[By Anchit Jasuja and Preksha Mehndiratta]

The authors are second year students of Gujarat National Law University, Gujarat.

The sanction of a scheme or arrangement under the Companies Act, 2013 (“Act”) cannot be done without the sanction of the National Company Law Tribunal (“NCLT”) under its supervisory jurisdiction. However, if a shareholder or creditor has any grievance with respect to the scheme, he may approach the NCLT to file the objections provided that he has the requisite qualifications. Though the Act is clear as to who may file objections against the scheme, there remains ambiguity as to the stage at which objections, if any can be filed.

Who can file?

The Act only allows the filing of objections by shareholders and creditors if they meet the requisite criteria laid in the proviso of Section 230(4)[i] which is at least 10% of the shareholding for shareholders and at least 5% of the outstanding debt for creditors. Even when the Companies Act, 1956 was in force and there was no statutory criteria for locus standi, the courts have recognized in cases such as Indian Metal and Ferro Alloys Ltd. [ii]that a person, who has no interest in the company as a shareholder or a creditor, cannot file objections before a company court. With the coming of the Act, provision for locus standi was added. However, the proviso and rather the entire act is silent about the time of filing such objections.

Judicial approach to appropriate time for filing objections

The confusion with respect to the appropriate time to file objections is evidenced by contradictory judgements given by courts of law. In the case of Landesbank Badenurttemberg v. Nova Petrochemicals Ltd., [iii]which predates Section 230(4) of the Act and its proviso, when the issue raised was alleged non-disclosure of material interests and objections, the Gujarat High Court held them to be premature and ordered them to be raised up at the floor of meetings. The court reasoned that since the objections could be raised at the meeting or even when the application to the court was filed for sanction, therefore, there is no reason for the court to consider objections at the stage when the meeting has not been convened.

In a contrary view, the Gujarat High Court in another case allowed objections to a scheme even before the court passed orders for the conduct of meetings of shareholders and creditors. [iv] When a case with similar facts came before the Supreme Court in Rainbow Denim Ltd. v. Rama Petrochemicals Ltd. [v], the court did not allow the appeal from the order of the supervisory court and directed it to reject the objections until the meeting has been convened, thus, implicitly rejecting the objections for being filed at an early stage.

Though what must be noted is that none of the cases on the issue explained the legal basis for either rejecting or accepting the objections against a scheme before convening the meeting of the shareholders and/or creditors.

Legislative intent and analysis

Since the power to file objections has been given in a proviso to Section 230(4), therefore it has to be seen and read in the context of that proviso. Firstly, it has to be noted that the proviso cannot be disconnected from the enactment it follows and has to be read together with it. In other words, a proviso does not travel beyond the provision for which it is a proviso.[vi] This is because it is assumed that the legislature would not have added a proviso under a Section if that proviso had nothing to do with the Section. Therefore, since the proviso in Section 230(4) follows the procedure for voting, the proviso cannot be disconnected from the voting procedure.

Secondly, the proviso is made as an exception to something out of the enactment or to qualify something enacted therein which would otherwise be outside the purview of the enactment.[vii] Furthermore, it has been stated that the cardinal rule of interpretation of a proviso is that the proviso only operates in the area of law encompassed by the main provision. It creates an exception to the main provision under which it operates and no other.[viii] Therefore, it is only natural to interpret that the main enactment, i.e., the voting procedure is to be followed in most cases, but in special cases when that voting procedure fails to address the concerns of the shareholders or creditors, then objections may be filed.

Thirdly, the proviso cannot swallow the general rule. [ix] Which means that even if there is an exception to the voting procedure, i.e., filing of the objections, that exception cannot be used to wholly subvert the procedure established to get a scheme approved by a meeting of creditors or shareholders.

The scheme that emerges from the interpretation of the locus standi provision is that a voting procedure has to be adopted, which would be a tool to address concerns of shareholders and creditors for which they might object and when that procedure fails to achieve its purpose of addressing the concerns, then special circumstances arise where objections may be filed before the NCLT. Additionally, since the proviso cannot swallow the main enactment, thus the power to file objections is to be read as a power which does not exist as a right and can only be materialized when the main enactment fails its purpose, i.e., when voting fails to address the concerns of the shareholders and creditors.

Such an approach would also be in line with expediting the process of approval of a scheme or compromise, since it would eliminate any possibilities of the involvement of the NCLT in addressing the concerns of the shareholders and creditors, when that can be done by the company itself. This would not only benefit the company, but would also reduce the burden on the tribunals. This approach would also synchronise the legislative policy with regard to filing of objections since the NCLT regularly takes into account the chairman’s report of the meeting of shareholders and creditors when finally granting the sanction to the scheme or compromise. If the objections are considered before the meeting takes place, the courts would have to apply its mind again to sanction the scheme after it has been approved in the meetings.  Thus, it would only be efficient that objections are filed when the tribunal has to finally sanction the scheme because at that time even the tribunal would have more resources such as the Chairman’s report to determine the fairness of the scheme.

Conclusion

Even though there is sufficient clarity about who can file an objection to a scheme or compromise, there is less clarity on the appropriate time to do so. Still, the courts have chosen to reject objections when they could have been resolved in the meetings of shareholders and creditors. The approach of postponing of entertaining objections before the meetings have been convened is the only approach which would harmonize Section 230(4) of the Act and its proviso, and it remains to be seen whether this approach comes to be universally accepted by the courts or merely becomes a guideline.

End Notes

(i) Companies Act, 2013, § 188, No. 18, Acts of Parliament, 2013 (India).

(ii) Re, Indian Metal and Ferro Alloys Ltd., (2009) 149 Comp Cas 362 (Orissa).

(iii) Landesbank Badenurttemberg v. Nova Petrochemicals Ltd., (2008) 86 CLA 113 (Guj).

(iv) Re, Essar Oil Ltd., (2004) 7 Comp Cas 864 (Guj).

(v) Rainbow Denim Ltd. v. Rama Petrochemicals Ltd., (2003) 166 Comp Cas 640 (SC).

(vi) State of Punjab v. Kailash Nath, AIR 1989 SC 558.

(vii) Kedarnath Jute Manufacturing Co. Ltd. v. Commercial Tax Officer, AIR 1966 SC.

(viii) Govindarajan, Interpretation of Proviso, taxmanagementindia, (Mar. 24, 2020, 10:34 AM), https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=6407

(ix) Shree Raghuthilakathirtha v. State of Mysore, AIR 1966 SC 1172.