2010: A Round-Up

Any attempt to summarise the developments in Indian private law (and other business laws) over a calendar year will inevitably be forced, for reasons of space, to omit several events worthy of mention, especially for a year as eventful as 2010 has proved to be. The objective here is more modest, and confined to a brief overview of important judicial developments in Indian company law in 2010. For a more complete picture, of course, one should bear in mind that important doctrinal advances have been made this year in other areas of private law and taxation as well. Without attempting to be exhaustive, some of these in private law are the Supreme Court’s important pronouncement in Trimex International on subject to contracts and letters of intent, its approach to penalty and liquidated damages in Indian contract law, its clarification of the scope of “implied exclusion” of the jurisdiction of the Indian courts in foreign arbitrations and of the circumstances where a non-signatory is bound by an arbitration clause. In taxation law, the courts in 2010 have limited the role of the real income principle for NBFCs, rejected a constitutional challenge to the levy of service tax on software transfers, rejected (it is submitted correctly) the Samsung approach to s. 195 of the Income Tax Act, momentously (and, with respect, incorrectly) allowed the Revenue to proceed against Vodafone, and clarified what constitutes a sale in the course of export for the purposes of the Central Sales Tax Act and Art. 286 of the Constitution.

The focus of this brief comment – company law – has itself been the source of some controversy in 2010. In May, a Constitution Bench gave the Government a Pyrrhic victory in dismissing a challenge to the constitutionality of the National Company Law Tribunal, observing that Parts 1B and 1C of the Companies Act are in their present form unconstitutional. The Court emphasised that while Parliament is undoubtedly competent to create Tribunals, it cannot – in form or substance – exercise that competence in a manner that infringes on the independence of the judiciary. Mihir has discussed the judgment in some detail here, and it is submitted that the decision must be welcomed for it finally clarifies that the “looser” model of separation of powers that the Indian Constitution adopts is not a reason to vest judicial power in bodies that lack the characteristics associated by the Constitution with the exercise of judicial power.

At about the same time, the Court handed down its much-awaited judgment in the dispute between the Reliance brothers, on which I have commented in detail here. Sudershan Reddy J.’s concurring opinion (not dissenting, contrary to media reports) is especially interesting, since it appears in passing to endorse a far wider approach to fiduciary duties of directors than is presently accepted. Krishnaprasad has discussed this matter in more detail on this blog. The majority’s statement that the doctrine of identification is inapplicable to “large” companies may need clarification in the future, especially as to the extent to which Lord Hoffman’s classic exposition in Meridian Global is applicable in India. That is accentuated by the fact that the subsequent judgment in Iridium Motorola on identification and attribution in criminal law does not refer to Meridian either. Mr. Umakanth has commented on Iridium here.

In June, the Court had an opportunity to address one of the most complex and fascinating doctrines in company law – apparent authority and its relationship with the doctrine of indoor management. As the recent Red Jaguar case reveals, this point is not entirely clear even in England. The Supreme Court recognised, and it is submitted correctly, that the doctrine of indoor management cannot be used autonomously, but only to confine the operation of the doctrine of constructive notice – in that sense, both constructive notice (vis a vis apparent authority) and indoor management (vis a vis constructive notice) are negative doctrines, a point that has not always been appreciated.

The SEBI Takeover Code had not until recently been considered in detail by the courts, and the Supreme Court’s opinion in Daiichi, which this blog discussed here, is thus an important development. I have suggested elsewhere that close attention must be paid to two conclusions the Court reached on the scope of Regulation 2(1)(e)(2)(i), and in particular that the observation that it is necessary to establish that a certain acquisition was for the common objective or purpose of substantial acquisition of shares may constitute obiter dicta. Nevertheless, that observation is likely to prove influential especially in the High Courts and it will be interesting to observe what approach the courts take to the deeming provision in Regulation 2(1)(e)(2) when the opportunity next arises.

Perhaps the most significant development in company law this year was the decision of a Division Bench of the Bombay High Court in September in Messer Holdings, where it concluded that s. 111A of the Companies Act does not in fact render invalid restrictions on transfer of shares that are typically found in joint venture agreements. While this decision is enormously helpful for the cause of commercial certainty, it is not clear that it is consistent with the authorities or constitutes good law. The Supreme Court is no doubt likely to be asked to resolve the controversy, since a single judge of the Bombay High Court (overruled in Messer) and the Delhi High Court have reached the opposite conclusion.

All in all, it has been an eventful year for Indian private law, and 2011 is likely to continue in the same vein, for it is possible that some of the Companies Bill, the Arbitration Consultation Paper, the Direct Taxes Code and the GST Bill are enacted into law. Whether that happens next year or later, it is clear that Indian private/commercial law is set for a major overhaul. Contract, partnership and agency remain codified by classic statutes, and doctrinal advances in those respects are therefore more likely to be made in the courts than by the legislature.