NDPS Act : Narcotic Drugs and Psychotropic Substances Act, 1985

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May 10, 2022

This article has been written by Nikunj Arora of Amity Law School, Noida. This article provides an in-depth analysis of the Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act). The article lists down the objectives of the act, positive and negative aspects of the act, related amendments along with important sections.

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

The Narcotic Drugs and Psychotropic Substances Act (NDPS Act), 1985 was passed with the intent of controlling drug abuse and prohibiting the use, distribution, manufacture, and trade of drugs. Narcotic drugs are those that induce sleep, whereas psychotropic substances are those that react with the mind and change it positively. The Parliament of India passed the NDPS Act on 14 November 1985. These types of drugs have their place in the practice of medicine. Consequently, the Act includes provisions for the cultivation of cannabis, poppy, and coca plants as well as the manufacturing of psychotropic substances in connection with the cultivation of these plants.

Its primary objective is to regulate the manufacturing, possession, sale, and transportation of drugs that are considered narcotics or psychotropics. As a result of this act, 200 psychotropic substances are prohibited from sale to walk-in customers. Prescriptions are required to obtain these drugs. There have been multiple amendments to the law since it was established.

Additionally, NDPS does not differentiate between drug users, drug dealers, and hard-core criminals involved in this trade. An individual is prohibited from manufacturing, producing, cultivating, possessing, selling, purchasing, transporting, storing or consuming any drug or substance that is considered narcotic or psychotropic without permission from the appropriate authorities. This article, thus, tries to highlight the provisions of the NDPS Act.

Overview of the Act

Development of law on drugs and narcotics in India and the enactment of the NDPS Act

There was no statutory control over drugs and narcotics in India before the introduction of the NDPS Act, hence, the control was essentially exercised through three Central Government acts, namely, the Opium Act, 1857 (XIII), the Opium Act, 1878 (I) and the Dangerous Drugs Act, 1930 (II). Throughout the Atharva Veda, cannabis smoking was mentioned and was accepted as a form of recreation on a par with drinking alcohol. In the country, cannabis and its derivatives like hashish, marijuana, and bhang were legal up until 1985.

The Indian government is a signatory to the UN Single Convention on Narcotics Drugs (1961), the UN Convention on Psychotropic Substances (1971), and the UN Convention on Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988), which prescribe a variety of measures intended to achieve the dual objectives of limiting the use of narcotics and psychotropic substances for medical and scientific purposes and preventing their abuse. India’s obligations under the three UN drug conventions were taken into account when enacting the NDPS act as well as Article 47 of its Constitution. The Act covers the whole of India as well as all Indian citizens living outside India and all persons travelling aboard ships and aircraft registered in India.

India was among the first developing countries to formulate a National Drug Policy (NDP) to improve access to drugs for low-income individuals, although pharmaceutical companies have gradually taken over the market through prescriptions from physicians. A drug price control order (DPCO) was passed by the Indian government in 1963 to regulate the prices of drugs in the market. Although DPCO had little effect, many drug companies withdrew from the country. Consequently, the production of certain drugs moved from India to China. In 2013, DPCO underwent a major reform. In 2013, DPCO was deemed more favourable to non-controlled products, as there were no new investments made.

Initially, opium and morphine were used for medical preparation during the civil war and led to narcotic addiction. Veteran soldiers who had participated in these wars became addicted to these drugs, leading to a diagnosis known as soldier’s disease. During the Second World War, even though hemp (marijuana) production had been effectively banned in 1937, some governments soon discovered they required it for necessities such as rope and cordage.

The Indian government opposed the Single Convention on Narcotic Drugs (1961). It was therefore decided by the convention that India would be given a grace period of 25 years to make cannabis available for scientific and medical purposes only and not for any other reason. Given the political sensitivity of the issue, India had become obligated to international delegations. This forced the Indian government to eliminate the deeply rooted use of cannabis. In consequence, the NDPS Act, enacted on 14 November 1985, prohibited all narcotic drugs in India with very little opposition.

Aim and object of the NDPS Act

To achieve the following objectives, the NDPS was enacted:

To amend and consolidate the laws governing the use and possession of narcotic drugs.
To establish stringent provisions for the control, regulation, and supervision of the illegal possession, sale, transit, and consumption of narcotic drugs and psychotropic substances.
To provide a mechanism for forfeiting narcotic drugs and psychotropic substances, as well as the properties derived from, or used in, illicit drug trafficking.
To establish a mechanism for the implementation of the provisions of the International Convention on Narcotic Drugs and Psychotropic Substances, as well as for other purposes connected therewith.

Important definitions under the NDPS Act

Narcotics:

The NDPS Act defines various terms used throughout the legislation in Section 2. Defining narcotics as a legal concept is very different from describing them medically as a sleep-inducing agent. Narcotic drugs are defined by Section 2 (xiv) of the Act as coca leaf, cannabis (hemp), opium, poppy stems, derivatives/concentrates of any of these substances, and other substances notified by the government in its official gazette.

In accordance with S.O. 1350 (E) dated 13.3.2019, certain additions to substances, salts, and preparations thereof have also been declared manufactured drugs, together with the existing notified manufactured drugs.

Narcotics are substances that reduce the effectiveness of the senses and soothe discomfort. In the past, ‘narcotics’ term was generally considered as something that constituted all drugs, but nowadays, the term’s meaning has been changed to heroin, heroin derivatives, and their semi-synthetic versions. There is also the term Opioid that describes these medications. A few examples include heroin and prescription drugs such as Vicodin, codeine, morphine, etc.

Drugs are also often referred to as opioid pain relievers. Their primary purpose is to treat severe pain that cannot be adequately treated by other pain relievers. As long as these medications are used with caution and under the close supervision of a health care provider, they can be quite beneficial in the treatment of pain.

Psychotropic substances:

Further, the term ‘psychotropic substances’ is used to refer to any substance which modifies the mind. In Section 2(xxiii), ‘psychotropic substances’ are defined as any substances, whether natural or synthetic or any natural derivative or for that matter any preparation of such substance or derivative on the list of psychotropic substances specified in the Schedule of NDPS Act. For example Amphetamine, Methaqualone, Diazepam, Alprazolam, Ketamine, etc.

Punishment under the NDPS Act

The NDPS Act prescribes punishment according to the quantity of seized drugs. Depending on the severity of the offence, the degree of punishment will vary. A lesser punishment may be imposed if the drugs were used for personal purposes. In response to amendments, it now divides punishment into three categories depending on the number of drugs seized, as well as allowing judicial discretion in terms of punishment severity. In the case of cannabis, punishments for the cultivation of the plant may include rigorous imprisonment for up to ten years, in addition to a fine that may be as high as Rs 1 lakh.

Further, persons who produce, manufacture, possess, sell, purchase, transport, and traffic in illegal cannabis are subject to punishment depending on the amount seized. Accordingly, if found in possession of a “small quantity” of cannabis, detention can result in a rigorous prison sentence of up to one year with a fine of up to Rs 10,000.

As long as the quantity is less than a commercial quantity but greater than a small quantity, the convict may face an intense jail term of up to 10 years and a fine of up to Rs 1 lakh. Commercial quantities of cannabis will be punishable by rigorous imprisonment for a term that shall not be less than 10 years but may extend to 20 years. A fine of not less than one lakh rupees extending to two lakh rupees can also be imposed along with the court being able to issue a fine of more than two lakh rupees. The Department of Revenue defines a “small quantity” of cannabis as possessing less than 1 kg, while a “commercial quantity” would be 20kg or more.

In addition, Section 27 of the Act deals with punishment for the consumption of narcotic drugs and psychotropic substances, stating that when the drug consumed is cocaine, morphine, diacetylmorphine or any other narcotic drug or psychotropic substance, the punishment will include either a year of imprisonment or a fine of up to twenty thousand rupees. Those who use any other drug for which punishment has not been specified will be sentenced to up to six months in prison, as well as a fine of up to Rs 10,000.

The Act provides for rigorous punishment of repeat offenders, including jail time of up to one and one-half times the maximum term of imprisonment, as well as a fine of up to one and one-half times the maximum fine. It is also possible for repeat offenders to be sentenced to death if they are found guilty of a similar offence again, depending on the number of drugs seized.

Having committed an offence under the NDPS Act may even result in the same punishment as the actual offence under Section 28 of the Act. A similar provision in Section 25 provides that anybody who knowingly permits an offence to be committed on their premises by another individual will face the same punishment as if the offence was committed by them directly. By amendment to the Act in 1989, due to the serious nature of the offence, the sentence awarded under the NDPS Act became non-commutable except for the sentence awarded for the consumption of drugs.

Positive and negative aspects of the NDPS Act

Positive aspects:

Among the significant features of this act is the fact that narcotics and psychotropic substances can be added or removed from the list quite easily. The government does not need to pass any formal bills or amendments to effect these changes, as the changes can be made based on information available or by simple publication in the official gazette.

The Central Government has established the Narcotics Control Bureau with specific responsibility for coordinating drug law enforcement nationwide in accordance with subparagraph 3 of Section 4. Based on national plan parameters, the NCB functions as the coordinator of national liaison and a central point for collecting and disseminating intelligence.

Specifically, the act empowers both Magistrates and specially appointed officers of the Central and State Governments to issue search and arrest warrants. By utilizing this technology, it should be possible to respond to any information quickly and appropriately and avoid the need for a warrant to be issued. As a result, timely and effective responses to any information are guaranteed.

Negative aspects:

In most cases, punishment is meted out for acts that cause harm to others, such as murder and theft. Offences created by statute, such as those referred to in the NDPS Act, fall into the category of victimless crimes. An individual in possession of marijuana or drinking an opium-laced drink does not harm themselves or others. As a general rule, an offence comprises two elements: the specific act and the guilty mind or dishonest intention that led to the act.

The NDPS Act, however, eliminates the requirement of dishonest intention under Section 35 and directs the court to presuppose the presence of a culpable mental state for all offences under the Act. Thus, in a situation where possession is an offence under the Act, then there shall be involvement of conscious possession.

By virtue of the NDPS Act, a defendant is presumed to know the contents. According to Section 54 of the Act, if a person fails to account satisfactorily for the possession of narcotic drugs, psychotropic substances, or any other incriminating article, it will be presumed that he has committed an offence.

In the case of a second conviction, which may be limited to abetment or attempted committing an offence, Section 31-A provides for a mandatory death sentence, instead of a life sentence.

It is the belief of civil activists that the NDPS Act should be reviewed from the perspective of civil liberties due to its unduly harsh punishments such as the death penalty, virtual denial of bail, and the presumption of intent and knowledge, in effect placing the burden of proof on the accused to prove their innocence.

Amendments to the NDPS Act

The following were the amendments made to the Act:

Narcotic Drugs and Psychotropic Substances (Amendment) Act, 1988 (2 of 1989) 1989

A major amendment to the NDPS Act has been made, providing stricter provisions and the addition of sections for financing illicit traffic under Section 27A. Trafficking in illicit substances includes production, possession, sale, purchase, transportation, warehousing, and anyone booked under section 27A.

Narcotic Drugs And Psychotropic Substances (Amendment) Act, 2001

The purpose of this amended act is to rationalize sentencing by making it more objective. The law was now easier for addicts to navigate, and bail was liberalized as well.

Narcotic Drugs and Psychotropic Substances (Amendment) Act, 2014

On May 1, 2014, the NDPS Amendment 2014 came into effect. Section 71 of the NDPS act describes how drug cases should be handled, including treatment facility rules. As part of the previous amendments, high-level offences under the Act were penalized more severely along with criminalizing the consumption of drugs. In contrast to the earlier procedure which required long steps and multiple licenses of different validity periods, morphine producers only need a single license from the respective State Drugs Controller.

As a result of the amendment, a uniform regulation was achieved across the country, preventing state-by-state conflict. Several essential narcotics that are used in pharmaceutical preparations, such as morphine, fentanyl, and methadone, have been made more accessible to patients. As a compromise, the death penalty for repeat criminal convictions for trafficking large amounts of drugs was reduced to a discrete 30-year sentence. After this amendment, the maximum penalty for “small quantity” offences has been raised from 6 months to 1 year.

The Narcotic Drugs and Psychotropic Substances (Amendment) Bill, 2021

As of December 6, 2021, the Narcotic Drugs and Psychotropic Substances (Amendment) Bill, 2021 was introduced in the Lok Sabha. The purpose behind it is to replace the Narcotic Drugs and Psychotropic Substances (Amendment) Ordinance, 2021. A drafting error has been corrected in the Narcotic Drugs and Psychotropic Substances Act, 1985 through the bill. The Act outlines the rules and regulations relating to certain operations (such as manufacture, transport, and consumption of these substances) relating to narcotic substances and psychotropic substances.

The definition of illicit activities was changed in 2014 when the Act was amended. This section was not amended, and it continued to refer to the earlier clause number about punishment for financing such illicit activities. A new clause number is added to the section on penalties in the Bill.

Important sections under the NDPS Act

The following are the important sections under the NDPS Act:

Section 3

According to Section 3 of the NDPS Act, the Central Government has the right to add or remove such substances or natural materials or salts or preparations of such substances or materials from the list of psychotropic substances. In a very simple manner, the government can do so at any given time simply by notifying in the official gazette without passing any legislation or amending the laws based on available information or a decision based on an international convention.

Section 7A and Section 7B

The Central Government is empowered under Section 7A to form a fund called the National Fund for Control of Drug Abuse. Specifically, the fund is intended to be used to cover expenditures incurred in connection with the measures taken to combat illicit trafficking in narcotic drugs and psychotropic substances. Among the provisions of Section 7B, the Central Government must submit an annual report on the activities that are funded by this fund.

Section 8(c)

According to Section 8(c), It is unlawful for anyone to cultivate any coca plant or gather any Portion of coca plant, or cultivate the opium poppy or any cannabis plant or produce, manufacture, possess, sell, purchase, transport, warehouse, use, consume, import inter-State, export inter-State, import into India, export from India or tranship any narcotic drug or psychotropic substance.

However, the following is an exception to the section:

‘Medical or Scientific Purposes and in the manner and to the extent provided by the provisions of this Act or the rules or orders made thereunder.’

In State Of Uttaranchal vs Rajesh Kumar Gupta(2006), it was held that the exceptions must be judged on two criteria: first, whether the drugs are used for medicinal purposes, and second, whether they fall within the scope of the regulatory provisions contained in Chapters VI and VII of the Narcotic Drugs and Psychotropic Substances Rules, 1985.

In Union of India & Anr vs Sajeev V. Deshphande (2014), the Court held that under Section 8(c), the prohibition would be attracted to drugs that are not mentioned in Schedule I to NDPS Rules but are mentioned in Schedule I to NDPS Act, and to the drugs intended for medicinal and scientific purposes, because they are prohibited by NDPS Act. It is not contemplated in the NDPS Act to write any rules prohibiting various activities that involve narcotic drugs and psychotropic substances. With regards to dealing with such substances, it merely involves the framing of rules that permit and regulate such activities. Under Section 8(c), certain activities are expressly prohibited (such as the import and export of narcotic drugs and psychotropic substances out of India in the present case). The rules adopted under the NDPS Act should not be interpreted in a manner that overrides the rights and obligations found in the parent act. Furthermore, the Court made it clear that just because narcotic drugs and psychotropic substances are being dealt with for medical or scientific purposes, it cannot itself lift the prohibition created under Section 8(c). The dealing must be done in accordance with the NDPS Act, Rules and Orders, in the manner and to the extent specified.

Section 27

Various punishments are laid out in this section for the consumption of narcotic drugs or psychotropic substances, such as harsh imprisonment up to 1 year, or a fine that could reach twenty thousand rupees, or both, and upon consumption of a narcotic drug or psychotropic substance other than cocaine, diacetyl-morphine, or any other narcotic drugs or psychotropic substances, a prison term up to 6 months may be imposed, or a fine of Rs 10,000 may be imposed, or both.

In Gaunter Edwin Kircher v. State of Goa, Secretariat Panaji, Goa, the Court held that in order to satisfy Section 27, the following requirements must be met:

An individual has been found in possession of any narcotic drug or psychotropic substance, even if the quantity is ‘small’;
The possession of such goods should, therefore, be in violation of any provision of the Act, any rule or order made under it, or any permit issued thereunder; and
Any such narcotics or psychotropic substances that were in his possession were intended for his personal use and not for resale/distribution.

In Anil Kumar v. State of Punjab (2017), the Court stated that if a person who is already imprisoned is convicted of a subsequent criminal offence, the prison term would normally begin when the person has served the original sentence. A court can only run the sentence concurrently with an earlier sentence if it is appropriate, considering the specific facts of the case. It is necessary that the court exercise such discretion in accordance with sound judicial principles and not mechanically. It depends on the nature of the offence/offences and the facts and circumstances of each case as to whether discretion is to be exercised in directing sentences to run concurrently.

Section 36A

A clause in Section 36A of the NDPS Act called ‘non-obstante’ empowers the Special Court to hear cases punishable by imprisonment for more than three years. This provision is intended to ensure speedy trials. Following are some of the features:

Under the NDPS Act, the government can set up Special Courts to speed up the prosecution of offences.
Through a notification to the official gazette, it will be set up in particular areas or areas.
The Special Court shall be considered to be a Court of Session.
There shall be one judge of the Special Court, who will be appointed by the government with the concurrence of the Chief Justice of the High Court. To qualify for an appointment as a Special Court judge, a judge must first be a sessions judge or additional sessions judge.
Under the NDPS Act, all of the offences punishable with a term of imprisonment over three years can be tried by a Special Court.
By reviewing a police report or a complaint made by a state official or a central official, a Special Court will determine whether there was an offence.
Besides the offenses under the NDPS Act, the Special Court has also been empowered with the authority to try an accused who has also been accused of other criminal offences under the Code of Criminal Procedure, 1973 (CrPC).
Proceedings before a Special Court will be governed by the provisions of the CrPC, including those pertaining to bail and bonds.
In the case of a Special Court, the person prosecuting the case shall be considered a public prosecutor.

Section 41

In Section 41 of the Act, magistrates have the authority to issue search warrants as well as specially designated Gazetted officers of the central excise department, narcotics department, customs department, revenue intelligence unit, or any other department of the state. As a result, actions can be taken promptly as well as effectively when receiving information.

Section 50

Section 50 of the NDPS Act provides that a person can request a search be conducted by a magistrate or gazetted officer and that the officer can detain the person until the magistrate is brought in. It is, however, possible for the officer to proceed to search the person pursuant to Section 100 of the Code of Criminal Procedure, 1973 if he has reason to believe that the person cannot be taken to the nearest constituted officer or magistrate without the likelihood of the person being found in possession of any narcotic drugs or psychotropic substances. The search warrant shall state the reasons for such belief, and a copy thereof shall be sent to his immediate supervisor within 72 hours.

Section 64A

This is an appreciable initiative on the part of the government whereby addicts are offered a chance to seek medical treatment and for which they are not liable. In order to make use of Section 64A, an addict must be charged under Section 27 of the NDPS Act or with an offence involving a small number of narcotic drugs or psychotropic substances. Moreover, he shall seek voluntary medical treatment for de-addiction; if he undergoes medical treatment for de-addiction, he will not be indicted under the provisions of section 27 or under any other provision for offences involving a small number of narcotics or psychotropic substances. However, if the addict doesn’t receive complete treatment to overcome the addiction, this immunity can be lost.

Bail under the NDPS Act

As a matter of law, it is well established that a liberal approach in the area of narcotics and psychotropic substances is inappropriate. The Supreme Court has laid down parameters in its various judgments through which it has been provided as to what is required to be considered when the accused is seeking bail for an offence under the NDPS Act.

The Apex Court in the case of Union of India v. Ram Samujh and Ors. (1999) observed that

“….It should be borne in mind that in a murder case, the accused murders one or two persons, while those persons who are dealing in narcotic drugs are instrumental in causing death or in inflicting death−blow on several innocent young victims, who are vulnerable; it causes deleterious effects and a deadly impact on the society; they are a hazard to the society; even if they are released temporarily, in all probability, they would continue their nefarious activities of trafficking and/or dealing in intoxicants clandestinely.”

Accordingly, bail is treated differently in narcotics cases than it is in general. Generally, bail is a rule and jail belongs to the exception category, whereas, in cases of NDPS, jail belongs to the rule category and bail belongs to the exception category. It should be noted that Section 37 of the NDPS Act deals with the issue of cognizable and non-bailable offences. In Section 27 of the NDPS Act, it is stated that all offences punishable under the Act are cognizable and that no person accused of an offence punishable under the Act will be released on bail or his bail unless certain conditions are met. This section applies to offences under Section 19 or Section 24 or Section 27A and also to offences that involve commercial quantity.

The following conditions must be met before bail can be granted under the Act:

The accused has reasonable grounds to believe that he is not guilty of the offence.
The fact is that if bail is granted, the defendant is unlikely to commit any crime while out on bail.

In another case of State of Kerala v. Rajesh, the Apex Court observed that,

“The scheme of Section 37 reveals that the exercise of power to grant bail is not only subject to the limitations contained under Section 439 of the CrPC but is also subject to the limitation placed by Section 37 which commences with a non−obstante clause.”

Under said section, the operative part is in the negative form which prescribes that no person accused of commission of an offence under the Act is entitled to an extension of bail unless both of the following conditions are met:

The prosecution must have a chance to object to the application.
The decision can only be made if the court is satisfied that there are reasonable grounds to believe that he is not guilty of the offence.

It is not possible to grant bail if either of these conditions is not met. The pertinent point to note is that, when there is a conflict between Section 37 of the NDPS Act and Section 439 of the Code of Criminal Procedure, 1973 (CrPC), Section 37 of the NDPS Act prevails.

In the case of Hakim@pilla v. the State of Rajasthan S.B (2019)., the Court noted that Section 37 of the NDPS Act is titled ‘offences to be cognizable and non-bailable. The section, however, begins with a non-obtante clause that states that whatever offences are punishable under the Act will be cognizable. The legislation does not prohibit bail for every crime. There are also offences under other laws discussed in Schedule I of the CrPC. In Part II of the First Schedule, item No.3 stipulates that if the offence in question is punishable with imprisonment for less than three years under other law, it is bailable and non-cognizable.

Under Section 21 of the NDPS Act, the offence of possession of a small quantity of Ganja (up to 1 kg) can result in a six-month prison sentence and a fine. The offence is cognizable by virtue of Section 37(1) of the NDPS Act, however as stated in Item No.3 in the list (in Part II of the First Schedule), the offence is bailable.

In the case of Rhea Chakraborty v. The Union of India and Ors. (2020), the Supreme Court took precedents from the State of Punjab v. Baldev Singh (1999). According to the Court, Section 37 of the Punjab Incarceration Act makes all offences under the Act to be cognizable offences and non-bailable offences as well as provides stringent conditions for the grant of bail. Relying on the same, Justice Kotwal noted that “the situation has not changed since 1999 when these observations were made by the Hon’ble Supreme Court”. These observations are therefore applicable to today’s scenario with greater force, which is why the Hon’ble Supreme Court’s ruling in Baldev Singh is binding and all offences under the NDPS Act are non-bailable.

Presumption of culpable mental state under the NDPS Act

In criminal law, there is a fundamental principle known as the ‘Presumption of Innocence’, which states that an accused is innocent until proven guilty. This fundamental principle is derived from the maxim “Semper necessitas probandi incumbitei qui agit”. This means that the burden of proof lies with the person who is charging you. Section 35 of the NDPS Act deals with the presumption of the culpable mental state of an accused. This implies that the court will presume that the accused has such a mental state to proceed with the prosecution.

Under this section, an explanation is given stating “In this section culpable mental state includes intention motive, knowledge of a fact and belief in, or reason to believe, a fact.” The NDPS Act, therefore, requires a person charged with an offence to rebut the presumption against him and show that he has not committed the act constituting an offence.

The Supreme Court of India in Naresh Kumar alias Nitu v. State of Himachal Pradesh held that the presumption of guilt under Section 35, and the requirement of satisfactory explanations of possession under Section 54, are rebuttable. Nonetheless, the prosecution remains responsible for proving the charges beyond any reasonable doubt. Specifically, Section 35(2) states that a fact can be regarded as proved if it is established beyond a reasonable doubt and not by the preponderance of the probabilities.

Furthermore, in Noor Aga v. State of Punjab and Ors (2008), the Apex Court held that Sections 35 and 54 impose a reverse burden on the accused, and thus, are constitutional. The standard of proof required by the accused to prove his innocence is lower than that required by the prosecution.

Conscious possession of drugs under the NDPS Act

There is no explicit mention of the term ‘conscious possession’ in the NDPS Act, yet various judicial judgments have developed it in light of the needs and circumstances of the individual case. Section 35 of the NDPS act states the following:

In the event of a prosecution for a felony under this Act, the Court shall presume the presence of a culpable state of mind of the accused, but the defendant may counter with evidence that he was not in a culpable state of mind concerning the offence charged. Herein, the term culpable state of mind encompasses intention, motive, and knowledge of a fact, as well as a belief in or reason for believing a fact.
A fact is regarded as proved for purposes of this section only when the court is of the opinion that it exists beyond a reasonable doubt and not just when its existence of it can be demonstrated by a preponderance of the evidence.

From the foregoing, it can be concluded that conscious possession means having a mental state of possession at the same time as having physical possession of the illegal substance. Under criminal law, the elements of ‘Actus Reus’ and ‘Mens Rea’ are essential elements of a criminal offence. Similarly, under the NDPS Act, the physical and mental possession of drugs are essential elements to constitute an offence.

‘Conscious’ refers to a deliberate or intended state of mind. In Gunwantlal v. the State of M.P., it was pointed out that possession in a given instance need not necessarily be physical, but maybe constructive such that the person who physically holds it, shall be subject to such power or control. ‘Possession’ refers to the right to possess. As stated in Sullivan v Earl of Caithness, wherein a person kept his firearm in his mother’s apartment, which was in a safer environment than his own home, he should be considered to be in possession of that firearm. Upon establishing possession, the person claiming that it was not conscious possession must demonstrate its nature, since his knowledge of how he came to be in possession enables him to do so. Section 35 of the Act provides statutory recognition to this position based on the legal presumption. In accordance with Section 54, it is also possible to draw a presumption of guilt based on the evidence that is in possession of illicit objects.

There have been numerous judicial pronouncements made concerning the said term. All of them are interconnected but vary according to facts and circumstances. In the case of Dharampal Singh v. the State of Punjab (2010), it was discovered that the co-accused was driving a car that contained 65 kilograms of opium. It was acknowledged by the court that the automobile was not a public conveyance, therefore it could not be said that the passenger was in conscious possession of the recovered substance. Further, it was stated that once possession is established, the court may presume that the accused possessed a culpable state of mind and the offence was committed.

It should also be noted that in Solabkhan Gandhkhan Pathan v. the State of Gujarat (2003), there were issues of validity of conscious possession when the accuser was simply a travelling passenger on an autorickshaw as well as carrying illicit drugs with him. The court, however, upheld the validity of conscious possession. It was ruled that the suspect did not possess either physical possession or the preconceived notion or motive to commit the offence under the prescribed statutory provision. The accused was acquitted. The court concluded that both physical and mental possession was necessary for an offence to occur under the NDPS Act.

Further, in Madan Lal and Anr v. State of Himachal Pradesh (2003), the court held that the same act would not be considered a criminal offence under Section 20 of the NDPS Act until physical possession is coupled with a mental state of mind, and the possession is taken without cognizance of the nature of the possession.

Therefore, the courts have repeatedly held that physical possession must be coupled with mental control over illicit drugs or psychoactive ingredients. In addition, the court even stated that the expression ‘possession’ has a multitude of different meanings, depending on the context in which it is used. It can, therefore, be deduced that the term ‘conscious possession’ is subjective and therefore needs to be handled accordingly and with some caution in various case scenarios.

Conclusion

The drug problem in India is much worse than it appears. In ancient India, ganja, charas, and other psychoactive substances were used for healing, pain relief, and even psychotherapy. India had no law criminalizing possession or use of drugs prior to 1985. Now, it is important to note that the NDPS Act contains several provisions that specify serious punishments. For example, according to Section 37, the right to bail cannot be granted for more serious offences. Compared to the Unlawful Activities (Prevention) Act, 1976 (UAPA), this legislation was more draconian and the courts tended to be hesitant to release people on bail as a result.

Numerous laws are intended to solve societal problems, however, when they are misused, they can become brutal. It is more likely for draconian legislation to emerge when the legislation becomes more stringent. In light of its strict nature, the NDPS has the potential to be misused even more. Therefore, the Courts are required to ensure the law does not become weaponized and justice is administered to all segments of society.

References

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The Doha Agreement

By

Rachit Garg

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May 10, 2022

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The article is written by Ansruta Debnath, a law student of National Law University Odisha. This article talks about the provisions of the Doha Agreement of 2020, its need, and its implications.

It has been published by Rachit Garg.

Table of Contents

Introduction

Agreement for Bringing Peace to Afghanistan or the Doha Agreement was signed in Doha, Qatar between the Taliban and the United States of America on February 29, 2020. The nations reached an agreement after almost twenty years of war after the U.S. invaded Afghanistan in 2001. This article outlines the historical forces that led to the invasion, the growing need for an agreement, the result and the present situation of Afghanistan.

Historical background of and need for the Doha Agreement

9/11

The entire series of events culminating in the Doha Agreement started when on the morning of September 11, 2001, four coordinated terrorist attacks took place on American soil. Four planes were hijacked from three East Coast airports. The first two crashed into the two buildings of the World Trade Centre, the third into the southwest side of the U.S. Department of Defense, the Pentagon. The last one crashed into a countryside farm of Pennsylvania when the passengers tried to take over the plane from the assailants. The damage was the largest to the World Trade Centre, which got destroyed and marked one of the largest terror attacks in history.

It was soon concretised that al-Qaeda, an Islamic militant terror outfit, and headed by Osama bin Laden was responsible for the attacks. This attack was an enormous tactical success for al-Qaeda, because of its highly televised nature. While most people were largely ignorant of this organization before the attack, it became a household name after.

Evidence gathered by American intelligence soon showed that bin Laden was lodged in Afghanistan. The latter, however, refused to extradite bin Laden to America. Al-Qaeda was headquartered in Afghanistan and had forged a close relationship with that country’s ruling Taliban militia, which subsequently refused U.S. demands to extradite bin Laden and to terminate al-Qaeda activity there. Eventually, America and other allied forces invaded Afghanistan to extract justice and eliminate terrorism.

Taliban, al-Qaeda and Afghanistan

The most ironic aspect of the U.S. invasion of Afghanistan to topple the Taliban regime was that the latter was funded by American intelligence services, especially by the American foreign intelligence service, the Central Intelligence Agency or the CIA. The Taliban was formed by Islamic guerilla fighters and Pashtun tribesmen in the early 1990s when they attempted to resist the Soviet takeover of Afghanistan. Afghanistan and the Soviet Union were bordering nations and the latter, in the name of bolstering the Soviet-Afghan Friendship Treaty, invaded the former to re-establish a one-party communist government in 1979. Previously, the communist revolution of 1978 in Afghanistan established a one-party system but was extremely unpopular and was promptly overthrown.

Clearly, the American support can be explained because of their campaign against the Soviet Union and communism. Thus, the CIA and their Pakistani counterpart, Inter-Services Intelligence Directorate (ISI) funded the Taliban until it was able to take over 90 per cent of Afghanistan in 1996. As they solidified territorial authority, the Taliban administered a brutal brand of justice. Taliban law was based on the Pashtuns’ pre-Islamic tribal code and Sharia interpretations influenced by the madrassas ‘Saudi patrons’ austere Wahhabi ideologies. Even while the Ministry for the Promotion of Virtue and Prevention of Vice compelled women to wear the head-to-toe burqa, or chadri, prohibited music and television, and imprisoned males whose beards were deemed too short, the dictatorship neglected social services and other vital state duties.

Taliban also harboured various terror outfits, including al-Qaeda. Al-Qaeda had its headquarters in Afghanistan. The fact that the Taliban and al-Qaeda were allies first got formally recognized by the world when the United Nations passed Resolution 1267, which established the al-Qaeda and Taliban Sanctions Committee. This resolution made a link between the two organizations and imposed sanctions on their funding, travel, and arms shipments. Their relationship was further cemented when al-Qaeda operatives assassinated an anti-Taliban leader, Ahmad Shah Massoud. Massoud was the leader of the Northern Alliance which basically embodied the anti-Taliban resistance in Afghanistan. This assassination can be considered to have ensured that bin Laden would receive asylum in Afghanistan and protection from the Taliban after the 9/11 attack.

Invasion by the U.S.

The American president during the 9/11 attacks was President George W. Bush. He spearheaded the movement against the Taliban and al-Qaeda and accordingly the North Atlantic Treaty Organization (NATO) invoked Article 5, empowering its members to respond collectively in self-defence. For the first time in its history, the U.S. and allied military forces launched an operation, called ‘Operation Enduring Freedom’ against terrorism in Afghanistan. Thousands of militants were killed or captured in a matter of months, and Taliban and al-Qaeda commanders were forced into hiding. They mainly sought refuge in Pakistan.

Following the fall of Kabul in November 2001, the United Nations invited various Afghan factions to a summit in Bonn, Germany, including the Northern Alliance. The groups signed the Bonn Agreement on December 5, 2001, which was backed by UN Security Council Resolution 1383. The accord, which was purportedly struck with significant Iranian diplomatic assistance due to Iran’s support for the Northern Alliance side, installed Hamid Karzai as interim administration head and established an international peacekeeping force to keep Kabul safe. On December 20, the UN Security Council passed Resolution 1386, which established the International Security Assistance Force, or ISAF. By December 9, 2001, the Taliban completely collapsed.

The long war and need for the Doha Agreement

With the initial victory and installation of an interim government in Afghanistan, by 2002, America diverted its military resources to its war in Iraq. However, huge amounts of investment were made for “reconstructing” Afghanistan. In May of 2003, the U.S. Government announced that the time for “major combat” was over and that there will now be “stabilisation, stability and reconstruction”. But this objective got severely derailed when in 2004, bin Laden, who had been in hiding, resurfaced and the Taliban insurgency ensued. In a videotaped message, bin Laden was seen to taunt the Bush administration while taking responsibility for 9/11.

President Barack Obama authorized a boost in US force deployment after taking office in 2009, with the goal of achieving a decisive victory over the insurgency. He also announced that the drawdown of personnel would begin in 2011 and that Afghan security forces would take over all combat activities by 2014. In 2011, bin Laden got killed by the U.S. military through a raid of his Pakistan compound. This, on the other hand, merely fueled the Taliban insurgency and exposed the Afghan army’s and police forces’ inadequacies in terms of numbers, training, and equipment to deal with the post-2014 situation.

The U.S. declared in 2014 that the majority of its troops would be leaving, but that a few thousand would remain to “advise, train, and assist” Afghan security forces as part of “Operation Resolute Support”. Yet efforts for withdrawal failed because of the Taliban insurgency and lack of a stable government in Afghanistan.

The election of Donald Trump as president of America brought a new shift in U.S. policy towards Afghanistan. By 2017, the Taliban had become extremely strong and the American military described the war as a stalemate. Suicide bombings had increased enormously and the Taliban had gained control over almost a third of the country. With complete eradication of the Taliban extremely improbable and constant drain of American resources in Afghanistan, the need to chalk out agreements between the involved parties was greatly felt. From 2018, efforts for negotiation were started, all of which culminated in the Doha Agreement of 2020.

Main provisions in the Doha Agreement and their implications

Involved parties

The Doha Agreement was between the “Islamic Emirate of Afghanistan which is not recognized by the United States as a state and is known as the Taliban” and the United States of America. Scholars have criticised the fact that the Afghanistan government was not made part of the negotiation process. The agreement did not include the government but asked for an Intra-Afgan dialogue in the future.

Four main parts of the Doha Agreement

The agreement had four main parts-

Guarantees and enforcement mechanisms that will prevent the use of the soil of Afghanistan by any group or individual against the security of the United States and its allies.
Guarantees, enforcement mechanisms, and announcement of a timeline for the withdrawal of all foreign forces from Afghanistan.
After the announcement of guarantees for a complete withdrawal of foreign forces and timeline in the presence of international witnesses, and guarantees and the announcement in the presence of international witnesses that Afghan soil will not be used against the security of the United States and its allies, the Islamic Emirate of Afghanistan which is not recognized by the United States as a state and is known as the Taliban will start intra-Afghan negotiations with Afghan sides.
A permanent and comprehensive ceasefire will be an item on the agenda of the intra-Afghan dialogue and negotiations. The participants of intra-Afghan negotiations will discuss the date and modalities of a permanent and comprehensive ceasefire, including joint implementation mechanisms, which will be announced along with the completion and agreement over the future political roadmap of Afghanistan.

Implications of the Doha Agreement

The first part basically implied that the Taliban, if given power, could not continue to support terrorist outfits. The agreement asked the Taliban to send a clear message that those who pose a threat to the security of the United States and its allies have no place in Afghanistan. Further, the Taliban was not to cooperate with groups or individuals threatening the security of the United States and its allies. The Taliban was to actively prevent and eradicate such organizations and prevent all those people from obtaining visas, passports and other legal documents.

Another major takeaway from the agreement was the withdrawal and removal of American and America-backed military troops from Afghanistan. In 135 days, the U.S. said they would reduce its force to 8,600 troops, and NATO or coalition troop numbers will be reduced correspondingly and simultaneously. All military personnel would be gone in 14 months, including “non-diplomatic civilian personnel” (which may be construed as “intelligence” personnel).

Further, the U.S. and Taliban also committed to the release of political and combat prisoners of either side in a phased manner but within three months along with the progress of the intra-Afghan negotiations. The U.S. also committed to start diplomatic engagements with other bodies for the removal of sanctions from Afghanistan and the Taliban as and when the intra-Afghan negotiations started. Lastly, the United States and its allies promised to refrain from the threat of the use of force against the territorial integrity or political independence of Afghanistan or intervening in its domestic affairs.

The US-Taliban agreement did not call for an immediate cease-fire, and the Taliban fighters carried out scores of attacks on Afghan security forces in the days after its conclusion. In the southern region of Helmand, U.S. forces retaliated with airstrikes. The provision for a cease-fire was to be an “agenda” during the intra-Afghan talk and that it would be enforced at the end of those talks.

Negotiation between Taliban and the Afghan government

The aim of the Doha Agreement was to facilitate conversation between the Ghani government and Taliban so that a power-sharing agreement between both could be decided and implemented in Afghanistan. After nearly two decades of war, representatives from the Taliban, the Afghan government, and civil society gathered for the first time in Doha. Direct talks resumed when the Afghan government completed the release of the five thousand Taliban captives, which had been delayed for months. Both sides underlined their desire to bring peace to Afghanistan and develop a framework for Afghan society following the withdrawal of US forces during the opening statements. The government’s main demand was for a cease-fire, while the Taliban restated their demand for the country to be governed according to Islamic principles. However, various problems from both sides delayed further talks which eventually led to their failure.

Taliban takes over Afghanistan by force : who is to blame

The complete withdrawal of troops was to be announced by September 11, 2021, by newly elected President, Joe Biden. It was also stated that troops would be withdrawn regardless of the progress made in the intra-Afghan dialogue. Simultaneously, the Taliban stated that it would not attend “any conference” on Afghanistan’s future until all foreign soldiers had left the country. However, all promises of talks went down the drain when on August 15, 2021, Taliban forces stormed Kabul, took over the government of Afghanistan by force and established an Islamic government. The Ghani government thus completely collapsed. While the Doha Agreement allowed for the withdrawal of troops, the aim of a shared government was thus not fulfilled.

This hostile takeover can be attributed to certain factors. For starters, the Afghan forces were no match to the Taliban ones. Although the U.S. attempted to train the forces for the last twenty years, they were still unable to protect the capital. Further, the Afghan government was itself extremely unstable due to the massive amounts of corruption within it. The U.S. also diverted its resources to Iraq after invading Afghanistan too soon, instead of consolidating efforts on completely eradicating the Taliban. The sudden withdrawal of troops without ensuring that intra-Afgan negotiations were successful was also a big mistake, especially since the U.S. government was continuously advised against it. NATO Secretary-General Jens Stoltenberg had warned that withdrawing troops too early could allow Afghanistan to become a haven for terrorists and the Islamic State to rebuild its caliphate.

Afghanistan post Doha Agreement

The economy of Afghanistan is now collapsing and hunger and poverty are at an all-time high. Thus, all the resources and investment that had been poured into Afghanistan by the U.S. and other countries like India are at extreme risk of degenerating. Because the Taliban took over the country by force, they have also not been recognized by other nations as the legitimate government of Afghanistan.

Fears of the Taliban reinstating the system of government that was followed by them before 9/11 are not unfounded. The Taliban, while taking over, had declared that they would establish an Islamic State. This State, if the 1990s are any indicator to go by, included various human rights violations, a brutal system of punishment and no rights for women. In the present scenario, although the Taliban government has promised that they would form a more inclusive government, in reality, many conservative leaders have regained top ministry positions and hundreds of women have lost their jobs because of new restrictions on their movement.

Conclusion

The American government had invaded Afghanistan with the aim to eradicate terrorist organizations and remove the Taliban government. While the first objective was somewhat fulfilled, because the Taliban has returned as the sole government, there is no guarantee that they would not provide a haven to terrorists. During the signing of the Doha Agreement, the Taliban had been made to agree that they would not harbour fugitives in exchange for the release of prisoners, withdrawal of troops and a shared government that would implement checks and balances. But, without any counter-balance, the Taliban can in essence do whatever they deem fit. However, they have also been blacklisted by most countries and this will prove to be difficult, especially as they aim to build back from a broken and war-torn nation. Thus, the Taliban at some point in time will be forced to cooperate.

References

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Open Forum : Can a person be appointed as a director if existing directors are in the process of being disqualified u/s 274(1)(G) of the Companies Act, 1956

By

Sneha Mahawar

-

May 9, 2022

0

This article is written by Taniksha Gupta pursuing a Paralegal Associate Diploma at Lawsikho. This article has been edited by Ojuswi (Associate, Lawsikho).

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

The directors are in charge of a company’s well-being as well as, the firm’s and shareholders’ concerns. Directors are essentially fiduciary officials who have obligations to the corporation. The company’s shareholders appoint directors to manage the company’s activities to the greatest advantage of the stakeholders. The legislators have ensured that directors’ powers and responsibilities are protected to the fullest extent practicable. It uses a combination of regulation and punishing actions. There is also a specific provision for dismissals of directors in certain instances.

The dismissal of an individual for appointment as a director in a company is described in Section 274 of the Companies Act, 1956. The above-mentioned section has been replaced by Section 164 of the Companies Act, 2013 due to the ambiguity in the previous provision. The new provision has made the necessary amendments, and now all such disqualifications apply to both public and private companies. The author of this article discusses the legal uncertainty that existed over the nomination of an individual as a director while current directors were being disqualified.

Disqualifications of directors

A director can be disqualified for any of the following reasons under company law:

The court has determined that he is mentally ill.
He is bankrupt.
He is insolvent, and his application is pending before the adjudicating authority.
He has served at least six months in prison after being convicted by a court of any crime (whether or not incorporating moral turpitude). However, if an individual has been charged with any crime and has served a sentence of seven years or more, he is ineligible to serve as a director of any corporation.
If a court or tribunal has issued an order prohibiting him from ever being chosen as a director.
He has not compensated any requests on any company shares that he owns, whether by itself or with others, and a six-month period has passed since the last day set for the payout of the call.
He has been convicted of related party transaction-related offences at any point in the previous five years.
He has been unsuccessful in obtaining a Director Identification Number.

Analysis of Section 274(1)(G) of the Companies Act, 1956

Section 274(1)(g) of the Companies Act, 1956 provides that:

“a person shall not be capable of being appointed as director of a company, if such person is already a director of a public company which, –

(A) has not filed the annual accounts and annual returns for any continuous 3 financial years commencing on and after the first day of April, 1999; or

(B) has failed to repay its deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more.

Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of 5 years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (A) or has failed to repay its deposits or interest or redeem its debentures on due date or pay dividend referred to in clause (B).”

There are two points of view here as well. According to one viewpoint, because the corporation has been in default for a year, any person chosen as a director will be instantly disqualified. Another point of view is that new directors engaged after just a year are not debarred. The second viewpoint is backed by the Rules, which declare unequivocally that anyone who served as a director during the pertinent year, from the due date to one year beyond the due date, is disqualified. The latter perspective is supported by the finding that if no one else can be selected as director, who will fill the void? How will the company be revived? Moreover, the new directors had not previously served as directors of the failing firm on the given deadline of default or inside the one-year period permitted. Furthermore, no director would ever have been disqualified if the first viewpoint was right.

There was a lot of ambiguity in section 274(1)(g).

Position after Companies Act, 2013

The following is an excerpt from the applicable clause under the aforementioned sections:

Section 164. “(2) No person who is or has been a director of a company which—

(a) has not filed financial statements or annual returns for any continuous period of three financial years; or

(b) has failed to repay the deposits accepted by it, or pay interest thereon or to redeem any debentures on the due date or pay interest due therein or pay any dividend declared and such failure to pay or redeem continues for one years or more,

shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.”

Section 167. “(1) The office of a director shall become vacant in case—

(a) he incurs any of the disqualifications specified in section 164;”

Correspondence between Section 274(1)(G) of the Companies Act, 1956 and Section 164(2) of the Companies Act, 2013

It should be observed that Section 164(2) corresponds to Section 274(1)(g) of the Companies Act, 1956, which stated that a person could not be the designated director of a company if he or she is already a director of a listed corporation that has not submitted the Annual Accounts or Annual Return for any three consecutive financial years beginning on or after April 1, 1999.

As can be seen, the contrast between Section 164(2) and Section 274(1)(g) is that in Section 274(1)(g), the consequence of non-filing is limited to public companies, whereas Section 164(2) does not differentiate between private and public companies. Additionally, the application of Section 274(1) (g) was specified, i.e., the three financial years were taken into account beginning on or after April 1, 1999; although, no such date is indicated in the current Section 164(2). As a result, the similar is iterative in nature, i.e., violations prior to the enactment of Section 164(2) shall be taken into account for evaluating disqualification.

All corporations, regardless of their classification or position, are subject to disqualifications under section 164(2) of the Act. In supplement to the mandated disqualifications given by the Act, private firms may include any other prohibition in their articles. In addition, when it comes to the applicability of Section 164(2) to private firms, it is worth referring to the Ministry of Corporate Affairs’ circular of June 5, 2015, which clarifies the portions that are exempt in the case of private enterprises.

Similarity	1. A person could not be the designated director of a company if he or she is already a director of a listed corporation that has not submitted the Annual Accounts or Annual Return for any three consecutive financial years
Difference	1. Section 274(1) (g) specified that three financial years were taken into account beginning on or after April 1, 1999; although, no such date is indicated in the current Section 164(2).2. In Section 274(1)(g), the consequence of non-filing is limited to public companies, whereas Section 164(2) does not differentiate between private and public companies.

Interpretation of Section 167(1)(A) and Section 164(2) of the 2013 Act:

The phrase “he incurs any disqualification described in Section 164” appears in Section 167(1)(a). The section discusses disqualification under Section 164 as a whole, without distinguishing between disqualification defined under Section 164(1) and disqualification prescribed under Section 164(2). If the legislators had intended to relate only to Section 164(1), this should have been explicitly stated.

Section 164 also specifies the form of disqualification that prevents the individual from being nominated or re-appointed as a Director. Section 167, on the other hand, specifies the instances under which a current director will be naturally removed from the board of directors of any company (regardless of whether it is private or public). Any of the disqualifications envisaged under Section 164 is one such event.

Case laws

Vikram Ahuja v. Greenstone Investments Pvt Limited & Ors. (2016) before NCLT

One of the issues before the Hon’ble bench in the above-mentioned case law was “whether the disqualification set forth in Section 164(2)(a) r/w 167(1) (a) of the Act 2013 has a retrospective effect or not”;

After reviewing numerous case laws, the Hon’ble Tribunal determined that: “this provision has to be read as applicable to the situations where non-filing has started, at the most in the past and continuing while this enactment has come to into existence and also to future non-filing……..”
Furthermore, it has been held in settled case-law that a statute allowing for retrospective disqualification for previous behaviour does not become retrospective since one component of a request for its execution is extracted from a time prior to its enacting;
As a result, the provisions of Section 164 (2)(a) apply to non-filing that has occurred in the past and continues while this enactment is in effect, as well as future non-filing. The mere fact that such a rule applies to all past defaults does not raise the issue of retrospective or prospective impact.

Jai Shankar Agrahari v. Union of India (2020) before Allahabad High Court

In this case, several writ petitions were filed. The petitioners were the directors of different companies who have been declared disqualified to continue as Directors of those companies under Section 164(2) of the Companies Act. The petitioners argued that the aforementioned part violated sections 14 and 19(1)(g) of the Indian Constitution, which guarantees equality and freedom of trade and enterprise, respectively. The Court dismissed both aforementioned objections to the legality of section 164(2) of the Act. Furthermore, because the disqualification under section 164(2) was spontaneous by application of legislation, the principle of “audi alteram partem” does not operate in such circumstances (save for the purpose of determining facts).

Conclusion

The disqualification is one of the grounds for a director’s role to become empty in all of the firms where he serves as a director. It is important to remember, however, that such a vacation of appointment will take effect immediately after the director has been disqualified. There is a lot of misunderstanding about section 274(1) (g). More confusion has been created by the Companies (Disqualification of Directors u/s 274(1)(g) of the Companies Act, 1956) Rules, 2003. To clear up the above-mentioned problems, the Company Law Board was asked to issue clarifications as soon as possible.

Despite the fact that the said section 164(2) was notified with effect from 01.04.2014, the disqualification shall be regarded if a company in which an individual is carrying a role of directorship fails to file financial data and annual returns, and certain individuals as director must therefore be disqualified from being assigned as director in any other company, and his seat shall be vacated in all the organisations in which he is a director in terms of Section 167 (1) (a) of the Act.

Section 164 of the Companies Act, 2013 removes some uncertainty that existed in Section 274(1)(g) regarding director reappointment in the same company, which has now been clarified. Although the maximum provision has not been altered, there are significant implications for disqualification in the case of a private company. Disqualification for nomination as a director of a private firm has also been tightened.

References

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LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

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Overview of the SARFAESI Act, 2002

By

Sneha Mahawar

-

May 9, 2022

0

This article is written by Jaya Vats, a practising advocate, Delhi. In this article, the author provides a detailed study on all the aspects related to the SARFAESI Act, of 2002. The article provides an in-depth analysis of the purpose, need, and lacunae of the SARFAESI Act along with its relevance.

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

The financial sector has been a crucial player in India’s efforts to succeed in swiftly building the nation’s economy. As our current legal framework for business transactions has not kept up with evolving commercial practices and banking sector changes. This assures a poor rate of loan recovery and rising volumes of nonperforming assets at banks and other financial institutions.

The Central Government established the Narasimham Committees I and II, as well as the Andhyarujina Committee, to investigate banking sector reforms. These committees assessed the necessity for changes in the legal framework in these sectors. These committees proposed new laws for Securitisation and permitting financial institutions to hold securities and sell them in a timely manner without the involvement of a court, and the recommendations formed the SARFAESI Act, 2002.

Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, banks in India have been granted the ability to acquire the security supplied by the defaulting borrower against the loan and sell it to recover losses, without the intervention of any court of law, providing them with a method to dramatically decrease their non-performing assets (NPA’s). The statute is abbreviated as the SARFAESI Act or simply SARFAESI. In the event of the borrower’s default, the law allows banks to seize and auction off the security against the loan.

A brief overview of the SARFAESI Act

The SARFAESI Act is defined as “an act to govern Securitisation and reconstruction of financial assets, as well as the enforcement of security interests, and to provide for a centralised database of security interests formed on property rights, and for issues associated with or incidental thereto.”

The SARFAESI Act was enacted with the intention of allowing banks and other financial institutions (FIs) to recuperate on NPAs without the intervention of a court. The non performing assets are defined under Section 2(1) of the Act. These are the financial institutions that have a presence in India and have been notified by the Indian government. The Act specifies two broad strategies for recovering NPAs. This involves either taking ownership of the borrower’s secured assets (with the power to lease, assign, or resell the secured assets) or taking over the borrower’s management or company until the NPA is retrieved. The Act also allows banks and other financial institutions to sell financial assets to Asset Reconstruction Companies (ARCs). The financial assets can be sold to ARCs in compliance with the Reserve Bank of India’s (RBI) norms and recommendations.

The secured creditor’s right to pursue the security interest under the Act does not arise until the borrower’s account has been categorised as an NPA in the secured creditor’s (banks or financial institutions’) books of account in accordance with the RBI standards. The secured creditor must serve the borrower with a 60-day notice seeking repayment of the amount owed and describing the borrower’s assets on which the secured creditor intends to exercise its security interest.

If the borrower fails to fulfil its liability to the secured creditors after the 60-day notice period has expired, the secured creditor may enforce security interest over secured assets by:

Taking control of the secured assets;
Take over management of the secured assets, as well as the right to transfer the secured assets via lease, assignment, or sale;
Designate someone to administer the secured assets; and
Compel any individual who has acquired any of the borrower’s secured assets to pay the sums required to settle the obligation.

If a secured creditor is unable to recover the whole sum owed through the enforcement of a security interest over the assets secured, the secured creditor may seek recovery of the balance amounts through the Debts Recovery Tribunal (DRT) or the applicable court. A secured creditor may seek its remedies under both the SARFAESI Act and the DRT at the same time. For the SARFAESI Act to apply, the borrower’s account must be classed as an NPA by the secured creditor and have an outstanding balance of INR 100,000 or more. Furthermore, the requirements of the Act are not enforceable in certain cases, as outlined in Section 31 of the SARFAESI Act, such as an account where the residual debt is less than 20% of the initial principal amount and interest.

Elements of the SARFAESI Act

The SARFAESI Act is applied to the entire country of India. The SARFAESI Act, 2002 provisions are in effect for modifying the four laws listed below:

Indian Stamp Act, 1899.
The recovery of the debts due to the Banks and Financial Institutions Act, 1993 (RDDBFI).
The Depositories Act, 1996 and for those matters that are connected therewith or incidental thereto.
The Reconstruction and Securitisation of Financial Assets and Enforcement of Security Interest Act, 2002.

Aim of the SARFAESI Act

The SARFAESI Act has two main objectives, namely:

Recovering the financial institutions’ and banks’ non-performing assets (NPAs) in a timely and effective manner.
Allows financial organisations and banks to sell residential and commercial assets at auction if a borrower defaults on his or her debt.

Need for the SARFAESI Act

The characteristic of Indian industry is economic indiscipline or financial illiteracy. The ever-increasing Non-Performing Assets (‘NPA’), a fine euphemism devised to describe poor loans, led to the passage of the Recoveries of Debts due to Banks and Financial Institutions Act, 1993, which established a special Debt Recovery Tribunal (‘DRT’), defined under Section 2(1)(i) of the Act to reclaim NPA. However, on one hand, this did not speed up the recovery, and on the other hand, the severe civil law requirements rendered the attachment and foreclosure of the assets offered as security for the loan nearly worthless. Furthermore, the balance sheets of banks and other financial institutions were turning red as a result of large mandated provisions for non-performing assets (NPAs).

Recognising that one out of every five borrowers is a defaulter, the government was under obligation to provide proper mechanisms for debt recovery as well as to foreclose the security. Hence, The SARFAESI Act, 2002 (the Securitisation Act) attempts to fulfil these dual goals, as well as to provide a wide legal framework for asset Securitisation and asset reconstruction.

Applicability of the SARFAESI Act

The Act addresses the following issues:

The Reserve Bank of India registers and regulates Asset Reconstruction Companies (ARCs).
Facilitating the Securitisation of bank and financial institution financial assets with or without the advantage of underlying securities.
The ARC promotes seamless financial asset transferability by issuing debentures, bonds, or any other instrument that may be used as a debenture to buy financial assets from banks and financial organisations.
Entrusting Asset Reconstruction Companies with the task of raising cash through the issuance of security receipts to eligible purchasers.
Enabling the reconstruction of financial assets obtained when exercising securities enforcement authorities, changing management, or other powers planned to be imposed on banks and financial organisations.
Representation of any securitisation or asset reconstruction firm licensed as a public financial institution with the Reserve Bank of India.
‘Security interest’ is defined as any sort of security, including mortgages and changes on immovable assets, issued in exchange for timely repayment of any financial aid provided by any bank or financial organisation.
The borrower’s account is classified as a non-performing asset in compliance with the orders provided or guidelines published by the Reserve Bank of India from time to time.
The officials authorised shall enforce the obligations of a secured creditor in line with Central Government laws.
An appeal to the relevant Debts Recovery Tribunal against any bank or financial institution’s action, followed by a second appeal to the Appellate Debts Recovery Tribunal.
The Central Government may establish or cause the establishment of a Central Registry with the objective of registering transactions involving Securitisation, asset reconstruction, and the development of a security interest.
Applicability of the proposed legislation firstly to banks and financial institutions, with the central government, empowered to extend the proposed legislation’s application to non-banking financial enterprises and other entities.
The proposed legislation does not apply to agricultural land security interests, loans under one lakh rupees, or circumstances where the borrower repays 80% of the loan.

The SARFAESI Act does not apply to:

Rural Regional Banks.
Nationalised Banks.
State Bank of India and its affiliates.

Purpose of the SARFAESI Act

The efforts of the financial industry have been a crucial role in the rapid advancement of India’s economy. Despite the fact that Indian banks and financial institutions were keeping up with international standards and rules, there were gaps in several areas. Concerns included a lack of power with financial firms to reclaim defaulted loans.

Therefore, the SARFAESI Act, 2002 was passed after careful consideration, allowing banks and financial institutions to solve issues like liquidity, long-term assets, growing NPAs, and loan recovery delays (reconstruction).

Features of the SARFAESI Act

The following are the key aspects of the SARFAESI Act:

Formation of Special Purpose Vehicles, namely a Securitisation Company and a Reconstruction Company;
Financial asset securitisation;
Securitisation funding;
Reconstruction of assets;
Enforcing security interests, i.e. seizing the assets pledged as collateral for the loan;
The establishment of a Central Registry for the regulation and registration of Securitisation transactions;
Plate provisions for the boiler;
Dilution of provisions of SICA;
Transactions that are exempted.

Formation of special purpose vehicles, namely a securitisation company and a reconstruction company

The SARFAESI Act intends to securitize and rebuild financial assets via two special purpose entities, namely the ‘Securitisation Company (‘SCO’)’ and the ‘Reconstruction Company (RCO’). SCO and RCO must be companies formed under the Companies Act of 1956 with the primary purpose of securitisation and asset reconstruction, respectively. Before conducting business, SCO and RCO must be registered under the SARFAESI Act. Furthermore, a minimum financial stability criterion is established by mandating SCO and RCO to have an owned fund of Rs. 2 crores or up to 15% of total financial assets acquired or to be acquired. The RBI has the authority to set the rate of owned funds at any moment. For different types of SCO and RCO, various rates might be set. Existing SCO and RCO are likewise obliged by the SARFAESI Act to register. The RBI must be contacted in order to process the registration application. The SCO or RCO that has acquired a certificate of registration under the SARFAESI Act is a Public Financial Institution as defined in Section 4A of the Companies Act of 1956.

Aside from its core activity of securitisation and asset reconstruction, a SCO/RCO may carry out the following tasks:

Operating as a recovery authorised representative of a bank or other financial institution.
Taking on the role of manager to handle the secured assets whose possession has been taken over by the secured creditor.
Taking on the role of receiver, as appointed by a court or debt recovery tribunal.

An SCO or RCO that is engaged in any other business other than securitisation or asset reconstruction prior to the beginning of the SARFAESI Act must cease such other activity within one year of the SARFAESI Act’s commencement.

Financial asset securitisation

Only banks and financial institutions are permitted under the SARFAESI Act to securitise their financial assets relevant to NPAs with a securitisation firm. According to the SARFAESI Act, securitisation is the acquisition of financial assets from any financial institution or bank by any securitisation company or reconstruction business. The necessary funds for such acquisition may be acquired from ‘qualified institutional buyers (QIB)’ by the issuance of security receipts reflecting an undivided interest in such financial assets, or through other means.

The following are financial assets:

A claim on any debt or receivables, whether secured or unsecured.
Any obligation or receivable secured by mortgaged against, or charged against the immovable property.
A moveable property mortgage, charge, hypothecation, or pledge.
Any right or interest in the security underlying such debt or receivables, whether whole or partial.
Any beneficial interest in the property, whether mobile or immovable, or in obligations and receivables, whether existing, future, accruing, conditional, or contingent.
Any kind of financial aid.

The SARFAESI Act established a much-needed legal framework for the securitisation of financial assets. Securitisation of financial assets is a financial instrument that allows lenders to securitise their future cash flows from secured assets and therefore free up funds that have been held in such assets. The secured assets become “merchandise” in the hands of the SCO and RCO, and their realisation provides them with their return. This feature adds much-needed skill in effective management in the realisation of secured assets. By enabling the enforcement of the secured assets, the legal hurdles of conventional civil law procedure to seize the mortgaged assets have thus been successfully removed.

Securitisation of financial assets may take a while to bear fruit since it necessitates strong accounting principles, as well as the establishment of standards. In other words, in addition to the legal structure, there should be an accounting framework.

Securitisation funding

By issuing a security receipt, the SCO/RCO may raise the required money from the QIB for the acquisition of financial assets. The Registration Act exempts security receipts from mandatory registration. Securities receipts provided by any SCO or RCO are considered “securities” under Section 2(h)(ic) of the Securities Contracts (Regulation) Act, 1956. For each purchase, a scheme of acquisition must be developed, describing the description of financial assets to be acquired, the amount of investment, the rate of return guaranteed, and so on. In addition, separate and unique accounts must be kept for each plan of purchase. Realisations from financial assets must be kept and utilised for the redemption of investments and the payment of guaranteed returns.

In the case of non-realisation of financial assets, the QIB owning at least 75% of the total value of the security receipts issued has the authority to summon a meeting of all QIBs and make resolutions, which are binding on the SCO/RCO.

Reconstruction of assets

According to RBI standards, an SCO or RCO may carry out asset reconstruction in any of the accompanying directions:

Taking over the operation of the borrower’s business.
Restructuring the borrower’s management of his or her firm.
Selling or leasing a portion or all of the borrower’s business.
The debt payment schedule has been rescheduled.
Putting the security interest into action.
Entering into a debt settlement agreement with the borrower.

However, the aforesaid actions are subject to the requirements of any other legislation that is now in effect.

Enforcing security interests, i.e. seizing the assets pledged as collateral for the loan

The secondary purpose of the SARFAESI Act is to allow for the enforcement of security interests, which entails taking ownership of the assets pledged as collateral for the loan. Section 13 of the Act gives detailed provisions allowing a lender (referred to as a “secured creditor”) to seize the borrower’s security. The provisions are as follows in their entirety and substance:

To discharge his responsibilities, the Lender must send a notice of demand to the defaulting borrower, detailing the amount payable and the secured assets that will be enforced in the case of nonpayment.
After receiving the demand notice, no borrower may transfer the secured assets in any way without the lender’s prior written approval.
The borrower must fulfil the obligations within 60 days after receiving notice of demand.
In the case that the borrower fails to pay the demand, the lender may seize the borrower’s secured assets with the right to transfer them via lease, assignment, or sale in order to realise the secured asset. It shall select a manager to administer the secured assets whose custody has been taken over. It may require any individual who has purchased any of the secured assets from the borrower and owes money to the borrower to pay a portion of the money necessary to settle the secured debt.
The secured asset transfer made by the lender is assumed to be done by the secured asset’s owner.
If the borrower pays all of the dues, as well as any costs, charges, and expenditures paid by the lender, before the date specified for the sale of the secured assets, the lender is not required to transfer or sell the secured assets.
When there is more than one lender or joint financing, the permission of the lender(s) representing at least 75% of the amount due is necessary before taking any steps to enforce the security interest, and such approval is obligatory on all lenders.
The sale revenues from the secured assets must be allocated in the case of a corporate borrower in liquidation.
If the lender chooses to realise his security rather than surrender it and prove his obligation, he may keep the selling profits of his secured assets after settling the workmen’s dues with the liquidator.
If the profits from the sale of the secured assets do not entirely fulfil the obligation due, the lender may file a claim with the DRT or a competent court to collect the deficit.
The lender also has the option of pursuing any of the guarantors or selling the pledged assets without pursuing the borrower.
The lender may seek the aid of the Chief Metropolitan Magistrate or District Magistrate in obtaining control of the secured assets from the borrower.
If any individual, including the borrower, is dissatisfied with any of the lender’s actions, he may file an appeal with the DRT within 45 days by depositing at least 75% of the lender’s claim. The DRT’s judgment can be appealed to an Appellate Tribunal.
Unless his claim of the financial asset is lodged within the term provided by the Limitation Act of 1963, the lender cannot begin any procedures to enforce the security interest.

Establishment of a central registry for the regulation and registration of securitisation transactions

A central registry is being established to govern and control the functions of securitisation, asset reconstruction, and the development of security interests. Branch offices of the central registry may be formed on an as-needed basis. The registry will be led by a central registrar. The central registry performs the following functions:

Particulars pertaining to asset securitisation, financial asset reconstruction, and the establishment of security interests are recorded in a record known as the central register.
The records can also be preserved in electronic forms, such as on floppies, diskettes, and so on.
The particulars of any securitisation, asset reconstruction, or formation of security interest transaction must be filed within 30 days after the transaction by the SCO, RCO, or lender, as the case may be.
Modifications to a security interest registered with the Registry must be submitted within 30 days of the change.
Security interest satisfaction must be submitted with the Registry within 30 days after satisfaction.
On payment of the authorised price, any individual may see the records kept at the central registry.

Plate provisions for the boiler

The general provisions of the SARFAESI Act are as follows:

No civil court shall hear any case over which the DRT or Appellate Tribunal has jurisdiction under this SARFAESI Act.
The provisions of the SARFAESI Act take precedence over the provisions of any other laws or documents.
The Central Government has the authority to enact rules to implement the requirements of the SARFAESI Act.
As the Central Registry has not yet been formed, the provisions pertaining to the central registry will be relevant once the central registry is established.

Dilution of provisions of the SICA

By introducing two provisions in Section 15 of the SICA, the protective canopy of registering with BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’), which had previously incentivized industrial illness, has been abolished. They are as follows:

Where any SCO or RCO acquires financial assets after the beginning of the SARFAESI Act, no reference to BIFR shall be made.
Following the initiation of the SARFAESI Act, any awaiting reference before BIFR shall be terminated where secured creditors have taken any initiatives to retrieve their secured debts under the provisions of the SARFAESI Act, representing not less than 75 percent of the value of the amount outstanding.

Transactions that are exempted

The following transactions are excluded from the SARFAESI Act’s provisions:

Pledge of movables in accordance with The Indian Contract Act of 1872.
Aircraft security is being developed.
Establishment of a security interest in a vessel.
No security interest is generated in a conditional sale, hire-purchase, or lease.
Unpaid seller’s rights under The Sale of Goods Act of 1930.
According to the Civil Procedure Code, 1908 properties are not attachable.
A security interest in an amount less than or equal to Rs.1 lakh is granted.
A security interest in agricultural land has been developed.
The amount owed is less than 20% of the principal amount plus interest.

Procedure of the SARFAESI Act

Banks must follow particular procedures before they may repossess and claim a property in order to recoup their debts. They work in accordance with the SARFAESI Act procedure. Under the SARFAESI Act mechanism, if a borrower seems unable to settle his loan (including house loans) for six months, the financial institution has the legal authority to issue him a notice requesting that he clear the dues within 60 days. If the borrower fails to satisfy this obligation, the financial institution has the authority to sell the property in distress in order to collect the debt.

A borrower in default who is dissatisfied with the bank’s order may file an appeal with the appellate body established by law within 30 days of the date the order is issued.

Once the bank obtains possession of the property, it has the option to sell or lease it. It can also provide another entity the right to the property. The revenues from the sale are used to pay down the bank’s outstanding debts first. The leftover funds, if any, are paid to the defaulting borrower.

Methods for recovery under the SARFAESI Act

The RBI is responsible for the regulation and registration of securitisation or rebuilding businesses under the SARFAESI Act of 2002. These firms have been given permission to raise cash by selling security receipts to a qualified institutional buyer. This has enabled banks and financial institutions the authority to take control of securities issued in exchange for financial assistance and sell or lease them in order to take over management in the event of a failure. The SARFAESI Act specifies two basic techniques for recovering non-performing assets and these are as follows:

Asset reconstruction: The Asset reconstruction industry in India was born as a result of the SARFAESI Act. It is defined under Section 2(1)(b) of the Act. It can be accomplished by either proper management of the borrower’s business, or by taking over it, or by selling a portion or the entire business, or by rescheduling payment of debts payable by the borrower, or by the enforcement of a security interest in compliance with the conditions of this Act.
Securitisation: The practice of creating marketable securities supported by a pool of potential assets such as auto or house loans is known as securitisation. It is defined under Section 2(1)(z) of the Ac.t An asset is sold once it has been turned into a marketable security. By developing schemes for obtaining financial assets, a securitisation or reconstruction firm can acquire capital from exclusively QIB (Qualified Institutional Buyers).

The SARFAESI Act also includes an exception for security receipt registration. It implies that when a securitisation or reconstruction firm issues receipts, the holder of the receipts is entitled to undivided interests in the financial assets and there is no requirement for registration until and until the Registration Act, 1908 requires it. However, in the following circumstances, the security receipt must be registered:

There is a receipt transfer;
The security receipt creates, declares, assigns, limits, and extinguishes any right, title, or interest in real property.

Offences and penalties under the SARFAESI Act

The SARFAESI Act defines the following offences under Chapter-V under Section 27-30D:

Failure to file particulars of transactions involving asset securitisation, asset reconstruction, and the formation of a security interest.
Failure to file particulars of the amendment.
Failure to provide indications of particulars satisfactorily.
SCO and RCO’s failure to follow RBI orders.
Violation of any of the sections of the SARFAESI Act or any rules issued thereunder, including attempting to violate and aiding and abetting in contravention.

The SARFAESI Act under Section 27 imposes the following penalties:

For failure to file particulars of the above-mentioned transactions, every firm and every officer of the company, as well as every lender and officer of the lender, will be fined up to Rs.5000/- for each day the default persists.
Non-compliance with RBI directions will result in a punishment of up to Rs.5,00,000/- for each firm and each officer of the company, as well as an additional fine of Rs.10,000/- for each day the default persists.
Any violation of any provision of the SARFAESI Act is punishable by imprisonment for a term of up to one year, a fine, or both.

Under the SARFAESI Act, only a Metropolitan Magistrate or a Judicial Magistrate of the First Class has the authority to take cognizance and trial a crime.

Significance of the SARFAESI Act

The administration has indicated that it wants to dramatically reduce the number of non-performing assets (NPAs) and remove the obstacles they provide to the economy. The SARFAESI Act is a method for achieving this aim by reducing NPAs. As a result, the efficacy or success of the Act must be measured by the results obtained throughout its implementation. If the Act has resulted in a downward cycle of NPAs, it will be considered a policy success. Most banks have significantly lower levels of non-performing assets, and many have budgeted for even lower NPA levels this fiscal year.

Cooperative banks were previously excluded from the category of banks to whom the SARFAESI Act applied. The Indian government revised this act in 2013 to include cooperative banks formally under the scope of banks qualified to employ this Act. This action has greatly aided cooperative banks in avoiding excessive delays in collecting problematic debts that are involved in civil courts and cooperative tribunals.

With significant deposits from ordinary investors, the Indian Banking System today contains 1,544 urban cooperative banks and 96,248 rural cooperative banks. Given their magnitude in order to timely recover the default debts the SARFAESI Act plays a vital role leading to the cooperative banks’ smooth operation.

Shortcomings and lacunae in the SARFAESI Act

The SARFAESI Act, regardless of how advantageous it is, is not without flaws. One of the Act’s significant flaws is that it does not apply to unsecured creditors.

The bank has no influence over what happens to the asset after it is placed up for auction. If there are no buyers for the asset at the auction, the bank cannot proceed, pursuant to the previous conditions. Furthermore, the Government of India added a new clause in 2011 declaring that the bank might acquire the asset if there was no better bidder. This created another issue that if the factory was in the city, the bank might buy it and use it to erect a new branch or build a housing colony for its employees. However, if it was in an extremely remote place, it was useless to the bank.

The Act’s provision permitted the bank to keep a specific asset for a maximum of seven years. However, if the bank does not get a reasonable bid within the specified time frame, the remedy for such a situation is not specified in the Act.

Important case laws

The legality of the Act was questioned in the case of Mardia Chemicals v. Union of India, 2004 before the Supreme Court.

Facts: The IDBI Bank filed a notice against Mardia. Mardia defaulted—appealed in Court, where a number of similar petitions were grouped together and addressed collectively.

Issue: The Court had to decide whether it was permissible to challenge the SARFAESI Act on the grounds that it was not necessary to enact it in the circumstances at the time, particularly when another statute was already in effect, whether Section 13 of the Act was unconstitutional, and whether Section 17, particularly Section 17(2), is unreasonable and arbitrary, and thus unconstitutional.

Held: The Supreme Court upheld the Act’s constitutional validity, noting that “certain provisions of the Act may be a bit harsh for some of the borrowers, but on the ground that the impugned provisions of the Act cannot be said to be unconstitutional for the very fact that the object of the Act is to achieve faster recovery of the dues declared as NPAs and for better availability of capital liquidity and resources to help in the growth of the country’s economy and borrowers.” The Court further permitted the debtors to file an appeal against the lending institutions at the DRT without having to deposit 75% of the outstanding debt, and if the tribunal does not grant a stay order, the bank may sell the possessions.

In the case of Pandurang Ganpati Chaugule and Others v. Vishwarao Patil Murgud Sahakari Bank Ltd.,2020

Facts: The appellant challenged Vishwasrao Patil Murgud Sahakari Bank Limited’s action under the SARFAESI Act before the Civil Judge in Spl. Civil Suit on August 13, 2008. In deciding the primary issue, the Trial Court determined that it lacked jurisdiction to hear the case. The first appeal filed was denied. Against that, an appeal has been filed with this Court. A supplementary writ challenge under Article 32 of the Indian Constitution has also been filed, disputing the scope of the SARFAESI Act by co-operative banks sending notifications under Section 13.

Issue: One point of contention was whether cooperative banks at the state and multi-state levels are subject to the SARFAESI Act.

Held: A Five-Judge Constitution Bench of the Supreme Court of India ruled that cooperative banks created by cooperative societies should be recognised as banks under the SARFAESI Act, 2002.

In the case of Karnataka State Financial Corporation v. N. Narasimahaiah, 2008

Facts: In relation to the loans taken out by the industrial enterprises, the respondent provided sureties and/or guarantees. It sought the appellant-Corporation for a loan of 100 lakhs in the shape of a non-convertible debenture facility to cover its working capital requirements. respondents who were directors of the company signed guarantee and collateral security deeds that eventually failed.

Issue: The legitimacy of SARFAESI Act,2002 was challenged.

Held: The Supreme Court correctly emphasised the importance of the fundamental right to property. As a result, both creditors and lenders are guided as to the requirement of the asset mortgaged to the bank. The Supreme Court of India maintained the SARFAESI Act, 2002 as constitutionally legitimate, with the exception of the provisions under Section 17(2) of the Act, 2002, which was found to be in violation of Article 14 of the Indian Constitution.

In the very famous case of Kingfisher Airlines Ltd. v. State Bank Of India And Ors, 2017 I,

Facts: In 2005 the respondent approached the applicant banks for working capital and term loan facilities, including short-term loans, and entered into loan agreements with the applicant banks. However, due to financial problems, the respondent defaulted on repayment of such loans, and in response to bank requests for repayment of the loans, the respondent sought applicant banks, among other things, to restructure and recast the said credit facilities. However, the respondent is now a fugitive offender. Under the SARFAESI Act, the applicant-banks have begun proceedings against the defendants’ secured assets.

Issue: The main issue was as the respondent is a fugitive offender, can he remain outside the jurisdiction during the winding-up process.

Held: The Karnataka High Court held that a secured creditor may opt to remain outside the winding-up process while also preferring a company petition, and the Company Court may not exercise sovereignty over the property when recourse is sought against the secured asset by a secured creditor under the SARFAESI Act. When a secured creditor has sought recourse under the SARFAESI Act, the Company Court cannot exercise jurisdiction over the secured assets, whether before or after the winding-up order is issued, according to the Court. This is due to the fact that if a secured creditor files a petition for winding up, he is not required to renounce his secured asset.

In the case of Bank of Baroda v. Karwa Trading Company, 2022

Facts: the borrower was served with a notice under Section 13(2) of the SARFAESI Act, 2002, requesting a particular quantity of money. The bank took symbolic possession of the immovable property/residential residence and sent a notice in accordance with Section 13(4) of the SARFAESI Act, 2002. The bank published a notice of public auction for the sale of the residential property.

Issue: The appellant claimed that the DRT’s decision in favour of the bank violated Section 13(8) of the SARFAESI Act, 2002.

Held: The Supreme Court held that the borrower cannot be freed from the total responsibility due unless and until the borrower was ready to deposit/pay the complete amount payable, including all charges and expenditures, with the secured creditor. Furthermore, it held that a bank cannot be barred from disposing of the mortgaged property at public auction and realising the proceeds, and recovering the remaining debts until the borrower deposits/pays the total amount due and payable, as well as the fees paid by the secured creditor, in accordance with Section 13(f) of the SARFAESI Act.

Conclusion

Significant improvements in the SARFAESI Act, 2002 have occurred in recent years in order to meet the requirements of the statute. The judiciary has traditionally aided in keeping uncertainties about the application of legislative provisions at bay. As a result, the Supreme Court correctly affirmed the substantial development in the scope of the SARFAESI Act, 2002. The SARFAESI Act, 2002 is a vital Act for the advancement of the country’s economy, and broadening its scope is regarded as a necessary step in strengthening the country’s financial institutions.

References

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The dominant force in future commercial transactions comprising mergers and acquisitions

By

Rachit Garg

-

May 8, 2022

0

It has been written by Taniksha Gupta, pursuing a Diploma in M&A, Institutional Finance and Investment Laws from LawSikho. It has been edited by Ojuswi (Associate, LawSikho).

It has been published by Rachit Garg.

Table of Contents

Introduction

For decades, mergers and acquisitions have been essential tools for advancing company goals and allocating limited financial and human resources. There may be a variety of factors at play in these transactions, such as the desire to diversify one’s business. These transactions are influenced by a variety of factors, which change as the market changes. Patents, trademarks, and copyrights are just some of the Intellectual Property (IP) that has recently driven M&A deals. IP is now widely acknowledged as one of the company’s greatest beneficial assets. This acceptance, on the other hand, did not happen by chance. Intellectual property (IP) has come to be seen as a valuable asset as a result of decades of progress on the national and international levels. This article analyses the dominant force in future commercial transactions comprising M&A.

Mergers and Acquisitions

As an outcome of M&A, two or more companies are combined into a single entity. This process does not result in any new investments. However, the parties associated in such a transaction exchange shares. In most cases, the buyer corporation, which maintains its unique identity, is the one that endures, while the seller company dies.

It is accurate to refer to a merger as an amalgamation of all of the assets and liabilities from one firm being passed on to the recipient entity in exchange for payment through the transferee company’s equity capital or debt obligations or funds. The goal of an acquisition, on the other hand, is to get a majority stake in the obtained company’s stock. A consensus can be reached with those who maintain a major stake in the management of the firm, stocks can be purchased on the marketplace or by private sale, or a takeover proposal can be made to the supervisory board of stakeholders.

When it comes to corporate acquisitions, a takeover is very different from a merger. Takeovers take less time to complete because the acquirer sets the maximum price that can be offered to the target company, and the target company must be willing to cooperate for the takeover to go through. There is a difference between a merger and a takeover when it comes to the payment of consideration. However, since each set of shareholders loses executive control in both instances, mergers and acquisitions can be considered similar operations. Vertical, horizontal, circular or conglomerate business combinations can be classified according to the objective portfolio of a proposal.

The pharmaceutical industry has been involved in two of the top three big M&A deals through September 30th, 2019. The combined company value of AbbVie and Allergan was US$ 86.3 billion. Bristol-Myers Squibb and Celgene’s US$ 89.5 billion mergers were the most expensive. The second-largest deal was the merger of United Technologies and Raytheon, which was valued at US$ 88.9 billion. However, despite their military backgrounds, these companies are focused on technology. For the most part, these acquisitions are focused on intellectual property (IP).

Difference between Mergers and Acquisition

Parameters for Comparison	Merger	Acquisition
Definition	A merger occurs when two or more companies join forces to form a new entity.	An acquisition occurs when one company buys out the other.
Power	The powers remain the same for both the merging companies.	The acquiring company holds all of the ultimate power.
Name	In the event of a merger, the company is given a new name.	When a firm is acquired, the name of the purchasing company can be utilized.
Legal formalities	In comparison to acquisitions, mergers have additional legal procedures.	In comparison to a merger, there are fewer legal formalities in an acquisition.
Level	In a merger, two or more companies that consider each other to be of the same level come together to form a new company.	In an acquisition, the firm acquiring the other company is regarded as larger and more powerful.

Intellectual Property as a Major Factor

Insights into the role of intellectual property rights in mergers and acquisitions are critical, given the significance of intellectual property dealings in mergers and acquisitions, both in terms of quantity and valuation. The fact that mergers and acquisitions take place throughout both peak and recession periods is noteworthy. The rising side of the issue was highlighted by the mergers and acquisitions activities that contributed towards a major portion of the global economy in the mid to late 1990s. There has been a marked increase in the number of mergers and acquisitions where intellectual property is a prime concern.

One of the primary goals of an acquirer company is to increase the value of its stockholders, and taking IP into account is an important part of that strategy. The number of cross-border mergers rose significantly as the 5th wave of mergers progressed. The opportunity to integrate intangible assets was a major driving force behind mergers and acquisitions. Aside from that, sources report that the value of intangible assets is higher for companies that plan to expand their sector all across the border, especially for those companies.

A few of the earliest examples of a brand value-driven M&A transaction is the Grand Metropolitan of Great Britain -Pilsbury deal. “The Grand Metropolitan of Great Britain decided to buy Pillsbury Company for $5.7 billion in order to acquire well-known brands like Burger King and Haagen-Dazs. The amount of time and money required to build a brand with such high values was the driving force behind this transaction.” Companies have come to understand the value of focusing their expansion efforts on those with a more robust intellectual property portfolio.

In response to the assurance that IP reforms were taking place around the world as an international mandate to meet the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, there was a splurge in investment in developing and acquiring intellectual property. Despite the growing attention paid to intellectual property (IP), companies still neglect or fail to thoroughly investigate the IP assets of their targets. The target company, on the other hand, may overlook the value of its intellectual property (IP) assets when calculating the total value of its corporate asset for negotiations. Even though the situation has improved over time, intangible assets still have a high risk of being undervalued.

How IP drives M&A

To remain competitive in today’s business world, companies are increasingly focusing on acquiring technological capabilities. Increasing technological prowess is a two-way street. A company can make better products and provide better services because of it. Another benefit is that businesses are protected against cyber threats and the disruptions they can cause. Against this backdrop, intellectual property rights have emerged as a key factor in technology company M&A processes. Media, medicine, and telecommunications are all examples of industries that rely heavily on intellectual property (IP).

Growth of IP driven M&A Transaction

One of the most common methods for increasing a company’s business is through mergers and acquisitions (M&A). This could be done by acquiring the intellectual property (IP) of a competitor. As previously said, intellectual property (IP) assets are extremely valuable in today’s business world, and a strong IP portfolio is now a prerequisite for success. A strategy is needed to deal with the increasing competition in the technology sector. In 2012, Google had to acquire Motorola Mobility to thwart hostile attempts by Microsoft, Apple, and other Android competitors.

In the same way, companies in IP-intensive industries frequently use mergers and acquisitions (M&A) to bolster their IP portfolios to stay competitive. If IP is strengthened, will it have an impact on the role of IP-driven M&A? This question must be answered. The likelihood of cross-border M&A and domestic M&A involving high-tech enterprises improves when a nation has a stronger IPR system.

Assessment of IP

Intellectual property must be able to be valued independently of a company’s other assets and even sold if it is being valued. Intellectual property must be treated as a ‘stand-alone’ asset to distinguish it from other assets in the case of a business purchase or to be valued in its own right as an organically created asset. Even though intellectual property valuations are necessary for many different situations, a few things remain constant, such as the requirement that the asset is capable of being sold outright or licensed, the need for legal protection to establish the strength of any vested interest in it and provide a way to transfer or assign the asset, and finally, the need for the asset to be resilient enough to withstand loss.

Goodwill acquired through acquisition can be reduced because goodwill always needs to be amortized, but brand value can be retained in the balance sheet, giving a more realistic presentation of capitalization, which is the sole criterion for intellectual property valuation. In mergers and acquisitions, both the purchaser and the seller need to recognize and evaluate their true worth to arrive at a fair price. A valuation report does not reflect the value alone; it also explains how the value was calculated, detailing all assumptions, which gives true insight and would be of tremendous value to the buyer.

In mergers and acquisitions involving significant intellectual property assets, the value of these assets is frequently critical to the transaction’s success. As well as improving the overall appearance of a balance sheet and increasing net asset per share, the valuation of intellectual property allows for the right allocation of value to intellectual property or other readily identifiable intangible assets.

Need for Due Diligence

Assuming that IP rights are automatically transferred when one firm acquires another is a legal error. Issues of intellectual property owners may not be addressed at all by general warranties and assurances. Transactions involving private IT firms provide unique challenges in terms of intellectual property (IP). In some cases, private firms’ intellectual property (IP) rights may not be publicly available. As a result, the buyer must perform considerable legal study before purchasing a company’s intellectual property rights.

IP encompasses a wide range of things, including copyrights, patents, trademarks, and more. Each of these must be thoroughly analyzed before making a purchase decision. It is at this point that M&A consultants and IP attorneys need to coordinate their efforts. All of the target company’s intellectual property rights must be available to the buyer for use in the company’s present and future operations. Otherwise, an M&A deal is likely to be ineffective. To calculate the selling price, the selling corporation must also examine its intellectual property rights.

Conclusion

The acknowledgement of intellectual property (IP) did not proceed in a straight line. IP’s abstract character was frequently cited as a reason why it should not be recognized. As time went on, the necessity for intellectual property protection rose, and so did the need for exclusivity over ideas and concepts. As a way to foster intellectual progress and the development of socially beneficial technologies, such rights were granted to exclude others. The importance of intellectual property (IP) in mergers and acquisitions (M&A) negotiations cannot be overstated.

As previously stated, a company’s ability to defend its intellectual property rights is critical in securing such transactions, as the risks of purchasing a target company’s IP portfolio and the subsequent proliferation of counterfeit or pirated items outweigh the potential rewards. It is important to remember that attempts to improve IP reforms will always clash with the public interest and the approach to handle this conflict is to maintain a balance between the interests of both the public and private stakeholders.

References

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Moratorium under the Insolvency and Bankruptcy Code 2016 and its impact on parallel proceedings

By

Sneha Mahawar

-

May 8, 2022

0

This article is written by Taniksha Gupta pursuing a Paralegal Associate Diploma. This article has been edited by Ojuswi (Associate, Lawsikho).

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

The expression moratorium is not defined in the Insolvency and Bankruptcy Code, 2016 (“IBC”). It refers to a period during which no court deliberations for recovery, enforcement of security interests, sale or transfer of assets, or cessation of vital contractual agreements against a corporate debtor can be initiated or pursued. The scope and execution of the moratorium have left creditors perplexed about the admissibility of such processes against corporate debtors, particularly in quasi-criminal circumstances like cheque bouncing cases. Since such processes are permitted during the moratorium, creditors get two chances to collect their debts (i.e., in the insolvency proceedings as well as by initiating cheque bounce proceedings).

This article attempts to explain the concept of a moratorium and its impact on parallel proceedings.

Moratorium: Section 14

First, consider the spirit of the letter embedded in the aforementioned provision. The Insolvency and Bankruptcy Code of 2016, Section 14, reads as follows:

“14 (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:

the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;
transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

14(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

14(2A) Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified.

14(3) The provisions of sub-section (1) shall not apply to:

such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority;
a surety in a contract of guarantee to a corporate debtor.

14(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:

Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.”

Moratorium on Initiation of Liquidation Proceedings

According to Section 33(5) of the IBC “Subject to section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor: Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority.”

According to the interpretation of Section 33, there is no moratorium on the continuing of lawsuits. According to Section 33(5) of the IBC, if the liquidator wishes to institute a new suit or legal proceeding, he must obtain special approval from the adjudicating authority. Nevertheless, the liquidator can continue to explore or defend an existing proceeding without requesting approval from the adjudicating officer, thanks to the powers granted to him under Section 35(1)(k) of the IBC. It will be useful to refer to the parent Companies Act, which prohibits not only the filing of “suits or other legal proceedings,” but also their continuance.

Meaning & Definition

The Oxford dictionary defines the term as “a legal authority to debtors to postpone payment.” The term ‘moratorium’ is defined as “a cessation of an activity for an agreed period of time” in the Cambridge Dictionary. “A legally approved period of delay in the fulfilment of a legal obligation or the payment of a debt; a waiting period specified by an authority; or a suspension of activity,” according to Merriam Webster Dictionary.

The Insolvency and Bankruptcy Code, 2016 (IBC) explains a moratorium as a period during which no judicial proceedings for recovery, enforcement of security interests, sale or transfer of assets, or cancellation of key contracts against the Corporate Debtor can be launched or continued. The moratorium applied on initiation of an insolvency procedure is discussed in Section 14 of the Insolvency and Bankruptcy Code of 2016, as well as its impact on any process. It has been elevated to a position of prominence since it suspends many simultaneous insolvency actions filed against the corporation.

When an order declaring a moratorium is issued, it prohibits the institution of new litigation or the continuation of existing suits or procedures against the corporate debtor, including the execution of any judgement, decision, or order in any court of law, tribunal, or arbitration panel. The moratorium creates a “calm period” to guarantee that the already economically challenged corporate debtor maximises asset realisation and achieves a rapid resolution without being concerned about asset disbursement in simultaneous processes.

Purpose

The moratorium’s goals involve retaining the corporate debtor’s assets together throughout the insolvency proceedings, enabling the organised finalisation of the procedures envisioned throughout the insolvency proceedings, and making sure that the firm can resume as a viable business whilst creditors decide on a default settlement. The moratorium on the onset and resumption of judicial proceedings, which include debt regulatory action, helps to ensure a stance. The Moratorium protects corporate debtors not only from new recovery claims during the IRP but also from current claims that may be pending before multiple authorities. The apex court in Innoventive Industries Ltd v. ICICI Bank Ltd characterised the objective after the moratorium in IBC as “to allow the debtors with a breathing span in which he is to attempt to reorganise his business.”

Proceedings under Writs

Normally, a moratorium suspends most parallel proceedings brought by or against the corporate debtor, but when it comes to writ petitions filed in the Supreme Court or the High Courts under Article 32 or Article 226 of the Indian Constitution, a specific exception is made. Despite the fact that the article does not expressly allow for such an exception, the plain reading of the provision does. The essence of such petitions, as construed by the courts, is that they are impervious to the moratorium provisions because they concern constitutional powers and rights. The moratorium will not affect any cases brought or pending before the Supreme Court under Article 32 of the Indian Constitution, or any orders issued under Article 136 of the Indian Constitution. The embargo will have no impact on any High Court’s powers under Article 226 of the Indian Constitution.

The same was confirmed in the case of Canara Bank v. Deccan Chronicle Holdings Limited, where the appellant appealed to the NCLAT against the impugned order of the adjudicating Officer barring action for reimbursement of funds. The Appellant argued that the Adjudicating Authority lacked the ability to exclude the High Court and the Supreme Court from its jurisdiction. The NCLAT ruled that the ‘moratorium’ will not impact any suit or case that is now proceeding before the Supreme Court of India under Article 32 or Article 136 of the Indian Constitution. The High Court’s jurisdiction under Article 226 of the Indian Constitution would not be impacted by the moratorium.

Proceedings under Arbitration

Section 14(1)(a), which prohibits the execution of any order, judgement, or decree, also applies to arbitral procedures. However, in Power Grid Corporation of India Limited v. Jyoti Structures Limited, the Hon’ble Delhi High Court had to answer a peculiar question while evaluating an Application filed by Power Grid Corporation of India under Section 34 of the Arbitration and Conciliation Act, 1996 for the stay of a money decree granted in favour of Jyoti Structures Ltd. A financial creditor filed a Corporate Insolvency Resolution Process against Jyoti Structures while the section 34 petition was pending.

The Delhi High Court had to decide whether the term “proceedings” in Section 14(1)(a) of the IBC refers to all legal proceedings or is to be interpreted stringently to refer to a specific form of civil procedure, namely “debt recovery action,” which could have the effect of dispersing or reducing the debtor’s assets throughout the resolution process time frame. In this decision, the DHC concluded, among other things, that the phrase “proceedings” does not mean “all proceedings,” and that a moratorium would not extend to proceedings for the benefit of the corporate debtor. The reasoning behind this is that the assets of the corporate debtor should not be put under any further stress during the insolvency procedure.

The Hon’ble Delhi High Court used a purposive interpretation to say that “the IBC’s goal was dual: a Corporate Debtor could preserve its assets from further dissipation and strengthen its financial position by using the standstill time in Moratorium. In this context, it was determined that staying the execution of an arbitral judgement that would increase the Corporate Debtor’s financial corpus would be contrary to the IBC. As a result, it was determined that the term actions as used in section 14(1)(a) did not include all proceedings, and therefore Section 14 of the IBC would not apply to proceedings involving the Corporate Debtor.”

In the case of P Mohanraj & Ors v. Shah Brothers Ispat Pvt Ltd., the Supreme Court of India held that the position in the Delhi High Court judgement “does not state the law correctly that it is clear that a Section 34 proceeding is certainly a proceeding against the corporate debtor, which may result in an arbitral award against the corporate debtor being upheld, as a result of which, monies would be payable by the corporate debtor.” As a result, it is generally widely accepted that a proceeding under Section 34 of the Arbitration and Conciliation Act, 1996 is forbidden while the corporate debtor is subject to a moratorium.

Proceeding under the Negotiable Instruments Act

The Hon’ble High Court of Calcutta refused to quash the criminal charge under Section 138 of the NI Act simply because of a moratorium announced under Section 14 of the Code in MBL Infrastructure Ltd. & Anr. v. Sri Manik Chand Somani, holding that:

“The declaration of a moratorium does not prevent criminal proceedings under Section 138/141 of the Negotiable Instruments Act from continuing.”

The Hon’ble Bombay High Court declared in Tayal Cotton Pvt. Ltd. v. The State of Maharashtra that the concept of ejusdem generis must be considered and held that as a result, adopting this principle of interpretation, it is impossible to give any other interpretation to this provision in Section 14 of the Code then that it merely forbids a suit or a procedure of a similar character and does not include any criminal proceeding.

Lately, processes under Section 138 of the Negotiable Instruments Act, 1881, were an exemption to the moratorium, when the NCLAT permitted Section 138 of the NI Act processes to operate throughout the moratorium in the case of Shah Brothers Ispat Pvt Ltd v P Mohanraj & Ors.

On appeal to the Supreme Court, the Apex Court decided in a three-judge bench decision that where the Adjudicating Authority issues a moratorium order in an insolvency petition, concurrent processes under Section 138 of the Negotiable Instrument Act, 1881 are halted. The Supreme Court of India emphasised the legislative meaning behind such a ruling, stating that it is now a settled position that parallel procedures under Section 138 of the NI Act will not be allowed to proceed. The Apex court held in an explanation of Chapter XVII of the Negotiable Instruments Act, 1881, that “it is clear that a quasi-criminal proceeding under Chapter XVII of the Negotiable Instruments Act would, given the object and context of Section14 of the IBC, amount to a proceeding within the meaning of Section14 (1)(a), and that the moratorium would therefore attach to such proceeding.”

Thus, in the Shah Brothers’ decision, the Supreme Court deferred to the NCLAT’s rationale and interpretation of Section 138 of the NI Act,1881 and resolved the contradictory positions on the effect of the moratorium on Section 138 of the NI Act,1881 proceedings. After reviewing the plethora of decisions cited by the parties, the Hon’ble Supreme Court of India concluded that Section 14’s scope is broad and that proceedings brought under Sections 138/141 of the NI Act against a corporate debtor will be subject to the moratorium imposed by Section 14(1)(a) of the IB Code.

Tax Proceedings

Pre-assessment and post-assessment tax operations have to be separated into two groups. While assessment deliberations are regarded to be beyond the scope of the moratorium, tax recovery proceedings will indeed fall under the umbrella of the moratorium. This difference may appear to be improper, but in proceedings under the income tax act and some other analogous acts, such as sales tax, excise, and so on, prosecutions for determining the rights or obligations of businesses and other participants may have to be ascertained first by officials created specifically under the specific statute, so when it gets to recover dues, the winding-up court should be considered. The legislation aimed for the assets of a company in liquidation to be handled in one location by the NCLT, which would be the perfect situation to disburse the finances of the companies adequately.

While the tax authorities may resume the evaluation proceedings to ascertain the amount of their assertion, execution, distress, or recovery is not permitted. Statutory authorities fall under the definition of “operational creditors” (Section 5(20) of the IBC), and as a result, they must file a claim with the liquidator in the appropriate form to recover their debts. The liquidator will authenticate their claim and pay them only in compliance with Section 53 of the IBC’s priority system.

Conclusion

It has become apparent that after a moratorium has been announced, any process that could harm the company’s cash or assets cannot be allowed to take place. The purpose of the moratorium provision in the Insolvency and Bankruptcy Code, 2016 is to give the troubled corporate debtor some breathing room and to prevent further deterioration of the debtor’s assets and resources. The moratorium phase also enables the corporate debtor to devise the most appropriate resolution plan in accordance with the IBC’s rules and to recover the highest benefit of the company’s assets. In different parallel processes, courts have affirmed the primacy of the moratorium under the IBC using the same argument. There are a few gaps and disagreements that need to be resolved by the courts, but the existing stance puts moratorium provisions on a level higher than numerous other pieces of legislation. After reviewing a few case laws and the rationale of the courts throughout the parallel processes, it is clear that there is still some uncertainty that has to be resolved, as the concept of what moratorium and what procedures will come under the purview of section 14 must be examined. There is little doubt that the rule is broad and significantly more powerful, but there are a few concerns that will need to be addressed over time.

References

https://www.mondaq.com/india/trials-appeals-compensation/1074702/the-effect-of-moratorium-on-parallel-criminal-proceedings

https://www.reedlaw.in/post/moratorium-under-ibc-its-effect-on-parallel-proceedings#:~:text=The%20moratorium%20provides%20the%20’calm,parallel%20proceedings%20if%20taken%20place

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Difference between abetment and criminal conspiracy

By

Sneha Mahawar

-

May 8, 2022

0

This article is written by Koushik Chittella of Dr. Ambedkar Global Law Institute, Tirupati and Nikunj Arora of Amity Law School, Noida. This article briefly discusses the concepts of abetment and criminal conspiracy including different judgements delivered by the Supreme Court so that the readers acquire complete knowledge regarding these topics. The last section of this article completely deals with the differences between abetment and criminal conspiracy.

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

Many people think that planning and arranging the required things to commit a crime but not doing it later due to any reason is not a crime. But, this area of offences is called “inchoate offences”. These types of offences are incomplete. Inchoate offences contain the anticipation and preparation required to commit the crime even when the crime is not committed later. Some examples of inchoate (incomplete) offences include abetment and criminal conspiracy

Chapter V of the Indian Penal Code, 1860 deals with laws related to the people who instigate and help others in committing crimes. The offence of abetment is the instigation by a person to commit a crime or an illegal act. It is defined under Section 107 of the Indian Penal Code, 1860. Criminal conspiracy is the agreement between two or more persons to commit an act by illegal means. It was added in the year 1870 with the Criminal Amendment Act, 1913, introducing Section 120-A to the Code.

Abetment

Abetment is simply defined as the instigation or provocation by one person to another to commit a crime. Engaging in a conspiracy to commit a crime and any act done in furtherance is also said as abetment. The literal meaning of “abet” is to aid and encourage someone to do an act. The Apex Court in its judgement of Kartar Singh v. State of Punjab (1961) defined the term ‘abet’ as aid, and to help others in committing an illegal act. Whereas conspiracy is derived from two latin words ‘con’ meaning together, ‘spirare’ meaning to breathe.

Abetment is discussed from Section 107 to 120 of the Indian Penal Code, 1860. The term abetment is defined in Section 107, which emphasizes that abetment is the willingness of someone to instigate, assist, or encourage the execution of his criminal intent.

Take an example of three persons A, B, and C. A and B plan on killing C wherein A draws the plan and sets the traps to kill C. B knowing the whole scenario helps A to create gun traps. This is also considered an abetment wherein he helped the offender (A) in the commission of crime. The person instigating, encouraging, or promoting another to do so is called an ‘abettor’. The person who commits the offence is called the ‘principal offender’. In the above example, A is the principal offender, and B is the abettor. There is a significant difference between a person abetting and the actual perpetrator of the offence under criminal law. However, in a criminal conspiracy, A and B make an agreement to kill C and may or may not contribute equally but help each other as they have the same intention.

Elements of abetment

Abetment is constituted by:

Instigating a person to commit an act punishable, or
Engaging in any conspiracy to commit so,
Intentionally aiding to commit an offence.

Abetment primarily depends on the intention of the abettor. But to be liable for the offence, the prosecution, under Section 107 of the Indian Penal Code must prove the presence of mens rea (a guilty mind) with an actus reus (wrongful act). It must be noted that the words uttered by a person in a state of anger cannot be considered as any type of instigation or encouragement as it is impossible for a prudent man to control his words in critical moments of anger, whereas in a conspiracy, both the conspirators will have the knowledge of the commission of a crime. They contribute equally and share the actions of the conspiracy which makes them liable for the same.

Mens Rea

Mens rea (a guilty mind) is an important element in committing any crime. In the case of abetment, both the persons, i.e., abettor and principal offender must have the mental element, i.e., mens rea. It is impossible to commit abetment without a guilty mind. An abettor might help with the commission of a crime in two ways, directly or indirectly. He can directly help by buying and handing the pistol to commit the offence or help indirectly by the commission of an act which would be an offence amounting to a crime, whereas in the case of a conspiracy, the mental element is critically examined and the agreement between the parties to commit a crime is carefully evaluated by the court before convicting a person. The importance of mens rea is detailed by the honourable Court in the case of Thakore Nitaben v. State of Gujarat (2017).

Knowledge of Crime

Another important element in constituting a crime is the complete knowledge of that crime. It is crucial to note that the person committing an act that amounts to an offence must hold complete knowledge of that offence being committed by some other person who will be the principal offender. Any court hearing the case of abetment critically evaluates the presence of his knowledge of crime and the mental element (mens rea). If the person has both the elements and has engaged in the offence deliberately even after knowing the consequences of the act, he will be made liable for the offence of abetment, whereas in a criminal conspiracy, knowledge is an element examined after the mental element, the reason being the commission of a crime also depends on the knowledge. In most cases the conspirators will have complete knowledge of the crime, so the knowledge of the crime is given second importance.

Abetment under Section 107 of the Indian Penal Code

In the Indian Penal Code, abetment is defined under Section 107.

In simple words, it can be said as a person who instigates another to do an act illegal in its own nature or who intentionally engages in doing of the thing and wilfully aids others to do some illegal act is said to have committed the offence of abetment.

Punishment for abetment under the India Penal Code

In the Indian Penal Code, the Chapter on the abetment contains 15 Sections from Section 107 to Section 120. Section 109 deals with punishment for abetment when no express provision is available in the Code. The person who abets gets the same punishment as the principal offender only if the crime is done at the instigation of the abettor. The punishment for the act mentioned above is the same as the punishment for abetment under Section 117 whereas a conspiracy is defined under Section 120-A and the punishment for a conspiracy is given under Section 120-B.

Since people are conditioned to believe that only those who commit the crime will be punished, the concept of abetment being tried as a separate offence and being punished may sound very strange to the public. Throughout the Indian Penal Code, different punishments are outlined clearly and exhaustively according to their Sections that explain the different types of punishments. These include:

Section 109: As stipulated in this Section, a person who abets an offence receives the same punishment as the primary perpetrator of the crime if the actus reus of the principal offender was caused by the abettor’s inducement.

In the event that the abettor is absent at the time the offence is committed, the provisions of Section 109 remain applicable. The only requirements are that he has either facilitated or incited the commission of the offence or has been involved in a conspiracy to commit the offence. Additionally, he should have committed some unlawful act or exclusion, in accordance with the conspiracy, or intentionally aided the commission of the offence through an act or oversight.

In this Section, it is explained that abetment is punishable with the same discipline as the original offence if the Penal Code has not independently addressed the punishment as such. There is no requirement for instigation to be framed in a specific way or to be expressed only in words under the law. Conduct or behaviour can be used as instigation. Each case is unique, so determining if instigation occurred or not will depend on its particular facts.

Law does not require the prosecution to prove that the suspect’s true intention was to instigate and nothing more. As long as there was an instigation and the offence was committed, or if it was likely to be committed if the main offender had the same intention and knowledge as the thing that was likely to have been done by the person who was instigated. A person can only be held liable for abetment by instigation if these conditions are satisfied. Additionally, the abetted act must be accomplished as the result of the abetment, in accordance with the Explanation of this Section.

Section 110: Under Section 110, even if an abettor commits a crime with a different intent from the main perpetrator, he or she will still be held accountable for the punishment provided for the offence perpetrated by them. In accordance with this Section, an individual abetted does not have any liability.
Section 111: This Section revolves around the phrase “each man is deemed to intend the corollary outcomes of his act.” If one man instigates another to commit specific wrongdoing, and the latter, in response to such instigation, commits not only that wrongdoing but also another wrongdoing in furtherance of it, the former is criminally liable as an abettor in regard to the latter
Section 112: As a result of Section 112, an abettor is held liable for both the offence abetted and the offence committed. By examining Sections 111, 112 and 133 together, it is obvious that if an individual abets another in the commission of an offense and the principal goes further and accomplishes something else that has an alternative outcome than that intended by the abettor and renders the offence more serious, the abettor is responsible for the consequences.

This inquiry pertains to whether the abettor, if he were a sensible man at the time of being induced or if he had been deliberately aiding the main perpetrator, could have anticipated the likely results of his actions.

Section 113: It is important to read Section 113 in conjunction with Section 111. As part of Section 111, the act of actus reus is accommodated, even though its impact is different from that of the act abetted. This part of the law handles situations in which the act of actus reus is equivalent to the act abetted, but its impact is not the same.
Section 114: This Section is possibly only brought into activity when conditions adding up to the abetment of specific wrongdoing have first been proved, and after that, the presence of the accused at the commission for that wrongdoing is demonstrated furthermore. Section 114 talks about the case, where there has been the wrongdoing of abetment, however, where additionally there has been the real commission of the wrongdoing abetted and the abettor has been present there, and the manner by which it manages such a case is this. Rather than the wrongdoing being still abetment with circumstances of aggravation, the wrongdoing turns into the very wrongdoing abetted. The Section is clearly not punitory.

The provisions of Section 114 aren’t applicable in every situation in which an abettor is present at the commission of the crime abetted. In contrast to Section 109, which explains abetment, Section 114 explains abetment without the abettor being present at the time of the offence.

There is a difference between Section 34 and Section 114. Specifically, under Section 34, where a criminal act is done by multiple people, in order to achieve a common goal, each person is responsible as if it were finished by themselves; therefore, if two or more people are present, assisting and abetting in the commission of a murder, each will be tried as the main perpetrator for the crime, however, it will probably be difficult to determine who actually committed the crime.

The purpose of Section 114 is to address the situation whereby an individual, prior to committing the wrongful act, renders himself liable as an abettor, is present at the time of the actus reus, but does not actively participate in it. Section 34 does not cover the act of executing an order of one person by another by only instigating the act of the other.

Section 115: As a result of Section 115, the abetment of certain crimes is considered a criminal offence, regardless of whether the crime was actually committed or not.

There is a possibility of imprisonment for a minimum of seven years, and a fine will also be imposed. Moreover, if an abettor commits an act for which the abettor is liable as a result of the abetment, causing injury to any person, the abettor shall be subject to imprisonment of either description, such that the term may reach fourteen years, and shall also be subject to a fine.

Types of abetment

The Indian Criminal Law recognizes three types of abetment. They are:

Abetment by Instigation
Abetment by Conspiracy
Abetment by Intentional Aid

Abetment by Instigation

Any person instigating/encouraging another to do a crime is said to commit the offence by instigation. Instigation might be done by doing any act that provokes someone to do something that is illegal. Take an example of abetment of a child to commit suicide wherein the abettor has done an act like capturing his private browsing history such that the child has no way of getting out of that situation. This act of the abettor is known as abetment by instigation where he instigated the child to commit suicide. Even though he didn’t mean for that to happen, he is liable for abetment.

Jamuna Singh v. State of Bihar (1967)

In the instant case, the Apex Court has mentioned that the offence may or may not be committed but it can be tried when the instigation by the abettor is proved. The Court clearly mentioned that the offence of abetment by instigation can be tried when the instigation happens but it does not require the offence to be committed.

Abetment by Conspiracy

The second type of abetment is abetment by conspiracy wherein the person does an act or an illegal omission by engaging with two or more persons. Abetment by conspiracy is a case where abetment and conspiracy both are present in a single case. The prosecution tries the accused for both abetment and conspiracy. It is at the sole discretion of the court whether to convict the accused for conspiracy or only for the offence of abetment. Dowry death cases are perfect examples of abetment by conspiracy.

Noor Mohammad Momin v. State of Maharashtra (1971)

In the instant case, Noor Mohammad is accused of abetment under Section 109 of the code. He, along with 3 others committed a murder for which the Apex Court mentioned that the ambit of criminal conspiracy has a wider range of applicability than the offence of abetment in this case.

Abetment by Intentional Aid

Abetting a person to commit a crime by aiding/helping him with full knowledge directly or indirectly is abetment by aiding. Take an example of a security guard who wilfully leaves keys at the doorstep so that the thugs can rob the house. He helped them to get into the house, hence it is abetment by aid.

Some important cases

Chitresh Kumar Chopra v. State (2009)

In this case, the abettor instigated and annoyed the person who took a debt for business which in turn made him commit suicide due to the pressure. The Court in this case laid down that abetment of suicide and euthanasia is a crime and made him liable under Section 306 of the Indian Penal Code, 1860.

Tejsingh v.State of Rajasthan (1957)

This case is one of the oldest cases of abetment where the victim committed Sati (Sati is an old Hindu practice where a widow sacrifices herself by sitting on top of her deceased husband’s funeral pyre). The accused in the case provoked her by pronouncing slogans of sati. The judgement made the accused liable for abetment of suicide under Section 106 of the Penal Code.

Who is an abettor

Abettor is discussed in Section 108. The term ‘abettor’ refers to a person who is actively involved in the commission of an offence, or who actively participates in the commission of a certain act that would be an offense if committed by a person with the same mental capacity or knowledge as that of the abettor.

The following are the propositions concerning abetment, which are contained in Section 108:

Despite the fact that the abettor may not himself be bound to commit the illegal omission, abetment can still constitute an offense. When a public servant commits an illegal omission of duty governed by the code and a private party encourages him, the private party abets the offence of which the public servant is guilty, though the private party could not himself have committed the offence.
An act abetted need not be committed for the offence of abetment to be committed. Abetment relies on the intention of the abetter, not the act itself.
There is no requirement that the person abetted be capable by law of committing an offence, or have the same intention or knowledge of the offence as that of the abettor in order to constitute the offence of abetment. Regardless of the criminal intention of the abettor, abetment is a substantive offence; all that is required is the mere instigation to commit an offence. The abettee, meaning the person whose act the abettor abets, is not held to the same legal standard.
When the abetment of an offence is an offence the abetment of such an abetment is also an offence.
Conspiracy may constitute the offence of abetment without the abettor participating in the underlying criminal act. In such a case, it is sufficient for the person to be engaged in the conspiracy in which the offence is committed.

An abetment exists when a person, in India, abets the commission of any act outside of India that would be a crime if committed in India as defined in Section 108A of the IPC.

An abettor is liable under Section 111 of the Indian Penal Code. By virtue of this Section, abettor’s responsibilities are the same as that of a principal offender. Exceptions exist when acts are completed under the influence of an instigation, conspiracy, or intentional aid and as a probable consequence of the abetment. It is abetment of a crime that has a probable consequence which can reasonably be expected to be forthcoming from the abetment. In addition, proof of the probable consequences is crucial. In the absence of evidence supporting what the abettor claimed, the abettor cannot be held responsible for the actions taken.

Abettor will also be held liable for the act he did on abetment, regardless of whether the act was the same or not, as long as his intention is the same and he knew that it would be done. An abettor need not always be tried at the same trial as the principal offender and must be convicted of the offense charged before he or she can be charged with abetment of that crime. As a general rule, abetment cannot be proven until the act has been committed. However, this proposition is not unconditional. In some cases, the proof may not be sufficient to convict the offender, but it may suffice to convict the abettor. If the offender is acquitted of the charge on the basis of the benefit of the doubt, the court can convict the abettor on the basis of the evidence and facts.

Criminal Conspiracy

The English law defines conspiracy as an agreement made between two persons to do something which is harmful to others, which is contrary to the existing law. The illegal combination of the persons to do the offence itself is the gist of the offence.

Mulcahy v. Regina (1868)

In this case, the parties make an agreement to carry out illegal immigration. This case was the reason to include the offence of criminal conspiracy into the Indian Penal Code with the amendment in the year 1870. The Court gave the following statement “When two or more persons agree to carry a criminal activity, the very plot is the criminal act in itself, the conspiracy”

Criminal Conspiracy is a major offence and is usually charged alongside another offence but abetment is not a substantive offence. Take an example of murder wherein A and B to agree to kill C for his property. Here, the criminal conspiracy will be tried alongside Section 302, i.e., Murder but when we take an example where A abets B to kill C, A will only be charged for abetment and B will be charged for murder.

Criminal Conspiracy under the Indian Penal Code, 1860

It is defined under Section 120A. Criminal conspiracy is defined by Section 120A of the I.P.C. as an agreement between two or more persons to do or cause to be done an illegal act, or an act that is not illegal by illegal means. According to Section 43, the term “illegal” refers to anything that is an offence or that is prohibited or that generates grounds for civil action.

As noted in the Proviso attached to Section 120A, a mere agreement to commit an offense constitutes criminal conspiracy, and no overt act or omission is required to establish criminal conspiracy. This is necessary only when there is a desire to commit an illegal act which is not an offense. It does not matter whether the illegal act is the main purpose of the agreement or is only incidental.

In simple words, it can be said as an agreement between two or more persons to commit an act illegal in its nature, it is immaterial whether the act committed is the ultimate object of such conspiracy, or it is merely incidental to that object they are said to commit the offence of criminal conspiracy.

State of Andhra Pradesh v. Ganeswara Rao (1963)

In the instant case, the Apex Court allowed the Special Leave Petition made by the party and has set aside the acquittal of accused who were conspirators of murder. The case was remanded and the High Court was asked to consider and mark the observations made by the Apex Court.

Essentials of a conspiracy

The court has stated some broad essentials in the case of Davendera Pal Singh v. NCT of Delhi (2002) that amounts to criminal conspiracy. They are:

Object to be accompanied
Plan to accomplish
Agreement between two persons to accomplish the object herein

Punishment under the Indian Penal Code

Punishment is defined under Section 120-B of the code. It mentions that a party to a conspiracy, when committing an offence punishable with death, shall be punished with imprisonment for life or rigorous imprisonment for a period of 2 years. Any conspiracy other than an offence mentioned in the code shall be punished with imprisonment for a period not exceeding six months or a fine or both.

To try a person for criminal conspiracy, the prosecution must prove the presence of these elements:

Legal or an illegal act committed by illegal means.
Agreement between two or more persons to commit an act.
Meeting of minds.
A Conviction for the same.

Unlike abetment, it is hard to prove the offence of criminal conspiracy. The prosecution should prove the meeting of minds between the parties to a criminal conspiracy. But in an abetment, the accused will state the name of the abettor who is responsible in the initial stage. The evidence used in proving a conspiracy is “circumstantial evidence”. Circumstantial evidence is evidence-based on direct relevant facts of the case. It is considered to be direct evidence in most cases.

One of the major observations of criminal conspiracy was made by the apex court in the following case:

Parveen v. State of Haryana (2020)

In the instant case, the police were moving 4 accused in a train wherein some thugs entered the compartment and shot a policeman with a local rifle and tried to save the accused. When the police caught them, the primary accused were tried with criminal conspiracy. The High Court passed a judgement and decided the presence of a criminal conspiracy in the case. One of the accused Parveen (Sonu) filed an SLP (Special Leave Petition) before the Supreme Court to consider his case. The Apex Court heard the case and set aside the judgement given by the High Court by giving a statement that it is not safe to convict a person for a criminal conspiracy in absence of circumstantial evidence proving a meeting of minds between the parties.

Knowledge of the offence

Another important element in proving a conspiracy is the presence of complete knowledge of the crime. The Supreme Court has specified the importance of knowledge of the offence and has given a statement that having the knowledge is enough to try a person for conspiracy under Section 120A of the IPC.

State of Maharashtra v. Somnath Thappa (1996)

The Apex Court in the instant case has specified the meaning and the broad essential of criminal conspiracy as knowledge of the offence. To establish a charge for criminal conspiracy, the accused must have the knowledge of the crime happening as a consequence of his act. The Court punished the conspirators who had a guilty intention under Section 120A of the Indian Penal Code.

Section 10 of Indian Evidence Act, 1872

Section 10 of the Indian Evidence Act, 1872 states that once a conspiracy to commit an illegal act has been proven, the acts of one conspirator become the acts of other conspirators. As part of a conspiracy case, evidence must be admissible under Section 10. Any statement, act, or writing of any conspirator, even if it relates to their common intention, can be used against all of them to prove the existence of the conspiracy or prove that they were involved. Prior to the admission of such a fact, the following prerequisites must be met:

Two or more persons must have reasonable grounds to believe they have conspired to commit a crime or a wrong that can be prosecuted.
Any statement, act, or writing made by any one of them about their common intent can be used against the others only if it was made after the time the intention was first formed.

Due to the nature of the crime, it has been held in Badri Rai v. State (1958) that section 10 of the evidence act has been intentionally drafted so as to allow such acts and statements from the co-conspirator to be admissible against the entire group of defendants. It takes secrecy and darkness to conceive and execute a conspiracy. Consequently, it is not realistic for the prosecution to link each isolated act or statement of one accused with those of the other accused, unless there is some common link tying them together. In Emperor v. Shafi Ahmed (1925), it was ruled that one conspirator is responsible for what the other conspirator does in furtherance of the common intention harboured by them both, and each conspirator is responsible for what acts his fellow conspirator commits.

Difference between abetment and criminal conspiracy

The following points highlights the difference between abetment and criminal conspiracy:

The number of persons committing an offence varies in an abetment and a conspiracy. In an abetment, one person influences, provokes another to commit an illegal act whereas in a conspiracy two or more persons enter into an agreement to commit that offence.
The offence of conspiracy is substantive whereas abetment is not on its own a substantive offence.
Abetment is defined under Section 107 of the IPC. Whereas criminal conspiracy is defined under Section 120-A of the IPC.
To be tried for abetment, the person must have committed the act of aiding or instigating, or helping the principal offender. But, in the case of a conspiracy, it is irrespective of the commission of the offence. The prosecution can try a person for having the agreement and the knowledge of the act.
The parties to a conspiracy are called conspirators. But in the case of abetment, there are two persons called the abettor and the principal offender.
Abettor is not a principal offender whereas a conspirator (accused) is a principal offender.
Based on the stretch of the offence committed, the magistrate whether to award bail to the accused.
Abetment can be done in three ways whereas conspiracy is a method of abetment.
It can be said that abetment is the genus, whereas conspiracy is a species.
The concept of criminal conspiracy has a wider jurisdiction in most cases than of abetment.

Abetment	Criminal conspiracy
Parties to abetment are abettor and principal offender	Parties to a conspiracy are called conspirators
It is defined under Section 107 of the Indian Penal Code, 1860	It is defined under Section 120- A of the Indian Penal Code
Abettor is not the principal offender	A conspirator is the principal offender
Abetment is the Genus	Conspiracy is the species
It is a substantive offence	It is not a substantive offence
Abettor may not get the same punishment as the principal offender	All the conspirators in a case, get the same punishment

In India, the Supreme Court and other leading courts, as well as the Indian Penal Code, highlight the following main differences:

An abetment involves engaging or employing another person for the commission of an offence. The abettor, i.e., the person who aids and abets, is called the abettor, while the principal offender, that is, the one committing the offence, is called the principal offender, and conspiracy refers to a course or series of actions whereby an agreement is made between two or more persons for the commission of an illegal act or for doing/committing a lawful/legal act by illegal means. In that agreement, the parties are known as Conspirators.
An abetment is an offence in which a merely conspiratorial combination or agreement between the conspirators is not sufficient, but action or omission must occur in order to accomplish the goal, but a conspiratorial agreement suffices in order to commit a crime. As a result, an overt act is needed in case of abetment by conspiracy.
In abetment, individuals can commit the act, while in a conspiracy, it requires two or more to commit it.
When abetment takes place, a sanction from the competent authorities is not required to proceed against the abettors, since they merely assisted in the commission of the crime. In a conspiracy, the perpetrators of the crime must be sanctioned by competent authorities in order to be prosecuted.
Abetment belongs to a genus, while the conspiracy belongs to a species. Criminal conspiracy is punishable as a substantive offense under Section 120B, while abetment per se is not. It is possible to commit abatement in many ways such as instigation, conspiracy, intentional aid, etc., but conspiracy is one of them.
When the offence conspired to be committed already falls within the scope of the IPC, section 120B will not apply. Likewise, when a conspiracy amounts to abetment under Section 107, it is not necessary to invoke Section 120A and 120B since the code has specifically provided that such abetment can be punishable by Section 109,114, 115 and 116, IPC. In that case, it is unnecessary to frame a charge under section 120-B when a charge under Section 107 exists.
As a result of the close relationship between conspiracy, incitement, and abetment, the substantive offence of criminal conspiracy has an amplitude that is wider than that of abetment by conspiracy under Section 107.

Specifically, if we talk about the criminal conspiracy and abetement by conspiracy, the difference may seem to be narrow. The criminal conspiracy is addressed in Section 120A and abetment by a conspiracy in Section 107. As in criminal conspiracy, the difference lies in the presence of an agreement, whereas in abetment by conspiracy, a private act is necessary to hold the accused liable.

In its explanation of the difference between a conspiracy included in Section 107, second clause, and the provision of the conspiracy found in Section 120-A, several courts have explained that in the former offence, a mere combination of persons or agreement between them is not sufficient. The conspiracy must be at the forefront of the act or omission in order to commit the crime conspired for; in the latter case, there need only be an agreement, if it is to commit an offence. Once an act or illegal omission occurs pursuant to a conspiracy to commit an offence, the conspirators will become guilty of abetting the offence.

Abetment by conspiracy is proved by the prosecution demonstrating that the abettor initiated the act of doing a certain thing or conspired with another person or persons to do that act or actually aided that act or omission by means of an act or illegal omission. There is a greater amplitude to criminal conspiracy than to abetment by conspiracy.

How Judiciary differentiated between criminal conspiracy and abetment

In Pramatha Nath Talukdarv. Saroj Ranjan Sarkar (1961), the court held that the essence of criminal conspiracy lies in the intention to carry out an illegal act by committing an illegal act. An agreement to commit an offence constitutes a criminal conspiracy. Nevertheless, in cases where the agreement is to do an illegal act but it is not an offence or done by illegal means, some other action is needed. As such, there is a distinction between an abetment by conspiracy and a criminal conspiracy in that they involve agreement to commit an offence. Simple agreement does not constitute abetment by conspiracy. An act or omission must be performed in order to carry out the conspiracy. However, in the case of criminal conspiracy the act itself is the crime. It is the agreement or plot that constitutes the crime.

In Kehar Singh v. State (Delhi Administration) (1988) The Supreme Court held that there must be evidence of more than a simple conspiracy in order for there to be abetment by conspiracy. Once a provision of Section 120 B charge fails, it is necessary that some overt act be committed by the appellants to convict them.

In Saurendra Mohan Basu v. Saroj Ranjan Sarkar (1960) the court stated Section 196A of the Code of Criminal Procedure (CrPC) does not indicate that the offense of abetment by conspiracy requires a previous sanction under that section. Such previous sanctions are necessary only in cases where there is an allegation of conspiracy pure and simple, whether it be to commit an indictable or non-indictable offence or any illicit act. In addition, the Court held that a previous sanction under Section196 A is not required to take cognizance of the offence of abetment of forgery.

Conclusion

Choate offences are those that are complete and the 4 stages of the crime, the illegal act is done by the parties. If the offence is not committed, but all the stages of planning and preparation are done, it is considered to be an inchoate or incomplete offence. Abetment and criminal conspiracy are two offences that are mostly seen as inchoate offences.

The penal law of India has all the required provisions that a country must have, but the execution of the same is not being conducted in the right way and lacks professionalism. The laws relating to criminal conspiracy and abetment need to be revamped so that social welfare can be easily achieved. The courts should make sure that the quality of justice provided to the public is right as the crime rates in the country have been increasing massively.

References

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Crimes against humanity : all you need to know

By

Rachit Garg

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May 7, 2022

0

This article is written by Neha Dahiya, a law student at Dr. B.R. Ambedkar National Law University, Sonipat. This article explains the origin, essentials, and various statutes related to crimes against humanity. It also seeks to distinguish between war crimes and crimes against humanity.

It has been published by Rachit Garg.

Introduction

Crimes against humanity broadly consist of those crimes which are grave in nature that take away human dignity and are committed in the context of a large-scale systematic attack on a particular group or community. From time immemorial, such crimes have been usual in wars and battles when the only motive was to win, regardless of the cost. However, WWII revealed the ghastly nature of such crimes that can degrade a person to the level of a sub-human, taking away his liberties, dignity, and all other fundamental rights. This, along with the emerging concern for human rights protection provided a fertile ground for crimes against humanity to be recognised and regulated by proper laws.

Origin of crimes against humanity

Punishing Napoleon after the Battle of Waterloo

It was after the capture of Napoleon in the Battle of Waterloo in 1815 that the international community for the first time took the initiative to condemn a leader for what could be called ‘Crimes against peace or humanity.’ Originally, Napoleon was outlawed by the Congress of Vienna for having invaded France. However, he escaped from the island where he had retired and re-entered France with an armed force. The Congress of Vienna declared that by doing this Napoleon had put himself out of “civil and social relations and that as enemy and perturbator of the world, he had incurred liability to public vengeance.”

American civil war

In order to curb the crimes being committed against humanity during wars, the first attempt was made to introduce a comprehensive code for the conduct of armies in the field called the Lieber Code of 1863. Promulgated by President Abraham Lincoln during the American Civil War, the code prescribed certain duties of a commander to prevent unnecessary atrocities. However, these regulations were not binding on them.

Brussels Protocol of 1874

The European power also realised the importance of having a code of conduct so that no grave crimes were committed against humanity during wars. It decided to bring the Brussels Protocol in 1874. It was a result of the conference convened by Czar Alexander II of Russia. Its preamble declared “that the progress of civilisation should have the effect of alleviating the calamities of war.” Also, the Institute of international law at Oxford was given the task of preparing the ‘Manual on the Laws of War on Land’.

World War I

During the First World War, the parties involved in the fight used the laws and customs of war to try and punish the members of enemy forces who were captured. The treaty entered into after the war did not talk of mere crimes against international law, but “supreme offence against international morality and the sanctity of treaties.” It indicated the ‘war’ itself was a crime. The Allies stated that “the war is the greatest crime against humanity and the freedom of peoples that any nation calling itself civilised has ever consciously committed. It is a crime committed deliberately against the life and liberties of the people.”

World War II

World War II shook the entire world. The atrocities committed in the Nazi Regime were unspeakable and they sparked international concern about the crimes against humanity. The world felt an urgent need to address this issue. Thus came the Nuremberg Charter which for the first time formally defined what constituted ‘crimes against humanity.’

Defining crimes against humanity

International Criminal Court and the Roman Statute

The UN Diplomatic Conference of Plenipotentiaries on the Establishment of an International Criminal Court adopted the Rome Statute of the International Criminal Court on 17 July 1998. The Statute outlined the jurisdiction of the ICC over crimes against humanity. The Rome conference was instrumental in establishing a universally accepted definition of such crimes.

Article VII of the Rome statute defines ‘crimes against humanity as containing few acts that when committed as a part of a widespread or systematic attack targets a civilian population. Thus, such crimes need not be perpetrated during a war, but also during peacetime like a genocide.

Elements of crimes against humanity

As per Article VII of the Rome Statute, there are three main elements of crimes against humanity. They are:

Physical element- The definition provides a list of physical acts that can be categorised as crimes against humanity. They are:

Murder;
Extermination;
Enslavement;
Deportation or forcible transfer of population;
Imprisonment or any other form of severe deprivation of physical liberty that violates the fundamentals of international law;
Torture;
Rape, sexual slavery, enforced prostitution, forced pregnancy, enforced sterilisation, or any other form of sexual violence of comparable gravity;
Persecution (on political, national, racial, cultural, religious, gender, or any other universally recognised grounds);
Enforced disappearance of persons;
Apartheid;
Other similar inhumane acts causing great suffering or injury to the body, or to mental or physical health.

2. Contextual element- These acts must be committed in the context of a widespread or systematic attack against any civilian population.

3. Mental element- The perpetrator must commit these acts with the knowledge of the attack on the particular group and that his act/action is a part of that attack.

Lacunas in the definition of crimes against humanity given by the Roman Statute

The perpetrator must act with the knowledge of the attack. But here the elements of specific intent and mens rea have not been clarified. It is not clear whether these crimes require a specific intent
It is also not certain whether these crimes should involve a policy element as including the policy element can affect the court’s jurisdiction. Also, the difference between ‘policy’ and ‘systematic attack’, if any, has not been included.
The attack is supposed to be targeted against a specific civilian population. But what categories together constitute the ‘civilian population’ is not clear.

Salient features of the notion of crimes against humanity

David Luban, in his article ‘A Theory of Crimes Against Humanity’, published in the Yale Journal of International Law, outlined four salient features of the notion of crimes against humanity. They are as follows:

Particularly odious offences- The offences that can be categorised as crimes against humanity are usually so barbarous that they violate the human dignity of the victims. For example, the concentration camps in the Nazi regime kept the Jews under abysmal conditions with no proper facilities for sanitation, food, or water. They were forced into gas chambers in herds and killed mercilessly. In such conditions, they were stripped of their identity as humans and were made to live like sub-humans. Thus, these crimes can be called crimes against humanity.
International crimes- These crimes transcend the borders and no longer remain the concern of the domestic community only. They trigger international conventions and thus permit the international community to forgo the concept of the sovereignty of individual states. As is often repeated, “injustice anywhere is a threat to justice everywhere.”
Policy element- These crimes are most often committed, abetted, or at least tolerated by the state, a de facto authority, or a politically organised group. In most cases, the ruling authorities commit such crimes under the pretext of protecting the national interests of the majority population, inflicting suffering on the minority.
Collective element- In such crimes, people are attacked not in their individual capacity. Rather, they are targeted by the virtue of being a member of a particular group or community. Individual crimes rarely form a part of crimes against humanity. It is usually a particular race, ethnic group, nationality, or religion that is targeted.

Main approaches to study crimes against humanity

Orthodox view

As per the orthodox view, the collective and policy element of the crimes is what distinguishes them from other crimes. This is what makes these crimes serious and particularly odious as they are not isolated or sporadic events. Rather, they form a part of a larger chain of systematic attacks that target people based on their identity as a part of a particular group. This is what makes them international crimes and why they cannot be left unpunished when domestic courts fail to take notice of them. These crimes are so repugnant because of the mere fact that they are committed by the state’s power over the people it is supposed to protect.

Modern view

The modern view considers the irony of the collectivist nature of these crimes against humanity because of the common understanding pertaining to human rights. It is accepted universally that human rights are supposed to protect the dignity of each and every individual human. These are universal and inalienable rights that cannot be taken away even by the state. But these rights are guaranteed to each individual human so that he/she is able to lead a minimally decent life. Thus, the modern view believes that crimes against humanity ought to be punished not because they target a particular group and that is an international concern, but because they are individual humans possessing certain human rights that ought to be protected.

Difference between war crimes and crimes against humanity

War crimes particularly are committed during times of war, be it a civil war or interstate wars. These usually happen when the established protocols, set by international agreements are breached. Crimes against humanity, on the other hand, are crimes that attack human dignity causing degradation or humiliation of humans.

War crimes can include things like summary execution, damage to private property, torture, and deporting people against their will. As per Article 147 of the Geneva Convention, these acts, when committed during the times of war constitute war crimes. Crimes against humanity usually include crimes like deliberate persecution of civilians based on factors like race, ethnicity, political beliefs, culture, or religion. They are usually committed by government officials resulting in acts of sexual violence, extermination, imprisonment, and enslavement.

War crimes are basically committed in a conflict situation witnessing massive violations of humanitarian law. However, crimes against humanity can take place during peacetime when a specific group is targeted.

War crimes are perpetrated mainly by armies and soldiers. But crimes against humanity are perpetrated by the regional or national governments.

War Crimes	Crimes against humanity
Usually occur in conflict situations or military confrontations.	They can occur both in times of peace as well as during conflict situations.
They can be committed against another nation or the citizens of one’s own country.	They are committed against a particular group identity.
This is not a systematic attack.	This is a systematic attack.
They are committed during a war when there is friction between nations.	They are committed because of enmity or hatred towards a particular group or community.

The Nuremberg Charter

Post the Second World War, the International Military Tribunal, also known as the ‘Nuremberg Tribunal’ was established by the US, Great Britain, the Soviet Union, and France through an agreement to prosecute and punish the war criminals of the European Axis. It was intended to punish the criminals for four major categories of crimes and ‘Crimes against humanity’ (which shocked the conscience of humankind by their magnitude).

The charter listed the following acts as ‘crimes against humanity’:

Murder;
Extermination;
Enslavement;
Deportation;
Other inhumane acts done against any civilian population;
Persecutions on political, racial, or religious grounds;
When such acts are done in connection with any crime against peace or any war crime.

The influence of the Nuremberg Trials on International Criminal Law

Subsequent to the coming of the Nuremberg Principles, the UN passed Resolution 96(1) on December 11, 1946, which stated that “genocide was a crime as per the International Law, against the spirit and objectives of the UN and was condemned by the civilized world”.
The world for the first time took notice of the urgency of laws regarding barbarous crimes committed against humans in wars and the need to provide justice to the victims.
The first General Assembly of the UN unanimously affirmed that “aggression, war crimes and crimes against humanity were punishable crimes, even for the head of the state.”
Recognising the universal importance of the protection of human rights, the UN issued the Universal Declaration of Human Rights in 1948.
In response to the Nuremberg principles, the Convention on the Prevention and Punishment of the Crime of Genocide of 1948 came into existence.

The Genocide Convention

The Convention on the Prevention and Punishment of the Crime of Genocide of 1948, also known as the Genocide Convention was a major milestone in upholding international human rights and holding accountable the violators. It criminalised genocide and other related activities in the international sphere. It defined ‘genocide’ as “certain acts committed with the intent to destroy, in whole or in part, a national, ethnical, racial or religious group, as such.” The Convention formulated that the states should also regulate their legal structures and laws to criminalise these acts in the domestic sphere and the ones found guilty should be tried by the courts of law of the respective countries. Thus, the crimes against humanity finally took a concrete form in the provisions of this Convention.

Why should crimes against humanity be punished

Accountability- It is based on the relational notion of responsibility as answerability. Thus, being responsible for something means being answerable for that. In even domestic laws, such laws are considered ‘public’ and hence the person who has committed a crime must be brought to answer for his crime and should be punished for it.
Breach of moral obligation- We all have a moral obligation to refrain from breaching the rights or harming other human beings. This obligation operates even in the absence of a state or a social structure prohibiting such acts.
Sanctity of human rights- Human rights are inalienable, inviolable, and universal rights. As per the Universal Declaration of Human Rights, we have been provided with certain fundamental human rights that cannot be taken away even by the state. These rights are sacred for humans and must be protected at any cost. When such crimes are committed against humanity, they strip a person of dignity as a human. The offenders of human rights must be punished.

Conclusion

Ever since World War II ended and the horrors of the Nazi regime came forward, there has been a global concern for the crimes committed against humanity. The Nuremberg Charter became the lighthouse for directing the regulations on this issue. After this, several statutes like the Genocide Convention and the UN Resolution came to punish the offenders. However, we still lack a concrete and comprehensive framework that can punish the violators and provide justice to the victims. The concern for human rights has risen and so have its violations. It is the right time for the international community to strengthen the laws and protect the sanctity of humanity and human rights.

References

Leslie C. Green, “War Crimes, Crimes against Humanity, and Command Responsibility”, 50 Naval War College Review 26-68 (1997).
Margaret McAuliffe deGuzman, “The Road from Rome: The Developing Law of Crimes against Humanity “, 22 Human Rights Quarterly 335-403 (2000).
Massimo Renzo, “Crimes Against Humanity and the Limits of International Criminal Law”, 31 Law and Philosophy 443-476 (2012).

All about contract costing

By

Rachit Garg

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May 7, 2022

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This article is written by Jaya Vats, a practising advocate, Delhi. In this article, the author discusses a detailed study on all the aspects related to contract costing. The article provides an in-depth analysis of the meaning, objectives, nature, features, types, procedures, advantages and disadvantages of contract costing.

It has been published by Rachit Garg.

Introduction

Contract costing is a costing approach used in a firm when non-repetitive contracts are executed on a regular basis. It is a type of particular order costing approach that is used for a project that lasts more than a year and is typically completed on the contractee’s preferred site. It is a contract between two parties known as a contractor (i.e., the person executing the job) and a contractee (i.e., the person for whom the job is done). Here, specific job orders are undertaken for a relatively long time frame, which may take years to complete, and billing is done after the completion of each milestone in the contract.

What is the contract costing

The phrase ‘contract costing,’ according to CIMA (Chartered Institute of Management Accountants), refers to “a type of particular order costing that applies when work is performed to the customer’s unique specifications and each order is of extended duration” (compared with those to which job costing applies). Contract costing is a particular order costing that applies if work is conducted to the customer’s special requirements and each order is of extended duration.

The task is often construction-related, and the process is comparable to job costing in general. As a result, it is a subset of job costing in which the unit of cost is a single contract and distinct identifying numbers are assigned to each contract in order to collect cost. However, contract costing is a method of job costing where a contract serves as a cost unit. The concepts of job costing apply to contract costing and are based on the same cost-determination basics. It is similar to manufacturing job costing, but the main difference is that the contract is for a longer period of time. Contract costing is less detailed and easier to understand than job costing.

Contract industries where contract costing can be suitably applied

Contract costing is appropriate for use in –

Ready-made clothes;
The healthcare industry;
Industries of manufacture;
Businesses involved in the construction of buildings, roads, ships, dams, boiler houses, bridges, and other structures;
Engineering companies, civil engineering firms, and mechanical engineering firms;

Contractors involved in railway line projects are public works contractors.

Examples of contact costing

There must be two main parties engaged in contract costing: the contractor (who completes the task) and the contractee (who receives the completed task). The cost unit in contract costing is the contract itself. Contracts are often finalised at the workplace by the contractor.

Let’s look at a simple example of a cost-plus contract. Assume Infra Constructions is awarded a contract to build a building, and the following terms are agreed upon. Infra Constructions will be compensated for the total cost of the project (estimated at $ 25 million). Profits will be 20% of the total cost of a project, up to a maximum of $ 5 million. If the project is finished within 12 months, a $ 0.5 million incentive fee will be paid.

Infra Construction successfully completed the project in eleven months and so qualified for the $ 0.5 million additional bonus.

The entire cost expended was $ 20 million, which included direct labour costs, material costs, and project overhead. The contractee received the necessary documentation, such as bills, work hours on a project, and labour cost. As a result, the contractor’s total revenue will be = $ 20 million * 20% = $ 4 million + $ 0.5 million = $ 4.5 million.

Objectives of contract costing

Contract costing has four primary goals, which are as follows:

Actual and expected prices are compared.
A thorough cost evaluation is performed in order to establish a foundation for cost-plus pricing.
Profit calculation for a long-term contract that may be taken every year.
Management assistance in resource allocation.

Nature of contract costing

Contract costing is a kind of particular order costing that is commonly used in industries wherein work is being performed to meet the special demand of the customer and each order is of extended duration, including construction, shipbuilding, superstructure for bridge, civil infrastructure, and so forth. Typically, the task is performed outside of the facility.

Increased proportion of direct cost

Many costs that are generally regarded as indirect costs may exist. Because most site activities are self-contained, these may be traced back to a contract. As a result, they can be charged directly, for example, telephone established on-site, site electricity use, site cars, transportation, wage bill (of site labour), supervisory staff compensation, and plant cost (exclusively purchased for a particular contract).

Low indirect costs

In most contracts, the principal indirect cost component is a fee for head office expenditures. Other indirect expenses include the wages of workers who are not associated with a specific contract or the compensation of supervisory personnel who oversee two or more contracts.

Cost control difficulties

The contract’s scope and magnitude provide significant challenges to cost control. These issues are common and involve material consumption and inefficiencies, embezzlement, labour supervision and utilisation, and plant and equipment damage and loss.

Surplus materials

A contract’s supplies are invoiced directly to the contract. The cost of materials not utilised is credited to the contract account at the end of the contract, and if they were transferred immediately to another contract, the new contract account is deducted. If the materials are not required immediately, they must be held and the amount deducted from a stock account.

Features of contract costing

Contract Costing has the following key features:

Parties involved: A contract has two parties: (a) a contractor who engages and performs work underneath a contract, and (b) a contractee for whom the work is conducted.
Cost unit and cost centre: The contract, for example, is the cost centre (location) and cost unit (output) in contract costing.
Site work: The majority of the work in each contract is often completed at the contract’s location.
Indirect costs: Indirect expenditures, such as administrative office expenses and common expenses, are allocated to various contracts on an as-needed basis. Depreciation of common equipment used on many contracts, for example, is allocated based on the number of days the equipment has been utilised on multiple contracts.
Penalty clause: In a few contracts, there is also a penalty clause that requires the contractor to pay the customers if the contract is not completed within the time range.
Separate accounts: For each deal, a separate account is kept to determine profit or loss. Each client has their own account, which is used to keep track of services completed, advance billings, and funds collected till date.
Customer-oriented: Every contract is unique since it is completed in accordance with the customer’s modifications or requirements.
Expenses incurred directly: The majority of the contractor’s expenditures are directly related to the site.
Profit recognition: A contract normally takes a long time to complete. Earnings recognition after contract completion may result in large changes in profit year after year.

To minimise these variations, earnings are often recognised annually based on the percentage of finalisation and the sum of national profit.

When does the method of contract costing come into play

Contract costing is a costing approach used in businesses when individual non-repetitive contracts are conducted. It is a type of individual order pricing in which work is performed in accordance with the customer’s special requirements and each order is lengthy. It is commonly used by contractors who work on construction and engineering projects such as roads, dams, buildings, canals, railway lines, bridges, city or town drainage systems, hospitals, schools, or colleges buildings or private structures, shipbuilding, and so on. In general, the contract is carried out at the location as mentioned by the customer, and in accordance with the client’s specifications. Furthermore, the time required to finish a contract is typically more than a year. The major goal of generating contract accounts is to determine the cost of each contract separately as well as the profitability of each contract.

Facets of contract costing

The following are the major characteristics of contract costing:

Such contracts are often carried out at a contract site that is separate from the contractor’s premises.
These contracts are executed on a large-scale that may span many accounting periods.
For cost determination, each contract is regarded as a single unit of cost.
More frequently than not, one contract varies from the others.
Contracts are carried out in accordance with the requirements specified by the contractee.
Because the work is done at the contract site, the majority of the expenses will be direct.
The contract is carried out by the contractor for an agreed-upon sum of money termed as the contract price.
The contractee pays the contractor in instalments based on the amount of work accomplished and confirmed as complete by the contractee’s architect or engineer.
The contractor is expected to pay a penalty if the contract is not completed within the specified time frame.
The contract may include an ‘escalation term,’ which compensates the contractor for increased costs based on inflation.

Escalation clause

The escalation clause is generally included in a contract agreement because the contractor wants to be protected from any price increases. To avoid any conflicts, the agreement describes the mechanism for calculating adjustments. To protect both the contractor and the contractee from risks, the contract can also include an escalation provision that allows for a modification in the contract price owing to a change in the usage of means of production above an agreed-upon threshold. To put it another way, this is a clause in the contract that protects the contract’s price from fluctuations in the price of labour and materials, as well as changes in the usage of production components. The purpose of this provision is to protect both parties’ interests from adverse price fluctuations. As a result, under a contract with the transportation enterprise, the cost per ton-mile will grow or dip by 10% of the current market price for any increase or drop in the value of the fuel. In this case, the contractor must provide adequate documentation of extra expenditures before the consumer is willing to refund such charges. Furthermore, the contract specifies the justification for the price level.

If indeed the escalation clause gets expanded to include greater intake or usage of quantities of goods or manpower, the contractor must satisfy the contractee that the increasing usage is not the result of his inefficiencies. This clause will also provide that if prices come down under a predetermined threshold, the contractee is subjected to a reimbursement. It is known as the de-escalation clause.

The impact of an escalation clause

Inflationary price increases are a frequent occurrence in the present era. A contract often takes longer to fulfil, and the price of materials, labour, and the plant may rise over a certain threshold during this time. In such a circumstance, the provision known as the escalation clause protects both the contractor and the contractee’s interests against future unfavourable price adjustments.

The contractee is required to absorb the higher costs resulting from such escalation under this provision. A similar condition may also apply when material and labour use surpasses a certain threshold. A de-escalation or reverse clause, which provides for a drop in the contract price and passes the advantage on to the contractee, is common.

Types of contract costing

Contracts are classified into two types:

Contracts with a fixed price

The price is normally determined and decided beforehand in this form of transaction. Tenders are typically requested to provide contract specifics in order to determine the contract price. Any further work may be invoiced individually according to the parties’ understanding. For example, there may be a clause in the contract that allows the contractor to pass on increased expenses incurred as a result of material price increases or pay awards.

Fixed cost contract with escalation cost

The FPE contract is a fixed-price contract with an escalation clause designed to deal with the economic risks that come with long-term, fixed-price remuneration. This contract allows for the upward and downward adjustment of the specified contract price in the event of certain economic situations, which are clearly outlined in the escalation clause. Its purpose is to shield the administration and the contractor from the consequences of volatile market circumstances.

Contractors might be expected to include contingency provisions in their bids or proposals if such clauses were not utilised to remove or decrease the risk of loss. The risk associated with this option is serious. If the contingency exceeds the contractor’s estimate, the contractor may be harmed, and the government may be forced to pay exorbitant charges if the contingency does not materialise.

For example, a clause in a contract states that the rent will be increased on a regular basis if the cost of living index rises. Alternatively, changes in the economy induce a period of inflation in which the costs of raw materials required to make products or services rise over a specific threshold. The presence of an escalation clause benefits both the consumer and the firm that provides the customer with products. The clause allows the firm to avoid circumstances in which goods or services must be given to the client at a loss when a change in the economy raises the cost of raw materials or other costs that are necessary to the manufacturing process.

The client gains because offering a mechanism for price rises under particular conditions implies that there is less likely to be an interruption in the delivery of those contractual items, allowing the consumer to utilise those products in whatever manner is deemed beneficial.

Contracts with a cost-plus clause

A cost-plus clause contract is the complete antithesis of a fixed price contract. A cost-plus contract is one in which the price is not agreed upon in advance for various reasons. This form of contract is used when it is hard to determine future price or cost with adequate precision due to a lack of historical records and experience or unusual situations, such as the drilling of an oil well.

Later, the contract price is determined by adding a predetermined percentage of profit to the overall contract cost. The many categories of spending to be considered in determining the contract’s cost are agreed upon in advance.

In general, the contract provides the items of expenditure to be included in the real cost as well as the proportion of profit to be added to the actual cost. This form of contract is appropriate when the contract’s expected cost cannot be calculated with an acceptable degree of precision in advance for a variety of reasons. Dams, bridges, power plants, aviation, and other government contracts are often cost plus. The contract’s records and documentation must continue to operate for customers to view and authenticate. Cost-plus contracts offer various benefits and drawbacks for both contracting parties.

Procedure

The majority of the expenditures in contract costing are basic in structure, such as materials, labour, expenses, plant, sub-contract charges, and so on. Only a small fraction of the total is levied as overhead, which is allocated appropriately. The fundamental approach for contract pricing is as follows:

Contract account: Every contract is assigned a unique number, and a different account is established for every contract.
Direct costs: The majority of a contract’s costs may be directly attributed towards the contract. All direct charges of this nature are charged to the contract account. Contract direct costs involve:

Materials,
Labour and supervision,
Direct expenses,
Plant and machinery depreciation, and
Subcontract costs.

The cost of materials utilised is deducted from the contract account. Materials may be acquired explicitly on the open market, issued from retailers, transferred from previous contracts, or supplied by the contractee himself. The value of materials returned to retailers is credited to the contract account in question. Materials may be moved from one contract to another at times. If this is the case, the amount of the materials is deducted from the recipient contract account and reimbursed from the transferring contract account.

In general, the contract is performed exclusively at the contractee, i.e., the customer’s location, rather than within the company’s facilities. As a result, labour is hired on the job site to complete the contract.

Direct expenditures are deducted from the relevant contract account when they are incurred. Hire costs for the outside plant, subcontractor’s costs, architect’s expenses, power, security, and other direct costs are examples of direct expenses.

Subcontract work is often provided as part of a contract, and payments paid on subcontract work are credited to the Contract Account. The contractor (if permitted by the contract) may delegate a portion of the project to one or more subcontractors (s). The cost in this case is a direct charge on the contract and is accounted for as such in the contract costing.

Indirect expenses: The contract account is also deducted for overhead expenses, which are often little in comparison to direct costs. Such expenses are frequently incorporated in an arbitrary manner, such as a proportion of the prime cost, materials, labour, and so on. Expenses are often limited to head administrative and storage expenses.
Transfer of materials or plant: When supplies, plants, or other commodities are moved from a contract, that value is credited to the contract account.
Contract price: The contract price too is deposited into the contract account. If an agreement is not completed before the end of the fiscal year, the contract account is debited with the value of the work as of that deadline.
Contract profit or loss: The balance of the contract account indicates profit or loss, which is moved to the financial statement i.e, the profit and loss account. However, if the contract is not finished during the fiscal year, only a portion of the profit is considered, and the remainder is maintained as a reserve to pay any potential loss on the incomplete component of the contract.

The benefits and drawbacks of contract costing

Advantages

The contractor is in charge of the contract’s costs for labour, materials, other fixed charges, and so on.
Each customer receives a contract account that details the costs expended to date and the work completed.
Control is also maintained over defects caused by a lack of quality.
Expert assistance is useless in finishing a contract, and he also assists in identifying faults before the execution of the entire contract.
Retention money becomes a source of motivation to produce high-quality work.
A sense of belonging is fostered.

Disadvantages

The main drawback is that it takes time.
The escalation clause may not be acceptable to every customer.
Profits may be calculated incorrectly due to a lack of bookkeeping.
Lack of control may result in the contractor incurring a loss on the contract.
It is necessary to keep an eye on market circumstances at all times.
Increased time causes challenges in the execution of tasks.

Distinction between contract costing, terminal costing, and job costing

When it comes to the nature of the business, contract costing, job costing, and terminal costing are all similar. Contract costing varies from job costing in that a contract is completed at a location outside the contractor’s factory, while in the case of job costing the work is completed within the contractor’s foundry.

Furthermore, determining the value of a contract is simpler than comparing the value of a work. A contract is completed outside the manufacturing grounds, and therefore, the majority of the expenditures spent by the contractor in the implementation are direct.

A task is conducted within the manufacturing site and includes the completion of multiple jobs at the same time; indirect expenditures must be allocated to these tasks on an equal basis.

Since terminal costing requires a timeframe specified by the contractee upon which a task or contract must be performed, contract costing and job costing differ from terminal costing.

In the event of a predefined time frame, the contractor must compensate the contractee for any losses incurred as a result of the postponement in accomplishing the assignment or contract.

Conclusion

With the rising variations in industries as well as the intricacies of enterprises, costing is becoming increasingly necessary for management in order to make reasonable decisions, coordinate and manage, and have efficient cost management methods in place.

Reference

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What are the foreign investment caps in Japan in different sectors

By

Sneha Mahawar

-

May 7, 2022

0

This article is written by Swaranjali Yadav pursuing a Diploma in International Business Law.

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

Recently, there has been an inclination towards nationalism in most countries, especially in the wake of the pandemic. This tendency has affected the phenomenon of globalization. There has been a trend, in recent years, to put limitations or restrictions on foreign direct investments in a country. For example, in Canada, the government has put out an order that it would scrutinize every foreign investment in companies working in the medical sector. Similarly, in India, the government has put restrictions on the FDI from neighboring countries through the requirement of a prior notice to be served to the authorities. Japan is one of the countries to join the bandwagon recently. In the years 2019 and 2020, Japan introduced some amendments to its Foreign Exchange and Foreign Trade Act (FEFTA) to impose some restrictions on investment in certain sectors. This article talks about the provisions relating to foreign investment before the amendments and some background on the Act, the amendments that have been introduced recently and some important provisions in FEFTA and the exemptions from such amendments.

Before the amendment

The Foreign Exchange and Foreign Trade Act was enacted to liberalize the economy. This was also evident in the amendments which followed after the enactment. At that time, foreign investors were only required to submit a post-acquisition report to the Ministry of Finance and the relevant authority governing the industry. The post-acquisition report was submitted whenever a foreign investor acquired a stake in a private company or 10% or more voting rights in a public company. It should be noted that the report was submitted only after the shares were acquired. The report only provided notice of the investment and did not require the consent of the ministries. However, when foreign investors acquired a stake in an industry that was deemed to be closely related to Japan’s national security or was considered to be a key industry protected by the Japanese government, they were required to obtain prior approval from the government. The list included weapons, nuclear power, aircraft, agriculture, petroleum, and leather.

After the amendment

Starting from 2018, there seems to be a shift in Japan’s policy toward foreign investors. In 2019, cybersecurity was added to the “Core Sector” list and then in 2020, pharmaceutical and medical equipment were also added, possibly to secure a stable supply of medical necessities during the pandemic. In the latter half of 2021, rare earth metals were also added to the list. Most of the important amendments have taken place in the year 2019. The “Designated Business Sector” list consists of businesses falling into the following categories- national security, public infrastructure, public safety, protected domestic industries, and also some geographical areas with respect to which there may be certain restrictions in doing business (example – Iran).

There is another list that forms part of the FEFTA and is a subset of the “Designated Business Sector”, called “Core Business Sector” which prescribes even more stringent restrictions. This list was mostly concerned with the national security in Japan which is why it is regulated more heavily. Some of the “Core Sectors” includes electricity, weapons, aircraft, space, nuclear facilities, dual-use technologies, cybersecurity, gas, telecommunications, water supply, railway services, oil, and medical-related sectors.

The Act also lays out the actions which qualify as FDI. Apart from acquiring 1% or more shares in a “designated business sector”; when the investor acquires shares of a privately owned company; when an NRI, who was a resident before, transfers his shares to the foreign investor; when a substantial change is proposed to the objects of the company; when a business is transferred from a Japanese company; giving loans beyond a certain limit to Japanese companies, and such other acts are all considered as FDI.

The ministries review the notice and then issue a suspension or amendment order if the investment by the foreign entity is likely to hamper the public order, the economy of the country, the safety of the public or security of the nation. The amendments lowered the threshold of obtaining voting rights or shares from 10% to 1% and mandated that foreign investors acquire 1% or more of voting rights or shares in any listed company present on the list of FEFTA, to obtain prior approval from the Japanese Government. In any other case, foreign investors can serve a post-acquisition notice to the government.

The amendments also expanded the scope of the definition of a “foreign investor” by including “indirect subsidiaries” in which the overseas investors hold 50% or more shares. Before the amendment, the definition of “Foreign investor” included any overseas entity whether a corporation or an individual, corporations in Japan in which such entities held more than 50% shares and direct subsidiaries of such corporations. Similarly, in the case of partnerships, if the general partner qualifies as a “foreign investor” or if they made 50% or more investment in a Japanese corporation, they will be considered as foreign investors under FEFTA.

FEFTA also regulates the shareholders’ rights and acts, where the shareholder has 1% or more shares in the company and is classified as FDI. These include major decisions that may be proposed at shareholder’ meetings such as the appointment of a director or auditor; transfer of shares, interests or the business of the company or its subsidiaries; a merger or split of the company; distribution of the business or shares of the company or its subsidiaries; discontinuance and dissolution of the company. To do any of these acts the prior notice has to be submitted.

When a foreign investment manager holds 1% or more shares in a company on behalf of the foreign investors and exercises the shareholders rights on their behalf the manager will have to submit a prior notice with the Japanese authorities. The foreign investor, on the other hand, will be relieved from such formalities if he gives up all of these rights to his manager. However, on retention of some of the rights, the foreign investor will also be required to file prior notice.

Apart from FEFTA, there are other enactments as well which regulate the FDI in Japan in certain sectors such as the Broadcast Act, Nippon Telegraph and Telephone Corporations Act, Ships Act, Radio Act, Mining Act, etc.

Exemptions

The Act also provides for exemption in some cases. These exemptions are classified into two- “Blanket Exemption” and “Regular Exemption”. The “Blanket Exemption” is available only for “foreign financial institutions” registered in Japan and are subject to their financial regulations, such as banks, insurance companies and securities firms. However, to be eligible for the exemption they have to guarantee that they (including persons closely related to them) will not become directors or auditors of the company; will not ask for transferring the business or shares or interests in its subsidiaries, merger or split of the company, distribution of the shares or the business of the company or its subsidiaries as a dividend, discontinuance of the business or its disposal; it will not try to obtain the company’s technology which has been kept from the public. The objective is to keep foreign investors out of major decisions concerning the company. This type of exemption allows foreign investors to purchase any number of shares in a Japanese company without having to serve a prior notice to the Japanese authorities. However, they will have to submit a post-acquisition report upon acquiring 10% or more shares in the company. This exemption does not extend to private companies.

The second exemption which is allowed for entities other than “foreign financial institutions” is “Regular Exemption”. The extent of the exemption depends upon the type of business the Japanese company is engaged in. If the company is engaged in a “Designated Business Sector” and not a “Core Sector” the investor will be relieved from submitting a prior notice but will have to submit a post-acquisition report if acquired shares are 1% or more. However, the conditions specified above have to be taken care of. If the company is engaged in the “Core Business Sector” the investor will be relieved from filing a prior notice if he has less than 10% shares in the company but will have to serve a post-acquisition report if he holds more than 1% shares. The investor will have to abide by the conditions mentioned above and certain other conditions also. The investors shall not be present at important board meetings such as executive meetings and committee meetings and shall not make any written proposals to the Board or the Executive Board requiring responses from them.

Conclusion

Going forward, before making any investments, the foreign investors will have to consider the restrictions that have been introduced through these slews of amendments in certain sectors in Japan, especially the “Designated Business Sectors”. Along with the general restrictions the foreign investors will also have to keep in mind the industry-specific restrictions that are levied. For example, there is a limitation on FDI beyond 20% in broadcasters and 33% in Nippon Telegraph and Telephone. There might be a need to obtain approvals from different industries involved in such cases.

However, the Japanese authorities usually do not take a hard stance against the FDI in such sectors. They often allow foreign investors to invest in the companies after receiving satisfactory notice from them before such investments. Till now, only one such proposal for investment has been rejected by the Japanese authorities. Foreign investors should make decisions based on their interests at present and in the future. The short-term and long-term effects of these amendments on the FDI and ultimately the economy of Japan will only be clear after some time has passed.

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