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MAR 15, 2017

Powers of NCLT To Dispense Meetings of Shareholders

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Principal Bench of National Company Law Tribunal (NCLT) decided its first matter filed under Section 230-232 of the Companies Act, 2013 (Act) read with Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (Rules) in the case of JVA Trading Private Limited and C&S Electric Limited [1] wherein the bench took the view that it does not have the powers under the Act or Rules to dispense the requirement of calling and convening the meeting of the shareholders albeit the shareholders have given the consent to the proposed scheme. Stakeholders are aware that the provisions with respect to the arrangements as provided under the Act were enforced by the end of 2016 and NCLT was given powers to inter alia hear and decide the matters pertaining to arrangements between the companies. While Mumbai bench of NCLT was the first to hear such matters, principal bench followed and gave detailed reasons for not being empowered to dispense the meetings of the shareholders in case where the shareholders have already provided their consent.

In the case of JVA Trading (Supra) NCLT observed that there is no express provision under the Act or the Rules which empowers NCLT to dispense the requirement of calling and convening the meetings of the shareholders where the majority or all the shareholders have agreed to the proposed scheme. However, Section 230 (9) of the Act empowers NCLT to the dispense the requirement of calling and convening the meeting of creditors or class of creditors having at least ninety percent value agreed and confirm by way of affidavit the proposed scheme. However, there being no such provision with regard to the meetings of the shareholders, NCLT formed the aforesaid view.

This order raised the pertinent issue with respect to the powers of NCLT which in a way can be said to be transferred from High Court with the change effected in transition from Companies Act, 1956 to the Companies Act, 2013.

Position under Companies Act, 1956

Under the Companies Act, 1956 (1956 Act) the High Courts had a jurisdiction to deal with the matters pertaining to Arrangements under section 391-394 of the 1956 Act. There are precedents of High Courts where the meetings of the shareholders and compliance as required and mandated under the provisions of the 1956 Act were dispensed with. Few such cases are:

In M/S. GE Capital Transportation Financial Services Ltd.[2], the Court dispensed with the requirement of convening meeting of the creditors of the transferor and transferee companies on account of the applicant companies therein giving an undertaking to the effect that, upon Court notice being issued in the confirmation petition, the applicant companies would issue notice to their creditors inviting objections, if any, to the proposed scheme. The same was done in view of the circumstance that upon the scheme coming into effect, the entire business and undertaking would stand transferred to the Transferee Company thereby leading to no variation of rights of the said creditors. Further, the majority shareholder of the Transferor Company with a holding of 92.74% of the paid up equity share capital was exempted from participating in the shareholders meeting on account of his NOC/written consent being given beforehand.

In M/S. Mazda Theatres Pvt. Ltd. and Another versus M/S. New Bank of India Ltd. And Other [3] the division bench of Delhi High Court laid down three exceptions to the normal rule of convening meeting required u/s 391 (then applicable). First - the consent of all the shareholders given even outside a meeting is sufficient to comply with the requirement of a meeting; second -
the consent of the shareholders may be ascertained without calling any meeting at all; and third - all the shareholders of a company must cast their votes in a formally called meeting is made by the doctrine of acquiescence.

Position under Companies Act, 2013

Section 230 (9) of the Act read with Rule 5 of the Rules inter alia provides that NCLT while hearing the application u/s 230 (1) of the Act can dispense the meetings of the creditors as provided u/s 230 (9) of the Act i.e. in a case where such creditors or class of creditors having at least ninety percent value, agree and confirm, by way of affidavit, to the scheme of compromise or arrangement. However, neither the provisions contained under the Act nor the Rules specifically provide for any procedure or powers to NCLT for dispensing the meeting of the shareholders of the company. However, the aforesaid position of law is consistent with the earlier provisions under Companies Act, 1956 and earlier High Courts have on various occasions exercised their powers to dispense the requirement of calling and convening the meetings of the shareholders or creditors where the 3/4th majority of such shareholders or creditors have given their consent to the proposed scheme. In any case, the room for objection for any dissenting shareholder or the creditors was available under the Companies Act, 1956 and under the Act, i.e. when the notice of Petition is published in the newspapers.

Present Scenario

Now, as the practice at NCLT evolves, NCLT in the recent case [4] has dispensed the meetings of the shareholders where all the shareholders have given their consent to the scheme of arrangement. Despite there being many precedents of High Courts on the practice for dealing with the cases of arrangements, NCLT seems to be playing safe while delivering orders. The question still remains and yet to be seen is the case where the parties to the arrangement approach NCLT with the consent of 3/4th majority of the shareholders, whether NCLT will take the similar view or the jurisprudence laid down by the courts empowered under the Companies Act, 1956 empowered to deal with such matters earlier.

Conclusion

Having discussed the above, it can be said that NCLT can dispense the meetings of the shareholders if the bench is satisfied with the compliance, acquiescence etc. of the shareholders. The recent orders clarify the practical issues which were risen with the order of the JVA case. Dispensing the meeting of the shareholders is a welcome move and may also have implications in the cost reduction in the cases where the companies involved have attained the consent of the creditors and the meetings of the creditors can be dispensed. The only meetings left to be called after this would have been of shareholders which now NCLT considers to dispense.

AUTHORED BY

Mr. Manoj Kumar

Partner & Head – M&A & Transactions

FCS