COMPROMISES, ARRANGEMENTS & AMALGAMATIONS - COURT CONVENED MEETINGS

Section 230 of the Companies Act 2013 (referred to as Act), provides for detailed procedure relating to compromise or arrangements with creditors or members. The first and foremost stage in the process of getting the scheme approved by the National company Law Tribunal (referred to as Tribunal) is filing of Applications by the respective companies before the Tribunal, upon which the Tribunal may order a meeting of members or creditors or a class of members or the creditors.

The meeting so ordered shall be conducted in the manner as may be prescribed by the Tribunal.[1]

The Companies (Compromises, Arrangements & Amalgamations) Rules 2016, which was made effective from 15.12.2016, enlists detailed procedure for the conduct of the meeting pursuant to the Order of the Tribunal to sanction the scheme if compromise or arrangement by the members or creditors as the case may be.

Following are the highlights of provisions relating to meeting as prescribed under Section 230 of the Act and the Rules made thereunder.

BEFORE THE MEETING:

1.      Notice of the Meeting: Notice of the general meeting ordered by the Tribunal as stated above shall be sent to the members or creditors as the case may be through registered post or courier or by email or hand delivery at the address registered with the company[2]. A copy of the same shall also be displayed at the website of the company if any. The form in which such notice has to be issued is prescribed in Rule 6 of the Companies (Compromises, Arrangements & Amalgamations) Rules 2016. In case of a listed company a copy of the same will be displayed in the website of SEBI and the recognized stock exchanges where the shares of the Company are listed.

2.      Information / Disclosures supporting Notice:

a)      Statement disclosing the details of compromise or arrangement.

b)      Copy of valuation report, if any.

c)      Effect of compromise or arrangement on material interests of the directors of the company / debenture trustees.

d)     All information as provided in Rule 6 (3) of the Companies (Compromises, Arrangements & Amalgamations) Rules 2016.

3.      Advertisement / Paper publication:

Rule 7 of the Companies (Compromises, Arrangements & Amalgamations) Rules 2016, provides the form and manner in which the contents of the notice referred above is required to be published.  In event of separate meetings conducted by for the members and the creditors, a joint publication may also be preferred.

The Rules further states that the publication is required to be made both in an English newspaper and a vernacular newspaper having vide circulation in the state where the registered offices of the Companies are situated.

A copy of the said publication should be displayed in the website of the Company if any.

Proviso to Section 230 (3) mandates that the time frame within which the copies of the compromise / arrangement is made available at the registered office of the company should be mentioned specifically in the advertisement

4.      Voting: Persons received the notice may vote either in person or proxy or by way of postal ballot within one month from the date of receipt of the notice. The concept of voting through postal ballot is a new addition to the existing provisions relating to voting in a meeting convened for the purpose of sanction of a scheme. Rule 10 of the Companies (Compromises, Arrangements & Amalgamations) Rules 2016 list outs the procedure relating to voting by proxies.

5.      Notice to Statutory Authorities: According to Section 230(5), Companies shall send notice in the form prescribed in Rule 8 of the Companies (Compromises, Arrangements & Amalgamations) Rules 2016 to the following Authorities:

a)      Central Government, Registrar of Companies, Income Tax Authorities in all cases.

b)      RBI, SEBI and Stock Exchanges if applicable.

c)      Other sector specific regulators/authorities as directed by the Tribunal.

If the Authorities referred above intend to make any representation, the same shall be made within 30 days from the date of receipt of the notice. In event of no representations received within the stipulated period, then it shall be presumed that the authorities have no representations to be made with respect to the proposed scheme.[3] It is pertinent to note that this provision stipulating timeframe for the authorities to provide their representations is new addition in the present Act.

6.      Physical copy of the scheme of compromise or arrangement, upon requisition shall be provided at free of cost to everyone who is entitled to attend the meeting and vote in the said meeting.[4]

7.      Affidavit of Service: The chairman appointed by the companies or such other person appointed by the Order of Tribunal shall file the Affidavit of Service before the Tribunal, not less than 7 days before the date fixed for the meeting.[5]

DURING & AFTER THE MEETING:

1.      VOTING MAJORITY: Section 230(6) stipulates that the Scheme is said to be approved if majority of members/creditors representing three fourth in value cast their votes in favor of the same. In that event the scheme is said to be binding on all the members or creditors as the case may be.

2.      RECORDING THE RESULT OF THE MEETING: The Chairman of the meeting shall record the result of the meeting and file Rule 14 of the Companies (Compromises, Arrangements & Amalgamations) Rules 2016 within the time fixed by the Tribunal. In case if no such time is fixed, then the same shall be filed within 3 days after the conclusion of the meeting.

RIGHT TO OBJECT:

Proviso to Rule 230 (4) states that objection to the compromise shall be raised only members holding at least 10% of shareholding or person(s) holding 5% of the outstanding debt as per the last audited financial statement.

DISPENSATION OF MEETING:

Section 230 (9) of the Act states that the Tribunal may dispense with calling of a meeting of creditor or class of creditors where such creditors having ninety percent in value give their assent to the scheme. Also Rule 5 of the Companies (Compromises, Arrangements & Amalgamations) Rules 2016 states that the Tribunal may give directions to determine the meeting to be held or dispensed with as per Section 230 (9).

The question whether the same is applicable for dispensation of meeting of members was raised before the Principal Bench, New Delhi. The Bench vide its Order dated 13.1.2017[6], clarified that the same shall not be applicable to the meeting of members of the Company. Dismissing the prayer raised by the companies in the said scheme of compromise, the Bench clarified that Section 230(9) is applicable only to meeting of creditors or class of creditors and not to the members.

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[1] Section 230 (1) of the Companies Act 1956.

[2] Rule 6 (2) of Companies ( Compromises, Arrangements & Amalgamations) Rules 2016

[3] Section 230 (5) of the Act & Rule 8 (3) of the Companies (Compromises, Arrangements & Amalgamations) Rules 2016

[4] & Rule 11 of the Companies (Compromises, Arrangements & Amalgamations) Rules 2016

[5] & Rule 12 of the Companies (Compromises, Arrangements & Amalgamations) Rules 2016

[6] JVA Trading Pvt. Ltd. and C&S Electric Limited.

ANNUAL FILING FOR LLP - LAW AND PRACTICE

Limited Liability Partnership Concerns (LLPs) unlike Partnership Firms registered under the Indian Partnership Act 1932, are required to comply with more statutory compliances periodically. Similar to the Companies registered under the Companies Act, LLPs are required to file their financial statements with the Registrar annually and such annual filing documents are available for public inspection.

However unlike a Limited Company, the requirement for annual filing is not one and the same for every LLP. Financial criteria has been fixed depending on which the requirement to appoint an Auditor will arise. In rest of the cases there is no mandate to appoint an Auditor and Audit the accounts of the LLP.

The Limited Liability Partnership Act, 2008 [LLP Act] and the Limited Liability Partnership Rules, 2009 [LLP Rules] provides detailed provisions relating to the financial disclosures to be made by every LLP.

Corresponding Provisions from LLP Act:

 I.            Maintenance of Books of Accounts: Section 34:

• Section 34 of the LLP Act stipulates that every LLP shall maintain such proper books of account as may be prescribed relating to its affairs for each year of its existence at its registered office for such period as may be prescribed.
•  Every LLP shall, within a period of six months from the end of each financial year, prepare a Statement of Account and Solvency for the said financial year as at the last day of the said financial year in such form as may be prescribed.
• Such statement shall be signed by the designated partners of the LLP and filed with the Registrar every year in such form and manner and accompanied by such fees as may be prescribed.

II.            Annual Return : Section 35:

Annual return shall be filed with the Registrar within sixty days of closure of its financial year in such form and manner and accompanied by such fee as may be prescribed.

ANNUAL COMPLIANCES:

       I.            FILING OF STATEMENT OF ACCOUNTS AND SOLVENCY:

• Books of accounts to be maintained by the LLP in prescribed form and manner.
• Such books of accounts shall be preserved for eight years from the date on which they are made.[1]
• Statement of Account and Solvency duly signed by the Designated Partners shall be filed by every LLP in Form 8 with the Registrar, within a period of thirty days from the end of six months of the financial year to which the Statement of Account and Solvency relates. Therefor for a financial year ended 31^st March 2016, Form 8 has to be filed within September 2016.[2]

    II.            REQUIREMENT OF AUDIT:

• A LLP whose turnover does not exceed, in any financial year, forty lakh rupees, or whose contribution does not exceed twenty-five lakh rupees shall not be required to get its accounts audited.[3]
• Where the partners of such LLP do not decide for audit of the accounts of the LLP, such LLP shall include in the Statement of Account and Solvency a statement by the partners to the effect that the partners acknowledge their responsibilities for complying with the requirements of the Act and the Rules with respect to preparation of books of account and a certificate in the form specified in Form 8.
• A person shall not be qualified for appointment as an auditor of a limited liability partnership unless he is a Chartered Accountant in practice.
• Such Auditor may be appointed by the designated partners:[4]

a) at any time for the first financial year but before the end of the first financial year, 

 at least 30 days prior to the end of the each financial year (other than the first                   financial year)

b)   to fill a casual vacancy in the office of auditor, including in the case when the turnover or contribution of a limited liability partnership exceeds the limits specified.

c)  to fill up the vacancy caused by removal of an auditor.

The partners may appoint an auditor or auditors where the designated partners have power to appoint have failed to do the same.[5]

III.            FILING OF ANNUAL RETURN:

• Every LLP shall file an annual return with the Registrar in Form 11.
• In case of an LLP having turnover up to five crores rupees during the corresponding financial year or contribution up to fifty lakh rupees a certificate from a designated partner, other than the signatory to the annual return shall be annexed to the Form to the effect that annual return contains true and correct information.
• In all other cases, the annual return shall be accompanied with a certificate from a Company Secretary in practice to the effect that he has verified the particulars from the books and records of the LLP and found them to be true and correct.

IV.            ROC FILING FEE:[6]

S.NO	AMOUNT OF CONTRIBUTION (In Rs)	FILING FEE (In Rs)
1.	Less than 1 Lakh	50
2.	1 Lakh to 5 Lakhs	100
3.	5 Lakhs to 10 Lakhs	150
4.	More than 10 Lakhs	200

OFFENCES AND PENALITIES:

       I.            DEFAULT IN COMPLIANCE OF SECTION 34[7]:

Penalty levied on the LLP	Fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees
Penalty levied on the Designated Partner	Fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees

       I.            DEFAULT IN COMPLIANCE OF SECTION 35[8]:

Penalty levied on the LLP	Fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees
Penalty levied on the Designated Partner	Fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees

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[1] Rule 24 (3) of the LLP Rules 2009

[2] Rule 24 (4) of the LLP Rules 2009

[3] Rule 24 (8) of the LLP Rules 2009

[4] Rule 24 (11) of the LLP Rules 2009

[5] Rule 24 (14) of the LLP Rules 2009

[6] Annexure A of the LLP Rules 2009

[7] Subsection (5) of Section 34 of the LLP Act

[8] Subsection (3) of Section 35 of the LLP Act

Constitutional validity of SARFAESI Act 2002

Mardia Chemicals Ltd. Etc. Etc vs U.O.I

Citation:  (2004) 4 SCC 311

Bench: Supreme Court of India: CJI Brijesh Kumar, Arun Kumar

Introduction: 

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was passed with an object of giving additional powers to the borrowers in realizing the NPAs. The said legislation was challenged before many Courts as the same is unconstitutional, arbitrary and against natural justice. Also it was stated as leaning more towards the lenders. 

The Supreme Court in Mardia Chemicals Ltd. Etc. Etc vs U.O.I. & Ors, upheld the constitutional validity of the said Act and elaborated the provisions of the enactment in detail which cleared ambiguity arose out of this enactment before. 

Why SARFAESI Act was challenged?

In the said case, the SARFAESI Act was challenged as unconstitutional and arbitrary. In this regard, the following questions were raised before the court:

• Whether Sections 13 and 17 of the Act provide adequate and efficacious mechanism to consider and decide the objections/disputes raised by a borrower against the recovery,
• Whether the remedy available under Section 17 of the Act is illusory for the reason it is available only after the action is taken under Section 13(4) of the Act and the appeal would be entertained only on deposit of 75% of the claim raised in the notice of demand?
• Whether the terms or existing rights under the contract entered into by two private parties could be amended by the provisions of law providing certain powers in one sided manner in favour of one of the parties to the contract?
• Whether provision for sale of the properties without intervention of the court under Section 13 of the Act is akin to the English mortgage and its effect on the scope of the bar of the jurisdiction of the civil court?
• Whether the provisions under Sections 13 and 17(2) of the Act are unconstitutional on the basis of the parameters laid down in different decisions of this Court?
• Whether the principle of lender's liability has been absolutely ignored while enacting the Act and its effect?

Points of Law discussed:

The Supreme Court upheld the validity of the Act and the points of law discussed in the said case are hereunder:

1. A specific enactment for recovery of NPAs is much needed:

•     When the need for a specific enactment (When there is already Recovery of Debts due to Banks and Financial Institutions Act 1993) for recovery of NPAs is questioned, the Supreme Court answered it in affirmative.
• Pointing out the recommendations of the Narashimman Committee, the Supreme Court emphasized the need for faster recovery process to recover the NPAs to ensure healthy and growth oriented economy.
• Also the Supreme Court highlighted that SARFAESI Act is much needed even in the existence of DRT Act 1993 and pointed out the failure on the part of Debt recovery Tribunals in bringing desired results in this regard.

     2. Safeguards available to the borrowers:

• Section 13 (2) mandates that a notice shall be served upon the borrower in this regard and  a reply may be submitted by the borrower explaining the reasons as to why measures may or may not be taken under Section 13 (4) in case of non- compliance of notice within 60 days. 
• The intention of this provision is that the creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such      objections raised in the reply to the notice. 
• Once the same is done this is sufficient for ensuring principles of fairness on the part of the banks and financial institutions in dealing with their borrowers.
•  Communication of reasons not to accept the objections of the borrower, would certainly be for the purpose of his knowledge which would be a step forward towards his right to know as to why his objections have not been accepted by the secured creditor who intends to resort to harsh steps of taking over the management/business of viz. 
• The next safeguard available to a secured borrower within the framework of the Act is to approach the Debt Recovery Tribunal under Section 17 of the Act. Such a right accrues only after measures are taken under sub-section (1) of Section 13 of the Act. 

    3. on precondition to deposit 75% of the claim on appeal:

Such condition to deposit was not only declared as onerous and oppressive but also held unreasonable and arbitrary. Therefore provisions of 17 (2)  of the Act relating to predeposit of claim money was declared as violative of Article 14 of the Constitution and the same was struck down.

Miheer H Mafatlal Vs Mafatlal Industries Limited - Case study

Citation: AIR 1997 SC 506, (1997) 1 SCC 579

Bench: Supreme Court of India : S.B.Majumdar J

Introduction: 

• A Scheme of Amalgamation of M/s. Mafatlal Industries Limited [MIL] being the Transferee Company and Mafatlal Fine Spinning  and Manufacturing Company  Limited  [MFL] being the Transferor Company was proposed

• The Learned Single Judge of Gujarat High Court had sanctioned the said scheme in Company Petition No. 22 of 1994.

• Appeal was filed against the impugned Judgment before the Division Bench of High Court of Gujarat in Appeal No. 16 of 1994 and the said Appeal was also dismissed.

• Aggrieved by the Judgment of the Division Bench, the Appellant filed an Appeal by Special Leave before the Supreme Court.

Background Facts of the case:

1. Transferor Company: [MFL]:

MFL was incorporated on 20th April 1931 under the Baroda State Companies Act and had been carrying on the business of manufacture and sale of textile piece goods and chemicals. Its registered office was situated at Mafatlal Centre, Nariman Point, Bombay. It was engaged in the manufacture and sale of textiles and fluorine based chemicals.

2. Transferee Company: [MIL]:

MIL was incorporated on 20th January 1913 under the name 'The New Shorrock Spinning & Manufacturing Co. Limited' and its name was subsequently changed to 'Mafatlal Industries Limited' as per the fresh Certificates of Incorporation dated 24th January 1974. Its registered office was situated at Ahmedabad, Gujarat. The objects of MIL includes carrying on all or any of the businesses such as cotton spinners and doublers, wool, silk flax, jute and hemp spinners and doublers etc,.

3. Appellant:

The appellant who has objected to the amalgamation before the High Court of Gujarat is one of the directors of MFL.

4. Amalgamation:

Meeting of shareholders of the Company were convened and the Scheme was approved by the overwhelming majority of shareholders.

Grounds of appeal:

The following four important considerations were raised by the Appellant in the present case.

1.      Non -Disclosure of Interest of Directors :MIL while placing the scheme before the equity shareholders meeting did not disclose the interest of the directors, namely, Shri Arvind Mafatlal and Shri Hrishikesh Mafatlal in the explanatory statement supporting the Scheme and hence the shareholders were misled and could not come to an informed decision.

2.   The Scheme is unfair to the minority shareholders

3.  The appellant represented a distinct class of equity shareholders so far as the respondent transferee -company is concerned and consequently separate meeting so far as his group is concerned should have been convened by the Company Court.

4.   Share exchange Ratio was unreasonable: As it provides under the Scheme that two equity shares of the transferee company will be allotted against five equity shares of the transferor- company at their respective face value of Rs. 100/- per share

Points of Law discussed:

Scope and Ambit of Jurisdiction of Company Court:

Broad principles concerned with the Jurisdiction of the Company Court were laid down. While considering and sanctioning the scheme of Amalgamation, the Court has to see,

1.   That the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meeting as contemplated by Section 391(1) (a) have been held.

2.    That the scheme is backed up by the requisite majority vote as required by Section 391(2).

3.   That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question.

4.     That all the necessary material indicated by Section 393(1) (a) is placed before the voters at the concerned meetings.

5.     That all the requisite material contemplated by Section 391(2) of the Act is placed before the Court by the Applicant

6.     That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy

7.    That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising of the same class whom they purported to represent.

8.     That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant.

     Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over

Concept of commercial wisdom: Jurisdiction of Company Court:

• The question whether the Company Court has jurisdiction like an appellate authority to minutely scrutinize the scheme and to arrive at an independent conclusion whether the scheme should be permitted to go through or not when the same is approved by majority of the creditors or members of the company was answered by the Court in negative.

• The following lines are quoted in this regard:

“It is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the Court. The Court certainly would not act as a court of appeal and sit in judgment over the informed view of the concerned parties to the compromise as the same would be in the realm of corporate and commercial wisdom of the concerned parties. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the Scheme by the requisite majority. Consequently the Company Court's jurisdiction to that extent is peripheral and supervisory and not appellate. The Court acts like an umpire in a game of cricket who has to see that both the teams play their according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire.”

On issues raised:

  1.  On Non – Disclosure of interest of a director:

• This issue was dismissed and the following observations were made in this regard.

·       "If the special interest which the director has is in any way likely to be affected by the Scheme and if non-disclosure of such an interest is likely to affect the voting pattern of the class of creditors or shareholders who are called upon to vote on the scheme, then only such special interest of the director is required to be communicated to the voters as per Section 393(1) (a)."

•  Consequently the interest of Arvind Mafatlal in the share-holding or likely future impact thereon by the litigation was de hors the Scheme in question and was not required to be placed before the voters. Therefore the same is not valid ground of objection.

  2.  On the Scheme being unfair and unreasonable.

• The Supreme Court declared that the Scheme of Compromise and Arrangement is neither unfair nor unreasonable to the minority shareholders represented by the appellant as the scheme was approved by the overwhelming majority of the shareholders of the Company and it is not proved that the interest of the minority is prejudiced by the scheme.

• It was stated that the financial institutions and statutory corporations held substantive percentage of shares in respondent-company. This class of shareholders who are naturally well informed about the business requirements and economic needs and the requirements of corporate finance wholly approved the Scheme if it was contrary to the interest of shareholders as class. The following lines are quoted in this regard:

     “It could not be said that the majority shareholders had sacrificed the class interest of           appellant minority shareholders when they voted with overwhelming majority in favour of the Scheme.”

   3. On Appellant’s plea to be treated as a separate class of shareholders:

Quoting Palmer in this Treatise Company Law 24th Edition, it was held that unless a separate and different type of Scheme of Compromise is offered to a sub- class of a class of creditors or shareholders no separate meeting of such sub-class of the main class of members or creditors is required to be convened

4. On Valuation of shares:

• In this regard, reference was made to a decision of the Gujarat High Court in Kamala Sugar Mills Limited [55 Company Cases P.308] which dealt with an identical objection about the exchange ratio adopted in the Scheme. 

             "Once the exchange ratio of the shares of the transferee-company to be allotted to the                       shareholders of the transferor-company has been worked out by a recognized firm of                       chartered accountants who are experts in the field of valuation and if no mistake can be                   pointed out in the said valuation, it is not for the court to substitute its exchange ratio,                     especially when the same has been accepted without demur by the overwhelming majority               of the shareholders of the two companies or to say that the shareholders in their collective                wisdom should not have accepted the said exchange ratio on the ground that it will be                       determined to their interest."

   

             Therefore share exchange ratio fixed by experts who are certified professionals will not be                   disturbed unless the same is contrary to the provisions of law