Regstreet Law Advisors


1. NCLT gives first ruling on maintainability in Tata-Mistry Battle

The Mumbai bench of NCLT, by an order dated March 06, 2017 has rejected the maintainability of the petition filed against Tata Sons Ltd. by the Shapoorji Pallonji Group (“Petitioners”) under Sections 241, 242 and 244 of the Companies Act, 2013. The main ground argued by the parties was whether the requisite qualification to seek an action under Sections 241 and 244 of the Act i.e. to meet the 10% threshold of the issued share capital ought to be satisfied by taking into account only the equity share capital or both the equity and preference share capital issued by the company.

The Tribunal has clarified in its ruling that there is no change in the concept of Section 244 of Companies Act, 2013 as against Section 399 of Companies Act, 1956. It rejected the claim of the Petitioners that ‘members’ under Section 244 of the Act has to be read as ‘class of members’. It has also stated that redeemable preference shares cannot be excluded from the purview of ‘issued share capital’ on the ground that they are considered as debt in the accounting treatment.

NCLT has held that the only precedent which is applicable to the present case is Northern Projects Ltd. v. Blue Coast Hotels and Resorts Ltd. (2009) 748 Company Cases 279, which was cited by the Respondent Counsel to say that issued share capital means equity plus preference. Following this precedent, the Tribunal has adopted the literal interpretation of the statute since it found that the meaning of the section to be plain, simple and clear.

The Petitioners have also filed an application before NCLT for waiver of the 10% requirement. While the Petitioners have concluded their arguments on March 7, 2017 with respect to the waiver application, the next date of hearing is March 17, 2017. If the NCLT decides against allowing the waiver application, it is highly likely that the petitioners will approach NCLAT.

2. NCLT dismisses Cyrus Mistry’s plea for waiver of shareholding eligibility criteria

By its order dated April 17, 2017, the Mumbai Bench of National Company Law Tribunal (“NCLT” or “Tribunal”) has rejected the waiver application filed by the Shapoorji Pallonji Group (“Petitioners”) seeking waiver of the qualification mandate set out in section 244(1) of the Companies Act 2013 (“Act”) for filling petition under Section 241 of the Act.

The main grounds raised by the petitioner while seeking waiver were that the interest of the Petitioners in Tata Sons Limited (“Company”) is substantial, the issues raised in the petition are more appropriate to be dealt with u/s 241 and the cause raised is substantial in importance to the Petitioners, the class of members, the Company itself and also to the Public.

While deciding on the petition, it was noted by the Tribunal that to invoke a waiver it is not sufficient for Petitioners to just show that they have substantial interest in the Company, but they should also make an averment that acts complying of have caused harm or injury to the economic interest of the Petitioners. However, it was noted that the Petitioners have not mentioned as to what economic interest has been affected by the acts of the respondents.

The Tribunal further explained that waiver could be granted in a case where the economic interest of the petitioners is affected in such a way that he could not make out anything from the residue remained in the company, or the petitioner remains remediless and not in a position to go before any other forum and the petitioners shareholding has been reduced so as to prevent him to file a claim under Section 241.

It was further observed by the Tribunal that, a case seeking waiver must be for seeking shareholder action in relation to their economic interest. Also, the reasons for granting waiver shall be supported by fairly strong and compelling reasons. However, on dealing with each allegation of the Petitioner’s one after another, Tribunal observed that, first they have not disclosed any cause of action, second they are not shareholder actions, hence forth, they are not actions fit to be considered for granting waiver.

As to waiver, NCLT observed that, it is to be granted only on rare and compelling situations, but when no cause of action itself is present where the question of granting waiver in a case like this exists. Accordingly, NCLT dismissed the waiver application as well as the main company petition without costs.

3. MCA relaxes Provisions for Remuneration of Managerial Person

By notification dated September 12, 2016, MCA has relaxed Section II of Part II in Schedule V of the Companies Act, 2013 increasing the remuneration payable to managing or whole-time director or manger by companies having no profit or inadequate profit without prior approval of Central Government.

As per amended Schedule V, such companies can now pay almost double the earlier remuneration to their Managerial Person without Central Government approval. Eg: (a) companies where effective capital is less than 5 Crore can now pay a remuneration of upto 60 Lakh instead of upto 30 Lakh prescribed earlier and, (b) companies where effective capital is 250 Crore and above, can now pay a remuneration of up to 120 Lakh plus 0.01% of the effective capital in excess of 250 Crore – instead of the earlier limit of 60 Lakh plus 0.01% of the effective capital in excess of 250 Crore

However, in order to avail the benefit of these limits without Central Government approval, the Managerial Person should be acting in a professional capacity and not having any interest in the capital of the company or any of its holding or subsidiary company directly or indirectly then he can avail this benefit.

4. Companies Act: Provisions of Winding-Up, Schemes & Arrangements Notified

In order to simplify the M & A activity and winding-up procedure under the Companies Act, 2013, MCA has recently notified the much awaited sections of Companies Act, 2013 relating to compromise, arrangements, amalgamations, liquidation etc. and the rules prescribed there under.

These sections and the rules came into force from December 15, 2016 vide notification dated December 7, 2016 and are likely to impact the way restructuring options are utilized by companies in India and the prescribed rules i.e. Companies (Compromise, Arrangements and Amalgamation) Rules, 2016 were released vide notification dated December 14, 2016 and came into effect from December 15, 2016.

On December 15, 2016, MCA also notified NCLT (Procedure for reduction of share capital of Company) Rules, 2016 thereby explaining the procedure for reduction of share capital under Section 66 of Companies Act, 2013

In line with these notifications, MCA had also released a notification dated December 7, 2016 stating that NCLT shall now be the authority for all proceedings relating to restructuring.

Salient Features of the sections and the rules notified are:

  • An application for compromise or arrangement or amalgamation is required to be made to NCLT and then the NCLT may order for a meeting of the creditors/members or class of creditors/member as the case may be.
  • The Provisions for circulation of notice is broadened, as notice in all schemes or arrangement will be required to be sent to central government, income-tax authorities and if required, then also to other sector regulators viz. SEBI, CCI, Registrar of Companies and RBI etc.
  • Dispensation with creditors meeting will be allowed if creditors having 90% in value agree to the scheme and confirm it by way of an affidavit.
  • Reduction of capital under Section 66 will not be allowed if the company is in arrears in the repayment of any deposit accepted by it.

5. Much awaited provisions of Cross-Border Mergers and Amalgamations notified

In order to simplify the M & A activity and winding-up procedure under the Companies Act, 2013, MCA has recently notified the much awaited sections of Companies Act, 2013 relating to compromise, arrangements, amalgamations, liquidation etc. and the rules prescribed there under.

MCA vide its notification dated April 13, 2017 has notified section 234 of the Companies Act, 2013, thereby enabling cross-border mergers with effect from April 13, 2017. The newly notified Section 234 has opened the doors for much awaited outbound mergers of Indian Companies with Foreign Companies subject to prior approval of RBI and jurisdictional National Company Law Tribunal. On the same day, MCA has also notified Rule 25A and Annexure B in Companies (Compromise, Arrangements and Amalgamation) Amendment Rules, 2017 in relation to operation of section 234. Annexure B specifies the jurisdictions in which outbound merger will be allowed

Pursuant the above-mentioned MCA notifications, RBI has also issued the draft guidelines on Foreign Exchange Management (Cross Border Merger) Regulation on April 26, 2017, in order to address the issues that may arise when an Indian company and a foreign company enter into Scheme of merger, demerger, amalgamation, or rearrangement.

Public comments on draft guidelines are invited till May 9, 2017.

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