indian courts have jurisdiction.64
ii Collection of evidence in support of proceedings abroad, and seizure of assets or proceeds of fraud in support of the victims of fraud
The Civil Procedure Code and the Criminal Procedure Code65 have ample provisions to facilitate investigations and assist adjudication in relation to matters involving cross-border aspects. However, the procedure is to be routed through the government and the contracting state party, which may sometimes lead to delays.
Further, certain special laws provide mechanisms for cooperation in the attachment of assets and the examination of witnesses. PMLA, for instance provides a mechanism by which the courts in India, through the government, may request a foreign state to take such steps as requested, including the forwarding of evidence.66 The government may execute any request for the investigation and forwarding of evidence through special courts or the appropriate authority.67 In addition, the Enforcement Directorate, as the investigative authority, is empowered under PMLA to provisionally attach properties located outside India that are derived from illegal activity.68
iii Enforcement of judgments granted abroad in relation to fraud claims
Section 44A of the Civil Procedure Code provides for the filing and execution of judgments passed by the superior courts of any reciprocating territory69 in the district courts in India. It must be kept in mind, however, that there is a limitation period for the execution of a foreign decree of 12 years from the date of a judgment. Another pre-condition for enforcement of a foreign judgment is that it must be conclusive with respect to the subject matter adjudicated between the parties and satisfy the following conditions:70
- it must be pronounced by a court of competent jurisdiction;
- it must be adjudicated based on the merits of the case;
- it must not be based on an incorrect view of international law, or have been refused to be recognised under the law in India where applicable;
- it must not be based on proceedings opposed to principles of natural justice;
- it must not have been obtained by fraud; and
- it does not sustain a claim founded on a breach of any law in force in India.
Accordingly, in view of the above a foreign decree from a reciprocating territory can be directly executed in India. On the other hand, a party from a non-reciprocating territory would need to file a suit based on the foreign decree, or on the original underlying cause of action, or both, and obtain a domestic decree from a domestic Indian court of competent jurisdiction. He or she can only execute the resultant domestic decree. The limitation period for the filing of a suit and accordingly seeking a domestic decree based on a foreign decree for a non-reciprocating country is only three years.
There is a growing trend of foreign lenders wishing to pursue Indian borrowers who have defrauded them or who have defaulted on loans taken out by foreign subsidiaries of Indian companies. One such jurisdiction where this issue is a growing concern is the United Arab Emirates (UAE).71 Therefore, the 17 January 2020 notification of the UAE as a reciprocating territory under Section 44A of the Code of Civil Procedure 1908 is a significant boost to those UAE-based lenders looking to make more effective recovery against borrowers associated with group companies or promoters having assets in India.72
The recent insertion of Section 32A into the IBC has had the effect of indemnifying new management from criminal prosecution in relation to offences committed prior to the commencement of insolvency proceedings.73 The newly inserted provision stipulates that a corporate debtor's liability in relation to offences antecedent to insolvency proceedings shall extinguish from the date of the approval of a resolution plan by the adjudicating authority under the IBC. However, those who oversaw the conduct of business of the corporate debtor at the time of the offence shall continue to be liable to prosecution under the applicable laws.
Further, while India is still to adopt an effective mechanism for cross-border insolvency or ratify the UNCITRAL Model Law on Cross-border Insolvency 1997, the National Company Law Tribunal in Jet Airway (India) Ltd v. State Bank of India74 recently ratified a cross-border insolvency protocol providing for a cooperation and coordination mechanism for the insolvency proceeding of Jet Airways in India as well as before the Dutch court. This development may further frame the foundation for parallel insolvency proceedings in India and foreign states.
Similarly, while the legal framework for group insolvency is still in nascent under the IBC, the Honourable National Company Law Tribunal in a landmark decision in State Bank of India v. Videocon Industries Limited & Ors75 consolidated the insolvency of the principal with its subsidiaries in India as well as foreign subsidiaries and assets.
The covid-19 pandemic has also adversely affected Indian businesses, which has necessitated drastic interventions by the government on various fronts. One such intervention came in the form Section 10A of the IBC inserted through the IBC (Amendment) Ordinance 2020 on 5 June 2020, which has the effect of suspending the operation of Sections 7, 9 and 10 of the IBC for at least six months from 25 March 2020.
The Ordinance also relaxes the duty of a director to make a contribution to the corporate debtor who knew or ought to have known of the inevitability of the initiation of insolvency proceedings and did not exercise due diligence in minimising the loss caused to the company's creditors.76 While this move may be intended to protect the promoters or directors of those companies that are likely to fall victim to the difficult circumstances of the covid-19 pandemic, one cannot rule out the possibility of promoters exploiting this exemption to misappropriate assets, divert funds and fudge books and records.
1 Sandeep Baldava is a partner at Ernst & Young LLP and Shreyas Jayasimha is counsel, arbitrator and mediator at Aarna Law LLP (India) and arbitrator and mediator at Aarna ADR (Singapore).). The authors thank Aakash Sherwal, Saurabh Singh and Harshit Shah for their assistance and Krishnan Shakkotai for his inputs.
2 Section 3 and 5, Limitation Act, 1963.
3 Section 17, Limitation Act, 1963.
4 Section 17, Indian Registration Act, 1908.
5 Section 3, Indian Stamp Act, 1899.
6 Section 17, Indian Contract Act, 1872.
7 Section 19 of the Indian Contract Act, 1872.
8 Order XXI, Code of Civil Procedure, 1908.
9 Section 447, Companies Act.
10 Section 448, Companies Act, 2013.
11 Sections 89 and 90, Companies Act.
12 Sections 211 to 212, Companies Act, 2013.
13 Section 5, Indian Trust Act, 1882 r/w Section 17, Registration Act, 1908.
14 Section 4, Indian Trust Act, 1882.
15 Section 23, Indian Trust Act, 1882.
16 Section 63 of the Indian Trust Act, 1882.
17 Section 23, Indian Trust Act, 1882.
18 Section 25, the Indian Penal Code, 1860.
19 Dr S. Dutta v. State of Uttar Pradesh, 1966 CrLJ 459 (SC).
20 Section 109, Indian Penal Code, 1860.
21 Section 415, Indian Penal Code, 1860.
22 Section 420, Indian Penal Code, 1860.
23 Section 206, Indian Penal Code, 1860.
24 Section 411 and 412, Indian Penal Code, 1860.
25 Section 467-468 of the Code of Criminal Procedure, 1973.
26 Gujarat Bottling Co Ltd v. Coca Cola Co, AIR 1995 SC 2372.
27 Section 60 and Order XXXVIII of the Civil Procedure Code, 1908.
28 Order XL of the Code of Civil Procedure, 1908.
29 Section 101, Indian Evidence Act, 1872.
30 Section 5(1), Prevention of Money Laundering Act, 2002.
31 Section 94, Code of Criminal Procedure, 1973.
32 Section 452, Code of Criminal Procedure, 1973.
33 Order XI of Civil Procedure Code, 1908.
34 Order XII, Rule 8 of the Civil Procedure Code, 1908.
35 Section 30(b), Code of Civil Procedure, 1908.
36 Section 114, Indian Evidence Act, 1872.
37 Section 160, Code of Criminal Procedure, 1973.
38 Section 91, Code of Criminal Procedure, 1973.
39 Section 94, Code of Criminal Procedure, 1973.
40 Section 161, Code of Criminal Procedure, 1973.
41 RBI Annual Report 2018-19, available at https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?year=2019.
42 Master Directions on Frauds – Classification and Reporting by commercial banks and select FIs, available at https://www.rbi.org.in/SCRIPTS/BS_ViewMasDirections.aspx?id=10477#10.
43 Price Waterhouse & Co and Ors v. SEBI, SAT Order dated 9 September 2019 – wherein the appellants as statutory auditors were not dealing in securities either directly or indirectly and thus did not fall within the purview of the anti-fraud provisions of the SEBI regulations.
44 SEBI v. Kanaiyalal Baldevbhai Patel, (2017) 15 SCC 1.
45 SEBI v. Rakhi Trading, (2018) 13 SCC 753.
46 North End Foods Marketing v. SEBI, SAT Order dated 12 March 2019.
47 Section 5, Prevention of Money Laundering Act, 2002. However, the attachment needs to be confirmed within 180 days by an adjudicating authority.
48 Section 12, Prevention of Money Laundering Act, 2002.
49 Section 17, Prevention of Money Laundering Act, 2002.
50 Section 19, Prevention of Money Laundering Act, 2002 .
51 Section 24, Prevention of Money Laundering Act, 2002 .
52 See B Rama Raju v. Union of India,  164 Comp Cas 149 (AP).
53 Nevin John, 'Number of insolvency cases surged 30.29 per cent between October-December, 2019', Business Today, 18 February 2020.
54 The Insolvency and Bankruptcy Code, (Amendment Act), 2020 dt 13.03.2020.
55 CA(AT)(Insolvency) No. 957 of 2019, dated 17 February 2020.
56 CA No. 001808/2020.
57 See Committee of Creditors of Amtek Auto Ltd v. Dinkar T Venkatasubramanian, judgment of the National Company Law Appellate Tribunal dated 16 August 2019 in Company Appeal (AT) (Insolvency) 219 of 2019.
58 N Radhakrishnan v. Maestro Engineers & Ors, 2009 (13) SCALE 403.
59 AIR 2016 SC 4675; Also see Rashid Raza v. Sadaf Akhtar (2019) 8 SCC 710.
60 Swiss Timing Limited v. Organising Committee, Commonwealth Games; AIR 2014 SC 3723.
61 Section 92, Indian Evidence Act, 1872.
62 Section 126, Indian Evidence Act, 1872.
63 National Thermal Power Corporation v. Singer Company, AIR 1993 SC 998.
64 See British India Steam Navigation Co. Ltd v. Shanmughavilas Cashew Industries & ors (1990) 3 SCC 481.
65 See Order XXVI Rule 18 to 22, Civil Procedure Code, 1908; Section 166B, Code of Criminal Procedure, 1973.
66 Section 57, Prevention of Money Laundering Act, 2002.
67 Section 58, Prevention of Money Laundering Act, 2002.
68 Section 5 r/w Section 2(1)(u), Prevention of Money Laundering Act, 2002.
69 Illustratively, United Kingdom, the United Arab Emirates, Singapore, Burma, Aden, Fiji, Malaysia, etc.
70 Section 13, Code of Civil Procedure, 1908.
71 Sachin Dave, 'UAE banks headed for India to recover Rs 50,000 crore', ET Bureau, 10 February 2020.
72 Notification GSR 38(E) dated 17January 2020 issued by the Department of Legal Affairs, Ministry of Law and Justice under Section 44A of the Code of Civil Procedure 1908.
73 Inserted vide the Insolvency and Bankruptcy Code (Amendment) Act 2020 dated 13 March 2020 with retrospective effect from 28 December 2019.
74 Company Appeal (AT) (Insolvency) No. 707 of 2019; judgment dated 26 September 2019.
75 MA 2385/2019 in C.P.(IB)-02/MB/2018; Order dated 12 February 2020.
76 Section 66, Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017.