On December 7, 2016, the Ministry of Corporate Affairs (MCA) notified and brought into operation a significant chunk of sections under the Companies Act, 2013, including provisions relating to compromises, arrangements, reconstructions, mergers and amalgamations, with effect from December 15, 2016 (the Notification). This marks a paradigm shift in the corporate restructuring process, which is all set to undergo a transition from the earlier restructuring processes under the aegis of the High Courts, to National Company Law Tribunals (NCLTs), constituted with effect from June 1, 2016.
The MCA notified the Companies (Removal of Difficulties) Fourth Order, 2016, and the Companies (Transfer of Proceedings), Rules, 2016, on the same date as the Notification, clarifying that proceedings relating to schemes will stand transferred, forthwith, except where orders have been reserved. While applicants with final hearings on or before December 14, 2016, who were expecting orders to be reserved, heaved a sigh of relief, other applicants were caught in a limbo, while prospective applicants were left to surmise, and gear up for implementation of the new provisions, yet to be tested by NCLTs. The Notification was soon followed, on December 14, 2016, by the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, on sanction of schemes by NCLTs.
The two-step process of filing first motion petitions for convening/dispensing meetings of members/creditors, and seeking sanction of schemes by way of filing second motion petitions, after due consideration of reports of chairpersons, and the relevant ROC/Regional Director/Official Liquidator, has largely been retained under the new rules. Under the earlier rules, despite there being prescribed formats, varying standards would be followed by the High Courts with respect to particulars in petitions and documents to be filed. It is expected that NCLTs will determine uniform processes and formats, in respect of schemes. Although the new rules do not provide the format of first motion petitions, various requirements are prescribed, in the nature of disclosures on CDR, capital reduction, basis of identification of classes of members/creditors, provision of detailed explanatory statements, accompanying individual notices to members/creditors, and auditors’ certificates confirming compliance with applicable accounting standards, etc.
The new rules have crystallised the corporate restructuring process in terms of the jurisprudence laid down by the High Courts, such as permissibility of filing joint applications where two or more companies are involved, exemption from following a separate process of capital reduction, effected as a result of schemes, etc. Further, dispatch of notices by emails, voting through electronic means and postal ballots have been recognised as effective modes of service and voting, respectively, and can be granted in conjunction with each other. This is a welcome change, since the High Courts have on earlier occasions, rejected prayers for grant of electronic voting, even in the case of listed companies.
Some of the other aspects that will have an impact are: raising of objections to schemes only by persons holding 10% of shares, or more, and creditors with outstanding debt of 5%, or more; giving notices of meetings to Central Government, ROC, Income Tax authorities, RBI, SEBI, CCI, stock exchanges, and any other authorities, as directed by the NCLTs, who may make representations within 30 days; and dispensing of creditors’ meetings only if 90% or more agree/confirm, by affidavit.
Presently, only a handful of schemes have been filed with NCLTs, and the first order was passed by the Principal Bench, NCLT, New Delhi, on January 13, 2017, in relation to a scheme of amalgamation between two companies. It is interesting to note that the NCLT rejected the prayer for dispensation of the equity shareholders’ meeting on the ground that the new rules empower the NCLT to dispense with creditors’ meetings only, and there is no similar provision with respect to shareholders. Although one may argue that NCLTs are empowered to dispense with shareholders’ meetings under its inherent powers, interpretation will remain to be seen in later cases. The NCLT further directed that notices for meetings are required to be dispatched to all creditors, even though dispensation was sought from dispatching individual notices to creditors holding debt less than INR 2,00,000 (constituting 3% in value). The approach followed by the NCLT provides a takeaway, evident from its close scrutiny of the scheme, disclosures made therein and documents filed, and insistence on strict adherence to the new rules to a tee.
Timelines under the new rules have undergone change; while prior notice for creditors’/members’ meetings has increased from 21 to 30 days, filing of chairperson’s reports has reduced from 7 to 3 days. Timelines for the entire duration of sanction of schemes is unclear, given there is no precedent on approach and duration between hearings on the second motion petition. It is expected that timelines for sanction of schemes between two or more small companies, or between a holding company and its subsidiary, will be processed expeditiously by NCLTs.
Although NCLTs were constituted on June 1, 2016, they became functional from July, 2016; their effectiveness in dealing with complex restructuring schemes needs to be tested. There are merely 12 NLCT benches, spread across 10 cities, which exercise jurisdiction over multiple states, which can result in all sorts of anomalies. The NCLT, Delhi’s jurisdiction over companies registered in Haryana, which had been challenged in the Punjab and Haryana High Court, has now been transferred to NCLT, Chandigarh, with effect from February 3, 2017. Complexities can especially arise in stamp duty payments. Further, there is an urgent need to set up more than one bench, in each state, to alleviate such issues. NCLTs are still at a nascent stage; shaping of jurisprudence by NLCTs around the new rules will have to run its course, and it remains to be seen whether NCLTs are able to fulfill the lofty goal of specialised and effective resolution of matters, for which they were envisioned.