NCLT’s Contrary Actions: What Does It Signal?

NCLT’s Contrary Actions: What Does It Signal?

Recent orders issued by various benches of the National Company Law Tribunal (NCLT) in relations to meetings of shareholders with respect to compromises, arrangements and amalgamations, have left the legal fraternity confounded. Where, the Delhi and Mumbai benches, in a manner that is contrary to the conventional practice, have specifically ordered for a meeting of equity shareholders though dispensation had been prayed for, the Chennai Bench has dispensed with the meeting of shareholders under the new Companies Act, 2013 (New Act), and the Bengaluru Bench has passed orders of dispensation for the proceedings transferred under the Companies Act, 1956 (Old Act).

Background

Compromises, arrangements and amalgamations are covered under S.230 to S.240 of the New Act while the corresponding provisions under the Old Act, are S.391 to S.394. Be it the Old Act or the New Act, both vest discretionary powers on NCLT to call for or dispense with a meeting of the equity shareholders.

Section 230(1) of the New Act provides that (with slight modifications to the language), “where a compromise or arrangement is proposed, between a company and its members or any class of them, the Tribunal may, on the application of the company or the member of the company,… order a meeting of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs.”As is evident from the word underlined and in bold, the operative word is “may”. The construct is the same in S.391(1) of the Old Act.

Prior to the transfer of proceedings to the NCLT and the notification of the corresponding provisions of the New Act, the High Court exercised jurisdiction to hear matters relating to amalgamations and compromises. As per conventional practice, so long as there was consent in the form of affidavits or letters from all members/shareholders, the Court would normally dispense with the member/ shareholder meeting.

On the notification of the corresponding provisions of the New Act coming into force on December 15, 2016, such matters have been transferred to NCLT’s jurisdiction. It is also worth noting that several writ petitions have been filed challenging the transfer of proceedings which are pending till date.

The Current Case

The apparent contradiction has arisen in orders passed last month by NCLT benches in Delhi and Bombay and this month in Chennai and Bangalore, in relation to amalgamations.

Moving away from the traditional practice, NCLT Delhi has called for a meeting of the shareholders while hearing a scheme of amalgamation in the case of JVA Trading Private Limited (the transferor company) and C&S Electric Limited, where it has explicitly stated the following in its order:

“…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 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..”

The tribunal also supported this argument by referring to Rule 5 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. Note that the transferor company had had only 4 members and the Tribunal has ordered for the meeting at a specific time and place subject to issue of notice of the meeting and mandated a quorum of 3.

In less than a week after NCLT Delhi had passed this order, NCLT Bombay, in the case of Gauss Networks Private Limited (the transferor company) and Delta Corp Limited, ordered for a meeting of the equity shareholders along with a prior notice with the quorum as prescribed under s.103 of the new Act.  Unfortunately the order does not provide any explanation as to why it is not dispensing with the shareholder meeting.

This month however, NCLT Chennai made a diametrically opposite order. In the case of L&T Ship Building Limited (the transferorcompany) and Marine Infra Structure Development Private Limited, the tribunal noted that the shareholders of the transferor company had “accorded their unconditional consent and approval to the scheme of demerger”. While the NCLT bench provided an explicit dispensation of the creditor meetings, it appears that it did not even find a need to make orders with regard to the meeting of the shareholders given the consent received.

In a similar case, and only a day later, NCLT Bangalore in the matter of Coffee Day Overseas Private Limited (the transferor company) and Coffee Day Enterprises Limited, ordered for a dispensation of the shareholders meeting as the application made by the transferor company already included the  consent received from the two shareholders of the company. The dispensation was given by virtue of this submission. It is to be noted that this order was passed in a transfer proceeding, which, in our interpretation, is and would continue till dealt with in accordance with the Old Act as provided for under the removal of difficulties order.

This divergence points out to an obvious question: Does the NCLT have the power to dispense with the meeting of the shareholders? If it did not, then why have the southern benches of NCLT dispensed off with the same?

In our view, the stand taken by the NCLT, Chennai is prudent commercially, logically and has law on its side. The argument that the NCLT has power to dispense with the meeting of shareholders is strengthened by the word “may” which is continued under the New Act rather than the word “shall” evidencing the fact that the NCLT has power to dispense as per its discretion. (This view was also taken by the Delhi High Court in the case of Mazda Theaters Pvt. Ltd. & anr. vs New bank of India Ltd. & Ors. (1975 ILR Delhi 1)). The National Company Law Tribunal Rules, 2016, also provides at Rule 11 that it has inherent powers and the power to exempt under Rule 14.  In addition, section 465 (2) (c) of the New Act provides that irrespective of the repeal of the Old Act, the practice or procedure, principle or rule of law, exemption……………which was existent prior to the repeal shall not be affected. Hence, the other benches of the NCLT can recognize the practice or rule of law, by exercising their power under the NCLT rules and dispense with meeting of shareholders.

Pawan Jhabakh is an advocate currently practicing in the Madras High Court and Harini Subramani is a Consultant with J. Sagar Associates, Advocates and Solicitors. The views expressed here are their own.

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