By Prachi Pandya
“What is the argument on the other side? Only this, that no case has been found in which it has been done before. That argument does not appeal to me in the least. If we never do anything, which has not been done before, we shall never get anywhere. The law will stand still while the rest of the world goes on, and that will be bad for both”.
– Lord Denning
The Hon’ble Supreme Court, sets aside the Order of the Bombay High Court upholding the Central Government’s order of compulsory amalgamating NSEL and FTIL under Section 396 of the Companies Act, 1956. The judgement of both, Bombay High Court and Supreme Court, discusses in great detail, the not so often invoked Section 396 of the Companies Act, 1956. Interestingly, it is said that in the case of FTIL and NSEL it was the first time that Section 396 was invoked to amalgamate two non – government companies. So, what is this creature Section 396 in the Companies Act.
Section 391 to 394 of the Companies Act deals with merger, making of scheme or arrangement, voluntarily by creditors and shareholders. Section 396 was introduced to empower the Central Government to order compulsory amalgamation of two or more companies where it is convinced that it is ‘essential’ in ‘public interest’ to do so. When NSEL scam broke out, the Central Government, under Section 396 ordered amalgamation of National Spot Exchange Limited (NSEL) and 63 Moons Technologies Limited (formerly known as Financial Technologies (India) Limited (FTIL)). Rewinding a little, before we get into Supreme Court’s findings in its judgement of April 30, 2019.
FTIL is a 99.99% shareholder of the NSEL and is a listed company. On the other hand, NSEL was incorporated in 2005 by Multi Commodities Exchanges [“MCX”] and its nominees. NSEL provided an electronic platform for trading of commodities between willing buyers and sellers through brokers representing them.
On April 27, 2012, Department of Consumer Affairs issued a show cause notice to NSEL as to why action should not be initiated against it for permitting transactions in alleged violation of the exemption granted to it under the Foreign Contribution (Regulation) Act, 2010. Without adjudicating upon the show cause notice, on July 12, 2013, DCA directed NSEL to give an undertaking that no further contracts shall be launched until further instructions, and that all existing contracts will be settled on due dates.
Sometime in July 2013, 13,000 persons who traded on the platform of NSEL claimed to have been duped by other trading members, who defaulted in payment of obligations amounting to approximately INR 5600 crore!
On July 31, 2013, however, NSEL, notified its members that trading in all contracts (except E-series) stood suspended until further notice. As a result, all the trading/activities at the NSEL exchange, came to a grinding halt on July 31, 2013.
Shockingly, the settlement guarantee fund, which, according to NSEL, was having Rs. 738.55 crores as on August 1, 2013, was found to have hardly Rs. 62 crores as on August 4, 2013. Above all, though, transactions on the exchange were to result in actual deliveries of commodities, it was found that there were no commodities or in any case, there were inadequate commodities, for effecting such deliveries. This was a glaring revelation.
As a result, over 13,000 investors, with claims of over Rs. 5600 crores, neither received the amounts due to them from the defaulters nor from the settlement guarantee fund. There was not enough commodities in the warehouses for taking any deliveries. Thereby, leaving the investors in a complete lurch.
Reacting to the unprecedented crisis, Forward Market Commission (FMC) ordered forensic audit, which indicated serious breaches in operations. Thereafter several other actions were taken, such as inspection of books of accounts under Section 209A of the Companies Act and Economic Offences Wing registered cases against the directors, key personnel of NSEL and FTIL.
On August 18, 2014, the FMC, vide a letter to the Union of India, suggested that FTIL and NSEL be merged. Thereafter, the Central Government proposed action under Section 396 to amalgamate NSEL with FTIL and sent the proposed order dated 21st October 2014 (in draft) to the companies concerned as mandated Section 396 (4) (a). FTIL filed a Writ Petition questioning the compulsory merger under section 396.
Section 396 of the Companies Act
Section 396 empowers the Central Government to order compulsory amalgamation of two or more companies where it is satisfied that it is ‘essential’ in the ‘public interest’ to do so. The Bombay High Court and the Supreme Court in particular analysed in great detail as to whether it was ‘essential’ and in the ‘public interest’ to merge the two companies.
No order can be made under this section unless a copy of the proposed order has been sent in draft to each of the companies concerned, for their suggestions. The Central Government is then required to consider and make such modifications, if any, in the draft order in the light of suggestions or objections which may be received from such company, or any class of shareholders therein or any creditors or class of creditors. This is the extent to which the principles of natural justice have been incorporated in Section 396.
Further, under Section 396(3), the Central Government has to ensure that every member or creditor (including debenture holder) of the companies before amalgamation shall have, as nearly as may be, the same interest in or the rights against the company resulting from the amalgamation as he had in the company of which he was originally a member or a creditor. If this is not, such member or creditor shall be entitled to compensation which is to be assessed by the prescribed authority.
Under sub-section (3A), an appeal is provided to any person aggrieved from the order of such assessment. What is important to note is the mandatory language contained in sub-section (4), which states that no final order shall be made under the Section unless the time for preferring an appeal under sub-section (3A) has expired, or where any such appeal has been preferred, the appeal has been finally disposed of. This makes it clear that unless an order of compensation is first made under sub section (3), and an appeal therefrom has either not been filed or has been disposed of, no order of amalgamation can be made.
Doyens from the legal fraternity appeared on both sides and put forth a catena of arguments and judgments in support of their contentions. Even the Bombay High Court and the Supreme Court, considered various and varied aspects of law and statutory principles whilst arriving at their respective conclusion. However, this article broadly deals with findings on Section 396.
Findings of the Bombay High Court on 396
Findings of the Supreme Court on 396
However, when the order of the Bombay High Court was considered by the Hon’ble Supreme Court, it viewed it differently. The Supreme Court findings qua 396 were as follows :
The author is a High Court Advocate.