NCLAT Judgement on Dispensation of Meeting of Unsecured Creditors in case of Merger of Wholly Owned Subsidiary with its Holding Company

Ericsson India Private Limited (Transferor Company) WoS and Ericsson India Global Services Private Limited (Transferee company) have filed a Joint Company Scheme Application for amalgamation with Hon’ble National Company Law Tribunal, New Delhi Bench (NCLT). Transferor Company is a wholly-owned subsidiary of the Transferee Company.

[rml_read_more]

Joint Scheme Application prayed for the dispensation of a meeting of shareholders and unsecured creditors of both the Companies. As on 30.06.2021 Transferor Company had 473 creditors having a value of Rs. 24,640.21 million. Where Transferee company has 177 creditors having a value of Rs. 1262.71 million. It seems that neither of the companies have any secured creditors. Shareholders of both companies have given their consent for a scheme of amalgamation.

Grounds on which dispensation of meeting of unsecured creditors has been sought by the Applicant Companies:-

1. Unsecured creditors are in nature of sundry creditors and would be paid off in ordinary course.
2. The scheme is in no manner prejudicial to the interests of said unsecured creditors.
3. No liability of any of unsecured creditors is proposed to be reduced or extinguish.
4. Net worth of Applicant companies will remain positive post amalgamation.
5. No compromise or arrangement is made with any of unsecured creditors as no sacrifice is called for.

Requirements of disclosure

The second point of dispute was regarding requirements of disclosure of material facts.

Applicant companies have annexed their affidavits to their joint application and stated to be filed in compliance of Section 230(2) of the Companies Act, 2013 which deals with disclosures of all material facts relating to the company, such as the latest financial position of the company, the latest auditor’s report on the accounts of the company and the pendency of any investigation or proceedings against the company.  However, NCLT Observed that in those Affidavits there was no specific averments with respect to details of any investigation or proceedings pending against the Applicant Companies.

NCLT directed applicant companies vide order dated 9^th August 2021 to file an affidavit as mentioned under section 230(2)(a) of the Companies Act, 2013. Transferor and Transferee Companies filed an affidavit as per said directions and stated that there is no investigation or any proceeding pending against the applicant companies under the certain section of the Companies Act, 2013.

After filing of affidavit, NCLT observed that affidavit does not contain details of any investigation or proceedings pending against applicant company, where affidavit states that necessary disclosures as per section 230(2) (a) have been made in the joint application and content thereof shall be read as a part of the present affidavit and same are not being repeated herein for the sake of brevity. In joint application, companies have disclosed details of material proceedings that have been instituted and are pending against the company. Where it classifies proceedings into two categories Tax Outstanding and Non-Tax Outstanding Proceedings and considered only those cases which impacts “10 % of revenue or 10 % of net-worth of the Transferor Company or Transferee Company whichever is less based on the latest audited financial statement of the company as material information.”

In Non-Tax Outstanding investigation or proceedings where proceedings of Transferor company in reference to Reliance Communication & its associates is disclosed which is pertaining to proceedings under Insolvency Code and stated that there are no Tax Outstanding Proceedings are pending against both transferor and transferee company.

NCLT passed an order dismissing the application filed by the Applicant Companies for dispensation of the meeting of creditors and shareholders. NCLT has not commented on anything on the dispensation of a meeting of shareholders since the company has arranged the consent in the form of an affidavit from all the shareholders.

NCLT dismissed the Application on the following grounds –

1. Failed to make disclosure by way of affidavit as per section 230(2)(a) even after opportunitygiven by Tribunal:
   Applicant Companies failed to file proper affidavit disclosing the complete particulars of all investigations/proceedings pending against each of them including Case No., Court in which it is pending, amount of debt involved, next date of hearing and present status of the case etc. NCLT observed that even though Applicant Companies have stated in the affidavit that no investigation proceedings are pending against the Companies, but it has given the details of pending material investigation and proceedings in the Application and while providing such details, Applicant Companies have applied the criteria i.e., information impacting “10 % of revenue or 10 % of net-worth of the Transferor Company or Transferee Company whichever is less based on latest audited financial statement of the company as material information. There are no such criteria of materiality provided under section 230(2)(a) of the act. It states company shall disclose all material facts relating to the company, such as the latest financial position of the company, the latest auditor’s report on the accounts of the company and the pendency of any investigation or proceedings against the company.
2. No Explicit Power given to the tribunal as per the provisions of the companies act to dispense the meeting of creditors in absence of their consent affidavits:
   Applicant Companies have not obtained consent of creditors having at least ninety per cent value as per section 230(9) of the Companies Act, 2013. There is no explicit power given to tribunal to dispense with meeting of creditors in absence of their consent affidavits in any circumstance. If without their consent affidavits the meeting of unsecured creditors is dispensed with, they will be deprived of an opportunity of being heard or oppose the scheme.

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

1. Section 230(2)(a) of the Act contemplates disclosure only of material facts (and not all facts) which include proceedings and investigations and it is the company’s discretion as to which investigation or proceeding, it considers as the material fact for the purpose of disclosure. Rule 6(3)(viii) of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 requires the Companies disclosure of investigation and proceedings under the Companies Act Companies have disclosed the litigations which are considered as Material as per the Applicant Companies. Companies have disclosed all the duly Audited Financial Statements and supplementary accounting statements which adequately disclosed the matter of pending litigations of the Companies.
2. NCLAT has dispensed meeting of shareholders and creditors in some of judgements such as Ambuja Cements Limited‟ in Company Appeal (AT) No. 19 of 2021, Mohit Agro Commodities Processing Pvt Ltd. & Ors. in Company Appeal (AT) No. 59 of 2021.

NCLAT set-aside the order of NCLT on the following grounds –

1. Section 230(2)(a) read with Rule 6(3)(viii) of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, Companies shall disclose all Material investigation and proceedings related to the Company. Affidavit filed by the Company discloses all duly audited financial statements which include investigation and enquiries which are material for the implementation of scheme.
2. As per the clause 6 of the Scheme of Amalgamation, all proceedings in the name of the transferor Company shall be continued and enforced against the Transferee Company and such proceedings shall not be discontinued or prejudicially affect anyone by reason of the scheme. Accordingly, Company complied with section 230(2)(a) and Rule 6(3)(viii).
3. Since the merger is between Holding Company and its wholly owned subsidiary there will not be any dilution in the shareholding.
4. Net-worth of the Transferee Company is positive
5. NCLAT in various judgments of merger of Holding Company with Wholly owned subsidiaries wherein net-worth of both the Companies are positive and unsecured creditors are paid off in the ordinary course of business and there is no extinguishment with the liability of creditors have dispensed the meeting.

Conclusion

Provisions of section 230(2) (a) states that all material facts relating to the company, such as the latest financial position of the company, the latest auditor’s report on the accounts of the company and the pendency of any investigation or proceedings against the company. Since neither the term material is defined in the companies act nor there are specific criteria given, the company can disclose such facts which according to them are material. Further, there is no criteria/power given to the tribunal to dispense the meeting of creditors in absence of their consent affidavits, however, the tribunal may dispense the meeting based on facts of each case.

[su_note note_color=”#83ff7d” radius=”5″]Please feel free to share/retweet the article and as always you can write down in the comment box below for anything related to the article. We would love to answer.[/su_note]