Highlights:

Corporate Brief 

• Circular dated 07.06.2024 issued by Reserve Bank of India (RBII) regarding Foreign Exchange Management (Overseas Investment) Directions, 2022- Investments in Overseas Funds.
• Circular dated 28.06.2024 issued by Securities and Exchange Board of India (SEBI) regarding Facility for Basic Services Demat Account (BSDA) for Financial Inclusion and Ease of Investing.

RERA Brief

• Press note dated 8.06.2024 issued by Uttar Pradesh RERA (“UP RERA”) to prohibit the arbitrariness of promoters in issuance of letter of offer of possession.
• Press note dated 11.06.2024 issued by Uttar Pradesh RERA (“UP RERA”) to provide a model format for registration of co-allottee as a co-complainant.
• Press note dated 15.06.2024 issued by Uttar Pradesh RERA (“UP RERA”) to provide a standard written submission format for the complainants to avoid any ambiguity in relief sought and to ensure complete resolution of the complaint.
• Order bearing no. 56/2024 and memo no. MahaRERA/Secy/File No. 27/399/2024 dated 27.06.2024 issued by Maharashtra RERA (“Maha RERA”) providing guidelines regarding the maintenance and operation of separate bank accounts of registered projects.

NCLT Brief

• Whether Insolvency applications are maintainable against struck-off companies?

Litigation Brief

• Delhi High Court revolutionizes Employment Law: Lock-in Period disputes can now head to Arbitration!
• Supreme Court Lays Down Crucial Features of Doctrine of Legitimate Expectation.

Corporate Brief 

Circular dated 07.06.2024 issued by Reserve Bank of India (RBII) regarding Foreign Exchange Management (Overseas Investment) Directions, 2022- Investments in Overseas Funds.

• RBI vide its circular dated 07.06.2024 bearing number RBI/2024-25/41 regarding Foreign Exchange Management (Overseas Investment) Directions, 2022- Investments in Overseas Funds has amended the Foreign Exchange Management (Overseas Investment) Directions, 2022.
• Existing Paragraph 1(ix)(e) of FEM (OI) Directions, 2022 is replaced with the following:

“The investment (including sponsor contribution) in units or any other instrument (by whatever name called) issued by an investment fund overseas, duly regulated by the regulator for the financial sector in the host jurisdiction, shall be treated as OPI. Accordingly, in jurisdictions other than IFSCs, listed Indian companies and resident individuals may make such investment. Whereas in IFSCs, an unlisted Indian entity also may make such OPI in units or any other instrument (by whatever name called) issued by an investment fund or vehicle, in terms of schedule V of the OI Rules subject to limits, as applicable.

Explanation: ‘investment fund overseas, duly regulated’ for the purpose of this para shall also include funds whose activities are regulated by financial sector regulator of host country or jurisdiction through a fund manager.”

• Existing Paragraph 24(1) of FEM (OI) Directions, 2022 is replaced with the following:

“A person resident in India, being an Indian entity or a resident individual, may make investment (including sponsor contribution) in units or any other instrument (by whatever name called) issued by an investment fund or vehicle set up in an IFSC, as OPI. Accordingly, in addition to listed Indian companies and resident individuals, unlisted Indian entities also may make such investment in IFSC.” 

Circular dated 28.06.2024 issued by Securities and Exchange Board of India (SEBI) regarding Facility for Basic Services Demat Account (BSDA) for Financial Inclusion and Ease of Investing. 

• SEBI vide its circular dated 28.06.2024 bearing number SEBI/HO/MIRSD/MIRSD-PoD1/P/CIR/2024/91 regarding Facility for Basic Services Demat Account (BSDA) for Financial Inclusion and Ease of Investing has decided that in order to boost participation in the securities market, ease of doing investments and based on representations from market participants, it was also decided that an individual shall be eligible to opt for BSDA subject to the following:

1. The individual has or proposes to have only one demat account where he/she is the sole or first holder.
2. The individual shall have only one BSDA in his/her name across all depositories.
3. The value of securities held in the demat account shall not exceed ₹10 Lakhs for debt and other than debt securities combined at any point of time.

• All conditions as applicable to regular demat accounts, shall continue to apply to basic services demat accounts except electronic statements which shall be provided free of cost and physical statements may be charged at a fee not exceeding ₹25/- per statement.
• The circular is to come into effect from September 01, 2024, in supersession of para 1.8.1 to para 1.8.5 of the Master Circular for Depositories dated October 06, 2023.
• Further, The Depositories are advised to:

1. make amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision immediately, as may be applicable;
2. notify their DPs about the provisions of the circular and also to disseminate the same on their website;
3. put in place appropriate systems and procedures to ensure compliance with the provisions of the circular; and
4. communicate to SEBI, the status of implementation of the provisions of the circular in the Monthly Development Report.

RERA Brief

Press note dated 08.06.2024 issued by Uttar Pradesh RERA (“UP RERA”) to prohibit the arbitrariness by the promoters in issuance of letter of offer of possession.

Pursuant to office order dated 29.05.2024, a press note dated 08.06.2024 was issued by UP RERA to prohibit the arbitrariness by promoters in issuing letters of offer of possession and using language similar to a demand notice, final demand notice, or other any such similar language, and the disputes arising between the promoters and the allottees as a result of such letters.

For the purposes of bringing uniformity in language, a model format of the letter of offer of possession has been made available at the UP RERA portal.

As per the said press note dated 08.06.2024:

• The letter of offer of possession issued by the promoters shall not impose any binding condition on the allottees and shall be issued to the allottees within 2 (two) months of the receipt of OC/CC, by way of e-mail on the registered mail-id of the allottees, by post, by way of SMS on the registered mobile number and information by way of call on such number. The said information about issuance of letter of offer of possession shall also be available at the project site and at the office of the promoter. Further, the promoters are also required to provide the allottees a copy of the OC/CC of the project at the time of issuance of letter of offer of possession.
• In case there are any development works pending in the unit of the allottee, the promoter shall specify the finishing works remaining and the time frame within which the same would be complete. In case there are any amounts to be paid by the allottees as per the letter of offer of possession, the same should not be outside the ambit of the agreement for sale or AFS and should be legally justified.
• After the receipt of the letter of offer of possession, it shall be obligation of the allottee to undertake further actions as per the procedure after receipt of such letter.
• In case there arises any dispute with respect to this subject matter and the promoter has, instead of issuing an offer of possession, issued to the allottees, a demand notice, final demand notice or any letter with such language, then all decisions against the promoter would be taken under UP Real Estate (Regulatory and Development) (Agreement for Sale/ Lease) Rules, 2018.

Press note dated 11.06.2024 issued by UP RERA in respect of adding of co-allottee as a co-complainant.

Pursuant to its office order dated 05.03.2024, a press note dated 11.06.2024 was issued by UP RERA prescribing that in case there are more than 1 (one) allottees in respect of a particular unit, all the co-allottees are required to be added as co-complainant.

A model format of the application letter for adding co-complainant in the complaint has been published on the UP RERA Portal.

The complainant, at the time of the application letter, is required to attach a copy of the BBA/ AFS/ Allotment Letter, on the basis of which the co-allottee would be added co-complainant.

This step has been taken to ensure that the rights and interests of the co-allottees are secured and the co-allottees are given due opportunity to present their case.

Press note dated 15.06.2024 issued by UP RERA to provide a standard format written statement for arguments for the complainants to avoid any ambiguity in the relief sought and to ensure complete resolution of the complaint.

Vide the press note dated 15.06.2024, UP RERA provided a model format for a written statement for argument to provide a concise and clear description of complaint prayer. As per the format of written statement for arguments, the complainant is required to provide complete description of the property, agreement for sale, payments made to the promoter, complaint and prayer.

Order bearing no. 56/2024 and memo no. MahaRERA/Secy/File No. 27/399/2024 dated 27.06.2024 issued by Maharashtra RERA (“Maha RERA”) providing guidelines regarding maintenance and operation of separate bank accounts of registered projects.

MAHA RERA vide its order dated 27.06.2024 issued “MahaRERA Directions for Operation and Maintenance of Separate Bank Accounts for MahaRERA registered projects, 2024″ which have come into effect from 01.07.2024.

These directions are in continuance with previous circulars and orders in relation to the maintenance and operations of the separate bank account for MahaRERA registered project.

As per the said order dated 27.06.2024, the object of these directions is to establish mechanism for operation and maintenance of separate bank account for MahaRERA registered project and to safeguard consumer interests, ensure compliance, promoter transparency, accountability and financial discipline, as well as to have uniformity in the operation and maintenance of bank accounts of the project and standardize legitimate utilization of funds deposited in the separate bank account.

Full text of MahaRERA Directions for Operation and Maintenance of Separate Bank Accounts for MahaRERA registered projects, 2024 is available at: https://maharera.maharashtra.gov.in/sites/default/files/Orders_and_circulars/Order_No_56_2024.pdf

NCLT Brief

Whether Insolvency applications are maintainable against struck-off companies?

Facts

FedEx Express Transportation and Supply Chain Services (India) Pvt. Ltd. (the Appellant/Operational Creditor), a provider of integrated and turnkey shipping, logistics, and supply chain management services, was providing shipping and logistics services to Zipker Online Services Pvt. Ltd. (the Respondent/Corporate Debtor). However, the Corporate Debtor defaulted on their payment obligations to the Operational Creditor. As a result, the Operational Creditor served a demand notice under Section 8 of the Insolvency & Bankruptcy Code, 2016 (“IBC”) demanding payment of Rs. 18,34,120.93/- plus accrued interest.

After receiving no response from the Corporate Debtor, the Operational Creditor had filed an application under Section 9 of IBC seeking initiation of the Corporate Insolvency Resolution Process [“CIRP”] proceedings of the Corporate Debtor on account of the unpaid debt. However, on September 5, 2023, the National Company Law Tribunal [“NCLT”], New Delhi Bench, dismissed this application, holding that the Corporate Debtor’s name had already been struck off from the register maintained by the RoC, and hence, the application under Section 9 of the IBC was not maintainable.

Aggrieved by this decision, the Appellant preferred an appeal to the NCLAT under Section 61 of the IBC, challenging the order of the NCLT.

Issue
Whether an application under Section 9 of the IBC is maintainable against a Corporate Debtor whose name has been struck off from the register of companies in light of the provisions of Sections 248, 250, and 252 of the Companies Act, 2013 [“Act”]?

Decision
The NCLAT, after careful consideration, finally held that the judgments cited by the Appellant in the cases of Hemang Phophalia v. The Greater Bombay Co-Operative Bank Ltd. & Anr. and Elektrans Shipping Pte. Ltd. v. Pierre D’Silva are not laying down the correct law and are per incuriam. Accordingly, the NCLAT ruled that Section 7 or 9 IBC applications are not maintainable against companies struck off from the RoC’s register.

The NCLAT emphasized that IBC is not a debt recovery mechanism but a means for reviving companies facing financial distress.

The NCLAT elucidated that through the winding up proceedings as provided in the Act, the purpose of debt recovery is served, which is distinct from the objectives of IBC. Furthermore, the exceptions outlined in Section 248(6), Section 248(7), and Section 250 of the Act, which provide avenues for debt recovery, do not apply in case of Section 7 or 9 IBC applications.

In light of the above, the NCLAT was inclined to dismiss the appeal preferred by the Operational Creditor.

Litigation Brief

DELHI HIGH COURT REVOLUTIONIZES EMPLOYMENT LAW: LOCK-IN PERIOD DISPUTES CAN NOW HEAD TO ARBITRATION! 

IN THE MATTER OF: Lily Packers Private Limited Vs. Vaishnavi Vijay Umak & Ors.

(Pronounced by the Hon’ble High Court of Delhi on 11th July, 2024 in the ARB.P. 1210/2023, 2024)

Facts:

1. Lily Packers Pvt. Ltd. is involved in the business of manufacturing and trading of corrugated packaging, sourcing and outsourcing of materials. On April 16, 2022, the Petitioner hired Ms. Vaishnavi Vijay Umak (Respondent) as a fashion designer for its “De Belle” division, and a contract outlining the extent of her work was signed. Numerous terms and conditions were included in the agreement, including clause 5, which stipulated that an employee would be in “lock in period” and consequently, would be unable to leave the job for three years during this time.

2. The Petitioner claimed that the Respondent left for leave on June 14, 2023 and never came back, in spite of the lock-in period mentioned in Clause 5. The petitioner was also worried about possible violations of the data protection, secrecy, and intellectual property agreements. Owing to these considerations, the Petitioner addressed a notice of demand and invoking arbitration to the Respondent subsequent to her virtual leaving of the employment. The petitioner had entered into similar agreements with respondents Mr. Meetkumar Patel and Mr. Rahul Sharma, who were engaged in the petitioner company as Autocad Design Engineer and General Supply Chain Manager, respectively. The other respondents also left the petitioner company before the expiration of the lock-in period and, hence, the present petition was filed.

3. The respondent employees did not agree to refer the matter to arbitration as the disputes mentioned therein were not arbitrable. As a result, the Petitioner filed the present petition before the Hon’ble Delhi High Court under Section 11 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’) seeking appointment of an Arbitrator to adjudicate the disputes inter-se the parties.

Issues before the Court:

• Whether a lock-in period in employment contracts is valid in law, or does it violate the fundamental rights enshrined in the Constitution of India?

• Whether disputes relating to a lock-in period in employment contracts are arbitrable in terms of the Arbitration Act?

Court Observation and Findings:

• In response to Issue No. 1, the Court affirmed that a lock-in period is valid in India, simply meaning that an employee agrees to serve their employer for a specified time. Terms such as the lock-in period, pay, and benefits are typically negotiated between the employee and employer. These clauses are usually agreed upon voluntarily with both the parties giving their consent. The Court highlighted that such provisions might be crucial for the stability and strength of the employer offering necessary continuity. Lock-in periods are especially common at executive levels across industries ensuring organizational stability and reducing employee turnover.
• The Court also emphasized that the principles governing the validity of covenants in employment contracts are well established. Any reasonable covenant during the employment term is considered valid and lawful. Therefore, it cannot be claimed that these cases violate any Fundamental Rights under the Constitution of India. Generally, employment contracts are viewed as contractual disputes, not issues of fundamental rights violations. While some conditions might be seen as unreasonable restrictions on employment rights, a three-year lock-in period is not considered one of them.
• In response to Issue No. 2, the Court’s decision was both thorough and nuanced. It underscored that the employer’s intention was not to impose restrictions on former employees regarding future employment opportunities with competitors after leaving their jobs. Instead, the contractual provisions under scrutiny were explicitly drafted to regulate behaviour strictly during the period of active employment.
• The Court’s deliberation was informed by a detailed review of the communications exchanged between the employer (the Petitioner) and the employees (the Respondents). These communications shed light on the employer’s dual concerns: safeguarding confidential business information and pursuing remedies for alleged breaches of the employment agreements.
• Given that these disputes arose within the framework of agreements voluntarily entered into by both parties, the Court determined that arbitration under the Arbitration Act was the appropriate legal avenue. By appointing an Arbitrator, the Court ensured a formal and impartial mechanism to adjudicate the disputes between the employer and the employees.

Conclusion:

The recent ruling by the Delhi High Court marks a significant milestone in defining the enforceability of lock-in periods within employment contracts. Essentially, the court’s decision clarifies that these periods, which restrict employees from resigning for a specified time after joining a company, are legally permissible and do not contravene the fundamental rights enshrined in the Indian Constitution. This clarification is particularly advantageous for employers as it provides them with greater predictability and protection against the costs associated with frequent turnover especially in industries where substantial investments are made in training new hires.

Moreover, the judgment seeks to strike a balance between the interests of employers and employees. It promotes stability for businesses by allowing them to retain trained talent for a reasonable period while also emphasizing the importance of transparency and informed consent in employment agreements. By doing so, the decision not only supports organizational continuity and efficiency but also ensures that employees enter into contracts with a clear understanding of their rights and obligations.

Supreme Court Lays Down Crucial Features of Doctrine of Legitimate Expectation

Case Referred: Army Welfare Education Society New Delhi Versus Sunil Kumar Sharma & Ors. Etc., Civil Appeal Nos.7256-7259 Of 2024

The Hon’ble Supreme Court recently observed that the doctrine of legitimate expectation cannot be extended to the operation of a contract, highlighting a list of crucial features that characterise the doctrine of legitimate expectation.

The present case arose from appeals arising from a judgment of the Hon’ble High Court of Uttarakhand. In this case, Teachers (Respondents) sought a writ of mandamus against the Private Institution/Society (Appellant) seeking salary and benefits at par with salaries and benefits received by the Government Teachers. The Respondents submitted that they had legitimate expectations that the Appellant would provide the same benefits and salary as received by the government teachers.

The Hon’ble Supreme Court observed that there is no statutory obligation on the Appellant which requires that the salaries and allowances of the Respondents are to be kept at par with what is payable to teachers of Government institutions. It was held that Appellant for the purposes of its relationship with its employees, cannot be regarded as a public or government authority. The Hon’ble Supreme Court observed that the doctrine of legitimate expectation would have no applicability to the facts of the present case, relying on the judgements of Union of India v. Hindustan Development Corporation [(1993) 3 SCC 499], Ram Pravesh Singh v. State of Bihar [(2006) 8 SCC 381], and Jitender Kumar v. State of Haryana [(2008) 2 SCC 161]. The Court observed the following crucial features that characterise the doctrine of legitimate expectation:

 

 

“ a.    First, legitimate expectation must be based on a right as opposed to a mere hope, wish or anticipation;

1. Secondly, legitimate expectation must arise either from an express or implied promise; or a consistent past practice or custom followed by an authority in its dealings;
2. Thirdly, expectation which is based on sporadic or casual or random acts, or which is unreasonable, illogical or invalid cannot be treated as a legitimate expectation;
3. Fourthly, legitimate expectation operates in relation to both substantive and procedural matters;
4. Fifthly, legitimate expectation operates in the realm of public law, that is, a plea of legitimate action can be taken only when a public authority breaches a promise or deviates from a consistent past practice, without any reasonable basis.
5. Sixthly, a plea of legitimate expectation based on past practice can only be taken by someone who has dealings, or negotiations with a public authority. It cannot be invoked by a total stranger to the authority merely on the ground that the authority has a duty to act fairly generally.”

The Hon’ble Court determined that legitimate expectation, as a device to keep a check on “state arbitrariness” does not extend to or govern contracts between private parties. In the course of this matter, the Court had also determined that the relationship between the administration of a private educational institution and its employees is contractual, and so governed by private law. The appeal was allowed, and the order by the High Court of Uttarakhand was set aside, though the appellants were directed to not discharge the respondents from service.

***

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