By Dr. U.K. Chaudhary, Senior Advocate (January 24, 2017)
Assisted by: Ms. Manisha Chaudhary, Advocate, Managing Partner and Ravi Kumar, ACS, Senior Associate
BACKGROUND
A very recent judgement of the National Company Law Tribunal (the Tribunal), in the case of JVA Trading Private Limited and C & S Electric Limited, a scheme of Amalgamation under Sections 230 to 232 of the Companies Act, 2013, read with Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, has raised an interesting question of law for extensive debate and discussion. The Hon’ble Tribunal in the said case has held – “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. On the other hand, reference to section 230(9) of the Companies Act, 2013, which provision was relied by the Learned Counsel for the applicants discloses that the Tribunal may dispense with the 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 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 meeting of members of the company cannot be entertained. ………………”
This Article is thus an attempt to discuss and analyse the law on the subject and to reach a just and fair proposition of law in this regard, as already in existence, under the Companies Act, 1956 and English Law, on the subject.
INTRODUCTION;
Merger and Amalgamation has been recognized as one of the many ways of corporate restructuring and used by corporates for ages as an important corporate strategic weapon, in the hands of internal management, namely shareholders/members and the Board of Directors appointed by them. Therefore, the provisions of compromise and arrangements (including mergers and amalgamation) under Companies Act, 1956 came under the scanner of many High Courts as well as of the Supreme Court of India and as a result of the same, many substantive and procedural aspects of this corporate jurisdiction are now well settled and enshrined in the company jurisprudence.
However, while drafting the provisions of Companies Act, 2013, the law makers on the one hand tried to cover some of the grey areas of compromise and arrangements and also tried to provide more clarity on various aspects of compromise or arrangement, but on the other hand ignored the well settled principles of law. The new provisions of compromises, arrangements or amalgamations leave many grey areas and rules of interpretations and also have given rise to various new issues in this regard. One such issue is whether the National Company Law Tribunal (the Tribunal) has the power to dispense with the meeting of members or class of members? The question becomes highly debatable due to the provisions of section 230(9) which expressly provides for dispensation of meeting of creditors, but no such express provisions are there for dispensation of meeting of shareholders, as interpreted by the Tribunal, recently while considering a case of amalgamation as mentioned above. The Tribunal reached a conclusion that it is not clothed with the power to dispense with the meeting of members or class of members. Let us examine whether is it truly so?
COMPROMISES, ARRANGEMENTS AND AMALGAMATIONS
Provisions relating to compromises, arrangements and amalgamations are covered under Chapter XV of the Companies Act, 2013 and under the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. The said provisions of the Act came into force w.e.f. 15th December, 2016 vide notification S.O. 3677(E) dated 7th December, 2016.
Power of the Tribunal to order the meetings in compromise or arrangements with creditors and members [Section 230(1)]
Pursuant to Section 230 (1) of the Companies Act, 2013, where a compromise or arrangement is proposed between a company and its creditors or class of creditors; or between a company and its members or any class of members, the Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or 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.
Power of the Tribunal to order the meetings in merger and amalgamation of companies [Section 232(1)]
Pursuant to section 232(1) of the aforesaid Act, where an application is made to the Tribunal under section 230 for sanctioning of compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Tribunal that the compromise or arrangement has been proposed for the purpose of or in connection with merger or amalgamation of any two or more companies, the Tribunal may, on such application, order a meeting of the creditors or class of creditors or the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal may direct. Further it has also been provided that in case the meeting has been ordered by the Tribunal then the provisions of section 230(3) to (5) shall apply mutatis mutandis to such meetings which basically provide the manner of giving of notices to such members, creditors and other statutory authorities and further the calling, holding and conducting of meeting(s) of such creditors and members.
ANALYSIS OF SECTION 230 (1) AND 232(1)
On perusal of the language of the aforesaid provisions, it seems in the first instance that it is the discretion of the Tribunal whether to call the meeting of the creditors or class of creditors or the members or the class of members, as the case may be, or to dispense with the requirement of the same in certain circumstances of each case as may be considered just and fair. The use of the word ‘may’ in section 230(1) itself is significant and needs careful examination for its impact on the powers of the Tribunal. In this regard, reference be made to the observations in the treatise of ‘The Guide to Companies Act’ 17 Edition; Page 4669 where it is commented as under:
“The word ‘may’ is used only to indicate the discretionary power to be exercised by the court in respect of matters under this section.”
WHAT IS TRUE FOR ‘COURT’ IS EQUALLY TRUE TO ‘THE TRIBUNAL’.
However, section 230(9) of the Companies Act, 2013 is considered by the Tribunal as a limitation on the aforesaid power of the Tribunal of dispensing with the meeting of members as it specifically provides that the Tribunal may dispense with the calling of meeting of creditors or class of creditors, where such creditors or class of creditors, having at least 90% value, agree and confirm, by way of affidavit, to the scheme of compromise or arrangement and this specifically clothes the Tribunal with the power of dispensation in respect of creditors, but no such subsection is framed for dispensation of members’ meeting. It is pertinent to mention here that in case the meeting, as aforesaid, has been ordered by the Tribunal, then at such meeting, the scheme is required to be approved by majority of persons representing three fourths in value of the creditors or class of creditors or members or class of members, as the case may be. Does that necessarily mean that Tribunal has no power to dispense with the meeting of members or class of members specially where the requisite consent of three fourths majority or 100% is obtained in writing prior to the filing of the petition under section 230(1) of the present Act?
AREA OF CONSIDERATION
Therefore, the important issue in relation to a scheme of merger or amalgamation faced by the corporates at present is whether the Tribunal has the power to dispense with the meeting of members in case consent by requisite majority of members i.e. anywhere between 76% to 100% is given in writing, before filing the scheme of amalgamation, as there is no specific provision in this regard under the present Act, unlike the specific provisions that has been incorporated in relation to the dispensing of the meeting of creditors or any class of creditors, as the case may under the present Act? The confusion is compounded by the language of Rule 5 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, which provides for the directions to be given at the hearing of the application under section 230(1) of the said Act. Rule 5(1) of the said rules provides that upon hearing of application under section 230(1) 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 matters provided in the said rule. Clause (a) of the said rule reads that the Tribunal shall determine 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 section 230(9) of the said Act. The answer to the issue in question lies in the various judgements under the relevant provisions of the Companies Act, 1956, from many High Courts and Supreme Court of India, as examined hereinafter.
POSITION UNDER THE COMPANIES ACT, 1956
Under the earlier the Companies Act, 1956, section 391-394 read with Companies (Court) Rules, 1959 contained the provisions with regards to compromise and arrangements and amalgamation. It may be noted that, (i) there was no specific provisions for dispensation of meeting of shareholders/members and even of creditors under the earlier Act or rules, and (ii) the High Courts (which means company court so designated) like the Tribunal, are also the creation of the statute, but the High Court used to dispense with the requirement of convening of meeting of members or creditors upon production of written consent of requisite majority of such members or creditors, particularly when consent was 100% or close to 100%.
Ordinarily, the convening of meetings of members and creditors is a must. But it has been established through various judicial pronouncements over the years that meetings may be dispensed with by the High Court not as a matter of right but at the discretion of the court, not based on the power of the court, clothing it by the provisions of the Act, but on the principles of just and fair, and principles and doctrine of acquiescence. It has also been held that such discretion under exceptional circumstances, must be exercised in favour of the applicants. In this regard reference be made to the decision of B.V. Gupta v. Bangalore Plastics, CA No. 1676/1981 (unreported) (Karnataka) applied in S.M. Holding Finance P. Ltd. v. Mysore Machinery Manufacturers Ltd., (1993) 78 Com Cases 432 (Kar.).
The most important part in the said decision of B.V. Gupta, is the reliance upon the doctrine of acquiescence to cloth the court with the power of dispensation, in absence of any specific power of the court, under the Companies Act. It was thus observed: “A third exception to the rule that all the shareholders of a company must cast their votes in a formally called meeting is made by the doctrine of acquiescence. If all the shareholders acquiesce in a certain arrangement, the question of a meeting having been called does not arise at all.”
In law, the doctrine of acquiescence occurs when a person knowingly stands by without raising any objection to the waiver of their rights, while someone else unknowingly and without malice and as an aforethought makes a claim on their rights.
The aforesaid doctrine of acquiescence has also been recognized by the Hon’ble High Court of Delhi in the case of Mazda Theatres Pvt. Ltd. and Anr. Vs. New Bank of India Ltd. and Ors. (1975) ILR 1 Delhi on the same line as above. What comes out from the said judgement is that the written consent given by shareholders is sufficient for dispensation of their meeting.
The relevant paras of the said judgement has been reproduced herewith:
“(14) Inroads have however, been made on this formal doctrine. Firstly, the consent of all the shareholders given even outside a meeting is sufficient to comply with the requirement of a meeting. After this principle was established by judicial decisions, a legislative recognition was given to it by paragraph 5 of Part Ii of Table A of the English Companies Act, 1948 which applies to the management of a private company limited by shares and is relevant for our purpose. It runs as follows:-
“SUBJECT to the provisions of the Act, a resolution in writing signed by all the members for the time being entitled to receive notice of and to attend and vote at general meetings (or being corporations by their duly authorized representatives) shall be as valid and effective as if the same had been passed at a general meeting of the company duly convened and held.”
Further, section 143 of the Engilsh Companies Act, 1948 now expressly enables written resolutions which are not passed at a general meeting to be registered. This change is reflected in India also. Under section 82 of the Indian Companies Act, 1913, special and extraordinary resolutions passed at general meetings alone were capable of being registered. But section 192 of the Companies Act, 1956 enables written resolutions not passed at general meetings to be registered.
(15) The second inroad on the requirement of a formal meeting is that the consent of the shareholders may be ascertained without calling any meeting at all. Further, the doctrine of lifting the veil of incorporation and looking at the reality of the action of the members of the company enables us to hold that the consent of the overwhelming majority of the shareholders outside a meeting is sufficient to show that the resolution was supported virtually by all the members of the company. Professor L. C. B. Gower calls this as “informal ratification by the members of the acts done on behalf of the company.” He draws the distinction between the formal and the informal acts as follows:-
“THE law normally insists that only a resolution duly passed at a meeting of the company can be regarded as an act of the company itself. In a number of cases, however, the question has arisen whether something less formal than a resolution passed at a duly convened meeting will suffice. In other words, can the veil be lifted so as to equate a decision of the members with a decision of the company itself ?”
(The Principles of Modern Company Law, 3rd Edn., pages 206-209). Decisions on this subject may be classified into (a) those requiring a formal compliance, and (b) those requiring only a substantial compliance. Formal compliance:- In Re George Newman Ltd., (1895) 1 Ch. 674 it was held by Lindley L. J., that “individual assents given separately may preclude those who have given them from complaining of what they have sanctioned, but for the purpose of binding a company in its corporate capacity individual assents given separately are not equivalent to the assent of a meeting.” In Re
Express Engineering Works, (1920) 1 Ch. 466, and in E. B.M.Co. Ltd. v. Dominion Bank, (1937) 3 A.E.R. 555, the decisions proceeded on the view that the consent of all the shareholders was necessary if no meeting was called. Substantial compliance:- In Parker & Cooper Ltd. v. Reading, (1926) Ch. 975, the decisions in Re George Newman
Ltd. (11) and in Re Express Engineering Works (12) were fully considered but were distinguished on the ground that the transactions requiring ratification in those cases were illegal. It was held that when transaction was not illegal it was not necessary that the shareholders should meet in a meeting summoned for that purpose if the transaction is an honest bona fide one entered into for the benefit of the company. In Re Duomatic Ltd., (1969) 2 W.L.R. 114(15), also no meetings of the shareholders were called. Of the transactions to be ratified one was ratified by all the shareholders but the other was not approved by the minority ordinary shareholders but only by the holder of the majority of shares. The minority shareholders did not object. The ratification was held to be valid. All the relevant case-law was reviewed before the decision was arrived at.
(16) Do the facts of the present case warrant a holding that the provisions of section 391 were substantially complied with? We are inclined to answer this question in the affirmative.
……………………………………………………………..
(19) A third exception to the rule that all the shareholders of a company must cast their votes in a formally called meeting is made by the doctrine of acquiescence. If all the shareholders acquiesce in a certain arrangement, the question of a meeting having been called does not arise at all, Professor R. R. Pennington in the third edition of his “Company Law” at pages 557-558 has expressed this doctrine of acquiescence in the following words:-
“THE court has said in some cases that a company may be treated as bound by a resolution, even though it is not shown that it was duly passed at a general meeting or that it was assented to by all the members. Thus, it has been held that a company loses its right to rescind a contract with its promoters if substantially all its members are aware of the right to rescind and fail to act for an unreasonable length of time. (Erlanger v. New Somrero Phosphate Co. 1878 3 A.C. 1218 . It has also been held that a company could not sue its directors for borrowing beyond the powers conferred on them by the articles (Re Norwich Yarn Co. Ex parte Bignold (1856) 22 Beav. 143, nor treat an irregular surrender of partly paid shares as void (Phosphate of Lime Co. v. Green (1871) L.R. 7 C.P. 43, when all the members had an opportunity of discovering the irregularity, and no one had taken steps to challenge it for several years. Similarly, where members of a company which had gone into voluntary liquidation took an active part in the liquidation proceedings, fully aware of a procedural defect in the passing of the resolution to wind up the company up, it was held that neither they nor the members who voted for the resolution could challenge its validity (Re Bailey, Hay & Co. Ltd. (1971) 3 A.E.R. 693. Again, where no properly subscribed articles had been filed on the incorporation of a company, but it had acted for many years as though an informal document which had been filed contained its articles, it was held that the members must be taken to have adopted the informal document as the company’s articles (Ho Tung v. Man On Insurance Co. (1902) A.C. 232. It is submitted that the first three of these cases can be explained by the fact that the company was asserting a right against the other party to the litigation which could be lost by acquiescence, and that when acquiescence by a company is alleged, it is not necessary to show that every member of it expressly or tacitly assented to what was done. The fourth case (Re Bailey, Hay & Co. Ltd.) was one in which the company sought to recover money paid to the members in question as a fraudulent preference, and they relied on the invalidity of the winding up resolution as a defense, clearly it is right that a member should not be able to challenge the validity of a liquidation when he has acquiesced in the liquidator’s acts or has allowed it to continue without drawing the liquidator’s attention to the defect of which he complains, but in the instant case the court merely treated him as estopped from pleading the invalidity as a defense, and it certainly did not rule that the winding up resolution must be deemed valid against all persons and for all purposes. The fifth case (Re Bailey, Hay & Co. Ltd.), it is submitted, was merely an application of the principle that the law will presume that acts have been done regularly and properly when they appear to have been, and it is noteworthy that the court said that it was entitled to infer that all, and not merely some, of the members had assented to the adoption of the informal document as the company’s articles.”
There are various judicial pronouncements and numerous orders from the High Courts as a Company Court, under the earlier Act of 1956, which provides the dispensation of meeting of shareholders under the earlier Act in absence of any specific power to do so under the provisions of the Act, when the written consent of requisite majority or 100% with regard to the same has been obtained by the company from its members. In this regard, reference be made to the decision of Bharat Explosive Ltd. (2005) 58 SCL 370 (All); In Re Dabur Foods Ltd. (2008) 144 Com Cases 378 (Delhi); Celica Developers (P) Ltd (2008) 145 Com Cases 154 (Cal); Balaji Industrial Products Ltd. [2008] 88 SCL 321 (Raj); Mysore Cement Ltd [2009]149 Com Cases 50 [Kart]; GE Capital Transportation Financial Services Ltd. [2009] 149 Com Cases 52 (Delhi).
Thus it seems that it is the ‘doctrine of acquiescence’ which clothed the High Court(s) with the power to dispense with the meetings of shareholders under the earlier Act in the absence of any specific power to do so, and the said ‘doctrine of acquiescence’ also clothes the Tribunal under the Companies Act, 2013 with the power to dispense with the meeting of members under the present Act. It will be very appropriate in law to say that the ‘doctrine of acquiescence’ is the sufficient clothing power, based on which the Tribunal may grant the dispensation of meeting of members, when written consent of all or requisite majority of members has been obtained. It is irrelevant to call the meetings of those members again which have already consented to the scheme. Further calling of meeting will only burdened the company with extra costs and extra time and will result into duplication of same work with no attendant benefits. Moreover, the word ‘may’ used in section 230(1) and section 232(1) itself shows the discretionary powers of the Tribunal. In this regard, the observation of the Hon’ble Supreme Court of India in the case of Mihir H. Mafatlal vs. Mafatlal Industries Ltd. [1996] 87 Com Cases 792, followed in Gujrat Ambuja Exports Ltd. [2004] 118 Com Cases 265, are very apt to note as under: “It is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the court. The court certainly would not act as a Court of Appeal and sit in judgement over the informed view of the concerned parties to the compromise as the same would be in the realm of corporate and commercial wisdom of the concerned parties. The court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the scheme by the requisite majority. Consequently the company court’s jurisdiction to that extent is peripheral and supervisory and not appellate. The court acts like an ‘umpire’ in the game of cricket who has to see that both the teams play their game according to the rules and do not overstep the limit. But subject to that how best the game is to be played is left to the players and not to the umpire”.
CONCLUSION
It is evident from the above discussion that the powers of Tribunal prescribed under the present Act is similar to the powers of High Court under the earlier Act. Section 230(9) provides some additional provisions for allowing dispensation of meeting of creditors and should, therefore, not be interpreted in restrictive way, because it is translating the power already exercised by the High Court, in the statute itself. Further the Rule 5 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 is just repetition of the corresponding provision of Companies (Court) Rules, 1959 and the Act of 2013 and the provision relating to section 230(9) as already stated has been additionally inserted. It is the “doctrine of acquiescence” which clothes the Tribunal under the Companies Act, 2013 with the power to dispense with the meeting of members, in case the written consent of all or requisite majority of members, has been obtained in this regard. Accordingly, the Tribunal has all the powers to allow dispensation of the meeting of members of the companies under present Act also and it will be appropriate to take a legal view that Tribunal has same power as that of the High Court under the Act of 1956. However, it is up to the Tribunal to exercise such discretion. Even Section 230(9) also uses the word ‘may’ which again cast the discretion on the Tribunal and not confines the Tribunal in any way and does not render the Tribunal powerless in this regard.
_________________________
This article was first published on icsi.edu.
_________________________
