By Debanjan Banerjee.Background.The law related to mergers came into force when the Ministry of Corporate Affairs notified the Companies (Compromise, Arrangement, and Amalgamation) Rules 2016 (Merger Rules) on December 14, 2016..In a month’s time, on January 13, 2017, an order was pronounced on behalf of the Division Bench by the honorable President of the NCLT, New Delhi. The significance of this order was that the prayer for dispensation of shareholders meeting relating to the scheme of merger, was disallowed..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..This article has deliberately avoided any pedantic attention to the business impact of the NCLT order as this is not in the domain of legal expertise. Rather, our pull has been towards identifying the benchmark of legal validity when arriving at the pronounced order. In other words, has the Learned President validated or invalidated the established rule of law when rendering the judicial pronouncement. Put differently,.Have there been any inconsistencies of applied standards of legal reasoning which could give doubt to the legal efficacy of the order;Further, does the order resonate the fulfillment of any underlying indeterminacies of the new legal regime related to dispensation of shareholders meeting (and which makes the past legal reasoning redundant).After describing the factual brief of the case, we have set up our analysis to get to the settled position of law with respect to “dispensation of meetings” as in the older statute, namely the Companies Act, 1956 (Old Act). The contextual framework which we have chosen to assess for the legal efficacy of the order which, in our view is decisive, is that the legal system of Companies Act 2013 (New Act) has transformed to a formalistic system of law. As a precursor to this context, we have commenced our analysis by a high level review of the legislative intent behind merger rules as provisioned for under the New Act..Brief facts of the Case:.JVA Trading Private Ltd (JVA) and C&S Electric Limited (Electric Limited) are engaged in the business of electric and electronic goods with the former being the transferor and the latter being the transferee companies respectively. A joint application for merger was filed by both the companies with NCLT Principal Bench at Delhi for merging the trading company into the manufacturing company (i.e. the transferee company). In their application, JVA had specifically prayed for dispensation of meeting of shareholders as it has only four shareholders, who had consented to the merger and an affidavit to this effect was annexed with the Company Application..NCLT declined to dispense with the requirement of convening meeting of the shareholders, curiously enough, by relying on the same provisions that the learned counsel for the applicant relied upon in the application being Section 230 (9) of the New Act. The NCLT observed that the New Act do not clothe this Tribunal with the power of dispensation to the meeting of the members/shareholders”..Further, The NCLT referred the secondary rules, more specifically to Rule 5 of the Merger Rules,.“which provides for direction 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.” .Analysis.In spite of the recommendation by the Parliamentary Standing Committee on Finance (Finance Committee) in its report of 2010 to provide for qualified dispensations both of Shareholders and Creditors meetings, the subsequent 2012 report of the Finance Committee clearly indicates that Ministry of Corporate Affairs (MCA) disagreed for dispensation of shareholders meeting. The result was that the New Act incorporated provision only with regard to dispensation with meeting of creditors..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..The New Act with its foundational structure of rule based law has effected a regime change to company’s law. Under the new legal system, the primary rule(s) governing merger provisions namely, Section 230 (9) has authoritatively provided that only creditors meeting can be dispensed. Further as potently brought forth by the Learned President, the secondary rules i.e. Rule 5, which is the rule of recognition to the primary rule as under Section 230 ( 9) expressly provided that jurisdiction of the tribunal for dispensation of meetings is limited to creditors meetings only. There can be a plausible argument that the Learned President could have taken recourse to the legal reasoning of the open texture of law regarding the dispensation of shareholders meeting. However, given that the New Act is based on a legal machinery of a strict formalism of rule based system, the Learned President could have sensed that his discretionary powers are fettered from declaring the law of allowing the dispensation of shareholders meeting..The only missing element though, could be that Rule 24(2) of the Merger Rules was not given due consideration probably because the officer of the Court had not drawn the attention to this rule. 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..In conclusion, the legal reasoning of the Learned President is consistent that in the vacuum of specific rules related to dispensation of shareholders meeting under the new legal system of a formalistic rule based New Act, the NCLT lacks jurisdiction for the dispensation of shareholders meeting. Given the above consideration, the legal efficacy of the Learned President, giving the direction order not allowing the dispensation of the shareholders meetings, is redoubtable..Further, the succinct first order under the new Merger Rules, nevertheless has fulfilled the indeterminacy through the now declared law which disallows dispensation in relation to shareholders meeting..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..Debanjan Banerjee is a Partner with the Bangalore office of Juris Corp.
By Debanjan Banerjee.Background.The law related to mergers came into force when the Ministry of Corporate Affairs notified the Companies (Compromise, Arrangement, and Amalgamation) Rules 2016 (Merger Rules) on December 14, 2016..In a month’s time, on January 13, 2017, an order was pronounced on behalf of the Division Bench by the honorable President of the NCLT, New Delhi. The significance of this order was that the prayer for dispensation of shareholders meeting relating to the scheme of merger, was disallowed..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..This article has deliberately avoided any pedantic attention to the business impact of the NCLT order as this is not in the domain of legal expertise. Rather, our pull has been towards identifying the benchmark of legal validity when arriving at the pronounced order. In other words, has the Learned President validated or invalidated the established rule of law when rendering the judicial pronouncement. Put differently,.Have there been any inconsistencies of applied standards of legal reasoning which could give doubt to the legal efficacy of the order;Further, does the order resonate the fulfillment of any underlying indeterminacies of the new legal regime related to dispensation of shareholders meeting (and which makes the past legal reasoning redundant).After describing the factual brief of the case, we have set up our analysis to get to the settled position of law with respect to “dispensation of meetings” as in the older statute, namely the Companies Act, 1956 (Old Act). The contextual framework which we have chosen to assess for the legal efficacy of the order which, in our view is decisive, is that the legal system of Companies Act 2013 (New Act) has transformed to a formalistic system of law. As a precursor to this context, we have commenced our analysis by a high level review of the legislative intent behind merger rules as provisioned for under the New Act..Brief facts of the Case:.JVA Trading Private Ltd (JVA) and C&S Electric Limited (Electric Limited) are engaged in the business of electric and electronic goods with the former being the transferor and the latter being the transferee companies respectively. A joint application for merger was filed by both the companies with NCLT Principal Bench at Delhi for merging the trading company into the manufacturing company (i.e. the transferee company). In their application, JVA had specifically prayed for dispensation of meeting of shareholders as it has only four shareholders, who had consented to the merger and an affidavit to this effect was annexed with the Company Application..NCLT declined to dispense with the requirement of convening meeting of the shareholders, curiously enough, by relying on the same provisions that the learned counsel for the applicant relied upon in the application being Section 230 (9) of the New Act. The NCLT observed that the New Act do not clothe this Tribunal with the power of dispensation to the meeting of the members/shareholders”..Further, The NCLT referred the secondary rules, more specifically to Rule 5 of the Merger Rules,.“which provides for direction 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.” .Analysis.In spite of the recommendation by the Parliamentary Standing Committee on Finance (Finance Committee) in its report of 2010 to provide for qualified dispensations both of Shareholders and Creditors meetings, the subsequent 2012 report of the Finance Committee clearly indicates that Ministry of Corporate Affairs (MCA) disagreed for dispensation of shareholders meeting. The result was that the New Act incorporated provision only with regard to dispensation with meeting of creditors..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..The New Act with its foundational structure of rule based law has effected a regime change to company’s law. Under the new legal system, the primary rule(s) governing merger provisions namely, Section 230 (9) has authoritatively provided that only creditors meeting can be dispensed. Further as potently brought forth by the Learned President, the secondary rules i.e. Rule 5, which is the rule of recognition to the primary rule as under Section 230 ( 9) expressly provided that jurisdiction of the tribunal for dispensation of meetings is limited to creditors meetings only. There can be a plausible argument that the Learned President could have taken recourse to the legal reasoning of the open texture of law regarding the dispensation of shareholders meeting. However, given that the New Act is based on a legal machinery of a strict formalism of rule based system, the Learned President could have sensed that his discretionary powers are fettered from declaring the law of allowing the dispensation of shareholders meeting..The only missing element though, could be that Rule 24(2) of the Merger Rules was not given due consideration probably because the officer of the Court had not drawn the attention to this rule. 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..In conclusion, the legal reasoning of the Learned President is consistent that in the vacuum of specific rules related to dispensation of shareholders meeting under the new legal system of a formalistic rule based New Act, the NCLT lacks jurisdiction for the dispensation of shareholders meeting. Given the above consideration, the legal efficacy of the Learned President, giving the direction order not allowing the dispensation of the shareholders meetings, is redoubtable..Further, the succinct first order under the new Merger Rules, nevertheless has fulfilled the indeterminacy through the now declared law which disallows dispensation in relation to shareholders meeting..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..Debanjan Banerjee is a Partner with the Bangalore office of Juris Corp.
