[By Tanish Arora]
The author is a student at West Bengal National University of Juridical Sciences, Kolkata.
Introduction
The case is centred around the conversion of a Public Limited Company to a Private Limited Company and has been filed before the National Company Law Tribunal, Allahabad under Section 14(1) of the Companies Act, 2013.[1] The court has considered the question of what prerequisites must be present for such a company to convert to a private limited company and analyses the presence of such elements in the given case.[2] The court also concerns itself with the question of retrospective applicability of the altered articles to transfer of shared effected by the shareholder prior to the resolution amending the article.[3] This case comment provides an analysis of the court’s reasoning in this judgement and is divided into three parts. The first part provides brief facts and general background of the case. The second part provides an analysis of the reasoning of the court. The final part provides a concluding opinion of the writer.
General Background
The company was listed with Delhi and Bombay Stock Exchange when it was focused on manufacturing and distribution of edible oil during 2012, however, it later transferred this business and manufacturing undertaking and bought back all its shares from public shareholders. Following this, it became an unlisted public company after getting delisted from the stock exchange in 2013. Its offices also shifted to Noida.
As required under Article 14 of the Companies Act, 2013, the Company filed a petition before the NCLT to seek its approval for the conversion from a public limited company to a private limited company. As per the Article, the Tribunal can grant such permission as it deems fit.[4] Such application can be filed as per Rule 68 of the NCLT Rules, 2016,[5] for a conversion of a public company into a private company in the prescribed format and the manner accompanied by documents/information and requisite filing.[6] According to the explanatory statement attached with the EOGM the Company and its shareholders agreed to change its nature to private limited so as to improve its functioning under the Act, in addition to being more law compliant.[7]
Key Analysis of the Court
In order to decide the case on its merit the Tribunal called for a report from the Registrar of Companies (ROC) which stated the main objective of the company to be “Trading in commodities and holding an investment in the Group companies.”[8]; the company has been regular in filing its statutory return,[9] it has not violated Sections 383A/203 of the Companies Act,[10] and there is no pending proceeding against it under Sections 235/210 to 251/277 of the Act.[11]The court took note of the fact that no serious objection from the offices of the RD(NR) or ROC existed against the conversion and it will not be detrimental to Public Interest at large.[12] The Tribunal while giving its approval relied on:
- Section 18 r/w Section 13 of the Companies Act.[13]
- Subject to the approval of the Central Government.
- Members’ approval is obtained through a General Meeting of the Company, by way of a Special Resolution.
The court also ordered the Company to adopt a new set of Articles of Association as applicable to the Private Company.
Ramaiya’s commentary stated that a Public Company must be granted permission to convert to a Private Company if it is in its best interests and the shareholders agree to the same and if such a conversion is sought so that the company can function more efficiently and not merely to avoid restrictions imposed on public companies.[14] The court also relied on a judgement of the Kerala High Court stating that the “power is conferred on the company under the Act to alter the article by special resolution”[15] With regards to the retrospective applicability of the amended article the court opined in the negative.
In the present case, the court stated that the shareholders will be subject to the altered articles and placed reliance on the reasoning of the Pepe’s case of 1893,[16] that when the articles are altered the shareholder has the option of withdrawing his shared but if he does not do so and continues to hold the shares he is agreeing to be bound by the altered articles. The Pape’s case held this in terms of a person’s position in the society which has the right to alter its rules and the person being in a contract with the society shall remain subject to the rules when duly altered.[17]
Concluding Opinion
While section 14 of the Companies Act, 2013 merely mentions that the conversion of a Public Company to a Private Company shall be granted by the Tribunal as it may deem fit. The court, in this case, has actually gone to the lengths of defining what criteria a company needs to fulfil for the Tribunal to permit its conversion to a Private Limited Company by taking into consideration various factors as pointed out in the analysis part of this case comment.
The court has recognised the company’s autonomy in terms of making decisions about its operations by emphasising the need for member approval via Special Resolution at the Company’s General Meeting. By citing A Ramaiya, it has also identified the importance of such permission being granted to facilitate better company functioning rather than simply to avoid restrictions placed on public companies.
The Court has also talked about the applicability of the Alteration of Articles in this case. The importance of altering articles is considered so important that a company by no manner can deprive itself of the power to alter its articles.[18] In the present case, the court has clarified the applicability of altered articles as well.
The judgement also points out that the conversion of a Public Company to a Private Company must be such that it is not oppressive to the minority members by placing reliance Madhurabhami case.[19] Conversion of such a nature is regarded as illegal.[20]
The judgement is highlighting and places simple reliance on certain important elements before granting permission. These elements are such that the interests of all the concerned parties are fulfilled. The company’s interests are fulfilled as the approval of members is required. This means that majority shareholders cannot simply dominate the functioning. The Public interest is also met as the said conversion is subject to approval from the Central Government. Along with this, the court is making a valid precedent while providing objective criteria to define Section 14 conversion of a Public Company to a Private Company as the bare text of the statute only mentions “as the Tribunal may deem fit.”[21]
Thus, in my opinion, this case in all lights provides a perfect balance to the rights of a company as well as the public.
[1] The Companies Act, 2013, §14(1)
[2] In the Matter of v. The None, 2017 SCC OnLine NCLT 1827.
[3] Id.
[4] Supra, note 1.
[5] Rule 68, NCLT Rules, 2016.
[6] In the matter of: Act Finance Ltd. v. The None, 2018 SCC OnLine NCLT 28410.
[7] Supra, note 2.
[8] Ibid.
[9] Ibid.
[10] The Companies Act, 2013, §383A, §203.
[11] The Companies Act, 2013, §235, §210 to §251, §277.
[12] Supra, note 2.
[13] The Companies Act, 2013, §13, §18.
[14] A Ramaiya: Guide to the Companies Act, (18th Ed., 2014)
[15] Mathurabhumi Printing and Publishing Co. Ltd. Vardhaman Publishing Ltd. (1992) 71 CompCas 1 Ker.
[16] Pape’s case (1893), 2 Ch. 311.
[17] Id.
[18] Walker v. London Tramway Co. (1879) 12 Ch. D. 705.
[19] Supra, note 15.
[20] Cyrus Investments Pvt. Ltd. V. Tata Sons Ltd. & Ors., 2019 SCC OnLine NCLAT 858.
[21] Supra, note 1.