Orient Refractories Limited: NCLAT directs NCLT to approve the scheme

Merger of Orient Refractories and RHI Magnesita was announced in 2018 and should have been done by early 2019 but the scheme was rejected by NCLT in march last year. Companies moved NCLAT on the order from NCLT post covid when the tribunals opened.

The National Company Law Appellate Tribunal (NCLAT) by an order[1] dated January 19, 2021, set aside the order[2] passed by the National Company Law Tribunal, Mumbai Bench (NCLT) dated March 2, 2020 rejecting the scheme of merger of RHI India Private Limited and RHI Clasil Private Limited with Orient Refractories Limited (Collectively referred as “Appellants”).

NCLT found an anomaly in date of approval of the scheme and date of valuation report by chartered accountant and merchant banker as against Appointed Date which is a future date and also raised concern against profit-earning capacity of the Transferor Companies and the valuation done by the valuer. NCLAT in its order has mentioned that NCLT rejected the Scheme of Amalgamation on certain grounds which was not required to be noticed for determination of Amalgamation under section 230-232 of the Companies Act, 2013.

We have discussed in detail the reason for rejection of the scheme of capital reduction by Hon’ble NCLT in our previous article[3] in the month of May 2020.

This article deals with the submissions made by the Appellants i.e. Transferor and Transferee Companies before NCLAT and the reasons stated by NCLAT for setting aside the order passed by the NCLT.

Submission by the Appellants

1. Since scheme is approved with the 99.95% votes of the shareholders of the Orient Refractories Limited out of which 96.05 % votes given by the public shareholders.
2. Even the Securities and Exchange Board of India (SEBI), the authority which is responsible for the protection of public shareholders and other authorities to whom notice was issued under section 230 (5) of the Companies Act,2013 has not objected for the proposed scheme.
3. Appellants have put their reliance in the matter of UFO Moviez India Ltd. & Anr. V. UOI, Company Appeal (AT) No. 48 of 2019 wherein order of rejection passed by the NCLT was overruled and the Appeal was allowed by NCLAT vide Judgment dated 24.10.2019 inter-alia holding the rejection of the scheme of merger by NCLT has been on the grounds, which were not required to be delved into for the determination of a merger in terms of scheme of Section 230-232 of the Companies Act.
4. NCLT has wrongly held that the scheme is beneficial for some shareholders as opposed to all the shareholders and is against public policy. NCLT has overlooked the commercial wisdom exercised by the shareholders of the Appellants, who have made an informed decision to approve the said scheme and in doing so has attempted to apply its own commercial wisdom on all the stakeholders.
5. Scheme was pending for approval before the Hon’ble NCLT for more than 1.5 years and during such time NCLT had not raised any concern with such appointed date and directly through the order rejected the scheme. NCLT has not given an opportunity to clarify the doubts w.r.t valuation methodologies which have been directly raised in the order.
6. Against the objection raised by the NCLT, that documents like Boards Report, Valuation Report are signed on the same date Appellants have put its reliance on the Judgment of NCLAT in the matter of Arvind Aggarwal vs. Trinitro Cement Ltd., Company Appeal (AT) No. 171 of 2017, wherein it was held by the NCLAT that even though the various reports/documents are dated on the same day such documents cannot be considered as invalid unless specific illegality is brought to the notice of the Adjudicating Authority.
7. To put the entire issue at rest, Appellants filed an affidavit stating that they are agreeing to change the Appointed Date same as the valuation date i.e 31.07.2018

Points Considered by the NCLAT

1. Majority of shareholders have voted in favour of the scheme and no minority shareholders have come forward to oppose the scheme. Irrespective of the said fact and considering, no regulatory authority has raised objections to the scheme, the NCLT rejected the Scheme of Amalgamation on a certain ground which was not required to be noticed for determination of Amalgamation u/s 230-232 of the Companies Act, 2013.
2. The NCLT while passing the impugned order have overreached its scope of Judicial Intervention in the determination of the Scheme of Amalgamation u/s 230-232. Since the majority shareholders of the Company are in favour of the scheme and no minority shareholders have raised any objection, the commercial wisdom of the shareholders shall not be overlooked by the NCLT.
3. Scheme cannot be said to be violative of public policy just on the ground that NCLT considered that the scheme appears to benefit only a few shareholders of Transferor Company without giving any reasonable findings for the same.
4. Since the appointed date under the Scheme was specified as January 1, 2019 but Clause 1.1.3 of the Scheme provides that the Appointed Date can be such other date as may be fixed by the NCLT. Therefore, NCLT shall not reject the Scheme on the ground that the appointed date and valuation date is different.

Provision under the Law

Pursuant to section 232(6) of the Companies Act, 2013 and vide General Circular no. 09/2019 MCA has clarified that Appointed Date can be a specific calendar date or it can be linked to the specific event. In this scheme, the specific appointed date is mentioned by the Appellants and hence they are in compliance with the circular issued by MCA.

Another important point raised by the NCLT was about profit-earning capacity of the transferor companies and valuation of the same done by the chartered accountant and the merchant bankers. It is settled principle which is also accepted by the Apex Court that if the valuation report is given by the competent/qualified person the same shall be accepted as it is, and commercial Part of the scheme has to be looked out by the shareholders of the company only since they are the one who are getting affected because of the scheme. Even if there can be better option which is more beneficial for the shareholders of the Company, the Adjudicating Authority shall not force the companies to make amendment in the proposed scheme of arrangement.

Conclusion

In order to put the entire issue at rest, Appellants filed an affidavit stating that they are agreeing to change the Appointed Date same as the valuation date i.e. July 31, 2018. Since there is no Legal Backing to the Hon’ble NCLT for rejecting the said scheme on the above-mentioned grounds, NCLAT could have passed an order allowing the scheme to take effect without making any change in the appointed date.

[1] https://nclat.nic.in/Useradmin/upload/2436495356006a6fc78878.pdf

[2] https://nclt.gov.in/sites/default/files/Feb-final-orders-pdf/C.P.%28CAA%29-2199%28MB%29_230-232_2019%20RHI%20India%20Pvt.%20Ltd.FINAL__0.pdf

[3] https://mnacritique.mergersindia.com/orient-refractories-rhi-magnesita-composite-scheme-rejected/