Arbitration of Oppression as in Companies Act 2013: A Utopian approach.

Arbitration of Oppression as in Companies Act 2013: A Utopian approach.

Introduction.

Arbitration as an effective method for dispute resolution was realised even before India gained freedom as it was a speedy mode of solving disputes and that it was more confidential. In pursuance of this method to resolve disputes the Arbitration Act of 1940 was passed but with the evolution of time and development of international commerce. The Act simply failed to fulfil the needs of growing international commerce within the country with regards to speedy solving of disputes. The need for a new Act became relevant after the economic reforms of 1992, which opened the gates for massive foreign investment in India. Thus a new Act was formulated on the guidelines of the UNCITRAL model law and so came into picture the Arbitration and Conciliation Act. The Act was comprehensive in nature and although it proved a boon to the foreign investments. It largely ignored one of the other changes that were introduced by the reforms in 1992. By the year 1992, it was clear that the citizens could easily set up Companies with a lot of ease. The Companies Act of 1956  in order to represent this sentiment was amended in 1996 and then in the year 2000. In the meanwhile, no change was made to the Arbitration and Conciliation Act with regards to make company law disputes ADR friendly. For that sake even the Amendments made in the Companies Act 1956 till date do not reflect any intention of the legislature to let the Companies or their promoters or the investors to get the benefit of the Alternative dispute resolution mechanism even after throwing open the equity market’s doors to the general public, especially the quick and effective benefit of Arbitration. But then again the question is always open to debate that when such a huge amount of public fund is invested in the Companies and whose ownership is distributed over such a large geographical area is it suitable to rely on a quasi-judicial body for decisions regarding such funds and the future of a company? The Alternative Dispute Resolution System has its benefit too as in a situation where funds are involved priority should always be given to amicable solution for mutual benefit but it must also be noted that benefit thus received must not cause loss to the shareholder holding least number of shares in the company. The most vulnerable problem of the Companies Act 2013 is that it all comes down to the number of shares you hold so even if you wish to exercise minority rights you must have a certain number of shares or at least many of individual shareholders should come together to get themselves recognised as a ‘minority’.  Is this always possible? Besides there is already a quasi-judicial body to deal with the matters related to the Companies National Companies Law Tribunal, then how can reference to Arbitration be made? Thus a time has come to bring about a change especially with regards to Arbitrability of oppression in order to adopt a Utopian or ideal approach towards Arbitrability of oppression.

  Oppression.

 The word oppression is not specifically defined in the  Companies Act of 2013. The Act of 2013 under sections 241 and 242 does not make any attempt to define the word oppression but the legislators through the interpretations of the sections 397 and 398 of 1956 Act which corresponds with the above sections made provisions to identify what is oppression based on the acts which may be termed as oppressive in nature. The wordings of S. 241 of the Act of 2013  can be summarised as follows: (1) Any member of a company(a) who feels that the affairs of the company are being conducted in such a manner which are against public interest, prejudicial, oppressive with regards to any of its members or against interest of company or (b) such changes are not in the interest of any  person or body towards whom the company owes a liability whether by any act changes,  alters or replaces any the  of directors, or brings about a change in the ownership and if such an act is prejudicial to any class of members. Then they may apply to the tribunal seeking relief against oppression as per the provisions of S.244.

Problems with regards to S.241

Since the statute does not define the word oppression the entire burden to interpret the word oppression falls on the judiciary. Justice Wanchoo in the case of Shanti Prasad Jain v. Kallinga Tubes[1] accepted the explanation given by  Lord Cooper in the case of Elder v. Elder & Watson Ltd[2]. Which reads as follows: The essence of the matter seems to be that the conduct complained of should, at the lowest involve a visible departure from the standards of their dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely. The case further quoted a summary given in Meyer’s with regards to determining important considerations which will be applied for determining the scope of S. 241 of new Act which is summarised as follows: The conduct complained i) Must be such so as to oppress a minority of the members. ii) Must arise out of the predominant voting power of majority which may at times due to treating the affairs of the company as their own property. iii) There is a wide discretion with the court to provide an alternative remedy to winding up of the company. iv) It is not paramount whether the act committed is legal or illegal but whether the act is oppressive or not is of primary importance.  The judiciary while interpreting the word oppression has through its interpretation made it very clear that oppression can only be claimed when the act is so eminently dangerous that it is going to affect their interest in the company as its members rather than just affecting their rights enjoyed by them as the members or the owners of the company. The Companies Act 2013 does not make any attempt to define the word oppression. The difficulty arises as the line drawn by the judiciary is so fine that it is very difficult for a person to identify what is oppression. This dilemma can be seen in the case of Rights & Issues Investment trust limited v. Style Shoes Ltd.[3] It was held that increasing the voting rights of the share held by the management was not oppression. Though prima facie it looked like a case of oppression but the court took a stand that this act was beneficial to maintain the current management. Hence it was not oppression. Similarly in another English case where a minority shareholder was removed from his position of working director. Here the court held that this was not oppression as he had suffered the loss as a director and not as a member.  There are various other decisions of the court where prima facie the case looks that of oppression but from the decisions of the judiciary in all the cases brought before it that emphasis is not to be given to the act but the motive behind that act. In the case of Vijay Kumar Narang v. Prakash Coach Builders (P.) Ltd. [4]it was held that: To constitute oppression the act need not be illegal or violative of any statutory provision but the impact of the act on the complaining member is to be considered. This causes a problem as the interpretation is to be given on facts of each case by the judiciary and in the long run because of a small difference in circumstance the judge may not abide by the earlier precedents and use his own discretion. With due respect to the judiciary at times a wrong precedent may be formed and it might take years to overrule the same, besides this in the absence of definition of term oppression each and every matter will have to be referred to the National Company law Tribunal; firstly to determine whether there is oppression based on its discretion. Only after it has been established will the matter of penalty be argued upon as in S. 242 of the Act.

The second problem with regards to S. 241 (1), it states that the matter in complain is to be that of public interest. The term public interest is not defined in the Companies Act. Hence again it is left for the judiciary to interpret the term public interest. The judiciary with regards to Companies law has not made any particular comment on what is public interest is, except that in the case of State of Bihar v. Kameshwar Singh.[5] It has been observed that the word public interest is not capable of being defined precisely and has no rigid meaning and is elastic and takes its colours from the statute in which it occurs, the concept varying with the time and state of society and its needs. Thus what is public interest today may not be so as to what will be a decade later. In a previously discussed case, it is clear that a legal act may be oppressive in nature. Thus this interpretation though on a case by case basis may be beneficial but subjecting such an open-ended legal terminology such as “public interest” to oppression is a dangerous proposition.

The third problem is with regards to parties to the arbitration agreement.  Arbitration clause is a part of every agreement but since there are number of shareholders in a firm signing an arbitration agreement with each of the following shareholder will not be possible besides the term oppression can only be complained against when there is a compliance with Section 244 which speaks about the minimum number of shareholders or members or the minimum amount of shares held to make a complaint under Section 241. As per the current Arbitration Act, there must be an agreement between the parties to enforce the oppressive act by a certain shareholder holding the minimum number required shares under Section 244 or any number of shareholders. Hence the question largely remains unanswered so as to who shall be parties to the arbitration agreement?

The last problem is with regards to Section 2(4) of the Arbitration and Conciliation Act. This section limits the use of Arbitration and Conciliation Act to the limit whereupon it cannot encroach upon any other Act in place. So in a situation where the Companies Act provides for the adjudication by the Company Law Tribunal, then the Arbitration and Conciliation Act cannot be applied to the act of oppression committed.

Why is it necessary to Arbitrate upon Oppression?

The remedies to complaint filed under Section 241 are mentioned in Section 242, Sub-section(1) clause (b) and Clause(a) to clause (m) of Sub-section (2) excluding clause (i) will not lead to any benefit to the oppressed party rather it will only lead to loss to the members of the entire company, even those members who have not been oppressed nor are oppressing even their interests are being affected. Some may argue that clause (h) is thus an answer to this question but the fact remains that if a director is removed from the board then the goodwill of the company will be tarnished which in turn will affect the value of the shares of the company. One opinion may be that the (2)(b) is a good opportunity for the oppressed people to take their stake and leave the company if they feel oppressed but then again isn’t it wrong to make the sufferers to leave the company and depriving them of an opportunity to be a part of a profit making company only because of the acts of its directors? For that matter, even in (2)(i) clause it is not expressly mentioned but from its wordings, it may be construed that priority is to be given to the to deposit the amount recovered in Investor Education and Protection Fund over repayment to identifiable victims. But the biggest drawback of adjudicating over oppression by the Company Law Tribunal is that the matter no longer remains confidential and as a result, the parties who are neither oppressed nor oppressing also suffer as the market value of their shares goes down due to the scandal in the company. It is an agreed fact that when so many members are involved even in Arbitration the confidentiality may not remain but at least there is a hope of matter remaining confidential.

Solutions.

From the above paragraphs it is clear that judicial interpretations have been given to the word Oppression and from these interpretations, the word oppression can be safely defined in the statute itself so as to free it from the purview of public interest and thus make it arbitrable. As the Arbitration and Conciliation does not permit any matter regarding the public policy to be Arbitrated upon as in S. 34(2)(b)(ii). From the Judicial decisions, it is clear that oppression consists of four main ingredients. These are: 1) The act must be such that it causes the rights of the minority shareholders to be affected. 2) The act may be legal or illegal. 3)  The act was done by the board of directors or the management for the purpose of self-benefit. 4) Any act which oppresses the rights of the minority shareholders but if such an act is done for the benefit of the Company as a whole then it is not oppression. If a definition in the Act is formulated with regards to the points mentioned above then the matters regarding oppression can become an arbitrable dispute. This solves the first two problems as mentioned in the earlier paragraphs of this essay.

The Bombay High court in the case of Rakesh Malhotra Vs Rajinder Kumar Malhotra.[6] Opened the gates for referring the matter to Arbitration by the Company Law Board but such matters should not be with regards to oppression but if the term oppression is freed from the shackles of ‘public interest’ then there should not be any problem to refer matters regarding oppression to Arbitration, when there is an arbitration agreement in place. The Judgment in   Rakesh Malhotra Vs Rajinder Kumar Malhotra is not the law of the land but this Judgment looks favourable with regards to promotion of Arbitration in the country, thus there is no harm in getting this principle ratified by the Supreme Court. Oppression prima facie looks like a case of fraud and in the case of Swiss Timing Limited Vs. Organising Committee, Commonwealth Games 2010[7]. The Supreme Court held that fraud as a subject matter of a dispute can be arbitrated upon and it is not against public policy to do so. Hence there should not be any problem legislatures to free the term oppression from the restrictions of public interest. Based on all the justifications made in this paragraph it will become possible for the Company Law Tribunal to refer the matter to Arbitration, besides in the form of Rakesh Malhotra Vs Rajinder Kumar there is also a precedent of High Court to support the contention where a matter before the Company Law Board may be referred to oppression. Hence by upholding this contention, the impediment imposed by the S.2(4) can be removed. This solves our problem with regards to first, second problem.

The most important problem which needs to be resolved is with regards to the third issue. That is, with regards to parties to the arbitration agreement. In the case of  Rakesh Malhotra Vs Rajinder Kumar. It was easy to insert an arbitration clause in the agreement as it was all within the family but in reality, the shareholders are spread over a large geographical area and hence it becomes very difficult even to bring them together to fulfil the requirements of  S.244 so as to file an application under S.241. The question of signing an Arbitration Agreement is entirely out of the picture and in the absence of laws or precedents in this regard. It leaves room for ample creativity to solve this problem.

To solve this problem first of all the amendment needs to be made to S. 5 of the Companies Act 2013 so as to insert a mandatory Arbitration clause in the Articles of Association of both public and private companies. The clause must contain the details with regards to disputes which may be arbitrated upon and shall include ‘oppression’ as one such dispute which shall be arbitrated upon. The Articles of Association must also contain the name of the permanent Arbitrator, a panel of Arbitrators or the institute of Arbitration who shall be designated as the Permanent official Arbitrators of the company.

To solve the issue of parties to the Arbitration agreement the following words may be incorporated in the proposed mandatory amendment to Section 5, “The parties to the agreement shall be any member or members of the company who come together with so as to form a group to comply with the provisions of S.244 of this Act. The other party to the dispute shall be the board of directors and or management and for the purpose of Arbitration proceeding the property of the managers and or board of directors shall be attached to any dispute to be referred to the Arbitrator, Panel of Arbitrators or Institute of Arbitration.      Provision should also be made in the Act so as to make it mandatory for the company to issue a copy of Arbitration Agreement with every IPO and FPO. Any person subscribing the shares shall also sign the Arbitration Agreement and submit it along with the share subscription form. Thus every member of the company shall become a party to the Arbitration Agreement. When the shares are purchased and sold in the market it shall be presumed that they abide by the Arbitration Agreement which is an integral part of the rights anybody enjoys as the member of the company. So as not to take away the autonomy of Company Law Tribunal. The tribunal on a case by case basis shall decide whether the dispute which is sought to be arbitrated upon is in accordance with the matters to be arbitrated upon as in Arbitration Clause of Articles of Association. This will definitely lengthen the Arbitration proceeding but the primary objective here is not only to g speedily dispose of the case but also to prevent the financial loss of members not a party to the suit which will take place if the remedies to oppression as provided  S.242 of the Act are resorted to.

 Conclusion:

In the article issues with regards to Arbitration of oppression are discussed and how they may be solved through arbitrating over them because at times even the judiciary feels that it is not right that all the matters be adjudicated upon this can clearly be seen in the approach taken by Bombay High Court in the case of Rakesh Malhotra Vs Rajinder Kumar. But primarily why oppression is to be brought under the ambit of arbitration is to protect the interest of members who are neither oppressing nor being oppressed and to protect the value of their shares. It is utmost necessary to bring oppression under the purview of Arbitration and Conciliation Act.

Though one of the approaches, as stated in the essay, is very hypothetical but is definitely plausible and which I believe would be a Utopian or an ideal approach.

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¹ Shanti Prasad Jain v. Kallinga Tubes, AIR 1965 SC 1535/[1965] 1 SCA 556.

² Elder v. Elder & Watson Ltd, 1952 SC 49 Scotland.

[3] Rights & Issues Investment trust limited v. Style Shoes Ltd, [1964] All ER 628.

[4] Vijay Kumar Narang v. Prakash Coach Builders (P.) Ltd, [ 2012] 114 SCL 132 (Kar.).

[5] State of Bihar v. Kameshwar Singh, AIR 1952 SC 252.

[6] Rakesh Malhotra Vs Rajinder Kumar Malhotra, (2015) 2CompLJ288(Bom).

[7] Swiss Timing Limited Vs. Organising Committee, Commonwealth Games, 2010 AIR 2014 SC 3723.

ANALYSIS OF NEGOTIABLE INSTRUMENTS ACT AMENDMENT

ANALYSIS OF NEGOTIABLE INSTRUMENTS ACT AMENDMENT 2015*

·         Introduction:

The  Amendments to the Negotiable Instruments Act, 1881 ("The NI Act")  focused on clarifying the jurisdiction related issues for filing cases for offence committed under section 138 of the NI Act.

The clarity on jurisdictional issues for trying cases of cheque bouncing would increase the credibility of the cheque as a financial instrument. This would help trade and commerce in general and allow the lending institution, including banks, to continue to extend financing to the economy, without the apprehension of loan default on account of bouncing of a cheque.

In view of the urgency to create a suitable legal framework for determination of the place of jurisdiction for trying cases of dishonour of cheques under section 138 of the NI Act, the Government had decided to amend the law through the Negotiable instruments (Amendment) Ordinance, 2015.

The objective was to ensure that a fair trial is conducted keeping in view the interests of the complainant by clarifying the territorial jurisdiction for trying the cases for dishonour of cheques. The Amendment states that the substantive principle for determination of the jurisdiction of cases under section 138 of the NI Act remains the same, except that that two distinct situations of payment of cheque (i) by submitting the same for collection through an account or (ii) payment of a cheque otherwise through an account, that is, when cheques are presented across the counter of any branch of drawee bank for payment, are covered under the Amendment.

·         Background:

Section 138 of the NI Act deals with the offence pertaining to dishonour of cheque for insufficiency, etc., of funds in the drawer's account on which the cheque is drawn for the discharge of any legally enforceable debt or other liability. The object of the NI Act is to encourage the usage of cheques and enhancing the credibility of the instrument so that the normal business transactions and settlement of liabilities can be ensured.

Various financial institutions and industry associations have expressed difficulties, arising out of the recent legal interpretation of the place of jurisdiction for filing cases under Section 138 to be the place of drawers' bank by the Supreme Court. To address the difficulties faced by the payee or the lender of the money in filing the cases under Section 138 of the NI Act, because of which, large number of cases were stuck, the jurisdiction for offence under Section 138 has been proposed to be clearly defined. Accordingly, the Negotiable Instruments (Amendment) , 2015 ("the Bill") in Parliament was introduced in Lok Sabha on 6th May, 2015 and considered and passed by Lok Sabha on 13th May, 2015. However, since the Rajya Sabha was adjourned sine die on 13th May, 2015, the Bill could not be discussed and passed by that House and the Bill could not be enacted in that session. The Bill was finally passed in the Rajya Sabha in its next session and received President’s Assent on 29 December 2015.

The Amendment provides for filing of cases only by a court within whose local jurisdiction the bank branch of the payee, where the payee delivers the cheque for payment is situated. Further, where a complaint has been filed against the drawer of a cheque in the court having jurisdiction under the new scheme of jurisdiction, all subsequent complaints arising out of section 138 against the same drawer shall be filed before the same court, irrespective of whether those cheques were presented for payment within the territorial jurisdiction of that court.

Further, it has been provided that if more than one prosecution is filed against the same drawer of cheques before different courts, upon this fact having been brought to the notice of the court, the court shall transfer the case to the court having jurisdiction as per the new scheme of jurisdiction.

·         Judicial trajectory:

Section 138 of the Act provides that an offence will be deemed to have been committed in the event of dishonour of cheque for insufficiency, etc of funds in the account. Vide the decision in Dashrath Rupsingh Rathod v. State of Maharashtra and Another[1], a three-judge bench of the Apex Court of India held that the territorial jurisdiction qua dishonour of cheques is restricted to the court within whose local jurisdiction the offence was committed, i.e. the bank on which it is drawn. The observations of the Apex Court in Dashrath Rupsingh marked a departure from the Apex Court's observations and findings in, inter alia, K. Bhaskaran v. Sankaran Vaidhyan Balan[2] and Harman Electronics Pvt. Ltd. v. National Panasonic India Pvt. Ltd.[3]. As a consequence, complaints under Section 138 of the Act were to be filed/ returned (in the event filed prior to the judgment and wherein proceedings had not traversed the stage of Section 145(2) of the Act) for filing in the "proper court", i.e. the Court within whose jurisdiction the bank on which the cheque in question was drawn is situated.

·         Lacunae:

Consequential to the decision of the Apex Court in Dashrath Rupsingh, uncertainty with respect to the "proper court" in relation to institution of complaints qua at par cheques arose. The Bombay High Court dealt with this issue in the case of Ramanbhai Mathurbhai Patel v State of Maharashtra[4]. The Bombay High Court considered the scenario when at par cheques are dishonoured by a branch of the bank other than the drawee bank branch. The issue in this regard was whether "proper court" will be the Court within whose juridisction the cheque has been dishonoured or the Court within whose jurisdiction the drawee bank branch is situated. Dismissing the petition, the High Court held that the complaint will be tried by the Court within whose jurisdiction the cheque is dishonoured. The Bombay High Court surmised that by issuing at par cheque, the drawer has given the option to the banker of the payee to get the cheques cleared from the nearest available branch of the bank of the drawer.

While the Apex Court's decision in Dashrath Rupsingh provides that the jurisdiction shall vest with the court where the cheque is dishonoured; in the instance of at par cheques, there could be multiple places where the cheque can be dishonoured.

Consequentially, a Special Leave Petition[5] was filed against this decision of the Bombay High Court. The Apex Court, vide its order dated 16.09.2014, stayed the order of the Bombay High Court. However, vide its order dated 20.03.2015, the Apex Court dismissed the SLP as withdrawn. Therefore, the lack of clarity pertaining to jurisdiction qua at par cheques prevailed.

Further, the aftermath of Dashrath Rupsingh witnessed procedural delays with regard to continuation of proceedings under the Act. These included delays associated with, inter alia, transfer formalities, oppositions to transfer requests, arguments upon the stage of evidence as envisaged in Section 145(2) of the Act. There was also express discontent over the transfer/initiation of the complaints, pursuant to the jurisdiction vesting with the court where the bank of the defaulter is situated.

The aforementioned lacunae, inter alia, led to representations by stakeholders, industry associations to the Government of India so as to redress the impact of the Dashrath Rupsingh decision upon business interests. In order to address the existing and contemplated difficulties in filing of complaints under Section 138 of the Act; the Government sought to introduce amendments to the relevant provisions of the Act by means of the Bill.

·         SALIENT FEATURES OF THE AMENDMENT

The Amendment Act amends the NI Act in order to regulate the jurisdiction of courts qua cheque bouncing vide the below mentioned modifications/ insertions:

• Section 142 of the Act has been amended by the Amendment via introduction of sub-section (2), the language whereof is reproduced hereunder for ease of reference:
  
  "(2) The offence under section 138 shall be inquired into and tried only by a court within whose local jurisdiction,—
  
  (a) if the cheque is delivered for collection through an account, the branch of the bank where the payee or holder in due course, as the case may be, maintains the account, is situated; or
  
  (b) if the cheque is presented for payment by the payee or holder in due course otherwise through an account, the branch of the drawee bank where the drawer maintains the account, is situated.
  
  Explanation.—For the purposes of clause (a), where a cheque is delivered for collection at any branch of the bank of the payee or holder in due course, then, the cheque shall be deemed to have been delivered to the branch of the bank in which the payee or holder in due course, as the case may be, maintains the account."
• Section 142A has been inserted by means of the Ordinance, the language whereof is reproduced hereunder for ease of reference:
  
  "142A. (1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 or any judgment, decree, order or directions of any court, all cases arising out of section 138 which were pending in any court, whether filed before it, or transferred to it, before the commencement of the Negotiable Instruments (Amendment) Ordinance, 2015 shall be transferred to the court having jurisdiction under sub-section (2) of section 142 as if that sub-section had been in force at all material times.
  
  (2) Notwithstanding anything contained in sub-section (2) of section 142 or sub-section (1), where the payee or the holder in due course, as the case may be, has filed a complaint against the drawer of a cheque in the court having jurisdiction under sub-section (2) of section 142 or the case has been transferred to that court under sub-section (1), and such complaint is pending in that court, all subsequent complaints arising out of section 138 against the same drawer shall be filed before the same court irrespective of whether those cheques were delivered for collection or presented for payment within the territorial jurisdiction of that court.
  
  (3) If, on the date of the commencement of the Negotiable Instruments (Amendment) Ordinance, 2015, more than one prosecution filed by the same payee or holder in due course, as the case may be, against the same drawer of cheques is pending before different courts, upon the said fact having been brought to the notice of the court, such court shall transfer the case to the court having jurisdiction under sub-section (2) of section 142 before which the first case was filed and is pending, as if that sub-section had been in force at all material times."

 

·         ANALYSIS:

Subsequent to the Amendment, the jurisdiction to hear complaints under Section 138 of the Act now vests with the court within whose jurisdiction the bank branch of the payee is situated. Further, in terms of Section 142A of the Act, all subsequent complaints under Section 138 of the Act against the same drawer shall be filed before the same court, regardless of the place where the cheques were presented for payment. This position is a clear departure from the position laid down by the Apex Court in the Dashrath Singh.

In my opinion, the position pursuant to the Amendment; it  balances the interests of the payee and drawer. If the jurisdiction is determined by reference to the place where the cheque is presented for payment, in the event that the drawer issues several cheques drawn on different banks in different locations to the payee, the payee will not have to file complaints in all the courts within whose jurisdiction the cheques are drawn. Further, since the court under the amended Section 142 of the Act will have jurisdiction to try all subsequent complaints against the drawer, the interests of the drawer and the payee are thereby sufficiently balanced. The Amendment also clarifies the position with respect to the cheques payable at par at all branches of the drawer bank, as the place where the bank of the accused is situated or where the cheque is dishonoured no longer holds relevance. It is also relevant to note that by amending Explanation I to Section 6 of the Act, the deficiencies relating to the meaning of the expression "a cheque in the electronic form" have been removed.

 Prajval Albuquerque.

* This article is solely based on the compilation of relevant parts from the articles published by Singh and Associates, Luthra and Luthra and Alpha Partners which have been subjected to certain modifications by me.   

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[1] Criminal Appeal No. 2287 of 2009

[2] (1999)7SCC510

[3] (2009) 1 SCC 720

[4] Criminal Writ Petition No. 2362 of 2014

[5] SLP (Criminal) No. 7251 of 2014

Amend Anti-Corruption Act.

With steps being taken to put a check on black money it is high time that the next big thing be done i.e. to relieve the common man from the clutches of corruption is here.

"When the rich stop giving,

The corrupt will stop asking,

And when everybody will have to stand in the same line,

INDEED MY COUNTRY SHALL BE FREE FROM CORRUPTION." 

Prajval Albuquerque.

Hence with this object in mind through this post I have made a sincere effort to analyse the Amendment Bill to Prevention of Corruption Act 1988 and the way forward.

Proposed Amendment To Prevention of Corruption Act, 1988.

   Introduction:
    The entire Act of 1988 is not repealed entirely but the following sections of the Act are proposed to be amended which are as follows S.7, S.8, S.9 and 10, S.11, S.12 to S.15, S.17A (I),[S.18A(I) to18N],19 and 20, S.24 have been omitted. The bill focuses on amending the Act with regards to the definition, meaning and application of 1988. The Bill makes  giving of a bribe an offence against only taking of bribe as in Current Act. The Amendment also focuses on; Intermediaries and third party involvement, giving of a bribe by a commercial organization, abetment, criminal misconduct and habitual offender, attachment of property acquired as a bribe, protection to retired public servants from prosecution, Presumption   of wrongdoing.

  History:

The Prevention of Corruption (Amendment) Bill, 2013  was introduced in the Rajya Sabha in August 2013 to amend the PC Act. The Amendment Bill was referred to the Standing Committee of Personnel, Public Grievances, Law and Justice, which submitted its report in February, 2014. In pursuance to the report there had been certain modifications to the Amendment Bill. The revised draft was approved at a cabinet meeting and was subsequently sent to the Law Commission of India for its views. The Law Commission has in February, 2015[1]

   Analysis of Sections in the Act and the Amendments passed by the cabinet :

·        S.7(As to be  Amended by the Bill compared with Existing Section 7 and UK Bribery Act):

The ingredients of these Sections are compared along with the sections of the Act in existence, proposed Amendment and UK Bribery Act[2] 

S. 7, PC Act, 1988	S. 7(1), 2013 Amendment	S. 2(1) UK Bribery Act
Any public servant who  accepts  obtains  agrees to accept  attempts to obtain “any gratification whatever, other than legal remuneration….” in the context of “official acts” or “official functions”	Any public servant who  requests any person for  obtains  agrees to receive  accepts  attempts to obtain “any undue financial or other advantage” …. in the context of “improper performance” of “a relevant public function or activity”	Any person who  requests,  agrees to receive or  accepts “a financial or other advantage”….. in the context of “improper performance” of a “relevant function or activity”

The Amendment by proposing to add the word requests in S.7 (1) acts as a very potent tool to snip corruption in the bud as now there shall be no need of actual physical delivery of the bribe, thus any such person who had demanded a bribe but due to intimation or pre-knowledge  of a trap by Anti- Corruption Authorities refuses such a bribe and files a suit of Defamation, or maligning the image of a public official  against the person from whom  such bribe was demanded and who took up the effort to set up the trap. By inserting the word request a safety cover for the activist is inserted, however it is up to  him how he would prove this request was made. Though the previous Act provided a protection against counter filing of suit by using the words attempts to obtain. Yet these words came into picture when a suit had begun against the person who had initially made a complaint against the public servant was before the court and the court decided whether the act of public servant was an attempt to obtain any gratification based on the motive of the act. The word request thus leaves no scope for identifying ‘was there an attempt or not’. Secondly by the use of the word request. It becomes easier for the complainant to identify what is an attempt to obtain gratification and thus he can be judicious while lodging a complaint. The words however attempt to receive gratification are not deleted. It is beneficial as the court where no request was made can still at is discretion based on facts determine whether there was an attempt to receive gratification. Hence there is clarity regarding when to complain and ample space for judiciary to decide on how to Act when no request was made yet there was an intention to receive gratification. Thus this Section is a perfect combination of rigidity and flexibility. When compared with UK bribery Act Amendment this section specifically uses the words, “requests any person”. But the word person is not defined in the Act so to increase the ambit of the Act S.9 was amended which incorporated the term commercial organization and in the same section,the word "business" is defined under (3)(a) of the above mentioned section which incorporates every other entity other than a person who may give bribe. The issue can be solved by the judicial interpretation of the words attempts to obtain. In spite of this to add more clarity to this Section a need is felt either to delete the word person as in UK Bribery Act or to define the word person in this amended Act, though the general clauses act takes care of it. S.7 is an excellently drafted section that caters to the various facets of receiving gratification which are described in detail so as to avid any loop hole in the law. The S.7 (2) (a) to (d) describes as what may be construed as public activity and (e) leaves the discretion to court so as to consider  of any other act as may be understood by a reasonable man. However a need is felt either to make the public servant responsible for his private acts which have an impact on the ultimate fulfilling of legal obligation. Basically the intention of framing this legislation was to stop the people from paying bribes hence focus should be not on the activity but on the consequence or the effect sought and the same which is to be achieved. Thus the provisions in this section should be made applicable regardless of the form of activity either public or private if the legal objective sought by the complainant is left unfulfilled due to non-performance or wrongful performance of the public servant due to non-payment of any gratification to which he is not entitled to or to achieve any such legal or illegal objective any public servant demands any gratification which he is not entitled to  then he shall be liable for prosecution.

The punishment has also been enhanced in this amendment  from  minimum punishment of 6 months to 3 years in this section and maximum from 5 years to 7 years.
   

S.8 ( As to be  Amended by the Bill compared with Existing Section 8):

In S.8 of the 1988 Act it stated the liability and the punishment to be imposed on any such person who received any such gratification for himself on behalf of any public servant  to which he was not entitled to.....(It further states the penalty for the same). S.8 has been modified in the Amendment as with regards to changing  context  and it  has been observed from the acts of the Corporates in the 2G Scam case that corruption is not only limited to situations where bribe would be demanded by the public servant to fulfill his legal obligation but where persons would give gratifications to direct a public servant to perform his public function in an unlawful or erroneous manner. Thus the amendment to S. 8 focuses on making the person offering or giving the bribe too liable for his act and a punishment of minimum 3 years and a maximum punishment of 7 years  will be awarded. At present however the bribe giver or offerer walks out scot free as per the provisions of the Section 24 of this Act. The intention of the framers of the 1988 Act was to prevent corruption in its totality and to punish any person who committed an act of offering bribe. Hence they drafted S.12 but however word used was abetment which means, “To contribute as an assistant or instigator to the commission of an offence”[3]. Based on this meaning the bribe offeror is in no way contributing to the act of public servant rather he is just making a proposal

“When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal”[4].

Thus if such person offered a bribe but did not give any such bribe would be  exempted under S24 and even if he actually paid such a  bribe he would not come under  S.12, as he would not fit in the definition of S.12. Hence the Amendment to S. 8 of this Act was the need of the hour. 

·        S.9 (As to be  Amended by the Bill compared with Existing Section 9):

Section 9 talks about the liability of the various commercial organization towards the acts of the employees committed for the benefit of the commercial organization. This concept is based on the tortuous concept of Vicarious liability of Master towards the acts of its servants. There are provisions in various Acts regarding the laws regulating them individually but to bring them under the ambit of one single Act so as to increase their liability towards public they have been combined and classified as commercial organizations which is defined in S.9 (3)(a) of the Amendment.

Note: The punishment has also been enhanced in this amendment  from  minimum punishment of 6 months to 3years   in this section and maximum from 5years to 7 years 

·        S.10 (As to be  Amended by the Bill compared with Existing Section 10):

S.10 is the punitive or the application section for the acts committed by the employees of the commercial organizations as in S.9 of the Amendment. S.9 and S.10. Where in (1) it  makes the persons in charge and responsible for running these commercial organizations responsible for the acts of its employees as in S.9 and awards punishment  for a period of minimum 3 years and maximum 7 years and fine . It however nullifies the liability of such persons mentioned above if they prove that the offence was committed without their knowledge or that they had exercised all due diligence to prevent the commission of such offence

This is further clarified in the (2) of this Section where it states the persons responsible for the acts of their employees and as and when such liability comes into effect. It is worded as follows:

“where an offence under section 9 has been committed by a commercial organization and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of any director, manager, secretary or other officer of the commercial organization,such director, manager, secretary or other officer shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly under this section.”
Here it must be clarified that the original 1988 Act S.10 does not contain Sub section 2 and will be incorporated in this Act if this bill is passed.

S.9 and S.10 when read together eliminates the ambiguity which has been created in S.7 by not defining the term person though this ambiguity is cleared by looking  at the definition of person in General Clauses Act, but however abiding by the Rules of interpretation it is always a safer bet to deal with such an essential term in the Act itself.

·        S.11( As to be  Amended by the Bill compared with Existing Section 11):

The Amendment bill omits the S.11 of the previous Act. The Section is in context of a Public servant obtaining valuable thing, without consideration from person concerned in proceeding or business transacted by such public servant. Going by the contents in the current Section it contains three main ingredients

Obtains or agrees to obtain any gratification for himself or any other person:

1.     Without consideration.

2.     Or for a consideration which is inadequate.

3.     Punishment for receiving such gratification.

Though a classification is made in this section with regards to public servants who demand a bribe yet the punishment is the same. This specific section does not serve any purpose. Secondly in case of corruption there is no need to make any reasonable classification as permitted in Article 14 as any such classification must be made with regards to objectives of the Act and no objective of this Act is fulfilled by making such classification. Hence the Amendment omits it.

·        S.12 (As to be  Amended by the Bill compared with Existing Section 12):

The current section in the Act punishes offence for abetting any of the acts committed in S.7 and S.11. But since the Amendment changes the wordings of S.7 and omits S.11. So a need is felt to amend the S.12 as well. Secondly the wordings of the Amendment to this section are so worded so as to generalize the offence of abetting any acts committed in violation of this Act. It also contains the punishment  there to.

·        S.13 (As to be  Amended by the Bill compared with Existing Section 13):

Only clause(a) and (b ) of the current Act have been substituted   .

These sub clauses in  the current Act relate only to habitual offenders but to make the law more stringent there should be no classification made with habitual and non- habitual offenders as this differentia is not necessary to serve the objectives of this Act so these have  been substituted  in the Amendments which rather focus on the words fraudulently and intention of the public servant.

·        S.14 (As to be  Amended by the Bill compared with Existing Section 14):

The current section punishes specific habitual offences as in S.8, 9 and 12.

The Amendment generalizes punishment for all the offences which are committed habitually rather than making it specific to certain offences besides this it also helps to concise the legislation.

The minimum and the maximum punishment under the current Act have been enhanced in the current amendment from 2 to 3 years and from 7 to 10 years.

·        S.15 (As to be  Amended by the Bill compared with Existing Section 15):  

 The current S.15 of the Act deals with punishment for attempting to commit professional misconduct as in S.13. The current amendment has amended S.13. Hence S.15 too has been amended in accordance with it. However the punishment has not been enhanced in the Amendment  to S.15.

·        S.17 (As to be introduced by the Bill):

S. 17 of the Act designates certain authorities to investigate charges of corruption bu t no authority can be appointed under this Act or investigation  by any authority appointed  be conducted violating any provision of CrPC.

S.17 A is added  in the Amendment so as to keep a check on the powers of the authorities who are designated to Act on a complaint of any person but to avoid  any arbitrary act or  misuse of power by such designated authorities. The legislators through this provision have given powers in the hands of Lokpal in case of central government employees and Lokayuktas in case of state government employees and without their  approval an investigation cannot be initiated but at the same time it can be said that the powers of the Lokpal and the Lokayuktas are being diluted because as per S.11 and 12 of the  THE LOKPAL AND THE LOKAYUKTAS ACT 2013 has empowered the Lokpal and the Lokayuktas to constitute a inquiry wing of which he himself must be a member of and prosecution wing but at the beginning of S.11 the words,“Notwithstanding anything contained in any law for the time being in force” hence once this legislation is passed the Lokpal will not be able to conduct or initiate inquiry on his own. But at the same time this section of the amendment plays a crucial role in the decentralization of Authority as the power to sanction an inquiry will be with him and the designated police officer. Hence there can be no scope for collusion between the accused public servant and the person investigating the matter. Despite all this some questions   still remains unanswered i, Why are special bodies like Lokpal and the various tribunals created ? They are created with a view to hasten the legal proceedings but if despite creating these bodies  if we are depending on police for investigation  then why  are we exerting pressure on our consolidated  funds by creating such bodies? Lastly doesn’t the Government trust the credibility of the Lokpal? If the Government does not trust the Lokpal then THE LOKPAL AND THE LOKAYUKTAS ACT 2013 Act must be severed or in the current Act Lokpal and the Lokayuktas should be given authority to conduct to investigate and prosecute the public servants as per S.11, 12 , CHAPTER IV and CHAPTER V of  THE LOKPAL AND THE LOKAYUKTAS ACT 2013.

The proviso to this Amendment allows for investigation of any public servant without the consent of  Lokpal or Lokayukta where the public servant has been arrested on the spot while receiving any gratification. The law commission of India in its report 254 has summarised this section as follows:

The proposed section 17A(1), introduced in 2014, thus extends such a limited requirement of “previous approval” to public servants who are or were in service at the time of the alleged offence. This is in line with the provisions of section 197 Cr.P.C. and the scheme of section 14 of the Lokpal Act.

The proviso to the proposed section 17A (1) is similar to Clause (2) of the repealed section 6A of the Delhi Special Police Establishment Act, 1946 (hereinafter “DSPE Act”) which provided that in certain factual scenarios/gross cases, no sanction/previous approval would be necessary. However, the proviso to the proposed section 17A (1) is narrower than Section 6A(2) of the DSPE Act – now requiring that even if a person is caught on the spot while accepting illegal gratification (“undue financial or other advantage”), it would have to be shown by the prosecution that it was intended that such acceptance consequential to a relevant public function or activity being performed improperly.

 CHAPTER  IV A (As to be introduced by the Bill):

·        CHAPTER  IV A has been proposed to be added in this Act through this Amendment so as to make a provision for attachment of property of any public servant who commits corruption or is accused of the same. The entire chapter constitutes of  Sections 18A to 18N which describes in detail when  such property can be attached along with the procedure. The Indian law commission in its 254 report has summarized this section, reported the drawbacks and has made recommendations which are as follows:

 Provisions regarding attachment and forfeiture have been introduced vide sections 18A-N of the 2013 Bill. However, they are bound to create confusion given that separate procedures for attachment and forfeiture in cases of corruption of public servants are covered under the following three laws:

a. The Criminal Law (Amendment) Ordinance 1944;

b. Prevention of Money Laundering Act, 2002 (“hereinafter PMLA”);

c. The Lokpal and Lokayukta Act, 2013.

 Hence, it might be better suited to replace the proposed sections 18A-18N with a single provision referring to the forfeiture and attachment procedures in the PMLA Act or the Criminal Law Ordinance of 1944. This will ensure our compliance with the UNCAC.

 There may be some  difficulties in the adoption of the PMLA procedure in cases which are investigated and prosecuted by State Government agencies, Ex. State Police, State Anti-Corruption Bureaus etc. It may not be desirable to load the Enforcement Directorate, the Adjudicating Authority and the Appellate Tribunal with thousands of cases under the PC Act all over the country as an exclusive forum for handling matters relating to attachment and forfeiture of property.

 Further, the reach of the 1944 Ordinance is slightly different than that of the PMLA in as much as the Ordinance enables the filing of application for attachment by the appropriate government merely on the belief that any person has committed a scheduled offence and the said person has procured money or other property by means ofthe offence, whether or not any court has taken cognizance of the offence.

 PMLA on the contrary enables provisional attachment where the Director or authorised Deputy Director believes that any person is in possession of any proceeds of crime (not necessarily the person who committed the crime) and such proceeds are likely to be concealed, transferred, etc. which may result in frustrating any proceedings for confiscation of such proceeds. PMLA requires that an order for provisional attachment cannot be passed by the Director or authorised Deputy Director unless, in relation to the scheduled offence, a report has been forwarded to a Magistrate under Section 173 of the CrPC or a complaint has been filed by a person authorised to investigate the offence before a Magistrate or court for taking cognizance of the scheduled offence.

Having regard to these factors, a better option would be to provide for recourse for both the PMLA and the Criminal Law Amendment Ordinance of 1944, whichever may be found most convenient, depending upon the nature of the case. It may, therefore, be desirable to delete the proposed new Chapter IVA and in its place, incorporate a new Section 18A along the lines of the provision made in the earlier Prevention of Bribery of Foreign Public Officials and Official of Public International Organisations Bill, 2011, which was introduced in the Lok Sabha in 2011 but lapsed with the dissolution of the 15th Lok Sabha.

Recommendation: The proposed Chapter IVA should be deleted and be re-cast as follows:

“18A. Save as otherwise provided under the Prevention of Money Laundering Act, 2002, the provisions of the Criminal Law Amendment Ordinance, 1944 shall, as far as may be, apply to the attachment, administration of attached property and execution of order of attachment or confiscation of money or property procured by means of an offence under this Act.”

Consequential amendments will also need to be made to the PMLA, 2002 so as to include all the offences under the PC Act, as now redefined, as predicate offences under the Act by appropriate substitution of Paragraph 8 of Part A of the Schedule to the PMLA.

·        S 19:

S.19 answers the question as and when sanctions are needed to prosecute a public servant. Changes have been made in this section to correspond with changes in other section along with which it is supposed to be read i.e. with S.7, S.13 and S.15 of the Amendment. As per the words in the current section (1) (a) and (b) it states that in case of allegation of  corruption occurring during the course of   public servants either of state cannot be removed on allegation of corruption without he sanction of the respective government but these clauses were unfavorable for the public servants as no sanction was required (As maybe construed from (a) and (b)to remove them when the allegation  was pertaining to a previous employment and that where the nature of their employment had been changed. To safeguard the interest of public servants and that they may merely not be removed from his office based on past allegations the necessary provisions have been made in the amendment by adding the words “or as the case may be, was at the time of commission of the alleged offence employed" in (a) and (b).(1)(c)States that only a competent Authority can pass any such sanctions. But a proviso to this has been added in the Amendment. Which states that only following authorities have permission to request such sanctions:

Police officer, officer of an investigation agency or any other law enforcement authority. Such request must be made to the appropriate Government or competent authority and the conditions in compliance with the sub clauses in the proviso.

However before abiding by any such  request a provision has been made so as to give any such public servant an opportunity to be heard. The proviso also consists of duration and hierarchy of authority for passing any such sanction.

The Subsection (2) which makes provisions with regards to previous sanctions, subsection (3) which deals with the provisions in CrPc which are applicable to this section of the Act and the courts power regarding prosecution without sanctions and (4) talks about erroneous exercising power as in (3). The Amendment has not made any changes in them and they  shall continue to be a part of this legislation.

·        S.20:

S.20 of this Act is about presumption of gratification received the section in the current Act has made differential provisions with regards to such gratification as in section 7 and 11. The current section while making such presumptions relies on S.12 and S.14 of the current Act . But with the Amendment omitting S.11 it become applicable only to S.7 . Besides with the amending of S.12 and 14 they can no longer be read along with section 20 so as to presume receiving of gratification.

The amended S.20 in the amendment  is concise and states that unless the contrary is proved it shall be presumed that the public servant has

violated S.7

·        S.24 (The Bill intends to omit this Section which currently exists in PC Act):

Section 24 has been omitted by the amendment as it is solely required in a scenario where there are no provisions regarding bribe giver but with the amended  S.8, 9 and 10 it is no longer required as it  serves no purpose. Besides the provision in this section provide a loop hole for the bribe giver to escape conviction. The section relies on other sections  but when such other have been amended in the Act  then this section will not comply with those sections so this Section has been deleted in the Amenddment.

§  Besides this the Amendment to PC Act has made provisions to amend  theCriminal Law Amendment Ordinance, 1944, in the Schedule and the DelhiSpecial Police Establishment Act, 1946

.

Summary

The whole amendment can be summarized as follows :

The cabinet  by passing this bill  has acknowledged the fact that it  is no longer true that the bribe giver  is always the victim but with changing times and rapid growth of corporate sector the bribe giver is no longer specifically a victim.

The times when bribery only existed due to the ignorance  of the common man,   are soon coming to an bribe was given to achieve a legal objective that includes basic necessities as the public servants would not do their rightful duty. The PC Act of 1988 was almost sufficient to keep a check and control over such officials but in modern scenario bribes are no longer given as a necessity but to gain undue privileges in this scenario where a public servant does not ask the bribe per se but is offered the same then holding such public servant alone guilty would not be right as per the principle of equality before law as in A.14. The bribe giver or the one who offers bribe is also equally guilty  and he must too be punished . The Amendment in S. 8,9 and 10 of PC Act are amended and S.24 of the Act is omitted with the sole purpose of making the person and commercial organizations liable for their acts of either giving or offering bribes.    The Amendment if passed will remove the drawbacks in the earlier Act one of them being the classification with regards to habitual offenders which will no longer be there once this Amendment is passed. The Act at present relies on imprisonment and fines as a mode of punishment but with the insertion of Chapter IV (A). The court will be able to attach properties of persons in relation of any offences under PC Act once this Amendment is passed. At the Same time provision is also made in the Amendment for protecting the public servants from prosecution when any false allegations are made by amending S.19. Under which provisions are made with regards to procedure which must be followed before any sanction is obtained for prosecution of public.

Like any other legislation this Amendment has some drawbacks but as compared to the current PC Act. This Amendment is the need of the hour and must be passed by the Parliament.

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[1][1] http://lawcommissionofindia.nic.in/reports/Report_No.254_Prevention_of_Corruption.pdf

[2]http://www.legislation.gov.uk/ukpga/2010/23/data.pdf

[3]Deans Law Dictionary

[4]S.2(a) of Indian Contract Act,1872