Whether violating/ non-compliance to the companies act can be a ground to reject the scheme of merger and amalgamation?

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Shubham Budhiraja[1]




Company-A and Company-B filed scheme of merger. ROC, Regional Director (RD) filed their report that both of the companies have violated section 73 of companies act, 2013 and wrong disclosure made regarding deposits. The directors were also disqualified. The NCLT dismissed the scheme. Hon'ble NCLAT confirmed the order of NCLT and held that violation of law cannot be ignored particularly when both A & B has never replied to Show cause notice of RD.[2]

 

(I)                   Section 75 of the Companies Act, 2013, relates to `Damages for Fraud’, due to `failure to repay the Deposits’, accepted by a `Company’.

 

(II)                 The definition of `Fraud’, under Section 447 of the Companies Act, 2013, is an inclusive one and it concerns the `Affairs’ of a `Company’ or a `Body Corporate’.

 

(III)              In Swansea Corporation v. Harpur, reported in (1912) KB 493 (CA), where Fletcher Moul Ton LJ, observed to the effect the words `damages’ and `damage in Law’, have more than one meaning and great care has to be exercised, in examining the context in which they severally appear.

 

(IV)               If a `Company’, had `Defaulted’ in the repayment of the `Fixed Deposit’, which was already `Matured’, despite the fact that the `Company’ was making `Profits’, it was obligated on the `Company’s’ part, that it should make arrangements in such a way that there could be no problem in the `Repayment of Deposits’, as per decision in Unitech Limited in Re., reported in (2015) 191 Comp cas 588 (CLB).

 

(V)                  Section 230 of the Companies Act, 2013, deals with `Power to Compromise’ or make `Arrangements’ with the `Creditors’ and the `Members’, and the said Section is wide enough to include any reasonable `Compromise’ or `Arrangement’. The word `Arrangement’, has wider meaning, than the term `Compromise.

 

(VI)               If the `Scheme’, is `unjust’, `unfair’, `unconscionable’ or an `illegal’ one, the `Court’ (now `Tribunal’), is justified in declining to `Sanction’ the `Scheme’, in the considered opinion of this `Tribunal’. No wonder, a `Tribunal’ / a `Court of Law’, is to bear in mind that the `fairness’ and `viability’ of the `Scheme’, qua the `right’ of `minority shareholders’, before according an `Approval’.

 

(VII)             The `Tribunal’, under the Companies Act, 2013, is to perform a `supervisory role’, near to a `Judicial Review’, of `Administrative’ action.

 

(VIII)          The `Tribunal’, aptly points out that if a `Transaction’, is entered into mainly with a view to circumvent, supplant, evade or avoid the `Rules of the Game’ or any `Law’ in `Force’, and also evade `Tax Liability’, a `Tribunal’ / `Court of Law’, cannot and will not `approve’, any `Compromise’ / `Arrangement’. Moreover, if the `Arrangement’, is an `inequitable’ and `unfair’ one, the `Scheme’, cannot be given a `Green Signal’, for an `Approval’, sought for in the matter, by the `Party / Parties’, concerned.

 

(IX)               In reality, a `Disclosure’, in respect of `any proceedings’, pertaining to a `Company’, which have an `impact or material effect’ on the decision, is to be made, apart from the `Disclosure’, to be made, in respect of any `pending investigation’. In fact, the `proceedings’, ought to be in the `character’ or `leading to an investigation’, which has a crucial bearing in the subject matter in issue.

 

(X)                  The `Tribunal’, is to see that the `Scheme’ is not a `camouflage’, for a purpose, other than `ostensible’ reason(s). Also, the `Tribunal’, is to find out, whether a particular `Scheme’, is `opposed’ to `public policy’ or `otherwise’, by `applying’ its `judicial mind’.

 

 


[1] Advocate, Delhi High Court [LLB, ACS, BCOM(H)], Budhirajalawchambers@gmail.com , +91-9654055315

[2] Company Appeal (AT) (CH) No. 28 of 2021, NCLAT Chennai, Judgment dated 16/01/2023

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