Section 185 of the Companies Act, 2013 and its impact on lending transactions

Section 185, effective from September 12, 2013 and Section 186, effective from April 1, 2014 are two provisions of the (“Act”) which have created much anxiety among the business community because of its direct impact on capability of the businesses to raise finance.

A bare reading of Section 185 of the Act, suggests that advancing of loans or giving of corporate guarantee or providing any security by any company (for the purposes of this article, the “Lending Company”) to a firm and/or body corporate with common management with such Lending Company is completely proscribed. Also prohibited are transactions where the Lending Company is advancing loans, providing security or guarantee to body corporate, the management of which is accustomed to act in accordance with the direction or instructions of the board of directors/or any director of such Lending Company. No guidance has been provided as to what constitutes “acting in accordance with the direction or instructions of the board of directors/or any director”. Furthermore, this provision has been made applicable both to the public and private companies and even the provision of undertaking such transactions with the approval of the Central Government (as under Section 295 of the Companies Act, 1956) has been omitted under the new Act.

The compliance of Section 185 of the Act has been ensured by putting in stringent punishments for contravention, the fine being as high as Rs.5,00,000 (Rupees Five Lakhs) extendible to Rs. 25,00,000 (Rupees Twenty Five Lakhs) for the Lending Company. The director or any other person to whom the loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the person shall be punishable with imprisonment which may extend to six (6) months along with a fine which shall not be less than Rs.5,00,000 (Rupees Five Lakhs) but may extend to Rs.25,00,000 (Rupees Twenty Five Lakhs) or both. The stakes being this high for both the Lending Company and the persons receiving such loan and/or the benefit of the guarantee/security, makes it very important to understand the nuances of this provision.

The following transactions are permitted under Section 185 of the Act:

  1. Any loan provided by a holding company to its wholly owned subsidiary company for its principle business activities.
  2. Any guarantee given or security provided by a holding company in respect of any loan for funding the principle business activities of its wholly owned subsidiary company;
  3. Any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company for its principle business activities;Even though ‘principal business activity’ has not been defined under the Act, generally the activities provided under the main objects of the memorandum of association should qualify as a principal business activity of that company.
  4. Any loan advanced or guarantee/security provided by a company, which in its ordinary course of business provides loans or gives guarantees or securities for repayment of any loan, provided that such loans shall not be provided at an interest rate less than the bank rate declared by the Reserve Bank of India. No loan may be given by the Lending Company at an interest rate lower than the prevailing yield of one year, three year, five year or ten year government security closest to the tenor of the loan.The phrase ‘ordinary course of business’ has also not been defined under the Act. This is because there can be no universal meaning ascribed to it. What is ordinary for one entity or one type of business or one sector or even one region may not be so for another. However, based on judicial precedents and keeping in view the intent and purpose of the provision, a transaction can be said to be in ‘ordinary course of business’, if:
  1. The Lending Company has in the past provided loans/guarantees/securities to such entities as a matter of routine.[1] The frequency of such transactions[2] and a certain amount of continuity is imperative as ‘business’ itself implies carrying on a particular trade or vocation as a ‘continuous’ activity by application of labour, skill and money to earn the income. [3] Also, important is that such transactions have been appropriately disclosed in the financial statements of the Lending Company for the past years.[4] The disclosure of such transactions in the financial statement indicate that such activities were being carried on normally in the usual course of business, specifically inclusion of the amounts involved as ‘business income’ gives further credence to the fact.
  2. The memorandum of association of the Lending Company allows for such transactions i.e. the providing of loans/guarantees/security to other entities should be part of atleast the incidental or ancillary objects of the memorandum of association. The Courts have not been uniform in their ruling with respect to the significance of the objects clause of the memorandum of association in making this assessment. The Courts also differ on whether an activity is in ‘ordinary course’ only if is part of the main objects or whether an activity ancillary to the main objects may also be considered so.[5]
  • The Lending Company has passed a board resolution, specifically, categorising the transaction as being in ‘ordinary course of business’. Also, the board should have examined the transaction from the perspective of Section 185 and should have resolved to undertake the same. The consent of all the directors present at the meeting should have been obtained in accordance with Section 186 (5) of the Act. Whether a transaction is in the ‘ordinary course of business’ is a question of fact and a board resolution is important in making this assessment.[6]
  1. The loan documents/security documents executed for the purpose of the loan/security/guarantee provided by the Lending Company should contain a clause stating that the transaction contemplated therein is in ‘ordinary course of business’.
  2. The transaction should be conducted at arms’ length basis and appropriate disclosures should be made with respect to the interest of any management of the Lending Company in the entity receiving the loan, guarantee or security. Ultimately the aim of Section 185 is to prohibit related party transactions where the Lending Company provides undue advantage or gain to any other entity related to the management of the Lending Company and to avoid conflict of interest scenarios for directors of such Lending Company.
  3. The Lending Company (not if it is a banking company or an insurance company or a housing finance company providing the loan/security/guarantee in ordinary course of business or company engaged in business of financing of companies or of providing infrastructural facilities[7]) should have complied/should comply with the following conditions under Section 186 of the Act:
  1. The loan or the guarantee/security to be provided should be within the limits prescribed under Section 186 of the Act i.e. it should not exceed the higher of 60% (sixty percent) of the paid up share capital, free reserves and securities premium account or 100% (one hundred percent) of its free reserves and securities premium account. Alternatively, if the giving of loan, security or guarantee is beyond the prescribed limits the Lending Company should have obtained special resolution of its shareholders in the general meeting.
  2. The Lending Company should disclose to its members in the financial statement the full particulars of the transaction, including the purpose for which the loan or guarantee or security is proposed to be utilised.
  3. The prior approval of each of the public financial institution from which the Lending Company has availed any term loan should be obtained in case: (1) the loan or the guarantee/security to be provided by the Lending Company is beyond the limits prescribed under Section 186 of the Act; and/or (2) the Lending Company has defaulted in repayment of loan instalments or payment of interest as per the terms and conditions of the term loan availed from the public financial institution.
  4. The Lending Company should not be in default of repayment of any deposits or payment of interest.
  5. The Lending Company shall have maintained a register in Form MBP 2 as per Companies (Meetings of Board and its Powers) Rules, 2014 and enter therein the particulars of loans and guarantees given, securities provided by it.
  1. The borrowing company shall have obtained requisite special resolutions under Section 180 (1)(a) and Section 180 (1)(c) of Act, if applicable.

Popular Views in the Market

One view in the market is that as Section 185 of the Act begins with ‘Save as otherwise provided in this Act’, it should be subject to Section 186 of the Act, implying that any transaction permitted under Section 186 should be permitted under Section 185 of the Act. However, this view makes the very existence of Section 185 redundant which could not have been the intent of the legislature. Such an interpretation of Section 185 should be avoided.

A popular method being used by financers/investors and creditors to comply with Section 185 is to make the Lending Company providing the security or guarantee a co-borrower to the lending transaction. This works well for some transactions but in other cases group companies are found reluctant to undertake such responsibilities.

Also, financers/investors/creditors have been seeking organisational restructuring of holding and subsidiary companies including eliminating common directors and other senior management to avoid falling within the purview of Section 185. For further comfort, certificates of non applicability of Section 185 from the company secretary or a director of the Lending Company is being insisted upon as pre-condition to such lending transactions.

Conclusion

One must look at Section 185 of the Act in the right spirit in which it was modified from its predecessor provision under the Companies Act, 1956. The objective was not to hinder business and financing of businesses but was to discourage related party lending transactions which bred favouritism and nepotism. Any transaction should be tested on the anvil of Section 185 of the Act while keeping this in mind.

Legal Education and its Challenges

Chief Justice Burger in his address to the American College of Trial Lawyers in Columbia observed:

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“In some jurisdictions, up to half of the lawyers who appear in court are so poorly trained in that they are not properly performing their job and that their manners, their professional performance and their professional ethics offend a great many people. They are engaging in on the job training at the expense of their clients’ interest and the public.”

Chief Justice Burger’s comment would hold equally good in the context of legal profession and its education in India. It is very general knowledge that a large part of the two lakh graduates being added every year to the existing ten lakh advocates in the country, are absentee law students who pass out from about 500 law colleges/schools. Such advocates ultimately learn, if at all, at the cost of the poor clients and court time. No wonder then that this, in turn, leads to the dispute resolution machinery to be seen as a villain by the society at large whereas this should be avoided as far as possible.
This unfortunate and disturbing situation demands that we ponder as to where the things have gone wrong. An effort has been made in this particular essay to identify the challenges the present legal education faces in India and also look into the means of arresting the falling standards so as to make it socially relevant.

Historical clock says:
The concept of dharma, in the Vedic period, can be seen as the concept of legal education in India. Although there is no record of a formal training in law, the dispensation of justice was to be done by the king on the basis of a self-acquired training. Justice was also administered by the king through his appointees who in turn were persons of known integrity and reputation of being fair and impartial. The guiding force for the king or his appointee was the upholding of dharma.
The institutions for formal legal education were introduced by British after the establishment of their rule in India. The first step in this direction was taken in 1857 when the three universities in the presidency towns of Calcutta, Madras and Bombay introduced legal education as a subject for teaching . This was followed by the setting up of a law college at Lahore after the establishment of PunjabUniversity. Thus, a beginning in the formal legal education grew stronger and showed its light in a part of the sub-continent.
At the initial stages, law courses were not full time. A student could take up law as a part-time course along with a full master’s course in social sciences or languages. There were hardly any standards or qualifications prescribed for the prospective law graduates. Though a beginning in imparting formal instructions in law leading to a degree was made with a limited number of law schools, the well offs in the society, however, would go to England to return as barristers.
Rule of law became the fundamental doctrine for governance of the country with adoption of the constitution in the post-Independence era. Consequently arose the need to streamline legal education in the country. During the decade of the fifties, law was introduced as a course (full time as well as part time) by a large number of institutions. In the absence of any rules for starting law courses and the qualifications for the faculty, the standard of the legal education went down during the infancy period itself. The decline was lamented by Dr. S.Radhakrishnan when he said:

“Our colleges of law do not hold a place of high esteem either at home or abroad, nor has law become an era of profound scholarship and enlightened research”.

The sorry state of affairs of legal education was echoed by the law commission in 1958. It observed :

“In the period of about ten years which has lapsed since the publication of the Radhakrishnan commission report, the position in regard to legal education in this country, it appears, has definitely deteriorated.”

The portals of our law teaching institution- manned by part-time teachers- open even wider and are accessible to any graduate of mediocre ability and indifferent merits. It is not surprising that in this chaotic state of affairs in a number of these institutions, there is hardly any pretence of teaching. This character is followed by law examinations held by the universities many of which are mere tests of memory and poor ones at that, which the students manage to pass by cramming short summaries published by enterprising publishers. The result, plethora of half baked lawyers who do not know even the elements of law and who are let loose upon society as drones and parasites in different parts of the country.

The Mushroom of Challenges:
In 1958, when the Law commission voiced its concern at the deterioration in legal education, there were hardly forty three institutions in the country preparing about twenty thousand students for the law examination. One notices a mushroom growth of law colleges in the sixties after enactment of the Advocates Act. This phenomenon continues unabated till date. The magnitude of mushrooming law colleges can be gauged from the fact that up till the early nineties, there were four law colleges in Bhopal whereas there are twenty two law colleges. Same is true about U.P. and Rajasthan in this region. These colleges work as money spinners and has put legal education at the back seat Admissions to these law schools are easy as the eligibility for admission is the minimum marks prescribed for the qualifying graduation examination. Thousands of students become eligible for admission and all of them get it. These sub-standard law schools have neither adequate buildings nor the qualified faculty in the required strength nor any library. Most of these institutions have part-time teachers with the exception of a few full time teachers. A student turns out a law graduate from such schools while sitting at home a few hundred miles away and without visiting the law school. These absentee law graduates play havoc with the clients and the court time after their enrollment as advocates. As of today, about 101 universities and about 500 law colleges are churning out two lakh law graduates every year. The first step to check the rot in legal education was to introduce the five year law course after the plus two level throughout the country. NationalLawSchool of IndiaUniversity, Bangalore is running exclusively a five year law course from the time it was set up in the year 1988 and along with it several other National Law Schools have come in various states of India. As a transitory measure, a three year programme is also allowed at various colleges and universities. Like other professional courses in engineering, medicine, commerce, architecture, etc. a student now decides his career in law at the turning point of plus two level. Introduction of a uniform five year law course would go a long way in improving the standard of legal education in the country. Still there remain some loopholes within the system.

Learning from the Critical Legal Studies and its application:
We should develop our first year courses into systematic embodiments of our views about the present and future organization of social life. In particular, we should teach the students that bourgeois or liberal legal thought is a form of mystification. The students should be taught to understand the contradictions of that thought, and the law teachers should make utopian proposals to them about how to overcome those contradictions.
The beginning should happen with a practical proposal. I think it’s different both in content and in spirit from the ones that liberal or vaguely progressive law professors typically put forward. For the last maybe fifteen years in the United States there has been an attempt to politicize the classroom. Politicizing the classroom means trying to teach basic contract, property and tort doctrine using cases and hypos that will perform three functions.
First, the cases and hypos have to be pedagogically useful just to get the students to learn black letter law. The teachers should have the major responsibility to teach doctrine, bar review type stuff. Though the students should have the right to criticize the professor for not doing enough and also question the questions. The need for cases and hypos that will perform this function while still working well to further the second objective, which is that cases and hypos should illustrate gaps, conflicts and ambiguities in the system of black letter law. The students should be made to see the pervasiveness of occasions for choice by judges when they are deciding what the rules should be. The third element, the politicizing element, depends on the first two. The cases and hypos that pose the problem of what to do with a gap, conflict or ambiguity in the system of doctrine should split the conservatives and the liberals in the class as close to right down the middle as possible. In other words, the students should find themselves evenly divided between two sharply contrasting yet possible rules to govern the fact.

Socio-Legal Research Perspective:
The level of research facilities available to a law teacher in India is not conducive to sustained research. The lack of role-facilities generates confusion, conflict as well as ambivalence towards primary role obligation calling for sustained attempts to contribute to knowledge in the field. A law teacher (unless he is a dean or Head of the University Department or a principle of a law college) gets no typing and duplicating assistance. Very few know how to type and of these not many can afford a typewriter. Availing the services of a professional typist remains for most of them a luxury. The role of Indian Council of Social Science Research can be very significant. Much of the current research effort has no relevance to contemporary social and national problems and suffers besides from lack of rigor in its analysis of phenomena and synthesis of facts. It is not yet emancipated from its tutelage of western theories and has failed to develop research tools, designs and models of its own appropriate to the Indian situation. Multi-disciplinary and inter-disciplinary research is yet rare. A most encouraging feature in the recent times has been that the concept of Indian law schools with focused research has made some profound and everlasting mark. The law community has actually acknowledged the same.

Conclusion:
The legal education should be able to meet in the ever-growing demands of the society and should be thoroughly equipped to cater to the complexities of the different situations. Specialization in different branches of the law is necessary. The requirement is of such a great dimension that sizeable or vast number of dedicated persons should be properly trained in different branches of law every year by providing or tendering competent and proper legal education. This is possible only if adequate number of law colleges with proper infrastructure including expertise, law teachers and staff are established to deal with the situation in an appropriate manner. The area of deficiency should be located and correctives should be affected with the co-operation of competent persons before the matter gets beyond control. Reforms in legal education cannot wait any longer and that there can be no improvement in legal education unless we can convince the brilliant young people to accept teaching assignments in law. We need to produce a number of committed and dedicated teachers who in turn need to produce a new crop of hard working lawyers, honest judges and distinguished jurists. This is a tough and certainly a challenging task. As we all know, a teacher is a nation builder and only a committed and dedicated teacher can produce conscientious students, honest professionals, and informed citizens. This is what the nation in general and the legal profession in particular needs today.

Is Legal Process Outsourcing an Ethical Practice

Since time immemorial, the legal profession has been acknowledged as the ‘’nobel profession’’. The reason why legal profession was braded so was because of the firm emphasis made on ethical aspects in the profession. “It is a pleasant world we live in, sir, a very pleasant world. There are bad people in it, , but if there were no bad people, there would be no good lawyers” said Charles Dickens. Lawyers were often meant to be the rescuers  of the wounded. Thus , the nobility of the profession was seldom questioned. However, changes in the nature of practice of law have raised up queries questioining ethics in such practices. Outsorcing and Offshoring  of legal process is one such practice that has been vehemently crticized for being unethica whilst the patrons of Legal process outsourcing have defended it with commendable justifications.

What is Legal Process Outsourcing ?

LPO is the process of obtaining legal support services from an external unit. By, obtaining support services from an outside firm, the outsourcer firm relishes several advantages. If it is from an outside country, it is called as ‘’offshoring’’. “Legal process outsourcing refers to the offshoring of different elements in the legal process by law-firms, corporations, and in-house legal departments (mainly in US and UK) to offshore centres (mainly in India).[1] The object behind the outsourcing is to capture the opportunities prevailing in the external environment. In case of off shoring, the outsourcer shall be depreived of certain benefits and previleges which the outsourced shall be entitled to. Thus, the outsourcer can stay at one place and reap the benefits existing at two different environment.

Reasons for Outsourcing in India

India is the top notch destination for legal outsourcing from U.S.A and U.K. The service sector in India accounted for about 52% of GDP in 2004-05. In fact India’s service exports had more than doubled from US$ 25bn in 2003-04 to US$ 60bn in 2005-06 and now accounts for nearly 37% exports[2]. As Indian nation is geographically situation in a time zone exactly distincitive of these two nations, it facilitates the firms in the U.S.A and U.K to work round the clock. Secondly, Indian law has been inherited from the United Kingdom during the Colonial era, therefore similarities in issues of law diminishes ambiguity to a commendable extent. In addtion , English is considered of pivotal importance in India and priority is given to learn and speak English than the native languages. The linguistic deftness and familiarity in English makes Indians more demanded in the Outsourcing Industry. The cost of labour is another highlighting reason as to why India is preferred. As a result of such factors, the Westerners use India as a major player in the outsourcing Industry.

What is Outsourced ?

The quality of legal work outsourced to India has vastly improvedover the years and now a majority of work includes high end servicessuch as End to End E-Discovery Management (Litigation and Regulatory Reviews), Legal Research, Drafting of Pleadings, IP services, Compliance &Due Diligence and End to End Contract Management[3]. In End to End discovery managemnt  collection of electronically stored information, processing and reviewning by a team of lawyers to code relevant documents to a particular case or regulatory enquiry. The offshore legal team aids the US legal firm in decision making as to whether it would be appropriate for their clients to go to trial or settle out of court on the basis of the review findings. Ontract management involves managing the life cycle of a contract. This includes an extensive use of technology and a perpetualservice for clients from the time the contract is redlined until the expiry of the contract. In the field of Intellectual Property Rights aspects such as trademark search, Copyright search, technical research , registeration and proof reading are outsourced. Legal research on case laws, legislations and statutes pertaining to a particular case is also outsourced.

Ethical Arguments against Legal Process Outsourcing

 Unauthorized Practice of Law ;-

The first and foremost criticism of ‘’Offshoring’’ on ethical grounds is that a part of the legal practice is performed by persons without authorization. The outsourcer may have an authorization, however the agency to which the legal work has been outsourced will not have authentication or authorization as it it geographically located in a place beyond the jurisdiction of the outsourcer. Thus it can be argued that the outsourcer aids and abetts unauthorized practice. American Bar Association’s Model Rules of Professional Conduct states as follows in Rule 5.5[4] ;-

A lawyer shall not practice law in a jurisdiction in violation of the regulation of the legal profession in that jurisdiction or assist another in doing so.’’ limiting the practice

of law to members of the bar protects the public against rendition of legal services by unqualified persons[5].’’

For an illustration ; An Indian attorney is unallowed to practise or to represent any client outside India. In case of Offshoring, America obtains service support from an Indian attorney for an American Client. This is on perspective would amount to abetment of unauthorized practice of law by the American Firm.

However, jurists are of the opinion that Indian is often an ‘’outsourced’’ and it is governed by the Advocates Act and the Bar Council of India Rules

  1. Breach of Confidentiality ;-

The legal profession thrives on confidentiality. Confidentiality and Security have always been an integral possession of the the relationship of lawyers and his clients. It could even be stated that confidentiality would be the foremost factor that makes the attorney-client relationship very delicate. Contrastingly , in the case of the LPO, the confidential information is transmitted by the outsourcer to an outsider firm thereby breaking the strands of confidentiality in the Attorney-Client relationship.  The question of whether the information transmitted is irrelevant in ethical point of view by few scholars who emphasis that one of the important tenets of legal professional ethics is Confidentiality.

If Client Confidences and Secrets are to be Disclosed[6]

MRPC 1.6 Confidentiality of Information (a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b)[7].

To combat the criticism of lack of confidentiality Confidentiality agreements are being utilised. Albeit there are additional safeguards undertaken to prevent breach of confidentiality through world recognized standards and certifications, small sized LPOs are maimed due to credibility issues when pursuing clients.

  1. Biling for Outsourced legal support ;-

Another practice in case of legal outsourcing which is vehemently criticised is the billing for external legal support. The outsourcer hires expernal legal aid for considerable advantages such as cost and time. However, when he bills the client for the advantages he enjoys , it could be termed unfair and unethical.  This criticism can however be vitiated if the Outsourcer  himself bears the expense of the fruits he enjoys.

  1. Conflict of Interests

Cnflict of interest occurs when an LPO undertakes a project, conciously or unconciously, which is detrimental to the interest of the client. However, in order to ensure that there is no conflict of interest, credible LPOs conduct a thorough conflict check prior to undertaking a project and also reject client work in case of a conflict[8].To combat these cracks and crevices, LPOs take adequate precautions by requiring attorneys to sign Non-Disclosure Agreements and moreover maintain a database of attorney profiles and their past project experiences to validate any conflict.

  1. Incompetent Representation

As noted above, proper supervision is required to ensure your client is adequately represented. Conduct the necessary due diligence to ensure the LPO delivers the necessary level of competence. Interview the company in advance, obtain references for both the company and the individual who will be doing the work, request sample work product, and communicate directly with person assigned to your project to discuss to ensure he/she understands both the assignment and ethics involved.

Conclusion

 Ultimately , LPO’s are an impeccable system of generating work and employment. It also serves as an outstanding mode of extending legal services globally and an efficient and effective technique to minimise the cost and to improve the quality of legal research and work. However, as discussed earlier there are several criticisms against the functioning to LPO’s around the globe. Arguments on ethical grounds cannot be avoided as ethics, morality and law are different pages of the same book. While ethics is the branch of knowledge that deals with moral principles, professional ethics is the personal and corporate rules that govern behaviour within the context of a profession. As the ambit of profession has been diversifying and complexing over several years, the concern for ethical practices have arisen. Therefore, there is a necessary requirement for a standard set of rules or regulations to govern the function of legal outsourcing. The American Bar Association and the United Kindom bar have been much ahead of us in formulating a professional code of conduct with regard to Legal Process Outsourcing. On the contraray the Indian Advocates Act or the Bar Council Rules have absolutely no mention about Outsourcing.  To obtain a more holistic monitoring of the Legal Outsourcing activities there has to be either a regulatory or a statutory instrument such that unethical and undesirable actions could be remedied and regulated.

When are the coveted principles of Natural Justice applied in Administrative Law

Natural justice is indeed a humanising principle for it seeks to ensure that law is fair and just and that there occurs no miscarriage of justice. The phrases ‘substantial justice’, ‘fundamental justice’, ‘universal justice’ or ‘fair play in action’ also alludes to the notion of natural justice. It functions on the basis of preconceptions such as ‘man is basically good and hence he must not be harmed’ and ‘one ought to treat others as one would like oneself to be treated’. Though considered a highly noble concept that has much potential, there exists no definition for the same, because the vagueness and ambiguity of the concept is so much so that it has been criticized as ‘sadly lacking in precision’ as per the 1914 decision of R v. Local Government Board, ex p Arlidge[1]. In spite of its flaws, natural justice is widely accepted, adopted and enforced and is considered “an essential part of the philosophy of law.” You may disagree with the previous statement saying ‘uncertainty of law is a cardinal sin’. However, do bear in mind that the vice of said uncertainty is far outweighed by virtues such as greater possibilities of fairness and prevention of miscarriage of justice among others that the law of natural justice offers. Natural justice mandates procedural fairness and hence seeks to make the decision-making process fair and reasonable. Actions of the public authorities are also subject to be governed by the principles of natural justice. Such actions come under the ambit of administrative law for it is the law that deals with the decision-making of administrative units of the government (administrative tribunals, commissions etc).

If one were to trace the history of administrative law, he would stumble up on the conclusion that administrative law flourished as a body of law in the twentieth century because of the creation of more government agencies owing to the newly popular notion of ‘welfare state’. Though natural justice principles were in existence since ancient times, there was little intersection of the same with the realm of administrative law. In fact the very first intersection between the said realms of law occurred in 1963 in Britain in the landmark case of Ridge v. Baldwin[2] where the principle laid down by the Donoughmore Committe, that administrative decisions ought to be immune from the principles of natural justice, was set aside. In the modern day, an administrative body is expected to act with fairness in all instances even if the statute is silent about such application. Miscarriage of justice is thus sought to be avoided in earnest. This common law principle is in use in India and is highlighted by cases such as Maneka Gandhi v. Union of India[3].

The following rules are pre-requisites to the application of principles of natural justice to administrative law:

  1. The right to procedural fairness must be secured for both parties. They should be allowed to access non-confidential information and must be given sufficient time to prepare their case. Hence, both parties ought to be given proper opportunity to present their case.
  2. The persons making submissions are entitled to an opportunity to be heard.
  3. The decision-maker must be an unbiased person as regard to the case concerned. He must be someone who holds no personal interest in the outcome of the case.

Specific instances of application of natural justice principles

Specific instances of application of natural justice in administrative law fall within the ambit of disciplinary actions against:

  1. Government employees: A civil servant of the government cannot be dismissed without holding an inquiry against him and into the concerned matter. He should also be informed of the charges against him for which said inquiry is being conducted.
  2. Employees of public authorities: An employee who is employed under a public authority cannot be dismissed without being granting a fair hearing.
  3. Pensioners: It is impossible for the government to reduce or to withhold the pension of a person without giving the pensioner an opportunity to be heard.
  4. Students: A student who is facing disciplinary action cannot be expelled for he is entitled to fair hearing before appropriate authorities as per the principles of natural justice. The same is so even if his exam results are sought to be cancelled as a disciplinary action. However, it must be borne in mind that said principle does not hold true for expulsions from the institution on the basis of academic grounds.

General Instances of application of natural justice

  1. Discretionary powers: Black’s Law Dictionary[4] defines discretionary power as “one which is not imperative or, if imperative, the time, manner or extent of execution of which is left to donee’s discretion.” When a public official, while acting in an official capacity, decides upon an official matter solely on the exercise of his own judgement, he is exercising his power of discretion. In the exercise of such powers, the principles of natural justice must be adhered to so as to ensure that such exercise of said power is not unfettered.
  2. Right to property: Article 300-A of the Constitution of India provides for the right of a person not to be deprived of his property except by authority of law. If a person’s right to property is taken away from him by administrative action, and not by way of any written law, he is entitled to have principles of natural justice applied in case of such deprivation. For instance, in the case of Pratap v. Soni v. Gandhidham Development Authority[5] it was held that, prior to the passing of an administrative order to demolish a house the occupant ought to be given appropriate show-cause notice.
  3. Powers of search and seizure: Powers of search and seizure that are rather extraordinary are given to the State so as to ensure security of the society. The exercise of such powers by the State becomes unwarranted if they do not adhere to the principles of natural justice. For instance, in order to exercise the power of confiscation, the affected party must be given the right to be heard.
  4. Government contracts: In case of the government contracting with a private party, the principles of natural justice ought to be adhered to, provided the action has a statutory basis, as was stated in the case of State of Haryana v. Ram Kishan.[6] By way of the doctrine of fairness, it is thus possible to amend or alter the express terms of such a contract.
  5. Blacklisting: The process of blacklisting disables or disqualifies a person from dealing with the concerned authority of a particular area for certain purposes. It is a relatively modern administrative technique which Wade classifies an oppressive instrument by both legal and constitutional impropriety. In modern India, where corruption is common practice and scams are being exposed every other day, blacklisting is quite common an occurrence. The persons that are proposed to be blacklisted are to be guaranteed a right to be heard.
  6. Replacement of statutory bodies and withdrawal of benefits: Principles of natural justice must be adhered to if the government seeks to suspend or supersede a statutory body such as Panchayat or a Municipal Corporation. If a person is to be stripped of the benefits granted to him by way of administrative action, he must be granted a fair and just hearing.
  7. Licensing: Licensing equips the licensing authority with the power to regulate certain activities. Though cancellation of a license is not strictly an administrative activity, the refusal to grant a license or suspension of license before actually cancelling it constitutes an administrative action. Principles of natural justice must be applied to such cases.

Apart from the abovementioned, there exist numerous instances of administrative action where principles of natural justice must be applied. Deletion of the name of a person from the election roll, termination of citizenship of an Indian citizen owing to him having acquired the citizenship of another country, an application for winding up by a co-operative society due to insolvency etc are a few examples of the same. The fact that it is somewhat a hectic task to enumerate and elucidate such quasi-judicial and administrative functions is testament to the growth of administrative law as a body of law. It is also further testament to the necessity of the application of principles of natural justice to ensure that the concept of fair play is very much in play as far the growing realm of administrative law is concerned.

Understanding the Law of Sedition

The Famous American Judge ,Justice Oliver Wendell Holmes had declared in 1929 that “If there is any principle of the Constitution that more imperatively calls for attachment than any other it is the principle of free thought — not free thought for those who agree with us but freedom for the thought we hate.” Our Constitution too accommodates a hateful thought under article 19 (1) (a) subject to the restrictions mentioned therein.  Sedition forms one such restriction. However the lack of understanding of the concept of sedition has several misgivings and has the tendency to color an expression of political dissent as sedition. This coloring is attributable to the definition of sedition under section 124A which makes any expression of disaffection towards existing government seditious . Therefore it becomes pertinent  to dispel the doubts about the situation under which  the law may become applicable  and procedural changes it requires in a developing democratic society to eliminate the fear of prosecution for smooth exercise of the free speech right.

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The offence of sedition in India

The first judicial interpretation of section 124A was rendered in the case of Queen Empress v Jogendra Chunder Bose (1892) wherein the Court defined the offence in the following terms ” If a person uses either spoken or written words calculated to create in the minds of persons to whom they are addressed a disposition not to obey the lawful authority of the government, or to subvert or resist that authority if and when occasion should arise, and if he does so with the intention of creating such a disposition in his bearers or readers mind, he will be guilty of the offence of attempt to excite disaffection within the section.” The Constituent assembly deliberately removed the word “sedition” from the constitution in the light of the prevailing section 124A and its interpretation relatable to the restriction “in the interest of security of state ”  present in article 19 (2).

Thereafter in the year 1950, the Supreme Court while considering the constitutionality of the laws prohibiting  circulation of certain magazines  in the interest of  maintenance of public order in two cases, Romesh Thapar v State of Madras and Brij Bhushan v Delhi , ruled that “unless a law restricting free speech is directed solely against the undermining of the security of state or overthrow of it,  a law cannot be a restriction on free speech.” However Justice Fazal Ali, dissenting in both cases observed that even speeches or words calculated to breach public tranquility and leading to public disorder be termed as seditious and should be curtailed. The dissenting view was later reflected in the first amendment to Constitution as the words “reasonable” and “public order” were added in the article 19(2).

Eleven year after the first amendment,  the question pertaining to constitutional validity of section 124A came up before the Supreme Court in the case of Kedarnath v State of Bihar (1962). The Court while declaring the law to be valid cautioned that the section shall not be misused to muzzle free speech which is the life of the liberty. The Court while balancing free speech and section 124A stated that only such activities which are intended, or have a tendency to create disorder or disturbance of public peace by resort to violence can be termed as seditious.  The distinction was  further elucidated in the recent case of Shreya Singhal v Union of India which distinguished advocacy and incitement holding that only later could be punished.

Required Changes

The procedural compliance in making an arrest on  mere filing of complaint under section 124A is inevitable and carries the effect of causing “chilling effect” on the right of free expression. We must remember that procedural law is not to be tyrant but a servant, not an obstruction but an aid to justice. If the procedure has the potential of being misused and abused, then it is the responsibility of the legislature and the judiciary to mould it to bring it in consonance with the constitutionally guaranteed rights. The Supreme Court in 2014  in the case of Arnesh Kumar v State of Bihar has issued the guidelines to be followed before making an arrest under section 498A of IPC due to the misuse of the section. Similar guidelines may also be provided in the light of judicial interpretation of section 124A making it obligatory to establish a prima facie case and obtaining of Courts permission before arresting a person under section 124A.

Conclusion

The application of section 124A is subject to  article 19 (2) i.e a speech may be prosecuted for  sedition when it either affects the security of state or carries the effect of stirring people blood to violently overthrow the existing government. The procedural stringency must be reduced to protect bonafide speeches. In absence of incitement, no speech can be curtailed. To know the law is not merely to understand the words, but as well their force and effect. Let arms yield to the gown and Court decide the nature of speeches. It is our duty to protect our fellow citizens right to speak though we may not agree with them. Most problems will be solved if we start believing that people are not wrong but different.

Private International Law

Jurisdictional issues and applicability of the correct domestic law and conflict of legal remedies in Indian courts viz-a-viz foreign courts have assumed great PRIVATE INTERNATIONAL LAW importance in the recent past in view of the world becoming a global village.  The realm of Private International Law has assumed greater significance and dimensions with the spread of the Indian community across the globe in large numbers. Young and enterprising men and women desirous of career opportunities abroad, move on and relocate themselves for permanent settlement in foreign countries without any hesitation to satisfy their financial needs apart from enhancing their technical skills and intellectual content.  We, Indians are being appreciated across the globe for our adaptability to new language, community living and altogether new lifestyles.  While all these positives have come with the economic growth and the pursuit for excellence abroad in our younger generation, the most important aspects of our culture and value systems have received a true and genuine beating.  As a result in many cases pertaining to Indian spouses/couples settled abroad, we can notice incompatibility of temperament (not at an acceptable marginal level but at a very high level), intolerance to accept the changed life style of either of the partners and constant stress in the marital relationship of spouses/couples living abroad with or without children.  Constant stress and matrimonial discord, invariably leads one of the parties to seek redress within the legal system of the country which they have chosen to pursue their dreams.

In very many cases it is not uncommon to find either the husband or the wife or the live in partner or the spouse, to abscond from the foreign soil in order to escape from the legal clutches of the country where they chose to pursue their dreams.  While absconding from the foreign court’s jurisdiction in most cases we can observe that either one or more children of the couple are taken by the parent who absconds and a whole lot of proceedings are initiated in our country i.e. in India relying on the Guardian and Wards Act and other laws relating to family disputes in India.  The aggrieved person domiciled in the foreign country also resorts to getting remedies legally through such courts having jurisdiction to decide issues like custody, child care, protection of children etc. from the courts of the country of domicile.  Resultant outcome is passing of orders of different nature in both countries favoring either of them.  Most of the times both the spouses decide to remain ex-parte in the foreign jurisdiction and orders are being passed in the absence of either of them.

The following case laws from the Hon’ble Supreme Court and other High Courts has stressed the need to redirect the party approaching Indian courts to their respective country of domicile for pursuing legal remedies such as custody of minor children in the absence of any orders being passed by foreign courts.  However if orders have already been passed by foreign courts the party residing in India where the wife or the husband with or without children are directed to pursue, contest and bring to finality the orders regarding custody of children in the foreign court which is the court of the country where the parties had domiciled foregoing their Indian citizenship.

  • Isabell Singh V. Ram Sing and Anr, reported in AIR 1985 Raj 30, – “I am thus satisfied that it would be in the welfare of both Joanna and Lisa if their custody is restored to the petitioner and she is allowed to take them to the United States of America. I would accordingly direct that the Respondent Ram Singh shall handover the custody of both Joanna and Lisa to the petitioner forthwith. The petitioner is entitled and is hereby authorized to take the children to the United States of America.”
  • Elizabeth Dinsha -Vs- Arvand M. Dinshaw & Anr, reported in 1987 (1) SCC 42 – “As already observed by us, quite independently of this consideration, we have come to the firm conclusion that it will be in the best interests of the minor child that he should go back with his mother to the United States of America and continue there as a ward of the concerned court having jurisdiction in the State of Michigan.”
  • V. Ravi Chandran –Vs- Union of India & Ors., (2010) 1 SCC 174 – “However, in a case where the court decides to exercise its jurisdiction summarily to return the child to his own country, keeping in view the Jurisdiction of the Court in the native country which has the closest concern and the most intimate contact with the issues arising in the case, the court may leave the aspect relating to the welfare of the child to be investigated by the court in his own native country as that could be in the best interest if the child.”
  • Elizabeth Packiam & Another –Vs- State of Tamil Nadu,. CDJ 2013 MHC 3660, – “Finding the petitioners have approached this court with utmost promptitude, that the minors were ordinarily residents of Australia, that no elaborate enquiry into the merits of the rival contentions is called for and it would be appropriate to allow the Courts of the Country of the minors natural habitat to decide upon custody and related issues this court allows this petition.”

“…………as the minors were not ordinarily resident in India and that it would be best to leave issues relating to their custody to Courts in their country of habitat, Australia.”

Both the parents are found to use minor children either one of them or all of them to some practical advantage in order to settle personal scores.  While doing so either of the parents are often involved in character assassination of their counter parts.  Prejudicing the tender mind of the minor children courts could cause havoc in the psyche of the young kids who are in the company of a single parent either the mother or the father.  Children are taught the worst things about their father or mother living in separation due to forced circumstances to tarnish the image of their counterpart and to boost and show that the parent with whom the child is currently living is the best in the world. To satisfy their personal egos, to wreck vengeance on the other partner, unmindful of the agonizing effect that is being etched on the delicate mind of the young child such acts are consciously pursued by none other than the parents.  Winning legal battles and teaching a lesson to the life partner takes centre stage and priority and the spouses are not afraid of cleaning up their savings to achieve the said goal. Some single parents are seen working overtime to make money for budgeting the legal expenses likely to be incurred in prosecuting and defending proceedings. Children also take undue advantage and increase their demands and requirements knowing fully well that certain requirements of theirs will be met if the parent with whom they are residing is made happy even by accusing the other parent.  Lot of emotional undesirable changes affecting the character of the child in the long run gets registered, nurtured and projected unknowingly.  The words such as co-parenting, single mother, single father etc., have all gained significance due to the recent globalization and opening of career opportunities throughout the world. Courts have also started to consider foreign judgments as binding on parties and in all the above Supreme Court decisions, we find that due respect for a foreign decree is being canvassed and subscribed with the authority by the Apex Court of our country perhaps to curb malicious prosecution, self serving litigation etc.

Even though prescribed provision of Public International Law requires only signatory countries to the treaty to honour their counterpart judgments and decrees, the Supreme Court is still considering the nuances, and changes in the Private International Law has come to the aid of the spouse who had secured appropriate orders regarding custody of children from the competent court.  The Supreme Court would go on to add a phrase “comity of courts” to bring in a host of other countries who are not signatories to the treaty regarding execution of foreign decrees.

Writ of Habeas Corpus generally considered as a remedy for securing a detenu who is in illegal custody of either the law enforcement agency or individuals, is the writ i.e. being invoked by the aggrieved parent against whose wish and consent the minor child has been withdrawn from the country of their domicile to the country of birth of the other parent. Various guidelines have been framed by the Supreme Court and the High Courts as to when and how the writ jurisdiction can and cannot be invoked and courts have always come to the rescue of the aggrieved parent by directing the return of custody of children along with their passports with a direction to the other parent to participate in any proceedings relating to custody in a competent court in the country of their domicile.  The spheres of 2 courts, the applicability of laws regarding jurisdiction, the management of litigation and the urgent interim measures regarding visitation rights of either of the parents pending litigation and the temporary custody are all aspects for which proper and effective legal remedy can be availed by invoking article 226 of the Constitution of India or Article 32 of the Constitution of India either before the Hon’ble High Courts or before the Apex Court as the case may be.  The above mentioned case laws will give enough insight into the legal topic private international law – custody of children/visitation rights and enforcement of foreign decree.