Volume III Issue I January 2020 - Corporate Law Journal...Estate Companies in the Hon ¶ble Supreme...

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

ii

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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iii

EXPERT FORUM

Anirban Bhattacharya

Partner at Chambers of Anirban Bhattacharya

==================================================

Ekta Bahl

Partner at Samvad Partners

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Rajesh Vellakkat

Partner at Fox Mandal & Associates

==================================================

Savitha Kesav Jagadeesan

Senior Partner at Kochhar & Co.

==================================================

Abhinav Kumar

Partner at Cyril Amarchand Mangaldas

==================================================

Neeraj Dubey

Partner at Lakshmikumaran & Sridharan

==================================================

Dhruv Suri

Partner at PSA Legal Counselors

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Ajar Rab

Partner at Rab & Rab Associates LLP

==================================================

Manisha Chaudhary

Managing Partner of UKCA and Partners

==================================================

Isha Sharma

Director at Trayambak Overseas Pvt. Ltd.

==================================================


iv

EXPERT FORUM

Vikas Sharma

President at H2 Life Foundation

==================================================

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

==================================================

CA Mukesh Bajaj

Partner at Tax & Regulatory Services

==================================================

CA Manoj Agrawal

Senior Manager, Finance, Dabur International Ltd.

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Yuvraj P. Narvankar

Managing Partner at Narvankar Legal Chambers

==================================================

Jyoti Shekhar

Legal Consultant & Founder Editor at EYRA

==================================================

Mini Gautam

Legal Consultant at SREI Group

==================================================

Pallavi Pareek

Managing Partner at Ungender.in

==================================================


v

EXPERT FORUM

Mohit Singhvi

Founder at Singhvi & Co.

==================================================

CA Hemant Chopra

Finance Director at CMS Info System Ltd.

==================================================

Pankaj Agarwal

Founder at Quad Legal

==================================================

CA Rajeev K. Sharma

Indirect Tax Practitioner

==================================================

Naman Mohnot

Founder at Aapka Consultant

==================================================

CA Kalpesh Semlani

Founder & Proprietor at Kalpesh G. Semlani & Associates

==================================================

Kanchan Khatana

Founder & Managing Partner at Kanchan Khatana & Associates

==================================================

CS Padam Semlani

Founder & Proprietor at Padam G. Semlani & Associates

==================================================

Roopanshi Khatri

Advocate

==================================================

Bishwa Bandhu

Advocate, Supreme Court of India

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Swati R. Jain

Advocate, Rajasthan High Court

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vi

CORPORATE RESEARCH CELL

Khushboo Khatreja

Senior Associate

DSK Legal

==================================================

Seema Choudhary

Policy Advocate

==================================================

Nilanjan Chaterjee

Associate Counsel

R. R. Prasad Associates

==================================================

Surabhi Singh

Associate

Cyril Amarchand Mangaldas, Delhi

==================================================

Akshita Goel

Associate

Cornellia Chambers, Gurgaon

==================================================

Ishita Sharma

Legal Associate

LegisLegal, New Delhi

==================================================


vii

FACULTY EDITORS

Professor Subhash Chandra Roy

Professor of Law

Chanakya National Law University

==================================================

Dr. Ajay Kumar

Professor of Law


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Dr. Father Peter Ladis F

Assistant Professor of Law


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Dr. Pradeep Kumar Das


School of Law and Governance, Central University of South Bihar

==================================================

Aashish Jain


College of Legal Studies, UPES

==================================================

Sarvesh Kumar Shahi

Visiting Faculty

Maharashtra National Law University

==================================================

P. Mohan Chandran

Business Content Writer

==================================================


viii

ADMINISTRATIVE TEAM

Shubham Jain

Founder & Managing Editor

==================================================

Raunak Mohnot

Co-Founder & Marketing Head

==================================================

Harshit Anand

Executive Editor

==================================================

Priyanka Pangtey

Networking Head

==================================================

Khushboo Jain

Operating Head

==================================================

Himanshu Aggarwal

Editing Head

==================================================

Vidushi Verma

Communication Head

==================================================

Mayank Kumar

Project Co-ordinator

==================================================

Ankit Yadav

Public Relations Head

==================================================

Rohan Singh

Publishing Director

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ix

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

--------------------------------------------------

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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x

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.


xvii

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


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


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


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,


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


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)

http://www.scconline.com/LoginForNewsLink/Y7IGn24H

http://www.scconline.com/LoginForNewsLink/6KnX7MfH

http://www.scconline.com/LoginForNewsLink/PIjCzsyx


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


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


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


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.

https://file.scirp.org/pdf/TEL_2016080515151959.pdf

http://www.mondaq.com/content/author.asp?article_id=286620&author_id=344056

http://www.mondaq.com/content/author.asp?article_id=286620&author_id=1105418

http://www.mondaq.com/article.asp?article_id=286620&signup=true


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.


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.

https://www.thehindubusinessline.com/profile/author/Rohit-Mahajan/

http://www.thehindubusinessline.com/


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/.

http://reports.mca.gov.in/


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.


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.


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.).


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 .


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.


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.


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.


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)).


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.


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).


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.


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.


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



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



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.


"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).


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/.


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).


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).

https://www.pwc.in/assets/pdfs/trs/mergers-and-acquisitions-tax/mergers-and-acquisitions-the-evolving-indian-landscape.pdf


http://reports.mca.gov.in/


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).

https://economictimes.indiatimes.com/articleshow/63446545.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst






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).

http://www.mca.gov.in/MinistryV2/mergers%2Band%2Bacquisitions.html


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


1134(E),(INDIA). 138


1134(E),(INDIA). 139

In Re, Continental Supply Co, (1922) 2 Ch 723.


“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).


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).


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.


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).


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).

http://www.mca.gov.in/Ministry/pdf/Monthly_Newletter_August_2018.pdf


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


https://www.business-standard.com/author/search/keyword/veena-mani

https://www.business-standard.com/article/companies/nclt-could-lose-power-to-approve-mergers-and-acquisitions-in-reform-move-118112200052_1.html

https://www.business-standard.com/article/companies/nclt-could-lose-power-to-approve-mergers-and-acquisitions-in-reform-move-118112200052_1.html


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


http://www.nishithdesai.com/information/news-storage/news-details/article/nclt-refuses-to-sanction-merger-scheme-on-tax-avoidance-grounds.html

http://www.nishithdesai.com/information/news-storage/news-details/article/nclt-refuses-to-sanction-merger-scheme-on-tax-avoidance-grounds.html


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.


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.


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.

http://www.acadpubl.eu/hub/


xviii

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