[Umang Pathak is a 4th year B.B.A., L.L.B. (Hons.) student at Jindal Global Law School in Sonipat, Haryana]
The National Company Law Appellate Tribunal (‘NCLAT’), in its decision in Cyrus Investments Pvt. Ltd. v Tata Sons Ltd., had decided the on the question of mismanagement and oppression which purportedly impacted the internal democracy of Tata Sons Limited (‘TSL’) and its accountability towards its shareholders. Among other issues, the NCLAT also dealt with the question of whether filing an application for conversion of TSL from a public company to a private company, along with the existence of article 75 of the Articles of Association (‘AoA’), prejudiced the interests of the minority shareholders. Article 75 gave TSL the power to ask any shareholder to sell their holdings by passing a special resolution and imposed certain restrictions on the transferability of shares. The NCLAT held that the conversion of TSL from a public company to a private company was illegal, and thereforerestrictions on transferability, such as article 75, were not enforceable.
However, the decision did not address another issue of vital importance – whether TSL was a ‘deemed public company’ as specified under section 43A of the Companies Act, 1956 and therefore could have the characteristics of a private company. This post will briefly expound on the concept of hybrid companies, with specific reference to the Supreme Court’s decision in Darius Rutton Kavasmaneck vs Gharda Chemicals Ltd. Against this background, the decisions of both the National Company Law Tribunal (‘NCLT’) and the NCLAT will be analysed. This would be followed by concluding remarks on the existence of hybrid companies, and the need for the Supreme Court to provide clarity on this issue, through the appeal pending before it against the decision of the NCLAT.
Emergence of Hybrid Companies
In 1975, section 43A(1A) was added to the Act, which by deeming fiction converted private companies that had a turnover exceeding one crore rupees to public limited companies. However, there did not exist any requirement to alter the articles of the company, which suggested that such deemed public companies could operate with characteristics of a private company. While section 43A was rendered inapplicable in the year 2000, other provisions of the Act, such as section 111(14) still contained references to section 43A. This resulted in several questions, such as whether the third category of deemed companies was eliminated, and whether such elimination was retrospective. This issue was adjudicated by the Supreme Court in Darius Rutton Kavasmaneck case wherein it was held that the concept of hybrid companies was not abolished completely from the Act. In this case, the two appellants were minority shareholders holding 17% shares in Gharda Chemicals Ltd. The company, incorporated as a private company in the year 1962, contained article 57 which was a pre-emption clause restricting transferability of shares to anyone outside the company. By virtue of section 43A(1A), Gharda Chemicals Ltd. became a deemed public limited company as its turnover exceeded the limit prescribed thereunder. In the year 2009, one of the members of company proposed to sell their shares to the public resulting in the possible breach of article 57. Thus, one of the parties applied for an ad-interim injunction before the Company Law Board to restrain such sale.
On the question of whether a public company could still have articles which restricted free transferability of shares, the Supreme Court answered in the affirmative. The decision primarily focused on the vested rights of the shareholders flowing from the AoA of the company, and held that the law could not deprive these rights overnight without giving an option to retain them. Furthermore, this decision was held in 2014 despite the enactment of the Companies Act, 2013 which did not have section 111(14) that referred to deemed public limited companies. The judgment, therefore, held that the category of hybrid companies was not completely obliterated.
Despite the above, the NCLAT order does not examine the question of whether TSL could be a ‘hybrid company’ that could be permitted to include article 75 in its AoA. Instead, the NCLAT order begins from the premise that TSL is a public limited company.
Analysis of the decision in Cyrus Investments
The existence of article 75 in the AoA of TSL established a covenant in the transferability of shares. The NCLT on the aforementioned issue, held that since TSL is a deemed public limited company by virtue of section 43A(1A), the continuation of article 75 would not be illegal and also not amount to conducting the affairs of the company against the interests of the minority shareholders. The NCLT, with reference to the decision in Darius Rutton Kavasmaneck, emphasized that TSL always had inherent characteristics of a private company. The NCLT also referred to the decision in Ram Parshottam Mittal v. Hillcrest Realty which held that the characteristics of the company are a decisive factor on whether a company is private or public, and that the caption that has remained on the file of the Registrar of Companies (‘RoC’) is not decisive in this regard. Furthermore, the NCLT provided a comprehensive analysis of the concept of hybrid companies, the background history of section 43A and only then proceeded to establish that TSL is a deemed public limited company. The NCLAT on the said matter did not take heed to resolve the issue on the existence of hybrid companies, and directly assumed that since TSL is a public company, converting to a private company without following the procedure under section 14 of the Companies Act, 2013 would be illegal and void. This suggests that despite the decision in Darius Rutton Kavasmaneck, greater clarity is needed with respect to the status of hybrid companies.
The confusion with respect to the status and existence of hybrid companies, even when there is no provision in the Companies Act, 2013 which can be referred or interpreted to prove the contrary, has received attention because of the NCLAT order in the Tata-Mistry Dispute. In recent news, the Supreme Court also stayed NCLAT’s orders on dismissing the petition filed by the RoC seeking deletion of the words ‘illegal’ and ‘with the help of RoC’ on the issue of conversion of TSL to a private company. It is also important to note the NCLT’s decision, expounds on the concept of hybrid companies despite the absence of any provision dealing with the same under the 2013 Act.
However, the existence of a deemed public company can still be conferred from section 2(71) of the 2013 Act which states that those private companies which are subsidiaries of a public company can retain their inherent private company characteristics such as restriction on transferability of shares and still operate as a public company. Therefore, in the 2013 Act, the concept of hybrid companies cannot be said to have been completely abolished. However, there still remains an issue with those companies which have been created by the application of section 43A. The NCLAT order has therefore created ambiguities with respect to the status of innumerable deemed public limited companies having the characteristics of a private company, which will hopefully be resolved by the Supreme Court.
– Umang Pathak