NCLAT Judgement – On Obtaining Consent of Creditors in case of Scheme of Arrangement between Company and its Shareholders

Vedanta Limited has proposed scheme of arrangement for capital reorganization of the Applicant Company, inter alia, providing for transfer of amounts standing to the credit of General Reserves to Retained Earnings of the Applicant Company and filed company scheme application with Hon’ble National Company Law Tribunal, Mumbai Bench (NCLT).

Company Scheme Application prayed for the dispensation of secured and unsecured creditors of the Company. As on 31^st March 2022, the Company had 227 Secured Creditors having a value of Rs 31,053 Crore Approx. and 3,656 Unsecured Creditors having a value of Rs 10,893 Crore Approx.

Grounds on which dispensation of meeting of unsecured creditors has been sought by the Applicant Company: –

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1. Scheme is an arrangement between the Applicant Company and its shareholders, under the provisions of Section 230(1)(b) of the Companies Act, 2013.
2. No consideration is proposed to be issued pursuant to the Scheme. Thus, the Secured Creditors of the Applicant Company shall, in no way, be affected by the Scheme, as there is no reduction in the amount payable to any of the creditors and no compromise or arrangement is contemplated with the creditors.
3. There is no outflow of cash from the Applicant Company and the Scheme would not in any way adversely affect the operations of the Applicant Company or the ability of the applicant company to honor its commitments or to pay debts in the ordinary course of business.

Hon’ble NCLT dispensed the meeting and direct the company to obtain consent affidavits from both secured and unsecured creditors by stating as follows: –

1. It shall be the responsibility of the Applicant Companies to ensure that every Secured Creditors is put on notice regarding the Scheme, so that they may take an informed decision thereon and file consent affidavit of all Secured Creditors at the time of Filing of Company Petition.
2. It shall be the responsibility of the Applicant Company to ensure that every Unsecured Creditors is put on notice regarding the Scheme, so that they may take an informed decision thereon and file consent affidavit of all Unsecured Creditors of at least the value of 90% Unsecured Creditors at the time of filing of Company Petition.

Applicant Company filed application with Hon’ble NCLT for rectification of their order having support of Judgement given by Hon’ble NCLT Delhi Bench in similar scheme of arrangement of Nestle India Limited.

The said application seeking rectification of order was dismissed by Hon’ble NCLT on following grounds: –

1. Order of Hon’ble NCLT Delhi Bench is an order of the co-ordinate Bench of NCLT which is not binding on this Bench.
2. No law prescribes that judicial discretion has to be exercised by all the forums in a particular manner or in a particular fashion.
3. Since this Tribunal has already exercised its discretion in dispensing the meetings, it is empowered to pass appropriate directions to protect the interests of other stakeholders, in consonance with Section 230(9) of the Companies Act, 2013. The Petitioner cannot insist this Tribunal to approve the Scheme without complying either of the two.
4. It is not legally permissible to this Tribunal, to delete any part of its order, by sitting as a Court of appeal or revision, and the remedy of the Petitioner, if at all, he is aggrieved against the said order of the Tribunal, is to go for an appeal and not through the present Application.

Applicant Company filed an appeal with Hon’ble National Company Law Tribunal (NCLAT) and argued on following grounds: –

Applicant company referred grounds pleaded before Hon’ble NCLT and also referred to catena of judgements to support their appeal such as: –

1. The order passed by Hon’ble High Court of Andhra Pradesh in the matter of Teck-men Tools (P.) Ltd. where it states that the requirement of obtaining consent arises only, if the arrangement is between the company and its creditors and not with shareholders.
2. The order passed by the Hon’ble High Court of Bombay in the matter of Hindustan Unilever Limited (Company Summons for Directions 346 of 2016) where it states that if a scheme is not prejudicial to the interest of creditors, then there is no requirement of holding meeting of creditors or dispensing that meeting.
3. Hon’ble NCLT Delhi Bench in Similar Scheme of Arrangement and in the matter of Nestle India, where Hon’ble NCLT Dispensed meeting of secured and unsecured creditors of the company.

NCLAT upheld the order of NCLT on the following grounds –

1. The Scheme reflects that the fund reflected by General Reserve are in excess of the companies anticipated operational and business needs in the forcible future and meant to create further shareholders value in such manner as the Board of the Director of the Company in its sole discretion decide from time to time. This reflects not a healthy sign when approx.70% of the shareholding is with the promoters and company debt content is 3 times of (Equity + General Reserve) and if we remove General Reserve which is a free reserve to provide cushion to the creditors then Debt content is one 13982 times of Equity. Once amount lying in General Reserve infrastructure is transferred to Retained Earnings, then Board of Directors approved Resolution allows free hand to Directors to even issue Bonus shares or pay Dividend etc.
2. The Company seems to be highly leveraged by debt. In such situation, General Reserve provides at least some cushion to the creditors of the company, be it bankers or other secured and unsecured creditors.
3. As far as citations of various judgments are concerned, it is not applicable as the health of each company varies.
4. In case of I.C.I.C.I Ltd., in Re 104 Bom, LR 399: (2003) 115 Comp Cas 465 (Bom).” – Hon’ble Court recorded that: –

[su_pullquote align=”right”]“As far as citations of various judgments are concerned, it is not appliable as the health of each company varies”[/su_pullquote]

• The court should, ordinarily, exercise its discretion, in favor of convening a meeting of the creditors, even in a scheme of arrangement between the company and its members for the safest way of ascertaining, whether or not the creditors are adversely affected by the scheme or not, would be in a meeting of the creditors themselves.
• Dispensing with the holding of a meeting of the creditors should be an exception and not the norm.
• Even in exceptional cases, where the court is satisfied that a meeting of the creditors need not be held, it should record its reasons in arriving at such a decision.

Conclusion

In view of aforesaid observation Hon’ble NCLAT upheld the decision of Hon’ble NCLT Mumbai Bench by stating that consent of Secured and Unsecured Creditors as required by Section 230(9) of the Act which requires vide Section 230 (1) of the Act a compliance even if compromise or arrangement is proposed between a company and its members or between a company and its creditors etc.

Without prejudice to Hon’ble NCLAT directions in this specific case to hold meetings of creditors, we believe it will be applied on case-to-case basis based on debt equity ratio of the company going for reorganisation of capital. Subsequently in case there is no debt in the company’s balance sheet, then in our opinion the scheme should be approved without calling the meetings of creditors.

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