NCLT Denies Itself the Power to Dispense With Meetings in an Amalgamation

Hitherto, schemes of arrangement
were carried out under sections 391 to 394 of the Companies Act, 1956 and the
jurisdiction for sanction of the schemes was exercised by the relevant High
Court. At the initial stage, the role of the High Court was to call for the
meetings of various classes of shareholders and creditors to seek their
approval to the scheme. It had been common practice for High Courts to dispense
with meetings of classes of either shareholders or creditors if an overwhelming
of number of members of the class had already granted their consent to the
scheme in writing, which was presented before the court.
With effect from 15 December 2016,
the provisions of sections 230 to 233 and 235 to 240 of the Companies Act, 2013
were notified, thereby conferring jurisdiction upon the National Company Law
Tribunal (NCLT) to oversee and accord sanction to schemes of arrangement. In
one of the first schemes to be considered by the NCLT, the Principal Bench
thereof passed an order on 13 January 2017 on the question of whether the NCLT
is empowered to dispense with the meeting of a class of shareholders if the
members thereof have granted their consent in advance. The NCLT answered in the
negative in JVA
Trading Pvt. Ltd. and C&S Electric Limited
.
This case involved a scheme of
amalgamation of JVA Trading with C&S Electric. JVA Trading had only four
shareholders, all of who had granted their consent to the amalgamation. Hence,
the question was whether the shareholders’ meeting of JVA Trading could be
dispensed with. Here, after analysing the provisions of the Companies Act,
2013, the NCLT held:
In relation to the
dispensation of the meeting of the equity shareholders of the Transferor
Company is concerned we are not inclined to grant dispensation taking into
consideration the provisions of the Companies Act, 2013 and the rules framed
there under both of which expressly do not clothe this Tribunal with the power
of dispensation in relation to the meeting of shareholders/members. On the
other hand reference to Section 230(9) of the Companies Act, 2013 … discloses
that the Tribunal may dispense with calling of a meeting of creditor or class
of creditors where such creditors or class of creditors, having at least ninety
per cent value, agree and confirm, by way of affidavit, to the scheme of
compromise or arrangement and does not provide for the dispensation of the
meeting of members.
Further, the
Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 more
specifically Rule 5 which provides for directions to be issued by this Tribunal
discloses that determining the class or classes of creditors or of members
meeting or meetings have to be held for considering the proposed compromise or
arrangement; or dispensing with the meeting or meetings for any class or
classes of creditors in terms of sub-section (9) of section 230.
Keeping in view
the above provisions, dispensation of the meetings of members of the company
cannot be entertained.
This effectively means that the
NCLT can never dispense with the holding of a meeting of a class of
shareholders or creditors (except under section 230(9)) even if such a meeting
turns out to be an empty formality. This will certainly add to the costs and
inefficiencies in effecting a scheme of arrangement. Under the Companies Act,
1956, courts did regularly grant dispensation despite the absence of any
express provision in that legislation or the accompanying rules. It is not as
if the affected minority shareholders are without any recourse. It is always
possible for them to raise their objections when the scheme is taken up for
consideration by the NCLT after the requisite classes of shareholders and
creditors have approved it.
From a legal perspective, the NCLT
does have general powers that it is at liberty to exercise in order to give
effect to a scheme, for example in rule 24(2) of the rules pertaining to
compromises and arrangements. However, the NCLT seems to be constrained by the
existence of sub-section (9) of section 230, which expressly provides for
dispensation of creditors’ meetings so long as they have been consented to by
90% of the creditors in value. The NCLT’s position is that this is only
dispensation possible, and no other.
This order prompted me to briefly
revisit the legislative drafting of the Companies Act, 2013, and some
indications suggest that it might be consistent with the rather narrow view
adopted by the NCLT in the present case, although the legislative history lacks
full clarity. The Companies
Bill, 2009
did not have any provision relating to dispensation with class
meetings of either shareholders or creditors. It was only during the
deliberations of the Parliamentary Standing Committee on Finance that such a
proposal was made for dispensation with meetings not only of creditors, but
also of shareholders so long as there was adequate support. In its 2010
report
, the Standing Committee recommended that it “needs to be clarified
if written consent is received from the requisite number of members or
creditors, the requirement to hold a meeting could be dispensed with, as the
meeting proposed in the clause is, in effect, to obtain the approval of the
members or creditors”. Clearly the intention was to allow dispensation for both
shareholders’ and creditors’ meetings if the scheme was adequately supported.
Interestingly, the provision that culminated in section 230(9) was introduced
in the ensuing Companies
Bill, 2011
to include references only to dispensations for creditors’
meetings and not for shareholders’ meetings. It appears this is not a case of
oversight. For example, a subsequent
report in 2012
clearly indicates that the Ministry of Corporate Affairs
differed with the suggestion of the Standing Committee regarding dispensation
because “meeting should be held so that the information about the merger,
amalgamation should be there in the knowledge of the members.”
What is unclear though is that if
this logic should apply for shareholders, why should it not apply to creditors
as well? Is there any reason why shareholders must be treated differently
(without dispensation) as opposed to creditors (with dispensation) while the
protection of minority interests may hold equally good in both cases,
especially since schemes of arrangement could be entered into between a company
and its shareholders (e.g. amalgamation) or between a company and its creditors
(corporate debt restructuring). Hence, while the legislative history suggests
keenness on the part of the Government to preserve corporate democracy through
the requirement of meetings, there less clarity on why a distinction has been
made between shareholders’ and creditors’ meetings. Moreover, although the
intention of sub-section (9) is to facilitate corporate debt restructuring (and
hence the emphasis on creditors’ meetings), its current wording is broad enough
to include other types of schemes. For example, it might result in curious situations,
such as where in an amalgamation, a shareholders’ meeting cannot be dispensed
with even if 100% of the shareholder consent, but a creditors’ meeting in the
same amalgamation can be dispensed with if only 90% of the creditors consent.
Surely, this cannot have been intended. In such a context, the reliance by the
NCLT on sub-section (9) that applies to creditors in order preclude itself from
granting dispensation to a meeting of a class of shareholders may not be beyond
doubt.
Despite the legal niceties
involved, the interpretation adopted by the NCLT is likely to cause
considerable practical issues, and might hamper genuine transactions that could
have been carried out efficiently where shareholders may have approved the transaction
up front. This may require further reconsideration either on the part of the
NCLT or through appropriate amendments to the relevant Rules.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • In case of Amalgamation of the small Companies, whether the meeting of the Creditors and Shareholders can be dispensed with, if the consent is given by 100 % holders thereof…. ?

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