NCLAT on Public Interest in an Amalgamation Scheme

[Jai Bajpai is a 3rd year student at School of Legal Studies, University of Petroleum and Energy Studies, Dehradun]

Introduction

The element of public interest in amalgamation schemes has remained a fairly unexplored territory in the Indian corporate law regime. In essence, an amalgamation scheme ought to be beneficial to each and every class of shareholders and creditors and also in public interest. It has long been observed by the courts that amalgamation carries the aim of benefiting the companies involved as a whole. The post discusses principles observed by the National Company Law Appellate Tribunal in the case of Wiki Kids Limited v. Regional Director (December 21, 2017).

Facts of the Case

The petitioner company Wiki Kids Limited (Transferor Company), sought to amalgamate with another petitioner company named as Avantel Limited (Transferee Company). Both of these companies proposed a scheme of amalgamation and then presented it before the Andhra Pradesh High Court seeking directions with respect to holding a meeting of the shareholders and the creditors for the purpose of the said amalgamation.

The High Court accorded a green signal to convene meeting of the shareholders and creditors. Subsequently, the scheme was approved by the shareholders of Avantel Limited by requisite majority. During this time, by way of the notification of the Ministry of Corporate Affairs dated December 7, 2016, the case was transferred to the National Company Law Tribunal (NCLT). Aggrieved by this order, they accordingly, filed a second motion before the NCLT, Hyderabad bench. The NCLT, upon scrutinizing various documents, turned down the scheme on the ground that it was solely beneficial to the common promoters of the two companies and that no public interest was involved.

The NCLT observed that Wiki Kids, after being incorporated in the year 2004, did not commence its commercial operations. Further, this company did not have any real income or profit.  It also observed that Wiki Kids had already spent 95 Lakhs Rupees out of its paid-up share capital of 117 lakh rupees and, even after such a spending spree, the company was only valued at 22 lakh rupees.

Moreover, it was also observed that the promoters of both the companies were common and that Avantel held 99.9% of the shares of Wiki Kids. The tribunal held that the scheme in its entirety was a method to provide financial benefit only to the common promoters. The tribunal held that such a scheme of amalgamation was against public interest and, thus, did not approve of the amalgamation.

Wiki Kids and Avantel, being aggrieved by this decision, approached the NCLAT, which upheld the NCLT’s decision.

It was argued on behalf of Wiki Kids and Avantel that all the statutory requisites were met and no objections whatsoever were raised by concerned authorities such as the Bombay Stock Exchange, the Securities Exchange Board of India, the Registrar of Companies, the Regional Director, the Official Liquidator or the Income Tax Department. They relied upon the ruling of the Supreme Court in Miheer H. Mafatlal vs Mafatlal Industries Ltd (1996), and put forward the argument that NCLT could not act as a court of appeal and ponder upon the view of the concerned parties to the scheme, as the same falls within the purview of the commercial wisdom of the concerned parties. It was also argued that NCLT under its power can only ensure that proper procedure was followed of consultation of the stakeholders. Reliance was placed on the decision of Hindustan Lever Employees’ Union v. Hindustan Lever Limited and arguments were made that the role of NCLT was limited only to ensure that all stakeholders have been consulted in a proper manner and, hence, it was beyond its jurisdiction to refuse the amalgamation scheme on the ground of invalidity of the scheme.

NCLAT’s Ruling

The NCLAT observed that the disclaimer in the valuation report which was provided by the independent chartered accountant stated that the valuation was based on the information and documents provided by the management of the two companies. Since these documents came from the management of the company itself, it could not be said that the report was “independent” in any sense. Therefore, it was held that shareholders were not provided information which was “independent” in nature and, on account of that, the assurance given to the shareholders could not be construed as a sufficient one.

The NCLAT also held that a scheme should be fair and in the interest of all the shareholders, and not only for a few among them. It also observed that the NCLT had both judicial members and technical members, so it had all the powers to scrutinize and to examine a scheme based on the study of the financial documents of the company. The importance of public interest was upheld and the tribunal observed that, without recourse to the mathematical examination of the scheme, if on a broad examination of the scheme it is apparent that it is no public interest is involved or it is only beneficial to a particular class of persons, the amalgamation scheme can be rejected.

Analysis

In this decision, the NCLAT has clarified that the NCLT is obligated to protect the public interest at large and, in view of that, it may refuse a scheme of amalgamation, particularly in this case where no public interest was being served on the account of the amalgamation scheme benefiting only certain class of persons.

The NCLAT further observed that an amalgamation scheme will not be narrowly examined only on the basis of completion of statutory requirements, but it should widely examined, and public interest must be one of the criteria to the test the scheme upon.

The NCLAT has further clarified that just because all the requirements or directions pertaining to a scheme (including approval of the shareholders and creditors) are complied with and no adverse observation has been made by any concerned regulatory authority, it would not mean that such a scheme shall be construed to be in general public interest. This ruling is of importance because, as far as the decision to restructure businesses are concerned, the parties involved would have to ensure that any scheme of arrangement proposed under the Companies Act, 2013 has a rationale that the benefits of such a scheme reaches all the shareholders, and that the scheme is in public interest.

It is pertinent to note that courts, relying on the ruling of the Supreme Court in Miheer H Mafatlal, have held that scope of judicial scrutiny in such matters is highly limited, and not appealable in nature. As long as there are no valid objections to a scheme and no irregularity has been pointed out, and relevant statutory requirements have been completed by the parties at the relevant time, courts have been held not to be in a position to interfere with schemes of such arrangements. This is because such schemes are based on the expectations of concerned shareholders, creditors and opinions of experts and professionals, apart from competent authorities, after scrutiny of the accounts and affairs of the companies. Accordingly, in the absence of any pertinent objection and prejudice to anybody, courts should not get into testing the wisdom of the scheme. Specifically, it has also been observed that a scheme cannot be refused sanction merely because it results in benefits only to the promoter group, when such scheme enjoyed the approval of a majority of shareholders, as observed in the case of J.K. Agri Genetics Ltd. v. Union of India (2012) 175 Com Cases 306 (Calcutta HC).

In this regard, the NCLAT ruling appears to run contrary to the existing judicial position and widens the scope of review that the NCLT exercises.

– Jai Bajpai