Reconstruction of a company comes into the picture when the business of a company suffers from long term financial crisis or loss and apparently has poor financial position as per its balance sheet. Indian Company Act, 2013 allows those companies, suffering from loss, to reconstruct itself by transferring it to another company, having exactly the same interests and objects, in a way that the stakeholders and other interested people of vendor company are not affected or altered.
However, it is not necessary for the suffering company to transfer its business to another company as it could re-arrange and adjust its shares and financial structure within itself by way of internal reconstruction. Therefore, we can now identify reconstruction as:
- External Reconstruction
- Internal Reconstruction
A reconstruction of company may take place in any of the following forms:
- By sale of shares
- By sale of undertaking
- By sale and dissolution
- By a scheme of arrangement
The power to review and arrangement of any company was entrusted to National Company Law Tribunal in the year 2002.
Courts (now “Tribunal”) discretion is predominant in the matter of reconstruction and amalgamation of a company. In the event a company or its member does not comply with the orders of the tribunal ought to have serious legal implications.
POWERS AND FUNCTIONS OF COURT IN RECONSTRUCTION
Any company whose essence is reconstruction or amalgamation shall issue an application under section 230 of Companies Act to the Tribunal for sanction of such scheme. Upon such application, the Tribunal orders a meeting with creditors or a class of them or of members or a class of them. This meeting is held according to the procedure under the provision of Section 230(3) to (6) of the Companies Act, 2013. The merging companies have to submit documents to the Tribunal, including but not limited to:
- draft of the agreement drawn and adopted by the directors of the merging company;
- confirmation notice stating that the draft has been duly filed with the Registrar
- reports by the directors of the merging company following the effect of the agreement upon the stakeholders;
- report of valuation by an expert;
- a supplementary accounting statement of any of the merging companies (if required).
Upon consideration of the above-mentioned documents, the Tribunal may sanction the scheme of arrangement if the same is duly complied or may subsequently make provision for the matter. While passing such order, the Tribunal may make necessary modifications in the arrangement or compromise for its proper implementation. The Tribunal here has the power to observe the implementation of the arrangement of the merging company.
Companies after receiving the order shall file the certified copy of order with the Registrar within 30 days of receipt of the same. And upon the filing of the certified copy of the order, the respective Company is under obligation to file an accounting statement (certified by charted accountant) with the Registrar as per the manner and time prescribed by the Tribunal until the final implementation of the scheme.
In the event Tribunal finds out that transferor or transferee of the company is not complying with the direction provided in the provisions, it would be liable to pay fine (which shall be not less than what is fixed by the Securities and Exchange Board) or imprisonment or both.
Whereas it is to be noted, if the Tribunal is satisfied that the arrangement can’t be implemented even with modifications, it will pass an order to wind up the company which shall be deemed to be an order under Section 273 of The Companies Act,2013.
COURT’S POWER AND DISCRETION IN VIOLATION OF LAW
The power of the tribunal is not just limited to the above-mentioned role. Section 232 of the Companies Act, 2013 confers power to the Tribunal to pass strict order in the case where transferee company holds any share in its own name of any trust on his behalf or on behalf of its associate or subsidiary company during the process of arrangement. Such violation may also result in dissolution without winding up of transferor company. Tribunal is entrusted with abundant of power to decree on such violation.
In Himachal Telematics Ltd v. Himachal Futuristic Communications Ltd, (1996) 37 DRJ 476: (1996) 86 Comp Cas 325, the Bombay High Court granted sanction for amalgamation of a Company with a Bombay based company. Hon’ble judge stated that the court holds the innumerable amount of power when it comes to the reconstruction of a company. The legislature has granted such power under Section 392 of the Companies Act which enables the court to give direction as well as to set out modifications in the compromise and/or arrangement.
The underlying purpose of Section 392 is to provide proper working of the compromise and /or arrangement. The court is in charge to actively supervise and oversee the process of arrangement or compromise and if over a period they observe obstacles, difficulties or impediments it shall immediately take necessary steps to eliminate such obstruction. The legislature has thus vested the power upon the Court in view of the fact that process of reconstruction is absolutely cumbersome and time-consuming.
Tribunal is authorized to entertain public interest. Any regulation and order passed by the Tribunal shall adhere the public interest. In reference to this topic public interest is taken into due diligence. Tax being an important part in the development of society promotes the public interest. In cases where reconstruction takes place, company often ought to neglect Tax payment. Where the company is being dissolved it does not exempt it from paying tax.
In wood polymer Ltd, re, (1977) 47 Comp Cas 597, where the scheme was submitted before the court for sanction of amalgamation of the transferor company with the transferee company envisaging dissolution of the transferor company without winding up. The Gujrat High Court rejected the sanction of scheme stating that;
The court is not in the position to judge the modality of avoidance of tax but it can also not support the exemption of tax as to scheme of amalgamation. Such act can never be said to be in public interest. And clearly oppose the interest of the public. And on this ground the Court did not sanction the scheme of amalgamation.
In another case having similar report, Kirti Plastics (P) Ltd., re, 1992 MPLJ 671:78 Comp Cas (MP) the Court though sanction the scheme but it was subject to direction which subsequently became part of the scheme. Such directions involved payment of stamp duty, transfer of unassignable rights to the assignee company, payment of due taxes, liability on the directors for violation of law (if any).
However, it is to be noted that amalgamation in the process of reconstruction does not necessarily involve dissolution of the transferor company.
COURTS DISCRETION IN EXCHANGE RATIO
The exchange ratio is the number of shares that are to be transferred to the existing shareholder of the company which is going to be transferred to another company.
The Company has to, for the purpose to proper implementation of the scheme, has to actively submit the report of the balance sheet to the Registrar. This order is made by the Tribunal and the procedure shall be in accordance with the Tribunal itself.
The Tribunal on the valuation of the exchange ratio, approval of the shareholders and creditors of the two companies is taken into consideration. Further, calculation of share value by taking Net Asset Value (NAV) is accepted as a proper mode of valuation. Such valuation shall be close to the date of the petition.
In Vadlamudi Rama Rao v. Asian Coffee Ltd., Sec’Bad on 24 March, 2000, 2000 (3) ALD 600, 2000 (3) ALT 371
The applicants were not satisfied with the share exchange ratio which was duly evaluated by the statuary auditor of the Transferee company. Applicants pleaded the Court not to confirm the scheme of amalgamation and requested for revaluation by an independent auditor. The court rejected the pleading of the applicants.
In the above case, the court observed that where the share exchange is approved by the majority of the shareholders and the method of valuation is duly complied, the court approves it.
Where the share exchange ratio was fair and the shareholders of the transferor company also approved the scheme, objecting shareholder cannot seek to the company to provide detail of such valuation.
The Court stated that if the scheme of amalgamation is approved by all the members of the transferee company without any formal meeting, the company shall hold on the scheme till the formal meeting is held and the report of such meeting is submitted to the Court.
CONCLUSION
Company law, 1956 though entrusted large number of powers in the hands of the National Company Law Tribunal (NCLT), some of the cases are still handled by the High Court. During the process of reconstruction, the interest of minority may get affected. The Court or Tribunal can allow the shareholders to publish a notice in the newspaper for inviting objections against the scheme. Any interested stakeholders in relation to this can appear before the court.
This article has been written by Oruj Aashna, student at Calcutta University.
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