ACS Divesh Goyal

CS Divesh GoyalShort Summary:

By Notification dated 7th December, 2016 MCA has notified the sections of M&A under Companies Act, 2013 (Section 230-240). In this Flash editorial, the auditor begins by referring the provisions of section 230-240 relating to Meeting of Shareholders & Creditors and also makes an attempt to light up on provisions of dispense of Shareholder Meeting via decided case laws. The main thrust of the article, however, is upon the provisions of section 230(9) which deals with dispension of meeting of creditors and most recent case laws decided by the Bench of National Company Law Tribunal in the case of JVA Trading Pvt. Ltd. and C&S Electric Limited in Company Application No.A.1/PB/2017 dated 13.01.2017.

Introduction:

Thus far, schemes of arrangement were carried out under sections 391 to 394 of the Companies Act, 1956 and the jurisdiction for sanction of the schemes was exercised by the relevant High Court. It had been common practice for High Courts to dispense with meetings of classes of either shareholders or creditors if an overwhelming of number of members of the class had already granted their consent to the scheme in writing, which was presented before the court. Due to implementation of new sections the companies will not require approval of the High Court for mergers under CA 2013. The approval shall be granted by the National Company law Tribunal (“NCLT” or “Tribunal”) instead.

What we understood by Dispense of Meeting?

As per the provisions of Section 230, for the purpose of approval of scheme of compromise & arrangement companies required to take consent of creditors or shareholders through their meetings. The very purpose for conducting a Meeting is to take consent of the members or creditors of the company while taking any substantial decision for the company.

The meaning of word ‘Dispense’ as per black law dictionary is an exemption from some laws; a permission to do something forbidden; an allowance to omit something commanded.

Therefore if Company received the consent of the shareholders and members in writing for approval of scheme then court has the power to dispense with the requirement of holding of Meetings.  This exemption from the meeting is concerned as dispense of meetings.

Section 230 of Companies Act, 2013:

Provisions for dispensation of Meetings

(9) 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.

Question for discussion in this editorial is “The power of NCLT to dispense with the Meeting of Shareholders? As the Section 230(9) exclusively mentioned regarding the power of dispense of Meeting of Creditors by Tribunal, but the act is silent on power to dispense with the meetings of shareholders.

Rulling by NCLT:

In first schemes to be considered by the NCLT u/s 230  & 232, the Principal bench of NCLT, New Delhi (‘the Bench’) thereof passed an order on 13th January 2017 on the question of whether the NCLT is empowered to dispense with the meeting of a class of shareholders if the members thereof have granted their consent in advance.

This case involved a scheme of amalgamation of JVA Trading with C&S Electric. JVA Trading had only four shareholders, all of who had granted their consent to the amalgamation. Hence, the question was whether the shareholders’ meeting of JVA Trading could be dispensed with. Here, after analyzing the provisions of the Companies Act, 2013, the NCLT held:

Decision of the Bench: The Bench has held that the power of NCLT for granting dispensation from the Meeting is limited to creditors Meeting only[under section 230(9)] and that the NCLT bench cannot grant dispensation from the Meeting of shareholders “ as we are not inclined to grant dispensation taking into consideration the provisions of the Companies Act, 2013 and the rules framed there under both of which expressly do not clothe this” even though the consent of all the shareholders has been obtained by the company.

From the above ruling it can be interpret that the NCLT can never dispense with the holding of a meeting of a class of shareholders or creditors (except under section 230(9)) even if such a meeting turns out to be an empty formality (even whether consent of shareholders is already obtained).

Genesis of constitution of Nclt:

The genesis of setting up of specialized tribunals can be traced to the Supreme Court judgment in Sampath Kumar case. In that case, while adopting the theory of alternative institutional mechanism for Supreme Court referred to the fact that since independence, the population explosion and the increase in litigation had greatly increased the burden of pendency in high courts. The supreme court also referred to studies conducted towards relieving the high courts of their increase load; the recommendations of the Shah committee for setting up independent tribunals as also the suggestion of the administrative reforms commission for setting up of Civil Service tribunals.

The anticipation that this newly set up structure of the tribunal system would usher in an era, where the adjudication authorities would be up to speed to dispose matters related to commercial transaction. However, some practitioners, academics and businesses were taken by surprise with the said order.

Effect of non-dispensation of meeting of shareholders:

As we are in the era of ease of doing business. Sometimes the advantage/ effectiveness of the Compromise & arrangement, Mergers and amalgamations for the Corporates are based on time. Any delay in time of pronouncement final order may fade away purpose of merger & amalgamation.

As the Rule 5 Companies (Compromises, Arrangements and Amalgamations) Rules, 2016

entrust power on NCLT to appoint chairman of the meeting and fix the fees of the Chairman. This is extra cost on the Company in case there are nominal no. of shareholders in the Company and they give their consent in writing for dispension of their meeting.

Consequently, one can construe that due to non- dispension of meeting of Shareholders of company this will certainly add to the costs and inefficiencies in effecting a scheme of arrangement. 

Analyzes of power of NCLT:

As in the above decision NCLT mentioned that, its powers are 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.

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.”

Even in Rule 24(2) of The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 powers are given to NCLT. “The rule has a provision related to dispensation with any procedure for implementation of the scheme of merger. One plausible explanation could be that the power of the NCLT to dispensation of proceedings is related to those circumstances around the implementation of scheme.

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.

Conclusion:

The Old Act read along with the Company (Court) Rules, 1959 had no specific provisions for dispensation to convene meetings (including class or classes of creditors and/or members) for considering the scheme of merger. In practice there have been many instances of directions issued by different High Courts, at its discretion (and often based on legal reasoning), for dispensation of meetings, if (majority) consent to the dispensation of meeting by way of affidavits were furnished. However there was no settled position of law that “consent” could be the standard to be used for dispensation of meetings. Thus it is indeterminate as to the valid law with regard to the dispensation of the meeting for considering the scheme of arrangements under the Old Act.

It is predictable that the MCA may have to consider another ‘Companies (Removal of Difficulties) Order’, given the concerns regarding the limitation of dispensation of shareholders meeting in the case of mergers.

(Author can be reached at csdiveshgoyal@gmail.com )

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One response to “Dispense of shareholder Meeting under Companies Act, 2013”

  1. CS GOPESH SAHU says:

    Nice Article on the topic Mr. Divesh, convening Shareholder meeting particularly in closely held company or in case of scheme of restructuring among companies having few shareholders being owned and controlled by common management would undoubtedly delay the entire process by couple of months and thus delaying the underlying objective for such restructuring, MCA must address the issue for promoting speedy disposal M & A cases.

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