NCLAT’s Power of Modifying Schemes under Companies Act and NCLAT Rules

[Shauree Gaikwad is a 5th year student and Rishi Raj a 3rd year student at Maharashtra National Law University, Aurangabad]

In the recent judgement of Rama Investment Company Private Limited v. Ankit Mittal, the National Company Law Appellate Tribunal (“NCLAT”) clarified the position of rule 11 of the NCLAT Rules, 2016 (“NCLAT Rules”) and stated that the appellate tribunal cannot exercise its inherent power, which has been provided under rule 11, to modify a scheme of arrangement under section 231 of the Companies Act, 2013 (“Act”) when the scheme has been rejected under section 230 of the Act. Further, clarifying the position of section 231 of the Act, the NCLAT observed that the statutory provision can only be applied if an order has been made under section 230 of the Act sanctioning compromise or arrangement and, moreover, modification can be carried out only if it is necessary for working of the scheme. 

Facts

Rama Investment Company Private Limited (“RICPL”) and certain other respondents are private companies that sought to enter into an amalgamation, with RICPL being the surviving entity. Certain companies fell within the jurisdiction of the National Company Law Tribunal (“NCLT”), Chennai bench, and the NCLT, Mumbai bench. The NCLT Chennai and NCLT Mumbai benches approved the scheme of amalgamation and arrangement by way of orders dated 12 April 2018 and 6 December 2017 respectively. 

However, an appeal was filed in the NCLAT against the NCLT Chennai order by Ankit Mittal and, on 29 November 2019, the NCLAT reversed the order of NCLT Chennai dated 12 April 2018. While reversing the orders, the NCLAT observed that the valuation of shares was unjust and unfair to those shareholders who will receive the payment and exit the company, while it will constitute a massive gain to persons who will continue to be shareholders of the company. Dissatisfied by this order of the NCLAT, RICPL filed an application under rule 11 of the NCLAT Rules to invoke its inherent powers for meeting the ends of justice and requested the NCLAT to modify its order dated 29 November 2019 under section 231 of the Act. 

Issues Addressed

Whether Rule 11 of the NCLAT Rules is applicable to this case?

According to rule 11 of the NCLAT Rules, none of the NCLAT rules shall be deemed to limit or affect the NCLAT’s inherent powers to make orders or issue directions in order to carry out justice or prevent abuse of the process of the tribunal. The NCLAT held that rule 11 of the NCLAT Rules shall not be applicable to this case. This is because RICPL was asking the NCLAT to reopen the case and consider whether the scheme of arrangement can be partly enforced with regard to private companies. Such a request cannot be made under rule 11 of the NCLAT Rules, but rather under section 420(2) of the Act, which states that if the parties bring to the notice of the NCLAT the fact that there has occurred a mistake apparent from the record, then the NCLAT can rectify such mistake by amending any order passed by it. However, in this case, there was no mistake apparent on the face of the record. Therefore, RICPL’s application seeking modification of the order dated 29 November 2019 is not viable under rule 11 of the NCLAT Rules nor under section 420(2) of the Act.

Whether a rejected scheme of arrangement can be modified under Section 231 of the Companies Act?

According to section 231 of the Act, the NCLAT is empowered to modify a scheme of arrangement sanctioned by the NCLT under section 230 of the Act, if the NCLAT is satisfied that the scheme of arrangement cannot be implemented satisfactorily with or without modifications. 

RICPL relied on S. K. Gupta v. K. P. Jain, wherein the Supreme Court, while interpreting section 392(1)(b) of the Companies Act, 1956, which is pari materia to section 231(b) of the Act, held that the legislature has conferred wide powers on the court to make such modifications as may be considered necessary for the proper working of the scheme of arrangement. By placing reliance on the aforementioned judgement, RICPL claimed that the NCLT has the power to modify the present scheme of arrangement to implement the same with regard to the private companies involved in the present case.

However, the NCLAT held that section 231 of the Act is not applicable to this case, as the scheme of arrangement proposed to be modified has been rejected by it, and that rejected schemes cannot be proposed for modification under Section 231 of the Act. Further, the NCLAT also held that RICPL’s reliance on S.K. Gupta was misplaced because in that case the party having a controlling interest in the company wanted merely to modify the party’s name used in the scheme of arrangement between Indian Hardware Industries Limited and its creditors, which had already been sanctioned by the NCLT, and use the controlling company’s name instead. 

Comments 

Although the gambit of the NCLAT’s powers is wide under rule 11 of the NCLAT Rules, its powers cannot be urged to be incorrectly used in an already approved scheme of arrangement. The NCLAT clarified that rule 11 cannot be invoked in this case due to the request that RICPL was making, i.e., RICPL was effectively asking the NCLAT to reopen the case and consider if the scheme can be partly enforced with regard to private companies. 

The NCLAT further clarified that the correct provision to be invoked to make such a request was under the Companies Act, 2013, specifically section 420(2), which states that if the parties bring to the notice of the NCLAT that there has occurred a mistake apparent from the record, then the NCLAT can rectify such mistake by amending any order passed by it, as long as it gives an opportunity to the parties to be heard. As the NCLAT found no mistake apparent on the face of the record in this case, it chose not to entertain such an application under section 420(2) of the Act either. The NCLAT’s decision is also in line with the rulings discussed earlier.

The NCLAT’s decision to not entertain this application to modify the scheme of arrangement, as it has not found any mistake apparent from the record in the scheme of arrangement, is in line with the landmark decision of the Supreme Court in Honda Siel Power Products Ltd v. Commissioner of Income Tax, Delhi, where it held that while a tribunal exercises its power to see if its order has to be rectified, it needs to first determine that no prejudice is caused to either of the parties appearing before it by its decision based on a mistake apparent from the record. 

The Delhi High Court in Commissioner of Income Tax, Delhi v. Maruti Insurance Distribution Services Ltd. held that a mistake should exist and must be apparent from the record. The power to rectify the mistake, however, does not cover cases where a revision or review of the order is intended. ‘Mistake’ means to understand wrongly or inaccurately; it is an error, a fault, a misunderstanding, a misconception. ‘Apparent’ implies something that can be seen or is visible, obvious, plain. A mistake that can be rectified is one that is patent, obvious and whose discovery is not dependent on arguments. Further, where an error is far from self-evident, it ceases to be an apparent error.

In Deepak Kumar v. Phoenix Arc Pvt. Ltd., the NCLAT held that a review applicant cannot seek protection under section 420(2) of the Act for filing a review application on the purported ground of rectifying any mistake apparent from the record. Further, there is no express provision under the NCLAT Rules that gives the tribunal an inherent power to review. The tribunal’s power to review is a statutory power given by rule 11 of the NCLAT Rules and can only be exercised to enhance the cause of justice or prevent abuse of process. Thus, the NCLAT’s decision, in this case, is in line with its own and various other courts’ view on the NCLAT’s power conferred under rule 11 of the NCLAT Rules and section 420(2) of the Act. 

Shauree Gaikwad & Rishi Raj
 
 

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