JUDICIAL UPDATE

 

CA. Pramod Lingden

CA. Lingden is a Member of ICAN. He can be reached at: ca.pramodlingden@gmail.com

 

Case-I: Banks & Financial Institutions Act, 2073 & Other Prevailing Laws

Supreme Court Decision Date: 2082/12/15

Supreme Court Case No.: 082-WO-0502

Parties: Ratneshwor Pd Sharma, Kathmandu (Petitioner) v. Citizen Bank International Ltd, Kathmandu et al. (Respondents)

 

Ineligible for Director Candidacy in the Ordinary Share Group

Abstract:

Maintaining corporate governance in any bank and financial institution is mandatory and indispensable. When the law provides distinct arrangements for promoter shareholders and ordinary shareholders, one shall comply with the prevailing laws, rules, and relevant directives to remain or enter as a director of a bank or financial institution. If a promoter shareholder enters as a director from the ordinary shareholders' group instead of contesting from their own group, dominance of the promoter share group would be established, leading to apprehension among ordinary shareholders and impacting the public financial system.

Background

A notice was published by the respondent, Citizen Bank International Ltd, on 2082/07/24, stating that the Annual General Meeting (AGM) of F/Y 2081/82 shall be convened, and an election shall be held to elect four directors to the Board of Directors, consisting of one director from the promoter share group and three directors from the ordinary share group. The petitioner is a shareholder of the respondent bank, holding ownership of both promoter as well as ordinary shares. Therefore, on 2082/08/04, the petitioner registered his candidacy for the position of director representing the ordinary share group.

However, the election officer of the respondent bank, referring to Section 1(15) of Directive No. 6 of the Unified Directives, 2081 issued by the Nepal Rastra Bank (NRB) decided to disqualify and cancel his candidacy to contest from the ordinary share group on 2082/08/08. The Directive provides that shareholders holding shares of the promoter share group shall not be entitled to file candidacy for the position of director from any group other than the promoter share group.

Petitioner, being dissatisfied with such decision of the respondent bank, filed a writ petition to the Supreme Court requesting for the issuance of an order of Certiorari to quash the decision of the respondent bank dated 2082/08/08, along with the Section 1(15) of the Directive No. 6/081 issued by the NRB which is contrary to the provisions enshrined in Articles 17, 18, and 25 of the Constitution of Nepal, Section 79 of the Nepal Rastra Bank Act, 2058, and Sections 18, 20, 67, 86, and 87 of the Companies Act, 2063; and further requesting for the issuance of an order of Mandamus against the respondent to maintain and validate his candidacy.

Arguments of the Parties

Petitioner

• Petitioner contends that he is a shareholder of the respondent bank holding both ordinary and promoter shares. Section 87 of the Companies Act, 2063 provides for the appointment of directors. However, this section nowhere stipulates that a shareholder holding both promoter and ordinary shares is eligible to become director from the promoter group only.
• Furthermore, he contends that Section 1(15) of the Directive No. 6/081 of the Nepal Rastra Bank Unified Directives is against Articles 17, 18, and 25 of the Constitution of Nepal, Section 79 of the Nepal Rastra Bank Act, 2058, and Sections 18, 20, 67, 86, and 87 of the Companies Act, 2063. Therefore, the directive violates the petitioner's constitutionally and legally guaranteed fundamental rights.

Respondents

• The respondent bank argued that regulation of banks and financial institutions is carried out by NRB. For maintaining discipline and regulation in banks and financial institutions, NRB issues directives exercising the powers conferred by Section 79 of the Nepal Rastra Bank Act, 2058.
• While the Banks & Financial Institutions Act, 2073 envisions two distinct types of shares, promoter and ordinary shares, the petitioner is seen to hold dual shares. Section 1(15) of Directive No. 6 of the Unified Directives, 2081 issued by the NRB for the corporate governance of banks & financial institutions clearly stipulates that shareholders holding shares of the promoter group shall not be eligible to contest for directorship from any group other than the promoter group. Therefore, the writ petition of the petitioner shall be dismissed.

Supreme Court Judgment

The Supreme Court dismissed the writ petition of the petitioner stating the following grounds:

• Banks & Financial Institutions Act, 2073 defines and classifies the promoter share group and the ordinary share group into separate categories, portraying promoter shareholders and ordinary shareholders as possessing distinct legal statuses. Maintaining corporate governance in any bank and financial institution is mandatory and indispensable. When the law provides distinct arrangements for promoter shareholders and ordinary shareholders, one shall comply with the prevailing laws, rules, and relevant directives to remain or enter as a director of a bank or financial institution. If a promoter shareholder enters as a director from the public shareholders' group instead of contesting from their own group, dominance of the promoter share group would be established there, leading to apprehension among ordinary shareholders and impacting the public financial system.
• The writ petitioner, being a shareholder of the promoter share group as well, faces no legal bar to becoming a candidate for director from the same group. He has failed to present any factual or legal basis showing his entitlement to contest from the ordinary share group as an ordinary shareholder instead of contesting in his capacity as a promoter shareholder. In this light, the claims of the petition do not appear to be based on facts.
• As Unified Directives issued by NRB apply with the force of law upon banks & financial institutions, the claim of the petitioner that he shall be allowed to contest from the ordinary (public) shareholder group does not appear consistent with justice and law.
• Therefore, considering the statutory provisions contained in Section 79(1) of the Nepal Rastra Bank Act, 2058, Section 131 of the Banks & Financial Institutions Act, 2073, Section 1(15) of the Directive No. 6 of the Unified Directives, 2081, as well as the judgment and principles propounded by this Court; and since there exists no violation of the petitioner's constitutionally and legally guaranteed fundamental rights by the decision of the election officer dated 2082/08/08, it is hereby held that this writ petition against the respondents stands dismissed.

 

Case-II: Public Procurement Act, 2063 and Labor Act, 2074

Supreme Court Decision Date: 2082/11/25

Supreme Court Case No.: 082-WO-0817

Parties: Navadurga Security Guard Supply Service Pvt Ltd, Kathmandu (Petitioner) v. Civil Service Hospital, Kathmandu et al. (Respondents)

Employer shall Provide Minimum Remuneration Despite an Insufficient Bidding Amount

Abstract:

The net amount received by the labor supplier, after the deduction of 1.5% Tax Deduction at Source (TDS), is insufficient to meet the minimum wage of the laborers as prescribed by the Labor Act, 2074. However, the terms and conditions of the labor supply agreement executed on 2082/10/09 between the respondent and the labor supplier appear paramount. The agreement stipulates that the remuneration, benefits, and facilities of the deployed employee shall comply with the provisions of Section 58(3) of the Labor Act, 2074 and shall not be less than the minimum remuneration. Therefore, such provision of the agreement makes the employer liable to pay the minimum remuneration despite an insufficient bidding amount.

Background:

Civil Service Hospital, Kathmandu initially published a public notice for the procurement of hospital security services through a contract to supply 50 qualified security personnel on 2082/05/23, followed by a second notice on 2082/06/24, and a third notice on 2082/07/19. A total of 7 companies, including the petitioner participated in the bidding process invited by the respondent hospital for the supply of security personnel services.

During the evaluation of the bids received, 3 bidders but excluding the petitioner company were determined to be technically and financially substantially responsive. The total amount quoted by all 3 bidders who were deemed substantially responsive was identical, amounting to Rs. 16,901,862. As the amounts quoted by the bidders were identical, a notice was published on 2082/08/15 stating that one bidder would be selected from among the tied bidders through a lottery system. Accordingly, M/S Deluxe Security Service Pvt Ltd was selected.

Upon fulfilling the procedures pursuant to Section 23(2) and (3) of the Public Procurement Act, 2063, the respondent hospital published a notice of intention to accept the bid on 2082/09/28 in accordance with Section 27(2) of the idem Act. Subsequently, a formal procurement agreement regarding the provision of security services was executed between the respondent hospital and M/S Deluxe Security Service Pvt Ltd on 2082/10/09. Pursuant to the agreement, the concerned company deployed security personnel and commenced operations from 2082/10/11.

The petitioner contends that after a 1.5% Tax Deduction at Source (TDS) from the bidding amount, the net amount remaining in the hands of M/S Deluxe Security Service Pvt Ltd would be insufficient to meet the minimum wage prescribed by the Labor Act, 2074. Therefore, the petitioner, being dissatisfied with such unfair decisions of the respondent to select a disqualified bidder, filed a writ petition to the Supreme Court requesting to issue an order of Mandamus along with other appropriate orders commanding the respondents to include its experience certificate in the evaluation, and to refrain from accepting the bids of, or entering into contracts with bidders who are not substantially responsive.

 

Arguments of the Parties:

Petitioner

• M/S Deluxe Security Service Pvt Ltd, the labor supplier with which the respondent hospital executed labor supply agreement, does not fulfill the criteria specified in the tender documents and Labor Act, 2074. It fails to guarantee the payment of the minimum wage prescribed by labor law to the laborers. There is a shortfall of Rs. 373.93 in the amount quoted by M/S Deluxe Security Service Pvt Ltd compared to the minimum wage prescribed by the Labor Act, 2074. Therefore, the act of issuing the Letter of Intention to a bidder that fails to fall within the criteria of Section 23 of the Public Procurement Act, 2063 is contrary to prevailing laws.
• Even when the its bid was qualified and admissible, the act of rejecting it and proceeding to execute a contract with an unqualified bidder is transparently unfair and lacks credibility, which runs counter to the overarching objective of the Public Procurement Act, 2063.

Respondents:

• Contrary to what is asserted in the writ petition, TDS is not an amount deducted from the remuneration of the laborers. Instead, the TDS is deducted against income of the labor supplier. Civil Service Hospital will deduct 1.5% TDS at the source itself while paying to labor supplier in accordance with the Income Tax Act, 2058.
• Pursuant to Section 27 of the Public Procurement Act, 2063, there is a mandatory provision to accept the lowest evaluated responsive bid, and the bidder company was selected accordingly. If the bill of the procurement supplier is not legally sound, the labor supplier M/S Deluxe Company ought to have been impleaded as a respondent. However, it has not been made a party to this case. Without impleading the company with which the hospital has executed the labor supply agreement as a respondent, it is impermissible to adjudicate upon the rights of the concerned company through this writ petition.
• There is no ambiguity that laborers shall receive the remuneration they are entitled to under the Labor Act, 2074. The labor supplier (employer) is liable to pay them such minimum remuneration. In case they are deprived, recourse will be taken pursuant to the idem Act. The petitioner has approached this Court by invoking the extraordinary jurisdiction merely because its own bid was not accepted. The petitioner lacks the locus standi to file a writ petition by raising an issue that belongs to the laborers. Therefore, the writ petition shall be quashed/dismissed.

Supreme Court Judgment:

The Supreme Court dismissed the writ petition of the petitioner stating the following grounds:

• As no violation of the provisions of the Public Procurement Act, 2063 and it’s Rules, 2064 is observed in the respondent hospital’s decision to select one bidder through a lottery system from among the bidders quoting identical amounts, and in the subsequent contract execution process, the contention of the petitioner does not appear to be justified.
• In the present dispute, the petitioner has primarily contended that the amount quoted by the labor supplier, M/S Deluxe Security Service Pvt Ltd, is insufficient to meet the minimum remuneration of the laborers, and that after the deduction of 1.5% TDS, the net amount received by the labor supplier falls below the standards prescribed by the Labor Act, 2074. However, the terms & conditions of the labor supply agreement executed on 2082/10/09 between the respondent hospital and the labor supplier, Deluxe Security Service, appear paramount. In the agreement, a mandatory condition has been incorporated stipulating that the remuneration, benefits, and facilities of the deployed personnel shall comply with the provisions of Section 58(3) of the Labor Act, 2074 and shall not be less than the same. Such provision of the agreement makes the employer liable to pay the minimum remuneration despite an insufficient bidding amount.
• It appears that the procurement contract was concluded between the respondent hospital and labor supplier, Deluxe Security Service, on 2082/10/09, and the implementation phase of the said service also already commenced as of 2082/10/11. When a writ petition is filed challenging an agreement executed between any two parties or the rights created therefrom, the parties to the agreement shall compulsorily be impleaded as respondents. In the present writ petition, the petitioner appears to have impleaded only the Civil Service Hospital and its Proposal Evaluation Committee as respondents, but has failed to implead M/S Deluxe Security Service Pvt Ltd, which is a direct stakeholder and beneficiary party to the labor supply agreement. According to the recognized principles of law, prior to the issuance of any order by a court that adversely affects the rights, interests, or concerns of any individual or entity, the concerned party shall be provided with a fair opportunity to present their case, which is an integral part of the principles of natural justice. In the present case, issuing an order that affects the rights of Deluxe Security Service Pvt Ltd whose contract is sought to be quashed, without granting it an opportunity to be heard or without summoning it, does not appear to be just or lawful.