Thursday, January 19, 2017

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.

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