No common sense to issue notice? Supreme Court raps NCLAT for ex-parte order in Matrix–Tianish merger

The Supreme Court on Wednesday pulled up the National Company Law Appellate Tribunal (NCLAT) at Chennai for passing an order expunging restrictions on the merger of Matrix Pharmacorp Pvt Ltd and Tianish Laboratories Pvt Ltd without issuing notice to affected parties [Ras Al Khaimah Investment Authority Vs Matrix Pharmacorp]..A Bench of Justice Surya Kant and Justice Joymalya Bagchi was unimpressed by the fact that the order was passed ex-parte without giving the affected parties an opportunity to respond. “This NCLAT does not have the common sense to issue a notice and then hear? Passing a 30-page order ex-parte," the Court remarked..The Court noted that there were two connected proceedings before the NCLAT - one involving the merger of Tianish Laboratories Pvt Ltd into Matrix Pharmacorp Pvt Ltd, and another concerning intervention petitions linked to contempt of court and execution proceedings before the Telangana High Court. In one case, parties were heard while in the other, the merger was approved without any notice.“Assuming the NCLT order is patently illegal, what will you do? Will you issue a notice at least?” the Bench asked, indicating that the procedural lapse had vitiated the order.Therefore, it proceeded to order status quo and listed the case for further consideration on December 15. .The litigation stemmed from a February 2, 2022 decree of the Ras Al Khaimah Civil Major Circuit Court in the United Arab Emirates, which held Hyderabad-based businessman Nimmagadda Prasad and others liable for damages claimed by the Ras Al Khaimah Investment Authority (RAKIA), a sovereign investment arm of the Emirate of Ras Al Khaimah.The dispute could be traced back to RAKIA’s investments in the RAKIA Free Zone Project in Andhra Pradesh (now in Telangana) over a decade ago, made in partnership with Prasad’s entities including Matrix Enport Holdings and IQuest Enterprises Pvt Ltd. RAKIA later alleged that Prasad had induced it into large-scale investments through misrepresentation and diversion of funds, leading to losses exceeding USD 300 million.Following the UAE judgment, RAKIA initiated execution proceedings before a commercial court at Hyderabad to enforce the foreign decree against Prasad and associated entities including Matrix group companies. These proceedings were accompanied by contempt of court petitions before the Telangana High Court, alleging violations of status quo directions regarding alienation of assets..While these enforcement and contempt proceedings were pending, Tianish Laboratories Pvt Ltd and Matrix Pharmacorp Pvt Ltd (formerly Matrix Pharma Pvt Ltd) filed a joint petition before the National Company Law Tribunal at Hyderabad seeking approval for their amalgamation under Section 230 of the Companies Act, 2013.On March 10 this year, the NCLT sanctioned the merger but imposed two crucial restrictions directing the transferee company not to alienate or encumber any of its assets without prior approval of the Telangana High Court and to seek leave before creating any charge.These directions were prompted by submissions referring to RAKIA’s pending enforcement actions and the High Court’s status quo orders in the contempt proceedings.However, on appeal by Matrix and Tianish, the NCLAT Chennai Bench comprising Justice Sharad Kumar Sharma (Member Judicial) and Jatindranath Swain (Member Technical) expunged these restrictions. The NCLAT held that the companies were not parties to RAKIA’s execution or contempt cases and hence, could not be bound by those orders. It observed that contempt proceedings are in personam and cannot affect third parties.The NCLAT’s reasoning emphasised that under Section 230, an amalgamation concerns only the transferor and transferee companies and outsiders cannot object unless directly impacted by the scheme..RAKIA moved the Supreme Court against the NCLAT decision. It contended that the Tribunal had effectively allowed a merger that could facilitate transfer or dissipation of assets subject to execution in India.RAKIA argued that the NCLAT erred in treating the companies as unconnected third parties when, in fact, both entities were part of a corporate network linked to Prasad’s family.During the hearing, RAKIA’s counsel urged the Bench to reimpose restraints on alienation of assets, warning that the merger structure risked frustrating enforcement of the foreign decree. .Appearing for the respondent companies, Senior Advocates Mukul Rohatgi and Niranjan Reddy maintained that Nimmagadda Prasad has no shareholding in Matrix Pharmacorp and that the merger between Matrix and Tianish Laboratories was a purely commercial reorganization unrelated to RAKIA’s enforcement proceedings.They relied on the NCLAT’s findings that the appellants were neither parties to the contempt nor to the foreign decree and that the Tribunal’s intervention under the Companies Act was limited to ensuring procedural compliance..The Court after considering the arguments ordered status quo.With Wednesday’s order, the Supreme Court effectively revived the asset restrictions originally imposed by the NCLT and subsequently removed by the NCLAT. The direction to maintain status quo extends not only to corporate assets of Matrix Pharmacorp and Tianish Laboratories but also to the personal properties of Nimmagadda Prasad, his daughter Swathi Gunupati Reddy, and his son-in-law Venkata Pranav Reddy Gunupati.The matter will next be heard on December 15 when the Court is expected to examine whether the NCLAT’s deletion of restrictions undermined enforcement of a valid foreign decree pending in Indian courts..RAKIA was represented by Senior Advocates Abhishek Manu Singhvi and K Vivek Reddy with advocates Rishab Gupta, Siddharth Seem, Rishabh Kapur, Tanmay Gupta and Pival K Peddireddy and Rishabh Kapur..Matrix Pharmacorp and Tianish Laboratories were represented by Senior Advocates Mukul Rohatgi, Niranjan Reddy and Narendra Hooda with advocates Saloni Kapadia, Aditi Thakur, Aishwarya Gupta, Indranil Deshmukh, Raunak Dhillon, Jeezan Riyaz, Shubh Sahai and Yuvraj Nandal from Cyril Amarchand Mangaldas..[Read Order]