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Analysis of power of NCLT to grant dispensation from the Meeting of shareholders

February 13, 2017[2017] 77 taxmann.com 366 (Article)
195 Views

Rahul Maharshi

Executive - Corporate Law Division, Vinod Kothari and Co.

Introduction

By virtue of the Commencement Notification by Ministry of Corporate Affairs ("MCA") dated 7th December, 2016, the power to deal with the matters pertaining to merger & amalgamations has been shifted from the District Court or High Court to the NCLT. With the noble object of reducing cumbersome corporate litigations process and making corporate restructuring process more smooth and efficient, the move of the Government has been welcomed. Nevertheless, the change has also created room for queries and doubts in the procedural segment and required clarifications on the same. One of such queries is w.r.t the power of NCLT to dispense with the Meeting of shareholders and creditors. In the recent ruling of NCLT, Principal bench, New Delhi ('the Bench') in the matter of JVA trading private limited and C&S Electric limited1, the Bench has held that the power of NCLT for granting dispensation from the Meeting is limited to creditors Meeting only and that the NCLT bench cannot grant dispensation from the Meeting of shareholders even though the consent of all the shareholders has been obtained by the company. This Article shall provide in-depth analysis of the said case in order to highlight the position regarding the power of NCLT to grant dispensation from convening the Meeting of shareholders and creditors.

Facts of the case:

JVA Trading Private Limited(hereinafter referred to as "Transferor Company") and C&S Electric Limited (hereinafter referred to as "Transferee Company"),jointly filed an application before the Tribunal under Section 230 to 232 of the Companies Act, 2013 ("Act, 2013") read with Companies (Compromise, Arrangements and Amalgamation) Rules, 2016 ("CAA Rules") in relation to the Scheme of Amalgamation proposed between them wherein it has been prayed to either grant dispensation from the Meeting or to issue necessary directions w.r.t the NCLT convened Meeting.

The details of members/equity shareholders, secured creditors and unsecured creditors of both the applicant companies were as follows:

Particulars JVA Trading Private Limited (Transferor Company) C & S Electric Limited (Transferee Company)
Members 4 317
Secured Creditors 1 11
Unsecured Creditors 3 1060

The Transferor Company having only 4 shareholders had given their consent to the Scheme of Amalgamation constituting 100% in value and number for which a prayer had been made before the Hon'ble Bench for dispensing with the requirement of conducting Meeting of members and with the issue & publication of notices in this regard.

In respect of the Transferee Company, Unsecured Creditors of less than Rs. 2,00,000 constituting less than 3% in value of total Unsecured Creditors which were 373 in numbers were basically creditors for supplies and the transferee company claimed that their liabilities were in no way sought to be extinguished by the Scheme and hence, individual notices to the above mentioned Unsecured Creditors were sought to be dispensed with.

Provision of law:

Section 230 of Companies Act, 2013

Provisions for dispensation of Meetings

(9) The Tribunal may dispense with calling of a meeting of creditors or class of creditors where such creditors or class of creditors, having at least ninety per cent. in value, agree and confirm, by way of an affidavit, to the scheme of compromise and arrangement.

Companies (Compromises, Arrangements and Amalgamations) Rules, 2016

Rule 5: Directions at hearing of the applications

Upon hearing the application under sub-section (1) of section 230 of the Act, the Tribunal shall, unless it thinks fit for any reason to dismiss the application, give such directions as it may think necessary in respect of the following matters:-

(a)   determining the class or classes of creditors or of members whose 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;
(b)   fixing the time and place of the meeting or meetings;
(c)   appointing a Chairperson and scrutinizer for the meeting or meetings to be held, as the case may be and fixing the terms of his appointment including remuneration
(d)   fixing the quorum and the procedure to be followed at the meeting or meetings, including voting in person or by proxy or by postal ballot or by voting through electronic means;
  Explanation.— For the purposes of these rules, "voting through electronic means" shall take place, mutatis mutandis, in accordance with the procedure as specified in rule 20 of Companies (Management and Administration) Rules, 2014.
(e)   determining the values of the creditors or the members, or the creditors or members of any class, as the case may be, whose meetings have to be held;
(f)   notice to be given of the meeting or meetings and the advertisement of such notice;
(g)   notice to be given to sectoral regulators or authorities as required under sub-section (5) of section 230;
(h)   the time within which the chairperson of the meeting is required to report the result of the meeting to the Tribunal; and
(i)   Such other matters as the Tribunal may deem necessary.

Order passed by the Hon'ble bench:

The Hon'ble Bench held that Section 230(9) of the Act, 2013 and Rule 5 of the CAA Rules, 2016 provide that NCLT has the power to grant dispensation for the Meeting. Such power is limited to the Meeting of creditors or class of creditors where such creditors or class of creditors, having at least ninety percent value, agreed and confirmed, by way of an Affidavit, to the Scheme of compromise and arrangement. Further, there is no explicit power mentioned in the Act or Rules w.r.t granting of dispensation from the Meeting of members. Hence, the Bench cannot grant dispensation for the Meeting of members. On the said grounds, the Hon'ble Bench issued the directions in relation to calling, convening and holding of the Meeting of the equity shareholders, secured creditors and unsecured creditors of both the applicant companies.

Analysis of powers vested in the National Company Law Tribunal ('NCLT')

Inherent powers of NCLT

Part- I Rule 11 of the NCLT Rules, 2016 dealing with "Inherent Powers" of NCLT reads as follows:

"Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal."

Considering the above powers vested with the NCLT, one can say that NCLT has the powers to make such orders as it may find necessary for meeting the ends of justice.

Time-tested principle of Corporate law i.e. 'Duomatic Principle'

The Duomatic Principle ('the Principle') provides that the company is bound in a matter intra vires by the unanimous agreement of its members. The logic behind the same is to avoid the time and cost of conducting a Meeting where the shareholders of the company have unanimously provided their consent to a particular matter. The Principle is very well covered in section 117 (3) (b) of the Act, 2013.

Purpose of conducting meeting of Shareholders:

The very purpose for conducting a Meeting is to take consent of the members of the company while taking any substantial decision for the company. A General Meeting, after all, is a forum for seeking the sense of the members. Thus, conducting a Meeting, even though the written consent has been taken from the shareholders will lead to unnecessary repetition of work.

Conclusion

It appears from the ruling that the Hon'ble Bench has ignored the time-tested principle of corporate law that the written consent suffice for a resolution, more so when it is 100% consent. Merely because there is an omission in the language in section 230 (9) of the Act, 2013, it cannot be said that the power of NCLT has been curbed in the manner under the said provision. Hence, the ruling of the Hon'ble bench should not be considered as a benchmark for the future reference in the corporate restructuring matters.

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1. http://nclt.gov.in/Publication/Principal_Bench/2017/Others/JVA%20Trading%20Pvt%20Ltd..pdf

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