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Volume III Issue I
January 2020
Corporate Law Journal Volume III Issue I
i
ADVISORY COUNCIL
Hon’ble Justice K.S.P. Radhakrishnan
(Former Judge, Supreme Court of India)
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Hon’ble Justice Pankaj Naqvi
(Judge, Allahabad High Court)
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Hon’ble Justice Mridula Mishra
(Vice Chancellor of Chanakya National Law University, Former Judge, Patna HC)
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D.R. Mehta
(Former Chairman of SEBI)
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Lalit Bhasin
(President of SILF & Bar Association of India)
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CA Amarjit Chopra
(Former President of ICAI)
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Dr. (h.c.) Advocate Mamta Binani
(Founder, Chamber of Advocate Mamta Binani & Former President of ICSI)
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Corporate Law Journal Vol III Issue I
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ADVISORY COUNCIL
Prof. Dr. A. Lakshminath
(Founder & Former VC of Chanakya National Law University)
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Prof. Paramjit S. Jaiswal
(Vice Chancellor of Rajiv Gandhi National University of Law)
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Karan S. Thukral
(Founder of Thukral Law Associates)
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Hemant K. Batra
(Legal Counsel – Advocate | Author | Speaker)
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Mr. Vinod Surana
(CEO & Managing Partner of Surana and Surana International Attorneys)
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Mr. Biswajit Chatterjee
(Partner at Squire Patton Boggs)
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Corporate Law Journal Volume III Issue I
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EXPERT FORUM
Anirban Bhattacharya
Partner at Chambers of Anirban Bhattacharya
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Ekta Bahl
Partner at Samvad Partners
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Rajesh Vellakkat
Partner at Fox Mandal & Associates
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Savitha Kesav Jagadeesan
Senior Partner at Kochhar & Co.
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Abhinav Kumar
Partner at Cyril Amarchand Mangaldas
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Neeraj Dubey
Partner at Lakshmikumaran & Sridharan
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Dhruv Suri
Partner at PSA Legal Counselors
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Ajar Rab
Partner at Rab & Rab Associates LLP
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Manisha Chaudhary
Managing Partner of UKCA and Partners
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Isha Sharma
Director at Trayambak Overseas Pvt. Ltd.
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Corporate Law Journal Volume III Issue I
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EXPERT FORUM
Vikas Sharma
President at H2 Life Foundation
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Payal Parikh
Managing Partner at ANB Legal
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Dr. Sheetal Vohra
Founder & Managing Partner at Vohra & Vohra
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Ashish Kumar Singh
Partner at Capstone Legal
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CA Mukesh Bajaj
Partner at Tax & Regulatory Services
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CA Manoj Agrawal
Senior Manager, Finance, Dabur International Ltd.
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Yuvraj P. Narvankar
Managing Partner at Narvankar Legal Chambers
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Jyoti Shekhar
Legal Consultant & Founder Editor at EYRA
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Mini Gautam
Legal Consultant at SREI Group
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Pallavi Pareek
Managing Partner at Ungender.in
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Corporate Law Journal Volume III Issue I
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EXPERT FORUM
Mohit Singhvi
Founder at Singhvi & Co.
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CA Hemant Chopra
Finance Director at CMS Info System Ltd.
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Pankaj Agarwal
Founder at Quad Legal
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CA Rajeev K. Sharma
Indirect Tax Practitioner
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Naman Mohnot
Founder at Aapka Consultant
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CA Kalpesh Semlani
Founder & Proprietor at Kalpesh G. Semlani & Associates
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Kanchan Khatana
Founder & Managing Partner at Kanchan Khatana & Associates
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CS Padam Semlani
Founder & Proprietor at Padam G. Semlani & Associates
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Roopanshi Khatri
Advocate
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Bishwa Bandhu
Advocate, Supreme Court of India
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Swati R. Jain
Advocate, Rajasthan High Court
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Corporate Law Journal Volume III Issue I
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CORPORATE RESEARCH CELL
Khushboo Khatreja
Senior Associate
DSK Legal
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Seema Choudhary
Policy Advocate
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Nilanjan Chaterjee
Associate Counsel
R. R. Prasad Associates
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Surabhi Singh
Associate
Cyril Amarchand Mangaldas, Delhi
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Akshita Goel
Associate
Cornellia Chambers, Gurgaon
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Ishita Sharma
Legal Associate
LegisLegal, New Delhi
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Corporate Law Journal Volume III Issue I
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FACULTY EDITORS
Professor Subhash Chandra Roy
Professor of Law
Chanakya National Law University
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Dr. Ajay Kumar
Professor of Law
Chanakya National Law University
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Dr. Father Peter Ladis F
Assistant Professor of Law
Chanakya National Law University
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Dr. Pradeep Kumar Das
Assistant Professor of Law
School of Law and Governance, Central University of South Bihar
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Aashish Jain
Assistant Professor of Law
College of Legal Studies, UPES
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Sarvesh Kumar Shahi
Visiting Faculty
Maharashtra National Law University
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P. Mohan Chandran
Business Content Writer
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Corporate Law Journal Vol III Issue I
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ADMINISTRATIVE TEAM
Shubham Jain
Founder & Managing Editor
==================================================
Raunak Mohnot
Co-Founder & Marketing Head
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Harshit Anand
Executive Editor
==================================================
Priyanka Pangtey
Networking Head
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Khushboo Jain
Operating Head
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Himanshu Aggarwal
Editing Head
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Vidushi Verma
Communication Head
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Mayank Kumar
Project Co-ordinator
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Ankit Yadav
Public Relations Head
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Rohan Singh
Publishing Director
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Corporate Law Journal Vol III Issue I
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STUDENT EDITORS
Shubham Jain
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Rohan Singh
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Sumit Kumar
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Sarthak Makkar
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Syed Ashad
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Akhil Kumar
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Pareesh V Irmani
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Ayushi Gupta
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RESEARCH ASSISTANTS
Mayank Kumar
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Ankit Yadav
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Corporate Law Journal Volume III Issue I
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FROM THE DESK OF THE PUBLISHER
Corporate Law Journal proudly announces the publication of its Volume III
Issue I. After the successful run of our first two volumes, we are eager to implement
the feedback we have received from our readers and make the journal even better.
The past year has taught us many lessons and we have met excellent people along
the way who have contributed to our journal drawing from their varied expertise.
The Journal demonstrates our commitment to excellence in scholarship and
student development. The legal industry is really about people, which ties in with
one of our core beliefs that people make a difference. Our goal is always to
produce a reputable legal journal.
The Journal primarily covers the latest topics of discussion and debate in
corporate law around the world and also the emerging trends in the field of
corporate law.
Like any reader, we rate publications that are readable, indeed fun! We
hope you enjoy Corporate Law Journal and we welcome your feedback. We are
confident that this edition will be valued by judges, lawyers, students, researchers
and scholars. As you read the topics addressed in this Journal, we are sure that you
will agree that this is an impressive work produced by the authors and editors. It is
a pleasure to work with such fine individuals and students on a daily basis.
Corporate Law Journal Volume III Issue I
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CONTENTS
INSOLVENCY AND BANKRUPTCY (ORDINANCE), 2019: A GLARING
EXAMPLE OF COLORABLE EXERCISE OF POWER
THE REGIME OF SHAREHOLDER’S DEMOCRACY IN INDIA
LIMITED LIABILITY PARTNERSHIP: QUASI COMPANY, QUASI PARTNERSHIP
OR SUI GENERIS?
NCLT’S GOVERNANCE ON MERGERS
Corporate Law Journal Vol III Issue I
INSOLVENCY AND BANKRUPTCY (ORDINANCE), 2019: A GLARING EXAMPLE OF COLORABLE EXERCISE OF POWER
(MOHIT SINGHVI1 & HIMANSHU CHOUDHARY2)
ABSTRACT
“When the custodian of power is influenced in its exercise by considerations outside those
for promotion of which the power is vested, the court calls it a colorable exercise of power
and is undeceived by illusion.”
- Justice V R Krishna Iyer3
The idea pulsating behind the power of framing ordinances can be traced since time
immemorial, i.e. from The Government of India Act, 1935, which gave the authority to the
Governor General to promulgate Ordinances. Section 42 and 43 of the said act dealt with
Ordinance making power of the Governor General which states that, ‘If circumstances exist
which render it necessary for him to take immediate action’, then only he can use this power.
It would be pertinent to mention here that the legislative intent behind inculcating this Article
was to empower the President to exercise legislative powers in cases which require
“immediate action”. It was also recommended in the Constituent Assembly to modify the
Chapter to read “Extraordinary Powers of the President” instead of the current “Legislative
Powers of the President” to make it clear that the powers “are extraordinary; that is to say,
they are not to be employed in normal times”4 and are also reasonably under surveillance.
That on 28th
December, 2019, His Excellency, the President of India promulgated, The
Insolvency & Bankruptcy Code (Amendment) Ordinance, 2019 whereby certain amendments
have been introduced in the IBC inter alia section 7 which is primarily the subject matter
behind construction of this Article. To provide a backdrop, it is to be noted that the
Parliament passed the Insolvency and Bankruptcy Code, 2016 (“Code”), first in the House of
People on 05.05.2016 and then in the Counsel of States on 11.05.2016. The Code received
the assent of the President on 28.05.2016 and on the same day was notified in the Gazette.
1 Head, Singhvi & Co. Advocates & Legal Consultants; Principal
2 Associate, Singhvi & Co. Advocates & Legal Consultants
3 State of Punjab vs. Gurdial Singh, (1980) 2 SCC 471
4 Constituent Assembly Debates, p. 201
Corporate Law Journal Vol III Issue I
This was done to organize the laws relating to insolvency and bankruptcy which where earlier
unorganized. That the status of Homebuyers/Allottees always went through the confusion
whether they fall under the category of “Financial Creditors” and whether or not they can set
off insolvency proceedings at all.
Amid all confusions and in order to clarify the position once for all, the Parliament passed the
Insolvency and Bankruptcy Code (Amendment) Act, 2018 with an aim to provide Legislative
clarity stating that the Home Buyers/Allottees were also to be treated as “Financial
Creditors” as under the Code. That to challenge the constitutional validity of the Insolvency
and Bankruptcy Code (Amendment) Act, 2018 various Petitions were filled by Builders/Real
Estate Companies in the Hon’ble Supreme Court and in Pioneer Urban Land and
Infrastructure Ltd. and Ors. vs. Union of India and Ors.5, the Hon’ble Supreme Court was
pleased to uphold the validity of Insolvency and Bankruptcy Code (Amendment) Act, 2018.
That with the baleful motive of overturning the Judgment of the Hon’ble Apex Court the
Insolvency and Bankruptcy (Amendment) Ordinance, 2019 has been brought in. That section
3 of the Ordinance not only amends but creates and embargo in as much as there is an
additional provision in section 7 of IBC which clearly states that Insolvency Proceedings by
those creditors referred to u/s 21(6A) (a) and (b) can be filed only jointly by 10% of the total
creditors or 100 of them whichever is lesser or cannot file at all. That the said Ordinance
amounts to violation of Article 14 of the Constitution of India, 1950 which creates a class
within a class and suffers from manifest arbitrariness. Also, it goes against the spirit of the
Hon’ble Supreme Court in its Pioneer Urban Land Judgment.
That in the case of Ramesh Thapar vs. State of Madras (1950 SCR 594), the Apex Court
opined that, “Where a law purports to authorize the imposition of restrictions on a
fundamental right in language wide enough to cover restrictions both within and without
the limits of constitutionally permissible legislative action affecting such right, it is not
possible to uphold it even so far as it may be applied within the constitutional limits, as it is
not severable. So long as the possibility of its being applied for purposes not sanctioned by
the Constitution cannot be ruled out, it must be held to be wholly unconstitutional and
void.” From perusing the above noted judgment, it is apparently clear that, by way of passing
the ordinance of 2019, the government has snatched right of the Home Buyer by imposing
certain conditions in the form of barriers. Not only this, the new amendment of section 7 is
5 (2019) 8 SCC 416
Corporate Law Journal Vol III Issue I
absolutely unconstitutional because the same is preventing the Home Buyers from availing
the remedy available under the IBC. It would not be out of place to mention here that there is
no embargo as such on the operational creditor who is also at the same footing which renders
the amendment discriminatory and smells of favoritism and hence is liable to be struck down.
That it is a settled law that equality and arbitrariness are sworn enemies; one belongs to the
rule of law in a republic while the other, to the whim and caprice of an absolute monarch. The
action of the central government disrupts the entire genesis of the fundamental rights of the
Home Buyers and hence is required to be looked into. Where an act is arbitrary it is implicit
in it that it is unequal both according to political logic and constitutional law and is, therefore,
violative of Article 14, and if it affects any matter relating to trade, it is also violative of
Article 21. Articles 14 and 21 strikes at arbitrariness in State action and ensure reasonable
restrictions and equality of treatment. That the Constitution does not allow unreasonable
restrictions to be imposed and in this scenario, if the classification fails to satisfy the
requirements of Article 14 and Article 21, it will be ultra vires not only the Constitution but
also the statute under which it is undertaken.
That the action of the government is ex-facie illegal and perverse and deserves to be thwarted
away in as much as the same appears to be concocted game plan in order to deprive the
individual Home Buyers from the basic constitutional right and hence deserves to be
nullified. This action of the government is de hors the constitutional rights which cannot be
allowed to be perpetuated and hence deserves rejection. That the law becomes void not in
toto or for all purposes or for all times or for all persons but only “to the extent of such
inconsistency”, that is to say, to the extent it becomes inconsistent with the provisions of
Part III which conferred the fundamental rights on the citizens. The instant action of the
government is bereft of any base, is restrictive in nature and takes away the fundamental right
of the individual home buyers and act as a restraint to initiate legal proceedings which is ex-
facie perverse.
That it is a settled law that equality and arbitrariness are sworn enemies; one belongs to the
rule of law in a republic while the other, to the whim and caprice of an absolute monarch. The
action of the central government disrupts the entire genesis of the fundamental rights of the
Home Buyers and hence is required to be looked into. Where an act is arbitrary it is implicit
in it that it is unequal both according to political logic and constitutional law and is, therefore,
Corporate Law Journal Vol III Issue I
violative of Article 14. In D.C. Wadhwa v. State of Bihar6, Justice PN Bhagwati observed
that: “The power to make an ordinance is to meet an extraordinary situation and it should
not be made to meet political ends of an individual. Though it is contrary to democratic norm
for an executive to make a law but this power is given to the President to meet emergencies
so it should be limited in some point of time.”
That the present issue is a glaring example of unreasonable classification as well as colorable
exercise of the legislative power used through the President under Article 123 of the
Constitution of India, 1950. The Hon’ble Supreme Court has considered the aspect of the
unreasonable classification in the case of P.P. Enterprises vs. Union of India7 wherein it was
observed as follows: “Also, to justify a restriction as reasonable, the restriction must be in
relation to the object to which the law is seeking attainment and it should not be in excessive
nature.”
Also, in P. Vajravelu Mudaliar v Special Deputy Collector8, it was held that such an abuse
of the power by the executive in a covert and indirect manner would be colorable
legislation. If a constitutional authority does an act which is not expressly permitted by the
constitution, it would amount to fraud on the constitution.
That the Hon’ble Supreme Court in Sansar Chand Atri vs. State of Punjab and Ors.9
quashed a notification that created a class within a class and held that Military pensioners
already formed a class within the broader definition of “pensioners” and further sub-
classifying them would be unconstitutional. That it is a trite law that the classification which
is permissible must be based on some real and substantial distinction bearing a just and
reasonable relation to the objects sought to be attained and cannot be made arbitrarily and
without any substantial basis.
That any law which is inconsistent or in derogation of the fundamental rights shall be
deemed to be void. At the time of issuing ordinance, basic rules with respect to equality,
reasonable classification etc. were not considered and accordingly, has snatched the right of
the Home Buyers and is de hors the Constituion of India, 1950. That the Hon’ble Supreme
6 AIR 1987 SC 579
7 AIR 1982 SC 1016
8 [1965] 1 SCR 614
9 (2002) 4 SCC 154
Corporate Law Journal Vol III Issue I
Court in the case of E. V. Chinnaiah vs. State of Andhra Pradesh and Ors.10 denied to
create class within the already existing class of Schedule Caste/Scheduled Tribes for the
purpose of reservation holding that such a “class within a class” amounts to tinkering with
and violation of Article 14 of the Constitution of India, 1950.
That the Ordinance holds the main objective to aid Corporate Debtor with funding and to
prevent action that arises against them, has no reasonable nexus with the amendments made
in section 7 of the IBC. That this Ordinance creates confusion with respect to position which
is already clear prior to the amendment by the judgment given by the Hon’ble Supreme
Court in the case of Pioneer case. That the ordinance is also against the principle of
legislative accountability in as much as the legislature is morally as well as legally
accountable to the common people. Any act which is detrimental to the rights of the citizen
is liable to be quashed and set aside it being unreasonable as the ordinance.
That there is always a presumption that the legislature does not exceed its jurisdiction and is
contained in the maxim, “ut res magis, valet quam parret”. Though a bare perusal of the
ordinance clarifies that the act of amending the present law is nothing but a tool to
overreach the process and restrict the exercising the right of the individual which is per se
perverse and deserves to be declared ultra vires. Although, the Apex Court on various
occasions has refused to review the issue pertaining to limit the power of promulgation of
Ordinances by the President. While the ordinance is amenable to judicial scrutiny, the court
would not look into the preconditions of necessity.11
Moreover, even the concept of mala
fide would not apply as legislative intentions are out of judicial reach.12
Further, it is for the
petitioner to prove that necessary circumstances could not have existed. 13
Though, the law
being dynamic the day is not too far when the Hon’ble Supreme Court and the High Courts
will have to rethink and set parameters in order to curb the misuse of such power in the
hands of council of ministers who are the real men behind such Ordinances.
That the Hon’ble Supreme Court in Chitra Sharma and Ors. v/s Union of India and Ors.14
,
has recognized that the fundamental Right to housing is also available to Home
Buyers/Allottees and the ordinance is in predominant violation of the right of the Home
10
(2005) 1 SCC 394 11
A.K. Roy v. Union of India, (1982) 1 SCC 271 12
T. Venkata Reddy v. State of A.P., (1985) 3 SCC 198 13
Gyanendra Kumar v. Union of India, 1996 SCC OnLine Del 367 14
(2017) 143 SCL 680 (SC)
Corporate Law Journal Vol III Issue I
Buyer and thousands alike and deserves to be thwarted away in its entirety. That whereas
the Operational Creditors have an Advantage to avail the benefits unlike any other creditor.
The biasness is done only with Financial Creditors wherein they are barred to take
advantage of the benefits allotted to them under the code.
That the Home Buyers/Allottees consider to approach NCLT as the last option as they do
not hold sound financial background unlike Builders and seek to avoid risk of investing
their money or decision of buying a home. That the action of the government seems to be
irrational, a haste and transpires denial of the right to chose forum which is per se perverse
and deserves to be thwarted away. That the Ordinance is also violative of Article 21 of the
Constitution of India in as much as the law that is not just, fair or reasonable is no law under
the Constitution. Hon’ble Justice DY Chandrachud, J., in K.S. Puttaswamy v. Union of
India15
, has held that:
“….Article 14, as a guarantee against arbitrariness, infuses the entirety of Article 21. The
interrelationship between the guarantee against arbitrariness and the protection of life
and personal liberty operates in a multi-faceted plane. First, it ensures that the procedure
for deprivation must be fair, just and reasonable. Second, Article 14 impacts both the
procedure and the expression “law”. A law within the meaning of Article 21 must be
consistent with the norms of fairness which originate in Article 14. As a matter of
principle, once Article 14 has a connection with Article 21, norms of fairness and
reasonableness would apply not only to the procedure but to the law as well…”
That the ordinance has been passed by using the powers under Article 123 of the
Constitution of India, 1950 which enables the promulgation of ordinances only in instances
requiring “immediate action”. The absence of emergent reasons negates any invocation of
the provision and Ordinance is against the spirit of Article 123 and ultra vires of the
Constitution of India, 1950. That the ordinance is on the face of is irrational and is colorable
legislation and Court must look to the substance of the ordinance, as distinguished from its
form or the label which the legislature has given it and must not allow this to be acted upon.
Arguendo, it is understandable that the shell life of the Ordinance is six months only, still one
of the biggest factors adding to the potential for misuse is the fact that ordinances can go
15
(2017) 10 SCC 1
Corporate Law Journal Vol III Issue I
without adequate legislative review for more than half a year at a time. Not only this, even in
a situation when the ordinance lapses or is repealed by the Legislative Assembly, even that
would not render the ordinance as void ab initio and any act undertaken during that epoch
shall continue to remain valid. Thus, even if the democratic institutions are to approve or
disapprove of the acts later, the fact remains that the caprice, if any proved at a later point of
time cannot be undone. Unfettered rights without any restriction would render the very
concept of democracy ultra vires and bereft of the constitution pillars.
That the instant Amendment seeks to take away the right per se apart from over-turning the
well reasoned judgment of the Hon’ble Supreme Court. Not only this, firstly the amendment
was being carried out by the Legislature itself and hence, this act of counter blasting their
own act seems to be marred by some extraneous conditions which can be seen only if the
curtains are raised. It is now to be seen as to how the Hon’ble Supreme Court shall take it
further in as much as the same has been taken cognizance by the Court in a petition filed16
challenging the Ordinance and an interim order has been passed staying the application of the
provisions of the ordinance.
16
Manish Kumar vs. Union of India & Anr. WP (civil) No. 26/2020
Corporate Law Journal Vol III Issue I
THE REGIME OF SHAREHOLDER’S DEMOCRACY IN INDIA
(KESHAV KHANDELWAL AND MAHESH SONI)17
ABSTRACT
The nascent debate on democratic rights of Shareholders in India has tended to draw huge
attention of the corporate world. One of the pillars of good corporate governance is
shareholder’s democracy but this concept is always sidelined in the day to day administration
of the company. As the money of shareholder’s are involved it becomes the duty of the
company to provide all essential information and to promote participation of shareholders in
operations of the company. The intent behind the Companies Act, 2013 seems to enhance
shareholder’s democracy in corporate structure. But their role is made limited to get
dividends out of the net profits and their participation or involvement in handling the affairs
of the company is never supported by directors. The excessive and absolute powers of
directors and limited rights of shareholders are the foundation of the debate of corporate
democracy. For integrating the principles of democracy in our corporate culture, each and
every member must make sincere and determined efforts in the decision-making process of
the company and the legislature should have to make laws according to the changes in the
global scenario.
The paper will try to showcase some of the aspects of shareholder’s democracy and then
analysis will be done to see that principles and provisions enshrined in Companies Act, 2013
are sufficient to protect rights of shareholders.
INTRODUCTION
Corporate governance has evolved itself as a system by which businesses are directed and
controlled. The fundamental aim of corporate governance is to build up an environment to
promote shareholder’s value and protect the interest of shareholders. The shareholders
recognized as owners of the company have no real power to manage the organization. For
managing the corporate administration and day to day activities the directors are given the
17
4th
Year, National Law University, Jodhpur
Corporate Law Journal Vol III Issue I
absolute power to manage the organization.18
The shareholders thus for better functioning
have to delegate many of their responsibilities as owners of the company to the directors to
control corporate functioning. This exchange of trust builds the accountability of the board to
the stakeholders and cooperation from the side of shareholders. But as the capital is invested
by the shareholders in the organization, thus their participation in the administration of
company becomes priority and the base of shareholder’s democracy. This makes obligation
on the side of management to provide them with more information in exercising voting
rights. Stakeholders have no powers to manage the company thus they should be provided
freedom to express their opinion in company. Company is run by few people on their
discretion, thus theses few managers of corporation earn more benefit as they control affairs
of company which gives rise to misuse of powers. As the involvement of investment made by
the stakeholders are there, then this misuse of powers directly affects the shareholders and
thus their right to participate become a necessity, which until now is overlooked.19
Further,
the shareholders are not able to make way for the implementation of their opinions because of
hurdles arising out in form of sturdy promoters, directors and managers in the organization.
The corporate structure in India provides a formal role in participation by way of voting
rights but the intent of corporate governance should be based on effective contribution in the
governance of the company by the shareholders. For the maintenance of good corporate
governance concept of shareholder’s supremacy in the governance of the business and affairs
of corporate sector either directly or through their elected representatives denotes the
shareholder’s democracy.
SHAREHOLDER’S DEMOCRACY IN INDIA
Democracy as it is understood is the rule of people, by people and for people. For the purpose
of understanding, the democracy w.r.t shareholder means the power of shareholders, by the
shareholders, and for the shareholders in the company. Concisely, it is a right to speak, have a
meeting, and communication with co-shareholders and to learn about what is going on in the
company. 20
In case of Life Insurance Corporation of India vs Escorts Ltd21
the concept of
18
Iragavarapu Sridhar, Corporate Governance and Shareholder Activism in India—Theoretical Perspective,
https://file.scirp.org/pdf/TEL_2016080515151959.pdf. 19
H. Frank, The Future of Corporate Democracy, http://scholarship.law.wm.edu/facpubs/1059. 20
Hemant Goyal and Sandhya Aggarwal, Supremacy Of Shareholders & Their Democracy In Line With New
Act, 2013, http://www.mondaq.com/article.asp?article_id=286620&signup=true). 21
Life Insurance Corporation of India v. Escorts Ltd, 1986 AIR 1370.
Corporate Law Journal Vol III Issue I
shareholder’s democracy was focused upon and court went on to say that: “Under the
Companies Act the powers have been divided between two segments: one is the Board of
Directors and the other is of shareholders. The directors exercise their powers through
meetings of Board of directors and shareholders exercise their powers through General
Meetings. Although constitutionally all the acts relating to the company can be performed in
General Meetings but most of the powers in regard thereto are delegated to the Board of
directors by virtue of the constitutional documents of the company viz. the Memorandum of
Association and Articles of Association. Thus the need for Shareholders' legal rights to
participate in corporate governance known as shareholder’s democracy comes into
existence.”22
In the globalized era, the government is aiming for investor protection measures, thus need
for shareholder’s democracy become a priori for corporate structure. Adjustments in the
balance of power between shareholders and management should be made to preface the
existence of transparency in corporate culture. Corporate democracy can be achieved by
promoting shareholders participation in functioning which further can be achieved by
disclosure of information to the shareholders.23
Further the need for protecting minority
shareholder’s rights from the abuse of majority shareholders is also a fundamental premise of
shareholder’s democracy.24
Company with thousands of shareholders and for their protection
and participation should run like democracies. This concept of Shareholder’s democracy in
interfaced between the two arena:
a) Increasing shareholder’s interest and participation in the company;
b) Protecting minority shareholder’s rights in the company.
A. Increasing shareholder’s interest and participation in the company
This participation ensures shareholder’s right to have a say in functioning of the company and
expressing their disagreements which can be attained by following ways:
1. Establishment of Committees To Attain Shareholder’s Democracy:
The Stakeholders Relationship committee: This particular move was taken to
increase shareholder’s encouragement in corporate governance. The minority 22
Id. 23
Vaibhav Sonule, Bindu Ronald, The Eclipse of Corporate Democracy in India,
http://www.ijhssi.org/papers/v6(7)/Version-3/A0607030108.pdf, (last visited on Jan 13, 2020). 24
Supra note 1.
Corporate Law Journal Vol III Issue I
shareholders through a member prescribed by board director can raise their
grievances to this particular committee which ensure regular participation.25
The Audit Committee: It maintains checks and balance, thus maintaining
protection of shareholder’s interest. It is charged with the principal oversight of
financial reporting and disclosure which ensures regular flow of information to
the shareholders.26
Nomination and Remuneration Committee: This committee focuses on
identifying persons who are qualified to become directors and to decide their
remuneration. This committee shall carry out evaluation of every director’s
performance and also determines qualifications, positive attributes and
independence of a director. This can enhance democracy by way of appointing
persons who are flexible in approach and can move towards enhancing greater
shareholder’s wealth.27
2. Class Action Suit: Class action suits is based on the concept that representative
action can be initiated by one shareholder on behalf of one or more of shareholders,
on the premise that they would all have the same locus standi to initiate an action
against an defaulting company.28 The above concept was incorporated in India after
Satyam Computer Services Ltd. committed fraud on Indian and US investors.29 Due to
the prevalence of class action suits in US, their investors were safeguarded but in
India no investor got protected as no provision was there with respect to class action
suits. This lacuna was addressed by the legislature while drafting of the Companies
Act, 2013 and introducing the provision of class action by way of Section 245 of the
companies act, 2013. This will ensure shareholder’s democracy by empowering
investors to sue a company for oppression, mismanagement and to claim damages in a
suit filed by one of the shareholder’s on behalf of all.
3. Maintenance and inspection of documents in electronic form: Shareholders have
the right to inspect any document, record, minutes, register kept by the company in
electronic form which will ensure shareholder’s involvement.
25
The Companies Act, No. 18 of 2013, § 178(5) (Ind.). 26
Id. § 177 . 27
Id. § 178(1). 28
Id. § 245. 29
Rohit Mahajan, Clearing the way for class action, The Hindu Business Line, www.thehindubusinessline.com.
Corporate Law Journal Vol III Issue I
4. Voting Through Electronic Means: To ensure wider involvement of shareholders at
General Meetings, Union Government can mention class of companies in which
members are able to give their vote means of electronic method. This will ensure
participation of distant shareholder.
5. Punishment for investing money by way of fraudulent means: There is a provision
in the act per se providing punishment up to 10 years and with fine for investing
money by way of fraudulent inducement. It will help in protection of shareholder’s
interest.30
6. Action by affected persons due to misleading statement in the prospectus:
Anyone who has invested the money being affected by the fraudulent inducement or
misleading statement in prospectus shall be entitled to file a suit. 31
7. Role of Proxy System: Proxy is commonly known to be voting on behalf of other
due to his inability to occur in general meeting. It is laid under section 105 of the
companies act, 2013 and maintains shareholder’s democracy by giving a chance to
shareholder to appoint another person to act as a proxy and cast the vote on his behalf
at the meeting which altogether confirms wider participation.
B. Protecting Minority Shareholder’s Rights: Securing Democracy for Minority
In Indian corporate governance revolution has occurred in the power of minority shareholders
is emphasized upon. The JJ Irani Committee had proposed that balance of powers need to be
laid between the rights of minority and rule of majority and found that: “The fundamental
principle of operation of shareholders democracy is that the rule of majority shall prevail but
the minority’s interests should be given a voice to make their opinions known at the decision
making levels.”32 Thus, the he law has provided such a mechanism in following ways.
1. Proportional Representation: Section 163 provides appointment of directors by way
of proportional representation. As it is well known fact that directors are appointed by
simple majority vote in the resolution made for appointments which further results
into majority rule as they have the absolute authority in selection of directors. For the 30
Id. § 36. 31
Id. § 37. 32
Report on Company Law, (2005), JJ Irani, Ministry of Corporate affairs. http://reports.mca.gov.in/.
Corporate Law Journal Vol III Issue I
purpose of enabling the minority shareholder’s proportionate representation on the
Board, Section 163 of the Companies Act provides an opportunity to companies to
appoint directors through a system of proportional representation which will show
minority participation in decision making.
2. Appointment of director elected by small shareholder: Section 151 of the
Companies Act, 2013 provides that one director can appointed by the company on the
basis of representation of small shareholders. This ensure minority to have say in
functioning of the company.
3. Special Majority: Other means to protect minorities is that certain major decisions have
to be implemented only by approval of a special majority of 75% or 90% of the
shareholders by value. This enhances the participation of minorities in major decision
making.
4. Information disclosure and audit: Information disclosure and regular audits
provides for regular accounting information to be supplied to the shareholders along
with a report by the auditors.33
Further for taking shareholder’s decisions in various
major resolutions they have to be provided all material facts relating to these
resolutions including the interest of directors34
and their relatives in the matter which
ensures their involvement in the functioning of the company. In this way some
safeguards are there for securing democracy for minority shareholder.
5. Exceptions to the rule of Non-Interference: Establishing Minority Shareholder’s
Democracy
The rule of non-interference: Against Shareholder’s Democracy
Fundamentals of the company law inhibit the equality of rights of members with
regards to other members. If any differences occurs between the members then the
issues is dealt by only rule of majority as they are the persons who have invested more
capital and thus are in a better position than that of minority shareholders. In these
cases minority rights are evaded for the benefit of majority and court cannot interfere
in such conditions to protect minority which lays the rule of Non - interference. This
rule is laid in case of Foss v. Harbottle35
. This whole situation curtails the
shareholder’s democracy. For regaining the democracy of shareholders there are
certain exceptions in common law and statutory principles. 33
The Companies Act, No. 18 of 2013, § 136 (Ind.). 34
Id. § 184. 35
Foss v. Harbottle, 67 E.R. 189.
Corporate Law Journal Vol III Issue I
EXCEPTIONS:
The common law principles:
(1) Ultra Vires Acts
Shareholders can bring right of action when the directors or majority shareholders
performs some ultra vires or illegal acts. In Bharat Insurance Ltd. v. Kanhya Lal36
, the
court held that as the assets of the company was mismanaged, a single member can
maintain a suit. The court held that application of funds against the objects of the
functioning of the company will be considered as ultra vires act and minority alone can
approach the courts.
(2) Fraud on Minority
When some of the acts of the majority amounts to a fraud on the minority then the
minority can bring an action. The said doctrine was taken as an exception to the case of
Foss v. Harbottle37
. In Menier v. Hooper’s Telegraph Works38
, the court held that if the
majority of shareholders are allowed to put something into their pockets at the expenses
of the minority, then there will be a gross violation of autonomy of minority shareholders.
The court finally concluded that minority shareholders of company has the power to
claim an action against the majority.
(3) Resolution where Special Majority is required but only simple majority taken:
When some issues requires special resolution but is passed with only simple majority then
the minority shareholder’s right to sue comes into role. This particular situation occurs
when the resolution harms the interest of minorities in the company. Further, a minority
shareholder can raise his right of action if no sufficient notice is served with regards to the
resolution which is sought to be passed.39
(4) Personal Actions
36
Bharat Insurance Ltd. v. Kanhya Lal, A.I.R. 1935 Lah. 792. 37
Supra note 20. 38
Menier v. Hooper’s Telegraph Works, (1874) L.R. 9 Ch. App. 350. 39
Nagappa Chettiar v. Madras Race Club, 1 M.L.J. 662.
Corporate Law Journal Vol III Issue I
Minority or individual shareholder has all the rights as other members of the company as
enjoyed by other shareholders. These membership rights should not be trespassed by the
majority shareholders for their own purposes. In Nagappa Chettiar v. Madras Race
Club40
the court held that the minority shareholder can enforce his rights pertaining to
right to vote, vote recording, or cast the right of vote as a director of a company at an
election and if any violation is there then equal remedy can be claimed.
(5) Breach of Duty
The minority shareholders are enshrined with the powers to bring action against the
company in cases of breach of duty by directors and majority shareholders which is
detrimental to the objectives of the company. In Daniels v. Daniels41
the allegations put
forward by the plaintiffs was that sale of property of company was made in pursuance of
the director’s personal interest. The court held that the plaintiff’s claim is valid and the
application of directors to dismiss the petition was dismissed.
Statutory Protections:
(1) The variation of class rights: The rights accrued to the shares of any class can be
varied under Section 48 of the Act with the consent in writing of the holders of not
less than three-fourths of the issued shares of that class or with the sanction of a
special resolution passed at a separate meeting of the holders of the issued shares of
that class. And the holders of more than 10% of the shares who disagrees with the
variation can apply to the Court for the cancellation of the variation under clause 2 of
section 48 of the Act.42
(2) Reconstruction and amalgamation Schemes: The minority holders are safeguarded
in scenario where they do not agree to the scheme of reconstruction and
amalgamation.
(3) Oppression and mismanagement: The principle containing the majority rule will
not have much influence in cases under Section 241 for prevention of oppression and
40
Id. 41
Daniels v. Daniels, (1978) 2 W.L.R. 73. 42
The Companies Act, No. 18 of 2013, § 48 (Ind.).
Corporate Law Journal Vol III Issue I
mismanagement. If a members is in disagreement to the way in which affairs of the
company is being conducted he can approach Company Law Board.43
(4) Alternative remedy not to wind up if prejudicial to some member’s interest: If a
member thinks that operations of the company are laid out in a way prejudicial to the
interest of other small holders, he can apply to the Company Law Board for
redressal.44
(5) Investigation by the Government: As per Section 210 of the Companies Act, 2013,
Union Government can investigate into the affairs of the company in public interest or
on the basis of report submitted by the registrar. This ensures protection of minority
shareholders from the irregularity in the company.45
ANALYSIS
From the various provisions and principles in company law it is clearly understood that
separation of power between administration and ownership is the fundamental premise on
which the existence of company stands. This separation of powers is beneficial for the
management of the company but somehow mitigates the participation of shareholders. In
current day situations the participation of the shareholders can be done only in two ways i.e.
by exercising exit option and by exercising voice option. In exit option they can leave the
company by selling their shares, thus expressing their dissent and disagreement for the way in
which the company was functioning. This particular option shows incompetency of today’s
corporate governance to ensure the rights of the shareholders and showing the lacunas about
the absence of shareholder’s democracy. In exercising the voice option by various different
ways such as participation in general meetings, voting selection and removal of directors,
remedies in courts, etc. the shareholder’s democracy is only incorporated and not seen to be
incorporated. Shareholders can exercise their powers by not opting the concerned directors
whose policies they are in contrasting with but then also it does not solve the problem as
some other person can also became a threat to their interest which clearly shows evasion of
democracy. They have to give consent to the persons selected by the board for being a
director. Further to exercise powers they can amend the articles which on the face of it shows
prevalence of democracy but this amendment has to be made by passing as special resolution
which is not easily possible. Moreover establishment of different types of committees is
43
O.P. Gupta v. Shiv General Finance (P) Ltd., (1977) 47 Comp. Cas. 297. 44
The Companies Act, No. 18 of 2013, § 242 (Ind.). 45
Id. § 210 .
Corporate Law Journal Vol III Issue I
shown as an enlightening aspect of democracy but focusing on the functioning and election of
these committees where composition comprises of non-executive directors and the persons
nominated by board, no discretion of shareholders is taken into consideration and all
appointments are made as per the whims of the board leads to the absence of democracy.
Proxy mechanism prima facie ensures the participation of the shareholders but the proxies
given by the members only have voting rights and no speaking rights. This particular aspect
curtails the right of shareholders to speak in the annual general meetings of the company and
finally supports the premise that shareholder’s democracy is still not evolved in India. Under
section 161 of the companies act the board is given to elect a person not elected in general
meeting and this person has to be appointed as a director by shareholder without any
autonomy. Further the board can appoint additional, alternate and nominee director without
considering the views of the shareholders.
The rule of non-interference as laid in Foss vs Harbottle46
had been given certain exceptions
while maintain rights of small shareholders, but these exceptions target the rule by majority
which is also a fundamental pillar of democracy and advantages of non-interference is
mitigated which targets the overall welfare of shareholders and emphasize on the wider
protection of interest as:
1.) Preservation of right of majority got vitiated as now the minority stakeholder’s on
their own will can interfere without the support of majority even when the
majority is in disagreement with them.
2.) Multiplicity of futile suits will be there as if any rights of the shareholders or of
the company is injured, many litigation suits will be filed.
3.) Litigation will also take place when majority restrains but minority persist it
thereby harming broad welfare of the stakeholders.
RECOMMENDATION
By analyzing different provisions of the company law the most commonly and accepted
principle supporting shareholder’s participation is proxy mechanism. But the absence of right
to speak somehow evades the flavor of democracy. The Sachhar committee recommendation
46
Supra note 20.
Corporate Law Journal Vol III Issue I
about the proxy to speak and vote is also in process to be implemented.47
The companies act ,
2013 talking only about the voting rights of proxies has explicitly avoided speaking rights
which are crucial for maintaining democracy, thus my suggestion will be to amend section
105 and to incorporate right speak of proxies in it. Further various committees helping the
shareholders should also be made transparent in their functioning by giving some control to
shareholders in appointing directors in these committees as the directors appointed in these
relationship committees is solely done by the board and no effective participation of the
shareholders is seen. Moreover now the time has occurred when Stakeholders Theory should
be taken into account for corporate governance which focuses more on the purpose of the
firm rather than the shareholder’s welfare. In this particular theory the welfare of other parties
that have a long term interest in the company i.e. employees, creditors, directors,
shareholders, customers should also be considered.48
This will ensure shareholder’s
democracy as continuous cooperation will be there between various constituents of a
company on which the success of an organization depends.
CONCLUSION
The abovementioned discussion on shareholder’s democracy is a shadow of how the
shareholders acting as parliamentarians are not able to implement policies, devoid them of
participation in taking administrative measures. The directors characterized as government in
a country has the absolute powers to exercise control and manage the company. This makes
the need for cooperation and balance between the shareholders and directors. From the above
discussion we have seen the misuses of the various provisions by the directors and the need
for establishing shareholder’s democracy. Democracy in the company law is meant to
provide right of participation to the shareholders, but what is prevailing in the current day
situation is their harassment. Proxies by way of powers provided under section 105 has only
right to vote which curtailed the rights of distant shareholders who are not in a position to
attend the meetings of the company, thereby making this particular aspect still under
consideration for the parliament to legislate upon in its aim to achieve shareholder’s
democracy. Indian law as compared to various other national laws is far to attain the
principles of shareholder’s democracy and is on the way to develop this concept. Further the
focus and intent of Companies Act was emphasized to be on democratic aspect but in reality
47
Supra note 6. 48
Supra note 6.
Corporate Law Journal Vol III Issue I
what the shareholders has achieved is nothing but faked promises. The provisions should be
made in such a manner that a system of check and balances is created which can ensure the
transparency in the functioning of the company. To effectively develop the democratic aspect
firstly the shareholders should be provided with more information so that the role of informed
participant is increased and then some limited number of directors should be appointed in
relationship committees at the discretion of shareholders. Further, initiative should be
developed as to give powers to shareholder to address the issues and suggest the corrective
actions which may or may not be implemented by the management of the organization. This
will ensure real democratic aspect of the functioning of corporate governance.
Corporate Law Journal Vol III Issue I
LIMITED LIABILITY PARTNERSHIP: QUASI COMPANY, QUASI PARTNERSHIP OR SUI GENERIS?
(RAHUL KUMAR49)
ABSTRACT
Limited Liability Partnership (LLP) is a recent concept which developed as a way out from
the cumbersome associated with companies and shortcomings associated with partnership
firm. The LLP Act of India carries advantages of the Companies Act and the Partnership Act
and leaves disadvantages of the both. It borrows the concept of separate legal entity from the
Companies Act and sanctity of agreement from the Partnership Act. Therefore, it is
considered to be the most favourable form of business for small service-based industries.
LLP is validly defined as a hybrid of a company and a partnership firm. This may be called a
convenient definition of LLP but not a complete definition, because some provisions of LLP
neither belongs to the Companies Act nor to the Partnership Act. Therefore, this paper
endeavours to arrive at a complete definition of LLP by comparing and contrasting the LLP
Act with the Partnership Act and the Companies Act.
INTRODUCTION
The concept of Limited Liability Partnership (hereinafter LLP) was first emerged in the USA
due to real estate and energy price crisis in the 1980s when the liabilities were imposed on
the lawyers and accountants who had represented the failed financial institutions.50
In fact,
several partners who had not even advised the failed institutions however held liable to the
extent of their personal assets. This incident created a need for limited liability in a
partnership.51
The first law on limited liability in the partnership was passed in Texas
enacting Texas House Bill 278 on 26th
August 1991.52
The LLP law spread over all the 50
jurisdictions of the USA by the end of 2001. Following this, major accounting firms in the
U.K. started demanding the creation of LLP law. Consequently, the LLP Act was passed in
49
Student 3rd
Year, BBA LL.B, School of Law, Bennett University 50
Robert W. Hamilton, Registered Limited Liability Partnership: Present at the Birth (Nearly), 66 U. CoLo. L.
Rev. 1065, 1069 (1995). 51
Alberta Law Reform Institute, Limited Liability Partnership Final Report No. 77 (April, 1999) 37,
http:/wwwassembly.ab.ca/lao/librarylegovdoes/alilr/1999/67876.pdf. 52
1991 Texas General Laws Ch. 901, Sec.84 (codified at TEX. REV. CIV. STAT. ANN. Art. 6132b, SEC. 15
(West Supp. 1995)).
Corporate Law Journal Vol III Issue I
the U.K. in 2000.53
The LLP Act of India broadly resembles the LLP Act 2000, of U.K.54
and
the LLP Act 2005, of Singapore.55
In 1957, when Partnership Act of 1932 was being revised, some merchants of iron, steel and
hardware industries suggested to include a provision of limited liability in partnership as the
Companies Act had too many cumbersome restrictions which created hurdles for small
businesses. But the suggestion was rejected by the Law Commission.56
Further, Bhatt
Committee in 197257
and Abid Hussain Committee in 199758
, recommended the inclusion of
limited liability in partnership for at least small-scale industries to encourage more
investment in the same. However, it was Naresh Chandra Report 2003 which highlighted the
grave need of LLP in service industries.59
Finally, J.J. Irani Expert Committee recommended
to enact separate legislation for LLPs in India and extend the scope of LLPs to small
enterprises.60
Following the recommendations of the preceding two reports, the LLP Bill
2008 was passed by the Parliament on 7th
January 2009 and was enforced by the central
government on 31st March 2009. The LLP Act is said to be a hybrid of the Partnership Act
and Companies Act except some exclusive provisions. It has been formulated by removing
defects of traditional partnership firms and rigid formalities of Companies Act but keeping
intact advantages of both. Therefore, it is necessary to highlight the advantages of LLP by
comparing and contrasting it with both the Acts.
LIMITED LIABILITY PARTNERSHIP VIS-À-VIS PARTNERSHIP ACT
It is evident from the history that the LLP Act was created to overcome the shortcomings of
the Partnership Act. Therefore, it is necessary to highlight the advantages of LLP over the
53
The Limited Liability Partnership Act, 2000, (UK). 54
Supra note 4. 55
The Limited Liability Partnership Act, 2005 (Singapore). 56
Law Commission of India, Seventh Report On Partnership Act, 1932, 1957,
http://lawcommissionofindia.nic.in/1-50/Report7.pdf. 57
Report The Limited Liability Partnership Bill, 2006,
http://www.prsindia.org/sites/default/files/bill_files/scr1206341536_The_Limited_Liability_Partnership_Bill__
2006.pdf. 58
Abid Hussain Committee, Report of the Expert Committee on Small Enterprises,
http://www.dcmsme.gov.in/publications/comitterep/abid.htm. 59
Naresh Chandra Committee-II, Report Of The Committee On Regulation Of Private Companies And
Partnership, 3.11, Recommendation 3.1, http://reports.mca.gov.in/Reports/3-
Naresh%20Chandra%20committee%20report%20on%20regulation%20of%20private%20companies%20and%2
0partnerships,%202003.pdf. 60
J.J. Irani Committee, Report of the Expert Committee on Company Law 2005, http://report§.
mca.gov.in/Reports/23-
Irani%20committee%20report%20of%20the%20expert%20committee%20on%20Company%20law,2005.pdf.
Corporate Law Journal Vol III Issue I
traditional partnership firms by comparing and contrasting both the Acts. To begin with LLP,
it can be incorporated by registering it with the registrar.61
According to section 2 (q) of the
LLP Act, a partner is someone who becomes partners in an LLP accordance with the LLP
agreement drafted by the partners.62
Interestingly, even a body corporate can be a partner in
an LLP.63
In -addition, a person who subscribes to his name to the incorporation document of
an LLP becomes the partner of the firm.64
Indeed, the LLP Act gives an LLP firm the liberty
to determine the criteria for admitting a new partner. The contribution of a new partner
mandated to account in the books of an LLP can either be in the form of cash or kind as per
the LLP agreement.65
‘Kind’ may consist of movable or immovable tangible properties or
intangible property of certain value.66
According to section 6 of the LLP Act, a minimum of two partners is required to form an
LLP.67
There must be at least two designated partners among whom one partner must be a
resident of India.68
However, there cannot be more than fifty partners in an LLP firm.69
Initially, partners needed to obtain their Designated Partner Identification Number (DPIN)
from the Central Government to become designated partners. However, the Ministry of
Corporate Affairs had integrated the Director’s Identification Number (DIN) issued under the
Companies Act with DPIN with effect from 9th
July 2011.70
Therefore, the partners of an LLP
now need to obtain DIN from the central government to become designated partners.71
Designated partners of an LLP are responsible for ensuring adherence and compliance with
the LLP Act and the LLP Rules similarly to the nominated directors of a company.72
Therefore, the designated partners are personally liable for any contravention to the Act or
61
The Limited Liability Partnership Act, 2008, §. 12 (India). 62
Id, §. 2 (q). 63
Id, §. 5. 64
Id, §. 22. 65
Id, §. 32, 33. 66
Vishal Shah, Provisions of the LLP Relating to Partners and Designated Partners, 35, Income
Tax Rev. (2009). 67
Supra note 12, §. 6 (1). 68
Supra note, §. 7 (1). 69
§. 464, The Companies Act, 2013 r/w Rule 10, The Companies (Miscellaneous) Rules, 2014,
http://www.mca.gov.in/Ministry/pdf/NCARules_Chapter29II_AdjudicationRule.pdf. 70
Notification, Ministry of Corporate Affairs, available at
http://www.mca.gov.in/Ministry/pdf/GSR_506(E)_12012015.pdf. 71
Id, Rule 3. 72
Vishal Shah, Provisions of the LLP Relating to Partners and Designated Partners, 35, Income Tax Rev. 39
(2009).
Corporate Law Journal Vol III Issue I
the Rules. However, only an individual can be held personally liable and not a body
corporate.73
Whereas, section 5 of the Partnership Act clearly states that the relation of partnership arises
from contracts and not from statutes.74
There is no necessity of even formal or written
agreement in partnership as it may arise from the conduct of the parties concerned.75
The
number of partner in an traditional partnership firm is similar to that of an LLP as it is also
bound by such provisions of Companies Act and Rules.76
Registration of partnership is also
optional on the parts of the partners. However, section 69 of the Act strictly cut short the
capacity of an unregistered firm and its partners to sue.77
It is not necessary for the partners to
contribute capital to the firm to become a partner.78
The LLP agreement also determines the rights and duties of partners. It may give partners the
right to transfer their interest either wholly or partly. Nevertheless, this does not lead to the
dissolution of the firm.79
However, it is important to note here that non-economic rights of
partners comprising of management rights or access to information concerning the
transaction of LLP are non-transferable in nature.80
Whereas in a traditional partnership firm,
a new partner can neither be admitted without the consent of the existing partners, nor any
partner can transfer his interest in the firm so as to make the transferee a partner in the firm.81
An elemental distinction between an LLP and traditional partnership firm is that the latter
does not have a legal existence separate from the partners who constituted it whereas the
former has a legal existence separate from its partners.82
In a traditional partnership, every
partner is liable, jointly with all the other partners and also severally, for all acts of the firm
done while he is a partner.83
Therefore, the liability of a partner in a traditional partnership
firm is unlimited as it does not have a separate legal existence from its partners. On the
contrary, in an LLP firm, no partner is liable for the action of other partners.84
Partners of an
73
Id. 74
The Indian Partnership Act, 1932, §. 5 (India). 75
Abdul Badsha Saheb v. Century Wood Industry, AIR 1954 Mys 33 (India). 76
Supra note 20. 77
Supra note 25, §. 69. 78
Shivraj Reddy & Bros v. Raghu Rao Reddy, 2002 Supp (1) ALD 19 (India). 79
Supra note 12, §. 42. 80
Id. 81
Supra note 25, §. 29. 82
Supra note 12, §. 3 (1), Supra 25, §25. 83
Supra note 25, §. 25. 84
Supra note 12, §. 28.
Corporate Law Journal Vol III Issue I
LLP firm are the agents of the firm but not of the other partners unlike that of a traditional
partnership.85
Section 4 of the LLP Act excludes the applicability of Partnership Act 1932 on LLPs, unless
it is otherwise so provided.86
However, for the purpose of taxation, LLP is treated as same as
traditional partnership firms.87
Therefore, an LLP is considered equivalent to a traditional
partnership and gets all the benefits provided to a traditional partnership firm.88
Income tax is
levied on the LLP itself and the profits earned by the partners are not computed as their
personal profit as it is considered as a ‘business income' which comes within the scope of a
‘deduction' for computing income.89
However, Union Budget 2011-12 levied Alternate Minimum Taxes (AMT) on LLP firms
similar to Minimum Alternate Tax (MAT) on Companies.90
It also added Chapter XII-BA
into the Income Tax Act which provided AMT at 18.5 percent of the adjusted total income of
the firm. This AMT is similar to the MAT levied on companies.91
However, the tax base for
an LLP is total adjusted income as against the book profit in case of a company.92
Nevertheless, an LLP has an advantage over a company due to its inherent flexible structure
along with the exemption from the dividend distribution tax.93
Therefore, it is evident that the
LLP Act carries almost all the benefits of the Partnership Act but not the detriments.
LIMITED LIABILITY PARTNERSHIP VIS-À-VIS COMPANIES ACT
An LLP can be incorporated by registration as same as companies.94
The procedure of
incorporation of an LLP is also similar to that of a company.95
Only the concept of
‘memorandum of association’ in companies is substituted with ‘incorporation documents’ in
85
Supra note 12, §. 26, Supra 25, §. 18, (Since partners and the firm are not separate from each other.), see also
Cox v. Hickman, 8 HLC 268 (1860). 86
Supra note 12, §. 4. 87
Income Tax Act, 1961, §.184 (India). 88
Id. 89
Id, §10(2A) & 28(v). 90
Union Budget 2011-12, Union Budget, https://www.indiabudget.gov.in/budget2011-2012/ub2011-
12/fb/bill31.pdf. 91
MAT and AMT, The Income Tax Department, https://www.incometaxindia.gov.in/Tutorials/10.mat-and-
amt.pdf. 92
Id. 93
Supra note 38, Chapter XII-D. 94
Supra note 12, Chapter III, and Chapter II, The Companies Act, 2013. 95
Id.
Corporate Law Journal Vol III Issue I
LLP firms.96
However, the procedure to form an LLP is easier and cheaper than that of a
company.97
With respect to the extent of liability of partners, an LLP is treated similar to a
company. LLP is a body corporate having a separate legal existence separate and distinct
from its partners.98
It has all the characteristics of a body corporate including that of perpetual
succession, ability to sue or to be sued, and a common seal.99
These characteristics of the
LLP resembles the Companies Act. However, an LLP firm is mandated to incorporate
‘Limited Liability Partnership’ or ‘LLP’ at the end of its name.100
LLP’s partners can define
their mutual rights and obligations under their own agreement or agreement with the LLP
similar to a traditional partnership firm.101
The LPP Act permits the operation of an LLP even
in absence of the contractual agreement of partners. However, in such case, “any matter, the
mutual rights and duties of the partners and the mutual rights and duties of the limited
liability partnership and the partners shall be determined by the provisions relating to that
matter as are set out in the First Schedule of the Act.” 102
An act done in the normal course of business or under the authority of the LLP is binding on
the firm including wrongful act or omission.103
Any liability arising out of such an act is an
obligation on the LLP itself and has to be paid off from the assets of the firm.104
A partner
does not have any personal liability directly or indirectly for an obligation of the LLP arising
in contract or otherwise by reason solely of the fact that he is a partner of the firm. However,
the liability of an LLP is limited in a situation where the partner is not authorised to act for
the partnership with another person and the other person knows that he has no authority to
deal in that particular act.105
However, in the case of fraud where one of the partners acted
with an intention to defraud, the liability is unlimited.106
A key difference between an LLP and a Company lies in the regulation of its internal affairs.
Internal affairs of a company are governed by statutes, primarily by Companies Act whereas
96
Supra note 12, §11, §. 4, The Companies Act, 2013. 97
Benefits of LLP, LLP Helpline, http://www.llphelpline.com/benefits-of-llp.html. 98
Supra note 12, §. 3. 99
Supra note 12, §. 3, 14. 100
Supra note 12, §. 15 (1). 101
Supra note 25, §. 11, Supra note 12, §. 23. 102
Supra note 12, §. 23, at First Schedule. 103
Supra note 12, §. 27 (2). 104
Supra note 12, §. 27 (3) (4). 105
Id. 106
Supra note 12, §. 30.
Corporate Law Journal Vol III Issue I
in an LLP, it is governed by the contractual agreement framed by the partners.107
Though, the
essence of an LLP lies in advantages over the traditional partnership, however even with
those advantages it remains a partnership firm only with the limited liability of partners. The
LLP agreement drafted by the partners operates as a Magna Carta of the firm.
Mergers and acquisitions have become a common company activity that is comprehensibly
regulated by the Companies Act.108
Similar concepts have been extended to the LLP Act also
where compromise, arrangement, and reconstruction are allowed. Provisions regulating such
compromise, arrangement and reconstruction are similar to the provisions for Merger and
amalgamation of companies under the Companies Act.109
However, there is no allotment or
appropriation of any shares, debentures or interest through a compromise in an LLP, unlike a
company. Moreover, the procedural requirements (like notice of hearing, report on working
of compromise or arrangement, directions at the hearing of the application and so on) for the
compromise are fewer for an LLP as compared to a company.110
The whole Chapter XII is
very favourable and attractive for small and medium scale businesses.111
The LLP Act also provides for whistleblowing against the suspicious activities of the firm to
ensure transparency. The investigation may be done in the following cases:
1. “On Tribunal Order – where the Tribunal either suo motu or by an application
received from the minimum of one-fifth members of the LLP, by order declares
that the affairs of the LLP ought to be investigated.
2. On court order – when any court by order declares that the affairs of the LLP in
question ought to be investigated.” 112
However, the Interest of partners is legally protected if they provide necessary information
during the investigation.113
The Companies Act also provides similar cases in which
investigation may be done. Section 210 of the Companies Act confers power on the Central
Government to investigate into the affairs of a company:
1. “On the receipt of a report of the Registrar or inspector under section 208;
107
Kranti Prakash Sai, Limited Liability Partnership in India: A General Analysis, (April 10, 2010),
https://ssrn.com/abstract=1587770. 108
Chapter XV, Companies Act 2013. 109
Supra note 12, Chapter XII, Id. 110
Compare Limited Liability Partnership Rules, 2009 Rule 35 with Company (Court) Rules, 1959 Rules 67-87. 111
Supra note 12, Chapter XII. 112
Supra note 12, §. 43. 113
Supra note 12, §. 31.
Corporate Law Journal Vol III Issue I
2. On intimation of a special resolution passed by a company that the affairs of the
company ought to be investigated; or
3. In public interest.”114
Furthermore, there are several other cases where inspection, inquiry, and investigation may
be done into the affairs of a company.115
The winding of an LLP may be done either by partners themselves or by the National
Company Law Tribunal on the realisation of certain contingencies.116
Though, there are
almost similar provisions for winding up a company or an LLP, however since LLP is based
on an agreement or partnership deed among the partners which may contain specifications
regarding winding up of the firm, it may become easier and more efficient to wind up an LLP
as compared to complex statutory provisions for a company. Furthermore, LLP (Winding and
Dissolution) Rules 2010 provided both voluntary and non-voluntary methods to wind up an
LLP.117
LIMITED LIABILITY PARTNERSHIP AS A SUI GENERIS
Apart from the majority of provisions under the LLP Act which are similar to the Partnership
Act and Companies Act, there are some provisions that are exclusively meant for an LLP
only. The LLP Act permits the conversion of general partnership firms, private limited
company, an unlisted public company into an LLP.118
However, a traditional partnership firm
requires to submit the details of its registration.119
Consequently, an unregistered partnership
firm is doli incapax to convert itself into an LLP. On the contrary, an LLP cannot convert
into other forms of businesses like traditional partnerships or companies. Therefore, once an
LLP comes into existence it has to remain in the same form till its winding up and
dissolution. The term ‘convert’ has been defined under second, third and fourth schedule as:
114
Supra note 59, §. 210. 115
Supra note 59, Chapter XIV. 116
Supra note 59, Chapter XIII. 117
LLP (Winding and Dissolution) Rules 2010, Ministry of Corporate Affairs,
http://www.mca.gov.in/Ministry/pdf/GSR_266(E)_12012015.pdf. 118
Supra note 12, Chapter X, Second, Third and Fourth Schedule. 119
Supra note 12, §. 4, Second Schedule.
Corporate Law Journal Vol III Issue I
"a transfer of the property, assets, interests, rights, privileges, liabilities, obligations and the
undertaking of the firm/private limited company/unlisted public company to the limited
liability partnership."120
This definition signifies that profits or gains from such transfers are taxable under the Income
Tax Act, 1961.121
But the Bombay High Court in Commissioner of Income Tax v. Texspin
Engineering and Manufacturing Works held that a partnership firm converting itself into a
limited company does not constitute a transfer as there is neither a transaction between a
party and counter-party, nor any distribution of assets involved, but merely vesting of the
property in the company. 122
Therefore, conversion into LLP does not mean a transfer for the
purpose of taxation under the Income Tax Act. This principle was adopted by the Finance Act
2010 which excluded conversion into LLP from tax implications.123
The LLP Act is also flexible for foreign direct investment (FDI) in India through LLP. The
Act allows a foreign LLP to register a place of establishment in India in accordance with the
rules of the central government. However, there are some discrepancies as a result of
uncertain law. Firstly, a foreign LLP operating in India, through its establishment in the
country, substantially exercises its control over the management of affairs in the country.
Therefore, the LLP has the status of a resident in India according to the Income Tax Act,
1961.124
Consequently, the worldwide income of a foreign LLP in a financial year will be
taxed in India under the Income Tax Act. Hence, taxation of foreign LLP operating in India
requires separate provisions to avoid double taxation.
Secondly, the law is also not clear on consideration for the statement of accounts, assets and
liabilities, and annual turnover for statutory audit compliance as to whether the value should
be merely India intensive or whether the worldwide figures would be computed. Thirdly,
since a foreign LLP is not incorporated in India, there is a possibility of more than one LLP
having the same name that exists and operates in India. It is a very simple and plain loophole
in the provisions regarding foreign LLP in the Act. Therefore, the above-stated lacunas
require reconsideration and redrafting of the provisions for foreign LLPs.
120
Supra note 12, Second, Third and Fourth Schedule. 121
Supra note 38, §. 2(47) and 45(1). 122
Commissioner of Income Tax v. Texspin Engineering and Manufacturing Works, (2003) 263 ITR 345
(Bom), (The expression 'transfer of a capital asset' in §. 45(1) is required to be read with §. 2. (47) (ii)) (which
states that the transfer in relation to a capital asset shall include extinguishment of any rights therein). 123
§. 18, Finance Act, 2010, and Supra note 38, §. 47. 124
Supra note 38, § 6(3).
Corporate Law Journal Vol III Issue I
CONCLUSION
This paper endeavored to compare and contrast the provisions of the LLP Act with the
Partnership Act and Companies Act. It also analysed some exclusive provisions of the LLP
Act which were only meant for this Act, to determine its nature. Though the majority of the
provisions are similar to either Partnership Act or Companies Act, however some exclusive
provisions as highlighted in section four of this paper aid it to stand apart from both the Acts.
The contractual agreement between the partners of an LLP works as a Magna Carta in an
LLP. The mutually agreed agreement lends great flexibility to an LLP which keeps it
substantially untouched from the rigid statutory provisions. The flexibility in an LLP makes it
the most appropriate form of business for small and medium-sized business or a professional
service-based business venture.
Nevertheless, the limited liability of partners in the LLP firm gives it the advantages of a
company too. It is said to be one of the most attractive provisions of an LLP which rescues
the partners from being personally liable for the wrongful acts of other partners. The LLP
firm has a separate legal existence from its partners. Therefore, the liability arising out during
the course of business is paid off from the assets of the firm itself and not from the personal
assets of the partners.
Now coming to the question whether the LLP is quasi-partnership, quasi-company or sui
generis, it is noted that the second section of this paper highlights the similarities and points
of distinctions between the LLP Act and Partnership Act. Therefore, it makes it a quasi-
partnership. Whereas, the third section highlights similarities and points of distinction
between the LLP Act Companies Act and therefore establishes it as a quasi-company.
Moreover, the fourth section of this paper highlights some exclusive provisions of the LLP
which are exclusive to the LLP Act only.
Therefore, it is submitted that the LLP Act has qualities of quasi- partnership, quasi-
company, and some unique provisions which do not resemble any other form of business.
The combination of these all qualities in one Act makes it very peculiar in nature. Therefore,
it would not be redundant to call it sui generis which means “being of its own kind.”125
125
Sui Generis, Black's Law Dictionary, https://thelawdictionary.org/sui-generis/.
Corporate Law Journal Vol III Issue I
NCLT’S GOVERNANCE ON MERGERS
(KRISHNA BHATTACHARYA126
)
ABSTRACT
The National Company Law Tribunal (NCLT) was given the power to deal with the
proceedings relating to compromise, amalgamation and arrangement by the Ministry of
Corporate Affairs vide notification dated on 7th December 2016. Since then the NCLT has
been rigorously trying to fulfill the exalted goal of effective resolution of matters by the
people having specialized expertise.
The paper titled “NCLT’s Governance on Mergers” will specifically focus on the
complexities involved in a scheme of merger and how NCLT is effectively aiding in
resolving the issues related to merger in an effective and expeditious manner in comparison
to previous law. The paper shall explicitly deal with the provisions and rules contained in the
Companies Act 2013, Companies (Compromises, Arrangements and Amalgamations) Rules,
2016 and other statutes which deals with the powers and restriction of NCLT and shall even
include various case studies in order to understand better and in- depth the functioning of
NCLT in mergers. This paper aims to critically analyze the powers and importance of NCLT
in a scheme of merger and whether the power given is a boon or a bane for the corporate
houses.
Keywords: Corporate, Merger, NCLT and Power.
INTRODUCTION
Under Companies Act 2013127
, chapter xv deals with Compromise, Arrangements and
Amalgamations which includes demergers, merger and acquisition as well. In the corporate
world the term merger and amalgamation are often used interchangeably. Before analyzing
the nuances of merger it is important to understand what exactly is a merger and its
objectives. A merger has been defines as “ the fusion or absorption of one thing or a right into
126
3rd
year B.B.A LL.B (Hons), KIIT School of Law 127
Companies Act, 2013, Act No.18 of 2013 (INDIA).
Corporate Law Journal Vol III Issue I
another128”. A merger has also been defined as an arrangement whereby the assets of two or
more companies become vested in, or under the control of one company( which may or may
not be one of the original of two companies), which has as its shareholders all or substantially
all the shareholders of the two companies. Therefore, in a merger, one of the two existing
companies mergers its identity into another existing company or one or more existing
companies may form a new company and merge their identities into the new company by
transferring their business and undertakings including all other assets and liabilities to a new
company129
.
Mergers can be of various types including conglomerate mergers, where two or more
unrelated companies come together to expand business and achieve synergy benefits;
horizontal mergers where two or more companies come together who are involved in the
same industry and have direct competition with each other. This type of mergers usually take
place to expand the customer base and as well as to have a monopoly advantage in the
market; vertical mergers, where two or more companies come together who are operating in
the same industry but at different levels within the supply chain. There can be two types of
vertical mergers, that is, forward and backward. This type of merger are usually done to
expand the customer base and reduce the cost of production or attain economies of scale; and
reverse mergers, where a profit making company mergers with a loss making company in
order to save from taxes and revival of the loss making company130
.
There are proactive changes in the process of merger under the Companies Act 2013 that
could make the process simpler, quicker and ensure the participation of shareholders and a
safer process for firms going for merger. Some of the highlighting things are merger between
Indian and foreign companies, fast track mergers and the creation of National Company Law
Tribunal (NCLT) after the Eradi Committee report131
, which shall decide the fate of the
proposal for merger. This positive change could be seen in the year 2017 when India saw
128
THE INSTITUTE OF COMPANY SECRETARIES OF INDIA, HANDBOOK ON MERGERS,
AMALGAMATION AND TAKEOVERS, LAW AND PRACTICE, (5th EDN., WOLTERS KLUWER
(INDIA) PVT. LTD.), pp.4. 129
Section 232(8)(I) of Companies Act, 2013, Act No.18 of 2013 (INDIA). 130
HITEN KOTAK LEADER,M&A TAX PWC INDIA, MERGERS AND ACQUISITIONS: THE
EVOLVING INDIAN LANDSCAPE, available<https://www.pwc.in/assets/pdfs/trs/mergers-and-acquisitions-
tax/mergers-and-acquisitions-the-evolving-india n-landscape.pdf> ( accessed on 19.10.2019). 131
THE ERADI COMMITTEE REPORT ON LAW RELATING TO INSOLVENCY AND WINDING-UP OF
COMPANIES 2000 available at <http://reports.mca.gov.in/ > ( accessed on 19.10.2019).
Corporate Law Journal Vol III Issue I
more than before mergers and acquisitions taking place which is the highest in the current
decade132
.
COMPLEXITIES IN A SCHEME OF MERGER
Mergers are done mostly to eliminate competition or increase the merging company’s market
share. This increase is often achieved by reduction in overhead expenses such as bargaining
with suppliers, distributors, reduction in the number of employees and many more. This type
of merger may be successful in the short term but in the long run the companies merged may
find difficulty in maintaining the same standard and quality of all the products. This may
further create a void for more competition. This is the reason it is very important to go
through the scheme of merger minutely by keeping in mind the long term growth prospect133
.
In a scheme of merger a lot of stakeholder are involved and to take the approval of all of
them is a herculean task. Even after taking the approval certain people may afterwards raise
objection to the scheme of merger. To avoid this a streamlined process is required and a
regulator who shall keep in check whether all the procedures are duly followed or not. This is
the sole reason the NCLT has been given power to sanction for the approval of scheme of
merger and also to oversee the implementation of merger or amalgamation. Along with this
certain discretionary powers are also given.
NCLT’S ROLE IN A SCHEME OF MERGER AND ACQUISITION
Prior to NCLT's constitution, matters including similar organizations were spread crosswise
over various forums viz., High Courts (for winding up and merger/amalgamation plans),
Company Law Board or CLB (for abuse or oppression and mismanagement) and Board for
Industrial and Financial Reconstruction or BIFR (for being pronounced as a sick company
and ultimately leading ti being winded up). People had to move to various courts and councils
for looking for various reliefs causing variety of procedures and deferrals because of the lack
132
SUMAN LAYAK, WHY 2018 MAY BECOME A BLOCKBUSTER YEAR FOR MERGERS AND
ACQUISITIONS, Mar 24, 2018, 11.29 available
<//economictimes.indiatimes.com/articleshow/63446545.cms?utm_source=contentofinterest&utm_medium=t
e xt&utm_campaign=cppst> ( accessed on 18.10.2019). 133
. HITEN KOTA, M&A TAX PWC INDIA, MERGERS AND ACQUISITIONS: THE EVOLVING INDIAN
LANDSCAPE,pp. 15 available<e<https://www.pwc.in/assets/pdfs/trs/mergers-and-acquisitions-tax/mergers-
and-acquisitions-the-evolving-india n-landscape.pdf > (accessed on 19.10.2019).
Corporate Law Journal Vol III Issue I
of a merged redressal forum. The NCLT is framed with a plan to combine these different
gatherings and give a solitary medium to arbitration and adjudication of all company matters.
Having a solidified stage will hopefully give a smooth section to disputants to look for reliefs
under one rooftop. It is additionally expected to spare time and give more productivity in
corporate contest goals.
In order to get merged the companies needs to go through the following procedure:
1. A company has to convene a board meeting and a resolution for merger needs to be
passed with 50 per cent majority present in the meeting134
and voting.
2. After the resolution the company shall then make an application in Form No. NCLT-1
to the NCLT of relevant territorial jurisdiction along with a notice of admission in
Form No. NCLT-2, an affidavit in Form No. NCLT -6 and a copy of scheme of
merger which shall disclose all material facts related to the company including the
financial position, auditor’s report, if there is reduction of share capital, etc135
.
3. The NCLT shall then convene a meeting and the scheme has to be further passed by
not less than 75% of secured creditors in value. Along with this Form No. CAA which
is creditor’s responsibility statement, safeguards for the protection of the stakeholders,
valuation report,
4. Auditor’s report conforming the liquidity, statement showing that the merger is in
consonance with the guidelines of the RBI and other necessary regulators and the
requisite fee.
5. The applicant has to further disclose to the tribunal the basis on which each class of
members or creditors has been identified and their approval for the said scheme136
.
6. The companies getting merged also have an option to give a joint application to the
Tribunal.
134
Rule 3 (1) Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 , GSR No.
1134(E),(INDIA). 135
MINISTRY OF CORPORATE AFFAIRS, GOVERNMENT OF INDIA, MERGERS AND ACQUISITION,
available at <http://www.mca.gov.in/MinistryV2/mergers+and+acquisitions.html> (accessed on 20.10.2019).
Also, section 230 of Companies Act, 2013, Act No.18 of 2013 (INDIA). 136
Rule 4, Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, GSR No.
1134(E),(INDIA).
Corporate Law Journal Vol III Issue I
7. The notice of the meeting is sent to all the creditors or class of creditors in the Form
No. CAA 2137
. The notice of the meeting shall be accompanied by the scheme of
arrangement or merger.
8. The notice of the meeting is also to be published in one English newspaper and
another newspaper in vernacular language.
9. The notice of the meeting also needs to be sent to regulatory authorities in Form No.
CAA 3. If the authority wants to make an objection before the tribunal they can do so
within 30 days from the receipt of the notice.
10. After the convening of the meeting, the report of the meeting prepared by the
chairperson of the meeting needs to be filed in Form No. CAA-4 within three days
before the tribunal.
11. The company within seven days after convening the meeting has to file a report of the
meeting along with the petition in Form No. CAA-5 for sanctioning of the scheme of
merger138
.
12. If the tribunal deems fit to propose any variation or modification in the scheme than it
can do so and it shall be in the Form No. CAA-6. The scheme passed will have an
appointed date from which the scheme shall be effective.
The entire procedure of merger is supervised and monitored by the NCLT.
NCLT’S POWERS
The NCLT has the power to sanction or reject or introduce modifications in the scheme of
merger presented before it. The matters which the tribunal has to consider in giving its
sanction is explained by J, Astbury in Continental Supply Co, Re139
:
137
Rule 5, Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, GSR No.
1134(E),(INDIA). 138
Rule 10, Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, GSR No.
1134(E),(INDIA). 139
In Re, Continental Supply Co, (1922) 2 Ch 723.
Corporate Law Journal Vol III Issue I
“First, that the provisions of the statute have been complied with. Secondly, that the class was
fairly represented by those who attended the meeting and that the statutory majority are
acting bonafide and are not coercing the minority in order to promote interests adverse to
those of the class whom they purport to represent; and, thirdly, that the arrangement is such
as a man of business would reasonably approve.”140
The tribunal has wide powers in sanctioning or rejecting a scheme of merger. The following
are the some of the powers:
1. Power of the Tribunal to supervise - The Tribunal has the power to supervise the
merger and as well as modify the scheme pre or post the merger if it considers
necessary for the proper working of the scheme141
. The Bombay High Court in
Reliance Natural Resources Ltd. V Reliance Industries Ltd.142
on a reference by
Petitioner found that by an agreement which was an essential term for the demerger
cannot be done away with a subsequent agreement. The new agreement was held as
nullity.
2. Sanction with Modifications- The tribunal has the power to sanction a scheme with
modification keeping in mind the public interest. In the case of Gountermann Peippers
( India) Ltd. Vs. Union of India143
, a scheme of arrangement was prepared under
which the textile division of one company was to be transferred to the other company.
The scheme was to result in better administration, operational organization and
efficiency with optimum utilization of all resources. The scheme was sanctioned by
an overwhelming majority of creditors and shareholders. But, two secured creditors
raised objections. They contended that the textile unit was under a huge debt burden
and its demerger would adversely affect their interest. They however, did not allege
fraud or raised any contention regarding modification. Their objections were not held
maintainable but it is interesting to note that the court (now tribunal) made certain
140
AVTAR SINGH, COMPANY LAW, ( 17TH Edn., EBC) pp.606. 141
DR. G.K. KAPOOR AND DR. SANJAY DHAMIJA, TAXMANN’S COMPANY LAW AND PRACTICE, A COMPREHENSIVE TEXT BOOK ON COMPANIES ACT, 2013, (23
rd edition July 2018), pp.859, Also
section 231(1) of Companies Act, Act No. 18 of 2013 ( INDIA). 142
Reliance Natural Resources Ltd. V Reliance Industries Ltd, (2007) 79 SCL 21. 143
Gountermann Peippers ( India) Ltd. vs. Union of India, (2005) 127 Com Cases 32 (HP).
Corporate Law Journal Vol III Issue I
modification while sanctioning the scheme of merger keeping in mind the objections
raised144
.
3. The Tribunal has wide discretionary powers but however, these powers are little
restricted in terms of proposing modifications in the scheme of merger. The Court (
now tribunal) cannot add terms to the scheme which did not exist in the original
scheme. The powers of the court (now tribunal) are limited to giving directions which
it considers necessary for the proper working of the merger or arrangement and in the
course of these directions it may only make such modifications in the said merger or
arrangement that are necessitated for the proper working of the scheme.145
4. In an event where any false data or information has been outfitted or where there is a
material concealment of actualities, at that point, upon an application made to it, the
NCLT will give a chance and hear the organization's defence and also think about the
liabilities before taking a choice. The result of outfitting false data could lead to
serious consequence as the Tribunal is enabled with wide optional powers which
include liquidation just as course to change the contract reports and expulsion of the
organization's name from the register of Companies. This is in expansion to the
individual obligation which might be affixed on various individuals who were
involved in the distortion procedure. Like with numerous different laws, such people
could be subjected to both money related and punitive outcomes.146
5. Section 241 of the Act147
characterizes the conditions where minority investors can
approach the NCLT under certain circumstances which is equivalent to mistreatment
and botch. It is important that such minority ought to be 100 individuals or the
individuals who hold 1/10th of the capital, whichever is less. Further, such investors
may likewise record an objection before the Tribunal if there are material changes in
the administration or control and which are not in light of a legitimate concern for the
creditors, debenture holders or different investors. It is basic that the candidate ought
144
A RAMAIYA , GUIDE TO THE COMPANIES ACT, vol. 2, (18th edn, , lexis Nexis),2014, pp.3748. 145
Real Lifestyle Broadcasting (P) Ltd. Vs. Turner Asia Pacific ventures Inc. (2013) 122 SCL 43; see Also, A
RAMAIYA , GUIDE TO THE COMPANIES ACT, vol. 2, (18th edn, , lexis Nexis),2014 pp.3828 146
Section 7(5),(6),(7) of Companies Act, 2013, Act No.18 of 2013 (INDIA). 147
Section 241 of Companies Act, 2013, Act No.18 of 2013 (INDIA).
Corporate Law Journal Vol III Issue I
to have the option to build up that the change will cause a hindering impact on the
company.
6. If the NCLT comes to a positive discovering with respect to oppression and
mismanagement then at that point it has wide powers, including liquidation of the
company148.
7. Power to recall its order- The court (now tribunal) has the power to recall its order
which is passed exparte only if intervener or party affected was able to statisfy that ex
parte order passed under section 230 was patently wrong, erroneous or passed under
misconception or misinterpretation.149
8. The tribunal also has the power to see that whether the terms of the merger are
designed to overcome the difficulties and re-establish the business or not.150
9. A class action can be filed by the members and depositors of the company against the
company, its directors, auditors, experts, advisors or consultants or any other person if
their interest is hampered and the tribunal has the power to take cognizance of these
matters and pass a necessary order after evaluation of all the necessary documents151
.
10. The tribunal has the power to put restriction on the shares of an entity152
. The position
taken by the High Court of Andhra Pradesh has now been affirmed by the Hon’ble
Supreme Court of India in Mackintosh Burn Limited v. Sarkar and Chowdhury
Enterprises Private Limited153
, (Mackintosh Case). The Hon’ble Supreme Court of
India held that the enlistment of a share may not exclusively be rejected on its ground
bringing about an infringement of any law yet but in addition for some other adequate
reason or sufficient cause that may prove to be detrimental. The Mackintosh Case
involved an unlisted public company, which had refused to register a transfer of
shares to its competitor. Here the Supreme Court noted “…The Company Law Board,
it appears, was of the view that the refusal to register the transfer of shares can be
148
DR. G.K. KAPOOR AND DR. SANJAY DHAMIJA, TAXMANN’S COMPANY LAW AND PRACTICE, A COMPREHENSIVE TEXT BOOK ON COMPANIES ACT, 2013, (23rd Edn. July 2018), pp.860. 149
Commerz Bank A.G Vs. Arvind Mills Ltd., (2002) 110 CompCas 539 Guj. 150
Pioneer Dyeing House Ltd. Vs. Dr. Shankar Vishnu Marathe (1967) 37 Comp.Cas.546 ( Bom). 151 Section 245 of Companies Act, 2013, Act No.18 of 2013 (INDIA). 152
Section 58 of Companies Act, 2013, Act No.18 of 2013 (INDIA). 153
Mackintosh Burn Limited v. Sarkar and Chowdhury Enterprises Private Limited, (2018) 5 SCC 575.
Corporate Law Journal Vol III Issue I
permitted only if the transfer is otherwise illegal or impermissible under any law.
Going by the expression “without sufficient cause” used in section 58(4), it is difficult
to appreciate that view. Refusal can be on the ground of violation of law or any other
sufficient case. Conflict of interest in a given situation can also be a cause.
11. The advantages of the sanction given by tribunal for the scheme of mergers are many
fold. Firstly, the scheme becomes binding upon all the parties to the scheme including
the shareholders, the company and the creditors. The word “creditor” includes all
kinds of creditors and also the State to which some sales tax is due154. This way the
majority of a class of members or creditors can bind the minority. Secondly, the
company is rescued from its financial straits. The trouble and expense of winding up
and of forming a new company are saved. Thirdly, the court sanctioning the scheme
has the power to supervise its implementation.155
COMPARISON BETWEEN 1956 COMPANIES ACT AND COMPANIES ACT 2013
Earlier mergers and demergers were governed by sections 391 to 394 of the Companies Act,
1956156
. After the 15th December, 2016 sections 230 to 240 of the Companies Act, 2013
governs mergers and demergers, pursuant to which all the scheme of arrangement require the
approval of the tribunal (NCLT) as against the High Court’s earlier. Most of the provisions
relating to merger are similar except few changes:
1. Under Companies Act, 1956 all types of mergers had to go through the same
procedure but in the Companies Act, 2013 certain types of mergers are given
relaxation to speed up the procedure of mergers also known as the fast track
mergers157
. When two or more small companies158
or a holding company and wholly
owned subsidiary company merge then members holding 90 % of the total shares or
9/10th creditors should approve the scheme of merger and file before the Regional
154
Seksaria Cotton Mills Ltd. Vs. AE Naik (1967) 37 Comp cas 656 (Bom). 155
AVTAR SINGH, COMPANY LAW, (2015) 17th edn, EBC, pp.612. 156
Companies Act, 1956, Act No.1 of 1956 ( INDIA). 157
Section 233 of Companies Act, 2013, Act No.18 of 2013 (INDIA). 158
Section 2 (85) of Companies Act, 2013, Act No.18 of 2013 (INDIA).
Corporate Law Journal Vol III Issue I
Director, Ministry of Corporate Affairs. In these types of mergers approval from the
tribunal is not required159
.
2. In the earlier Companies Act, 1956, there were no provisions for a merger of an
Indian company to merge with a foreign company whereas foreign companies were
allowed to merge with Indian companies. The new Companies Act, 2013 allows both
inbound and outbound mergers.160
3. In the earlier law upon a merger of unlisted company with a listed company, the
unlisted company was required to be listed post-merger.161
The 2013 Act enables the
unlisted company to remain unlisted provided that the shareholders who are not
satisfied are given an exit option.162
4. The new Act also permits voting by postal ballot and e voting which was absent in the
previous Act.
CRITICAL ANALYSIS OF NCLT’S POWER
In 2018 a total of 9073 cases came up before the NCLT, out of which 1630 cases are of
mergers and amalgamations, 2511cases of insolvency and the rest of the cases are under
various provisions of the Companies Act, 2013. The number of cases in the tribunal is being
increased day by day163
.
The procedure for getting the approval of merger is long but the with the powers given to the
tribunal, NCLT tries to see that all the parameters which are required for a merger are been
complied with. In the recent times the tribunals have been giving progressive judgments
159
BHALLA, SANDEEP, COMPANY LAW IN INDIA: PART - 1, 2016, IEbooks Inc., pp.607. 160
Section 234 of Companies Act, 2013, Act No.18 of 2013 (INDIA). Also Rule 25-A of Companies
(Compromises, Arrangements and Amalgamations) Rules, 2016 , GSR No. 1134(E),(INDIA). 161
VAIBHAV GUPTA AND SAMUDRA ACHARYYA, FINANCIAL EXPRESS, COMPANIES ACT:
NEW LAW JUST A BEGINNING; PROACTIVE STEPS BY NARENDRA MODI GOVT
NEEDED, (Published: December 27, 2016) available at
<https://www.financialexpress.com/opinion/companiesact-new-law-just-a-beginning-proactive-steps
bynarendramodi-govt-needed/487244/> (accessed on 19.10.2019). 162
Section 232 (3)(h) of Companies Act, 2013, Act No.18 of 2013 (INDIA). 163
SHRI INJETI SRINIVAS SECRETARY, MCA, MONTHLY NEWSLETTER MINISTRY OF CORPORATE
AFFAIRS, VOLUME-9 (AUGUST-2018),
available<http://www.mca.gov.in/Ministry/pdf/Monthly_Newletter_August_2018.pdf> (accessed on
22.10.2019).
Corporate Law Journal Vol III Issue I
which makes the market business friendly. The NCLT through its power modifies and
supervises the scheme of merger so that during merger or after merger there are no
discrepancies otherwise it may amount to additional costs and further litigations. There is
plethora of cases where the tribunal has refrained from interfering in the commercial wisdom
of the corporates. This is a welcome step where the NCLT does not go into market strategies
while approving a scheme of merger but simply see whether the companies are not doing
anything detrimental to stakeholders of the company.
In the present day all the merger schemes are approved by the NCLT. In the times of
recession in the economy a lot of small companies are getting merged to expand their
business and attain synergies and economies of scale. Due to rampant mergers taking place in
the market, the NCLT is overburdened with cases. Recently, a discussion has been going on
in the Parliament that a proposal shall be tabled in the winter session by virtue of which
NCLT will loose its power to approve mergers and acquisitions and the burden of approval
will be upon the Regional Directors of Ministry of Corporate Affairs.164
This step is also
sought to be taken considering that at present M&A process 6 to 8 months of time165
. By
removing the burden from the tribunal the government wants to create an easy environment
for business. As it is the Regional director has power in case of fast track mergers166
which
shall be extended further.
This step might adversely affect the mergers as it is doubtful whether the Regional Director
would minutely go through the scheme of merger like the NCLT before sanctioning a scheme
of merger. The members of NCLT consists of both the judicial members and as well as
technical members which makes them competent to adjudicate merger cases.
164
VEENA MANI, BUSINESS STANDARD, NCLT COULD LOSE POWER TO APPROVE MERGERS AND
ACQUISITIONS IN REFORM (November 22, 2018); available<https://www.business-
standard.com/article/companies/nclt-could-lose-power-to- approve-mergers-and-acquisitions-in-reform-move-
118112200052_1.html> (Accessed on 17.10.2019). 165
E TOWN NEWS, MCA'S REGIONAL DIRECTORS MAY BE GIVEN POWER TO CLEAR MERGERS
AND ACQUISITIONS (Sep 02, 2019) available <https://www.timesnownews.com/business-
economy/economy/article/mcas-regional-directors-may-be-given-power-to-clear-mergers-
andacquisitions/481136>, ( accessed on 17.10.2019) 166
Section 233 of Companies Act, 2013, Act No.18 of 2013 (INDIA).
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CASE STUDIES
1. In the case of M/s Real Image LLP Vs. Qube Cinemas Technologies Private Ltd167
one of the companies was LLP. The question before the NCLT bench of Chennai was
that whether an amalgamation or merger of LLP with a company was permissible
under section 230 to 240 under the 2013 Companies Act? Section 230 includes
company whereas section 233 includes foreign company as well as foreign LLP. But
as regards Indian LLP no such provision was present. The court then looked into
Section 394(4)(b) of Companies Act, 1956 which provided an inclusive definition of
'transferor company'. The expression “transferor company” was defined to include
“anybody corporate, whether a company or not within the meaning of the 1956 Act”
Thus, LLPs were included in the provision of mergers. The NCLT Chennai Bench
gave a wide interpretation of section 230 of Companies Act, 2013 and held “that the
legislative intent behind enacting both, the LLP Act and the 2013 Act was to
facilitate ease of doing business and create a desirable business atmosphere for
companies and LLPs. For this purpose, both the LLP Act and the 2013 Act provided
for merger or amalgamation of two or more LLPs or companies. The absence of
specific provision corresponding to section 394(4)(b) of the 1956 Act in the 2013 Act
was a clear case of casus omissus (omission in law)”.168
2. In the case of Ajanta Pharma Ltd.( AJL) Vs. Gabs Investment Private Ltd.( GIPL)169
,
the NCLT of Mumbai rejected the scheme of merger was rejected on the ground that
the merger was solely for the purpose of tax avoidance and it is against the public
interest.170
The scheme of merger was approved by the shareholders without any
objection. In the Companies Act, 2013 it gives the regulatory 171
bodies to file
objections if any within 30 days after receiving the scheme of merger. The taxing
authority contended by virtue of the scheme shares of one company would be
167
M/s Real Image LLP Vs. Qube Cinemas Technologies Private Ltd, CP/123/CAA/2018.
168
MEHUL SHAH, SANKET SHAH AND AMAN YAGNIK, INDIA: NCLT WIDENS ITS NET FOR
APPROVING SCHEMES UNDER PROVISIONS OF THE COMPANIES
ACT,2013, (15TH
AUGUST 2018), AVAILABLE
<http://www.mondaq.com/india/x/727574/Corporate+Commercial+Law/NCLT+Widens+Its+Net+For+Approvi
ng+Sc hemes+Under+Provisions+Of+The+Companies+Act+2013> ( Accessed on 20.10.2018). 169
Ajanta Pharma Ltd.( AJL) Vs. Gabs Investment Private Ltd.( GIPL) CSA No. 791 & 792 Of 2017. 170
NISHITH DESAI ASSOCIATES, NCLT REFUSES TO SANCTION MERGER SCHEME ON TAX
AVOIDANCE GROUNDS(October05,2018)available<http://www.nishithdesai.com/information/news-
storage/news-details/article/n clt-refuses-to-sanction-merger-scheme-on-tax-avoidance-grounds.html> (accessed
on 22.10.2019). 171
Section 230 of Companies Act, 2013, Act No.18 of 2013 (INDIA).
Corporate Law Journal Vol III Issue I
transferred to the shareholders of another company without paying any taxes. The
NCLT agreed with this and in the interest of public rejected the scheme of merger.
The court further explained what is meant by “impermissible avoidance arrangement”
under GAAR (General Anti Avoidance Rule) to lay down which schemes are to be
rejected. Not all schemes were there is a tax benefit is rejected by the court but the
schemes whose sole purpose is to avoid tax are such schemes which might get
rejected if detrimental to the public interest.
3. The Supreme Court of India in the landmark case of Miheer H Mafatlal v. Mafatlal
Industries Limited,172
elaborately explained the role of the Tribunal while considering
a scheme of merger or amalgamation. The court said that “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 in to the commercial wisdom exercised by the creditors and members of the
company who have ratified the scheme by the requisite majority. The Court acts as an
umpire in a game of cricket to see that both the teams play their game 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 the umpire”. The court also gave certain
guidelines in this particular case which are as follows:
The sanctioning court (now tribunal) has to see that all the requisite statutory
provisions are complied with.
The scheme has been backed by the majority votes in meetings which is required
for the sanctioning of the scheme.
The concerned meetings of the shareholders enable the voters to arrive at
informed decision for approving the scheme and the majority decision of the
voters is just and fair.
All the necessary materials and evidence including resolutions, minutes of the
meetings, etc. has been placed before the NCLT.
The proposed scheme does not violate any provision of law or contrary to public
policy and therefore to derive the real purpose underlying the scheme, the
corporate veil could be lifted to determine whether the scheme is good or not.\
172
Miheer H Mafatlal v. Mafatlal Industries Limited, AIR 1997 SC 506.
Corporate Law Journal Vol III Issue I
The tribunal has to satisfy itself that members, creditors or shareholders as the
case may be were acting bonafide and not coercing the minority.
Once the above parameters are found to be met, the tribunal does not have any
jurisdiction to sit in appeal over the commercial wisdom of the majority of class
persons who have given approval to the scheme.
4. Also, in the case of Union Bank of India Ltd. v. United India Credit & Development
Co. Ltd.,173
the Calcutta High Court held that “where there are several legitimate
alternatives, means and procedure for attaining the same object, there is no bar in
choosing any one of them, according to the views of the directors and the shareholders
of a particular company”.
5. In the case of Harish.C. Raskapoor v. Jaferbhai Mohemedbhai Chhatpar,174
the
Gujarat High Court held that the term “procedures” incorporate both civil and as well
as criminal proceedings. Where the executives are tried to be criminally prosecuted
against by creditors and the scheme of arrangement is still pending before the
tribunal, the criminal procedures can be stayed by the NCLT in reasonable cases with
the goal that the directors or the person concerned may not be pressurized by the
creditors and the proposed plan might be adequately considered and true analyses of
the the scheme of merger could be done.
6. In the case of G.V. Films Ltd. Vs. Metage Special Emerging Market Fund Ltd.,175
the
court ( now tribunal) while considering the scheme of arrangement found that the
shareholders of the company are spread all over India. The notices with regard to the
scheme of arrangement was published in vernacular newspaper which covered only a
small region. The court did not require publication of notices in editions of the new
paper covering the whole country. It was held that the company ought to have asked
for directors for conveying effective information to all the shareholders.176
These cases shows that how the tribunal while exercising its powers carefully evaluates all
the parameters and interprets the provisions of Companies Act,2013 before sanctioning a
scheme of merger so that after the merger the chances of discrepancy are minimal.
173
Union Bank of India Ltd. v. United India Credit & Development Co. Ltd., 1977 47 CompCas 689 Cal 174
Harish C. Raskapoor v. Jaferbhai Mohemedbhai Chhatpur, (1989) 65 Comp Cas 163 (Guj) 175
G.V. Films Ltd. Vs. Metage Special Emerging Market Fund Ltd., (2010) 154 Com Cases 252. 176
S. RAMANUJAN, MERGERS ET AL, ISSUES, IMPLICATIONS AND CASE LAW IN CORPORATE
RESTRUCTURING (3rd edn, lexis nexis) 2011, pp.23.
Corporate Law Journal Vol III Issue I
CONCLUSION
Mergers are an impressive reason of a powerful and developing economy. The legitimate
legal framework for corporate restructuring must be basic and facilitative and not restrictive
and covered in bureaucratic and managerial deterrents. The main obstacle in completing a
merger remain the often extended court procedure required for the approval of the plan or
scheme of merger.177
The court (now tribunal) has not to go simply by the ipse dixit of the majority of shareholders
or creditors though they voted in favour of scheme by requisite majority. The tribunal has to
examine both the pros and as well as the cons of the scheme. The jurisdiction of the tribunal
is no doubt peripheral and supervisory and not appellate. The tribunal does not have the
expertise to delve into the commercial wisdom exercised by the shareholders or creditors. Yet
the tribunal has to perform the duty of an umpire, like that of cricket umpire, and has to see
whether there are “no ball” and “wide balls” in the scheme. Where the tribunal notices that
many such balls were there and objections went to the root of the scheme, then the scheme is
held to be outside the purview of fairness and moreover the refusal of the sanction of the
scheme of mergers stands justified.178
177
JEEVITHA SELVARAJ, 2 ARYA R, A STUDY ON MERGER AND AMALGAMATION OF COMPANIES
UNDER COMPANIES ACT, 2013,International Journal of Pure and Applied Mathematics Volume 120 No. 5
2018, 195-205 ISSN: 1314-3395 (on-line version) url: <http://www.acadpubl.eu/hub/ Special Issue> (
accessed on 20.10.2019). 178
TCI Infrastructure Finance Ltd, Re (2007) 80 CLA 396 : (2008) 146 Com Cases 133.
Corporate Law Journal Volume III Issue I
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