[By Aastha Bhandari]
The author is a student at the OP Jindal Global University.
Introduction
The conundrum between the two significant concepts of Appointed Date (“AD”) vis-a-vis the Effective Date (“ED”) within a scheme of amalgamation/merger or demerger filed before the National Company Law Tribunal (“NCLT”) has been a contested subject-matter. It was left obscure, with contrasting judgments from the NCLT, up until the Ministry of Corporate Affairs (“MCA”) released its clarificatory circular on the matter in 2019. (“the Circular”) The two concepts form a substantial part of any scheme on account of the fact that section 232(6) of the Indian Companies Act of 2013 (“CA”) makes it mandatory for every scheme to “clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date.” Put simply, the ED refers to the date when the scheme receives the sanction of approval from the NCLT and AD refers to the date when the parties record the financial values of all the assets, liabilities and other parameters that are to be transferred from the transferor company to the transferee company, as a part of the scheme. As such, the scheme is deemed to be effective on the AD.
In line with this, it is the aim of this article to map the impact and influence of the Circular on the decisions of the NCLT on the validity of an AD vis-à-vis the ED. In particular, this article will focus on the MCA’s clarification regarding the validity of an AD, being a calendar date, which is set at a date that precedes the date of filing of the Scheme before the NCLT beyond one year.
Understanding the Background and Content of Clarifications Contained in MCA’s Circular
The following clarification that is relevant to the scope of this article is reproduced below:
When AD Precedes Date of Application of Filing the Scheme before NCLT: In its Circular, the MCA issued a significant clarification stating that where the AD is chosen as a specific calendar date, it may precede the date of filing of the application for the scheme of merger/amalgamation in NCLT. However, if the AD is significantly ante-dated beyond a year from the date of filing, the justification for the same would have to be specifically brought out in the scheme and it should not be against the public interest.
Decoding the Impact of the Circular on Decisions of the NCLT vis-à-vis sanctioning Schemes
In Avanthi Warehousing Services Private Limited v. Awaze Logistics Private Limited (2022), the Regional Director of the MCA (“RD”) made an observation to the effect that the Petitioner Companies had defined the AD in such a manner that it was approximately two years old from the date of filing of the Company Application (“CA”) for the scheme and thereby, the RD recommended a revision of the AD from 1.04.2020 to 1.04.2021. In line with the Circular, the Petitioner Companies justified the AD of this particular scheme by arguing that it had been approved by all the relevant stakeholders including the shareholders, secured creditors, and unsecured creditors. Further, the employees had also taken 1.04.2020 as the AD on record. Therefore, the Petitioners prayed for an acceptance of their AD by further relying on the Suo-moto order of the Supreme Court of India (“SC order”) dated 2021 on cognizance of the extension of limitation on account of the Covid-19 pandemic. In this case, the NCLT sanctioned the scheme on the grounds that it was not opposed to: i) public interest and ii) interests of the relevant stakeholders.
In Re: Murli Industries Limited (2022), the RD objected to the AD set by the parties to the scheme on the ground that it was non-compliant with the Circular as it outdated the year of the filing of the CA by more than a year. However, this represents a case wherein the Petitioner’s justification relied on the fact that the AD was not outdated and well within the one-year time period permitted by the Circular. This was because the scheme was approved by the Board of Directors on 23.03.2021 shortly after which the CA was filed on 28.03.2021. This response was accepted by both the RD as well as the NCLT, the final implication being that the time taken to undertake the scheme was elongated sizably. This represents one of the numerous cases in which the RD has objected to the scheme on the grounds of the scheme being outdated for over a year when the same is not factually correct. This trend has especially seen an increase during the Covid-19 pandemic.
In Vaiduriya Hotels Private Limited v. Ratnaa Lakshmi Hotels Private Limited (2022), the RD objected to the scheme on the ground that the AD was “non-acceptable” as it was ante-dated beyond a year from the date of filing of CA, thereby not being compliant with section 232(6) of the CA. In reply, the Petitioners argued that the date of filing was well within one year from the AD, with the AD being 1.03.2019 and the date of filing being 20.02.2020. It was only due to the peculiar and inevitable circumstances of the pandemic lockdown that all applications were numbered and listed for the first hearing on 14.20.2020. Therefore, the period from 15.3.2020 to 28.02.2022 shall stand excluded on account of the SC order.
Further, in the matter of Subhas Impex Private Limited and Others (2022), the RD objected to a particular AD in this case by stating that it lacked any relevance to the scheme because the AD had been set as 1.04.2019 however simultaneously the Petitioner Companies had submitted their financial statements to the NCLT up to the financial year ended 31.03.2021. In line with this, the RD found that the Petitioners had not adequately justified the setting of their AD through the production of relevant documents. The Petitioners justified the AD on two large grounds: i) that they had filed the CA well within a year from the AD and their application was allotted. However, subsequent to the Covid-19 lockdown the matter could not be listed. Thereafter, on returning to normalcy, the process of application changed to that of e-filing which resulted in a re-submission; and ii) all the relevant stakeholders including the Board of Directors, shareholders, and creditors had approved the scheme with the AD being 1.04.2019. This was accepted and the scheme was sanctioned by the NCLT.
This represents a string of jurisprudence that had not been covered by the Circular and shows that the NCLT has accommodated the rigors of the pandemic by i) sanctioning schemes where the AD is ante-dated beyond a year, and ii) but without focusing on the essential of the Circular- being prejudicial to the public interest. This is not to imply that these sanctioned schemes were definitively against the public interest. However, it is to be highlighted that there is no mention of public interest in the NCLT’s orders.
Concluding Remarks
As such, it is abundantly evident that the MCA’s Circular has provided the much-needed clarity in the aspect of setting an AD. Experts had pointed out the dangers of the flexibility provided to the NCLT, having the option to reject a scheme being prejudicial to the public interest, with the caveat being that it ante-dates beyond a year from the date of filing of the CA. However, it can be seen through the course of the analysis herein that the NCLT has sanctioned almost all of the schemes where the AD has been outdated and has accepted the justifications given by the parties to the scheme. It is yet to be seen whether the essential of public interest will act as a challenge for parties undertaking an NCLT-sanctioned scheme.
The NCLT’s approach shows the intent of the Tribunal to minimize its intervention in the process of effecting a Scheme under the CA. The decision of the relevant stakeholders, including the shareholders and creditors of the Parties, coupled with the decision of the Board of Directors has been given primary consideration over and above the mere fact of out-dating over a year from the date of filing of the Company Application. This evidently implies that the NCLT has been accommodative in considering the commercial interests of the Parties to set their own AD.
However, it must be noted that the RD (the representative of the Central Government) has in many cases: i) either misinterpreted the MCA’s clarification in this regard, or ii) not even preliminary investigated into why a Scheme’s filing is ante-dated and in what circumstances will this pose a hindrance in execution under section 232(6). It must be understood that such a Scheme shall be sanctioned if: i) adequate justification is provided by the Parties, and ii) it is not against public interest. It can be seen in many cases that the RD has gone above and beyond the fulfillment of these two conditions, the end result being that an already time-consuming process of undertaking a Scheme is elongated.
This article recommends that a clarificatory circular be issued by the MCA specifically addressing the RD’s duty of supervision and observation in respect of analyzing such Schemes. The prerequisite of fulfilling the two aforementioned essentials must be mandated and a simple procedure to analyze the same may be prescribed. Parties may definitely resultingly see a smoother merger/amalgamation process in cases of court-sanctioned Schemes.