NCLTs Bouncer under Section 230: Denting its own powers? by Manoj Singh Bisht, 6th March, 2017 (Guest Post)

Introduction

On January 13, 2017, while dealing with a scheme of amalgamation, among other things, the Principle Bench of the NCLT, New Delhi [Principle Bench] rejected the prayer to dispense with the requirement of convening the meeting of the equity shareholders of the Company. The Principle Bench opined that the provisions contained in Section 230 of the Companies Act, 2013 [Act] read with rules made thereunder do not clothe the Tribunal with the powers of dispensation in relation to the meeting of shareholders/ members. The order of the Principle Bench also refers to sub-section (9) of Section 230 of the Act which states 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. Similar order for holding a meeting of shareholders was passed by the Mumbai Bench of the Tribunal in the matter of Gauss Networks Private Limited without assigning any reasons for not dispensing with the meeting of the shareholders. Also, Chennai Bench of the Tribunal has taken a totally opposite stand, though the order doesn’t speak of dispensation but it has, in so many words, dispensed with the meeting of shareholders.

Discretionary Powers

Sub-section (1) of Section 230 uses the word “may” as was used under the erstwhile regime of, more specifically, section 391 of the Companies Act, 1956. Also, under sub-section (6) of Section 230 of the Act, the discretionary powers to approve or dismiss an application rests with the Tribunal. Therefore, it is amply clear that the tribunal has powers to outrightly reject/ dismiss a scheme.

Needless to say, the discretionary powers must be used by the tribunal judicially and to achieve the purpose and objects of the statute.

If one reads section 230 of the Act closely, it may be noted that the flow of legal position begins with sub-section (1) which uses the expression “the tribunal may”. Sub-section (1) sets the context. As per express language used by the legislature, tribunal may 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.

However, sub-section (9) of Section 230 states 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.

The purpose of sub-section (9) is not to take away the discretionary powers of the Tribunal but only acts as a cautionary provisions guiding the tribunal to exercise its powers under subsection (1) judicially and subject to compliance of sub-section (9). It is worded in negative sense to the extent of expounding that the dispensation is possible only if 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. However, the legislature, has not expressed similar caution with respect to meeting of shareholders and hence, decided not to guide the tribunal in using its discretionary powers as regard dispensation of meeting of shareholders of the Company by incorporating a specific sub-section in section 230. In other words, the Legislature has not put any condition for using its powers with respect to dispensation of meeting of the shareholders.

Significance of Duomatic Principle – Statutory Recognition under Section 117

It is important to note that section 117 of the Companies Act, 2013 recognises the concept of approval of resolutions or decisions without holding a meeting. This is also known as “duomatic principle”. Sub-section (1) of section 117 requires a company to file certain resolutions specified in sub-section (3) of Section 117 with the Registrar of Companies within prescribed timelines. Further, clause (b) of sub-section (3) of section 117 deals with resolutions which have been agreed to by all the members of a company, but which, if not so agreed to, would not have been effective for their purpose unless they had been passed as special resolutions [i.e. without really holding a shareholders meeting. As per sub-section (2) 114, calling a general meeting is one of the condition for passing a special resolution]. Similarly, clause (d) of sub-section (3) of NCLTs Bouncer under Section 230: Denting its own powers? Section 117 deals with (d) resolutions or agreements which have been agreed to by any class of members but which, if not so agreed to, would not have been effective for their purpose unless they had been passed by a specified majority or otherwise in some particular manner; and all resolutions or agreements which effectively bind such class of members though not agreed to by all those members.

The Delhi high court has held that a meeting contemplated in Section 391 [Now Section 230 of the Companies Act, 2013] is analogous to an extraordinary general meeting of the members of the company, inasmuch as a three-fourth majority is required to pass the required resolution. The normal rule is that the consent of the shareholders, whether it is unanimous or by a three-fourth majority, must be obtained in a meeting summoned on the orders of the Court under Section 391. This is in accordance with the general principle, that members must act in a general meeting. Inroads have, however, been made on this formal doctrine. Firstly, the consent of all or virtually all the shareholders given even outside a meeting is sufficient to comply with the requirement of a meeting. Secondly, written resolutions instead of those passed in meetings are now capable of being registered, e.g., Section 192 of the Company Act. Thirdly, the doctrine of lifting the veil of incorporation and looking at the reality of the action of the members enables the Court to hold that the consent of the overwhelming majority of the shareholders outside a meeting is sufficient to show that the resolution was supported by virtually all the members of the company. In these three ways substantial compliance rather than a formal compliance meets the requirements of the statute. Lastly, the failure of all the members of the company to object the absence of a meeting constitutes acquiescence from which also their consent can be inferred even though no meeting has been called.3 [Emphasis mine]

By now, it is clear that the approval of the shareholders if taken in a manner as stipulated in clause (b) or (d) of sub-section (3) of section 117, shall be good enough, legal and binding on the shareholders of the Company. It is important to note that the consent cum no objection for amalgamation etc. under erstwhile section 391 of the Companies Act, 1956 was not really considered {by the legal fraternity} as a case of application of concept stipulated in clause (b) of sub-section (3) of Section 117. In most of the cases, such consent/ no objection was never really treated as a resolution of the members and therefore, was never filed with the Registrar of Companies. Therefore, one of the important correction to be done in the scheme of things is to comply with sub-section (3) read with sub-section (1) of Section 117.

Though the tribunal’s powers is not restricted under sub-section (1) of section 230 and there are plethora of judgments of the high court(s) on this particular aspect, however, in view of the 3 Mazda Theatres (P) Ltd. Vs. New Bank of India Ltd. [MANU/DE/0104/1974] NCLTs Bouncer under Section 230: Denting its own powers? recent decision of the Principle Bench of the Tribunal, the Practising professionals may contemplate a need to adopt the duomatic principle, in due compliance of sub-section (3) of section 117 read with sub-section (1) of Section 117.

By doing this, a resolution would be deemed to have been passed at a duly convened meeting and suffice for the purpose of compliance of sub-section (1) read with sub-section (2), (3) and (6) of Section 230. Also, among other things, additional compliance w.r.t. submission of the documents with the authorities as stipulated in sub-section (5) of section 230 must be complied with. However, as time factor is of essence, the question as to when to pass a resolution as aforesaid {i.e. before moving the application or while seeking order for “approval via duomatic principle route stipulated in sub-section (3) of section 117” would depend on various factors including but not limited to whether the company has to hold a creditors meeting or not.

Needless to say that major impact would be in cases wherein 100% approval of shareholders or class of shareholders can not be obtained by the Company in question.

Rule 5 doesn’t override Section 230

As regard the language used under Rule 5 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, it is pertinent to note that it doesn’t overrides or puts a dent on discretionary powers of the Tribunal under sub-section (1) of Section 230 of the Act. It merely lays down the procedural aspects and doesn’t override the provisions of section 117 either. Infact, Rule 11 of the said rules overrides Rule 5 and protects the discretionary powers of the Tribunal.

What to expect, going forward

Given that the Principle Bench chose to read the provisions of Section 230 and rules made thereunder in strictest sense, it is yet to be seen if going forward the Principle Bench and other benches would look at this issue from a substantial compliance point of view. Also, more importantly, there is a need for change in strategy with respect to compliances to be followed by the petitioner(s) from time to time. The petitioner(s) would need to comply with section 117 and take assistance of relevant judgments (in fact, there are so many) of various high court(s) in order to support their argument and seek order(s) of the Hon’ble Tribunal for “dispensation of meeting of shareholders”. NCLTs Bouncer under Section 230: Denting its own powers?

After all this, if Tribunal still continues to follow the same path of strict reading of sub-section (9) of Section 230, overlooking the judgments of various high court(s) and other provision of the Companies Act, 2013, it may end up becoming a settled practice and finally, lead to denting one’s own powers. It may become more perturbing, sooner or later, as there are miniscule chances of somebody going for an appeal against it and challenging such a procedural aspect. It is beyond doubt that such “off road” approval of shareholders saves a lot of time and hence, it’s imperative that this issue reaches the right path, soonest possible.

Also, as the Chennai Bench has taken a different view, it is yet to be seen if all Benches would pause for a moment and synchronize their views or otherwise, we would see different orders coming out from one or the other Bench of the Tribunal, leading to more confusion !

– Manoj Singh Bisht (csmanojbisht@gmail.com)