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APR 21, 2017

Schemes Transferred from High Court to Tribunal Involving Buy Back of Securities: Dealt Prospectively or Restrospectively?

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These day’s schemes of arrangements are designed like a swiss knife by the companies which fulfill their various purpose through an effective medium i.e. by entering in a scheme of arrangement involving mergers, demergers, reduction etc.; companies tend to use non-obstante clause& deemed approval clause under the other applicable laws by praying such in the scheme. It was settled that the approval of scheme of arrangement worked as single window clearance for the companies involved and the companies need not to comply with the provisions applicable to the transaction separately. Like previously, under the scheme of arrangement which involved buy-back of securities by the company, the company was allowed to buy-back its securities without following the provisions of the Companies Act, 1956 (“1956 Act”) when the scheme was sanctioned.

However, now the provisions of Section 230-232 of the companies Act, 2013 have come into force. The provisions of Section 230 (10) have specifically provided that no compromise or arrangement pertaining to the buy-back of securities shall be sanctioned unless compliance of Section 68 of Companies Act, 2013 (“2013 Act”) is made. Section 68 of the 2013 Act deals with the Power of company to purchase its own securities. Section 68 overrides all other provisions of Companies Act, 2013 as it starts with the notwithstanding clause i.e. “Notwithstanding anything contained in the Act” but subject to Section 70 of the Companies Act, 2013 which deals with Prohibition for buy-back in certain circumstances.

Recently, after the notification of Ministry of Corporate Affairs of December 7, 2016, many pending matters were transferred from High Courts to the National Company Law Tribunals having jurisdiction. Few such matters included the schemes which also provided for buy-back of the securities by the company. In one recent case of Lotte Engineering & Construction India Private Limited[1], the company proposed the scheme of arrangement providing for buy-back of its equity shares upto 99.86% i.e. their equity shares from 6,92,275 will get reduced to only 1,000 equity shares. In this case the petition was originally filled under Section 391 of the 1956 Act before the Hon’ble High Court of Delhi and later vide Notification No. GSR 1119(E) the matter got transferred to Hon’ble National Company Law Tribunal, Principal Bench at New Delhi (“NCLT”) under the new enacted provisions of Section 230-232 governing compromise, arrangements, mergers and reconstructions.

Majorly following issues came for the consideration of NCLT in this matter:

Issue no. 1

For the matters transferred from High Court to NCLT, whether NCLT has to deal with them under the 1956 Act (under which they were filed) or under the 2013 Act?

NCLT’s Observation

NCLT with regard to the above issued observed that the Central Government by Notification No. S.O. 3676(E) dated December 7, 2016 titled “Companies(Removal of Difficulties)Fourth Order, 2016”, provided that all proceedings under the Companies Act, 1956 other than the case relating to winding up of companies that are reserved for orders or otherwise shall be dealt with in accordance with the provisions of 2013 Act and not under the 1956 Act. Given the arguments of the counsels which pleaded that NCLT shall deal with the matter applying the provisions of the Act under which it was filed, NCLT observed that pursuant to Section 434(1)(c) and vide notification dated 07.12.2016, it is implied that all the proceedings which have been transferred from High Court to Tribunal shall be dealt with in accordance with the provisions of 2013 Act and not under 1956 Act. The issue of dealing the matter at hand under the previous law or present arose for consideration of NCLT due to the provisions of buyback which were provided in the Scheme.

As discussed above, Section 230 (10) of the 2013 Act, provides that “No compromise an arrangement in respect of any buy back of securities under this section shall be sanctioned by the Tribunal unless such buy back is in accordance with the provisions of Section 68”. The counsel for petitioner pleaded that NCLT should consider the matter under the provisions of 1956 Act and since under the said Act, compliance requirement with the Section dealing with the buy-back was not provided, the applicant company was not required to comply with the said provisions and hence presently under the new law i.e. 2013 Act, should not be made to comply with the provisions of Section 230(10) of 2013 Act.

Therefore, NCLT concluded that the scheme of compromise and arrangement transferred from High Court to NCLT shall have a prospective effect and they will be guided under the new provisions of 2013 Act.

Issue no. 2

Whether a company can buy-back the shares exceeding the statutory limit prescribed under section 68 of the Act?

NCLT’s Observation

Since the proposed scheme in the matter of Lotte Engineering & Construction India Private Limited (Supra) contemplated buy-back of securities upto a level of 99.86% of the entire issued capital, NCLT observed that the same is not in compliance with the provisions of Section 68of 2013 Act. Section 68 provides a ceiling of 25% to the buy-back of securities in a particular year by the Company. the legal position of the later enactment being already settled above, NCLT took the view that the transaction provided under the Scheme shall not be allowed.

Similarly, the schemes framed under the provisions of the 1956 Act also provided for transfer of shares of the transferor company held by the transferee company to any trust (treasury stock) whether on its behalf or on behalf of any of its subsidiary or associated companies. There could be a scheme of arrangement pending for consideration before the High Court which was filed under the provisions of Section 391-394 of the 1956 Act which provides for transfer of shares held as cross holdings of the companies or a case where the transferee company is holding shares of the transferor companies; to a trust. Under the provisions of Section 232 of the Companies Act, 2013 the same is specifically prohibited and the statute provides that such shares held by the Transferee Company shall be extinguished or cancelled.Now if this scheme appears before the NCLT for consideration, it is settled that the latter law shall prevail the former and no such arrangement will be allowed.

Conclusion

Having the ratio of the above order, it can be concluded that the schemes filled under the erstwhile provisions of 1956 Act and which got transferred from High Court to Tribunal shall be treated in terms of the provisions of 2013 Act by the NCLT. NCLT has also decided other matters [2] which were on the same lines which followed the Lotte case. We may put our view forth that in a case like Lotte Engineering & Construction India Private Limited (Supra), one may have adopted the process of reduction of capital for paying out to its shareholders the excess capital rather than choosing the option of carrying out the transaction by way of buy-back of securities. Ideally there is no limit to the reduction and the excess funds can be paid to the shareholders of the Company. However, this is just our view on the limited facts which are available in the judgment.

Endnote:

[1] Order_21.03.2017_Lotte Engineering & Construction India Private Limited

[2] Saxo India Pvt. Ltd. & http://nclt.gov.in/Publication/Principal_Bench/2017/Others/RS%20Livemedia%20Pvt.%20Ltd.%20(Final).pdf

AUTHORED BY

Mr. Manoj Kumar

Partner & Head – M&A & Transactions

FCS