'No Public Interest'-SC Sets Aside The First Forced Merger Of Two Companies Ordered By Central Govt [Read Judgment]

In a significant judgment, the Supreme Court set aside the forced merger of two companies ordered by the Ministry of Corporate Affairs, which was the first ever instance of invocation of Section 396 of the Companies Act 1956.It was in 2016 that the Union Ministry ordered the compulsory amalgamation of National Spot Exchange Ltd (NSEL) with its parent company Financial Technologies India Ltd (later name changed as 63 Moons Tech Ltd). NSEL was a trading company which fell into a major financial crisis in 2013. In this backdrop, the Forward Markets Commission(FMC) had proposed merger of NSEL with its parent company FTIL in 'public interest' so that dues amounting to ₹5,600 crore be paid to investors and traders of NSEL. Based on this, the MCA issued amalgamation order in 2016, invoking Section 396 of the Companies Act 1956, which gives power to the Central Government to order "compulsory amalgamation" of two companies if it is "satisfied that it is essential in the public interest".The Bombay High Court rejected FTIL's challenge against the forced merger holding that it was "essential in public interest".In further appeal by FTIL, the SC held otherwise. The bench of Justices R F Nariman and Vineet Saran held that the amalgamation order was "ultra-vires Section 396 and violative of Article 14 of the Constitution of India" and struck it down.Private interests of investors do not amount to public interestThe SC noted that the immediate reason for amalgamation was that NSEL, as a corporate entity, seemed financially and physically incapable of effecting any substantial recovery from defaulting members.The amalgamation order by the MCA said that it was of the was of the "considered opinion that to leverage combined assets, capital and reserves for efficient administration and satisfactory settlement of rights and liabilities of stakeholders and creditors of NSEL, it would be in essential public interest to amalgamate NSEL with FTIL"This intention to protect the creditors of NSEL by forcing its parent company to satisfy the dues will not translate into essential public interest, held the Court."In the context of compulsory amalgamation of two or more companies, the expression "public interest" would mean the welfare of the public or the interest of society as a whole, as contrasted with the "selfish" interest of a group of private individuals. Thus, "public interest" may have regard to the interest of production of goods or services essential to the nation so that they may contribute to the nation's welfare and progress, and in so doing, may also provide much needed employment. "Public interest" in this context would, therefore, mean the combining of resources of two or more companies so as to impact production and consumption of goods and services and employment of persons relatable thereto for the general benefit of the community. Conversely, any action that impedes promotion of industry or obstructs growth which is in national or public interest would run counter to public interest as mentioned in this Section", observed the judgment authored by Justice Nariman.The sole object of the amalgamation order is really only to effect speedy recovery of dues of INR 5600 crore, observed the Court."What is important to note is that there is no interest of the general public as opposed to the businesses of the two companies that are referred to. It is important to notice that the leveraging of combined assets, capital, and reserves is only to settle liabilities of certain stakeholders and creditors when the order is read as a whole, and given the fact that the businesses of the two companies were completely different"."We have seen that these (FMC) recommendations are in the form of a letter dated August 18, 2014, in which the 'business reality' is the fact that dues of ₹5,600 crore have to be paid, and that NSEL does not have the wherewithal to do so. Thus, its parent company's financial resources ought to be used to effect such payment. "This 'business reality', therefore, speaks only of the private interest of the investors/traders who have been allegedly duped (which fact will only be established in suits filed by them in 2014), and nothing beyond (which would show some vestige of public interest)," said Justice Nariman in the order.The High Court had justified the amalgamation order on following three grounds :(a) Restoring/safeguarding public confidence in forward contracts and exchanges which are an integral and essential part of Indian economy and financial system, by consolidating the businesses of NSEL and FTIL; (b) Giving effect to business realities of the case by consolidating the businesses of FTIL and NSEL and preventing FTIL from distancing itself from NSEL, which is, even otherwise, its alter ego; and (c) Facilitating NSEL in recovering dues from defaulters by pooling human and financial resources of FTIL and NSEL.Regarding this, the SC observed that grounds (a) and (b) were not mentioned in the draft...

'No Public Interest'-SC Sets Aside The First Forced Merger Of Two Companies Ordered By Central Govt [Read Judgment]

Manu Sebastian

The expression "public interest" would mean the welfare of the public or the interest of society as a whole, as contrasted with the "selfish" interest of a group of private individuals.

Tags