On 7 December 2016, the Ministry of Corporate Affairs (MCA) issued a gazette notification (Enforcement Notification) whereby certain provisions of the Companies Act, 2013 currently not in effect, were notified to come into force. The notable sections brought into force, inter alia, include: (A) provisions contained in Chapter XV of the Companies Act, 2013 which extensively deal with compromises, arrangements and amalgamations (i.e. Section 230 (with the exception of sub clauses 11 and 12), Sections 231-233 and Sections 235-240 of the Companies Act 2013); and (B) provisions which govern winding up proceedings of companies under Chapter XX (i.e., Sections 270-288, Sections 290 to 303, Section 324 and Section 326-365 of the Companies Act 2013). The Notification states that the aforementioned provisions would come into force on 15 December 2016.
Additionally on the same day, the MCA notified the Companies (Transfer of Pending Proceedings), Rules 2016 (Transfer Rules) and also issued the Companies (Removal of Difficulties) Fourth Order, 2016 (Difficulties Order). The endeavour in formulating the Transfer Rules and the Difficulties Order is to facilitate a smooth transition of the proceedings initiated under the Companies Act, 1956 and pending before High Courts and District Courts and to ensure that the now functional National Company Law Tribunal (NCLT) can effectively take on the mantle of adjudicating on company law matters for which it has been specifically set up.
This ERGO Newsflash intends to briefly discuss and elaborate on: (i) the significant notified provisions outlined above; (ii) the proposed manner in which the pending proceedings are to be transferred; and (iii) the premise and intention of the Difficulties Order.
The Significant Notified Provisions
Vide the Enforcement Notification the following pertinent provisions will be enforced from 15 December 2016, namely:
Compromises, Arrangements and Amalgamations: Section 230 (with the exception of sub clauses 11 and 12), Sections 231-233 and Sections 235-240 of the Companies Act, 2013
The compromises, arrangements and amalgamations chapter, inter alia, deals with provisions concerning (i) the power of the NCLT to issue a binding order for a meeting to be called in order to provide for compromise arrangements with creditors and members, (ii) the power enabling the NCLT to implement the compromise or arrangement, (iii) the power of the NCLT to call for a meeting in case the arrangement or compromise is in the nature of a scheme of reconstruction (involving a merger or amalgamation), (iv) the conditions to be fulfilled in case of a scheme of amalgamation or merger, (v) ability to purchase minority shareholding in case 90% (ninety per cent) of the shareholding of the company has been acquired, (vi) power of the Central Government to issue an order for the amalgamation of companies in public interest, and (vii) other ancillary procedures and formalities essential for the proper implementation of a scheme of merger, amalgamation, arrangement or compromise.
Interestingly however, while a substantial part of this chapter has been brought in force, it is observed that the following provisions have not been brought in force: (i) Section 234 of the Companies Act 2013, which deals with merger or amalgamation of a company incorporated in India with a foreign company; thereby, implying that such cross border mergers will not yet be governed by the Companies Act, 2013, and (ii) sub-clauses 11 and 12 of Section 230 of the Companies Act, 2013, which deal with takeover offers under a compromise or arrangement.
Winding Up: Sections 270-288, Sections 290 to 303, Section 324 and Section 326-365 of the Companies Act, 2013
The winding up chapter, inter alia, deals with provisions concerning the (i) winding up of a company by the NCLT, including the powers and jurisdiction of the NCLT and the circumstances in which a company may be wound up by the NCLT, (ii) appointment, working, powers, obligations and procedural compliances to be observed by that of a company liquidator, and (iii) eligibility to file a petition for winding up before the NCLT.
It is important to note that Sections 304-323 of the Companies Act, 2013, which discuss similar powers and functions of the NCLT, company liquidator etc. in relation to ‘voluntary winding up’, have not yet been brought in force. The commencement provision in the Transfer Rules indicate that 1 April 2017 is the proposed date on which the voluntary winding up provisions will be enforced.
Transfer of Pending Proceedings: Section 434(1)(c) of the Companies Act, 2013
Section 434(1)(c) of the Companies Act, 2013, deals with the transfer of all proceedings under the Companies Act, 1956. These proceedings would include arbitration, compromise, arrangements and reconstruction, and winding up of companies. The section stipulates that the aforementioned proceedings shall stand transferred to the NCLT, on such date as notified by the Central Government, to deal with such proceedings from the stage before their transfer. The interpretation of this section would be that, as on the designated date for bringing this section into force, the NCLT will proceed to hear the transferred matters from the exact stage the proceedings were at, prior to their transfer. Therefore, the NCLT will not hear these proceedings de novo. Further, it is to be noted that the Section 434 (1) sub-sections (a)-(b) and subsection (d), which deal with other types of proceedings pending before: (i) the Company Law Board, and (ii) the Board of Industrial and Financial Reconstruction (BIFR) and its appellate authority, have not been brought into force.
Manner of Transfer of Pending Proceedings
The Transfer Rules (which also come into force on 15 December 2016) framed pursuant to Section 434(1)(c) of the Companies Act, 2013 clarify the manner in which pending proceedings must be transferred to the NCLT. We can observe that the nature of pending proceedings as identified under Section 434(1)(c) has been delineated into 2 (two) categories:
- Proceedings other than winding up: These refer to all proceedings relating to arbitration, compromise, arrangements and reconstruction. As per Rule 3 of the Transfer Rules, all such proceedings would stand transferred to those benches of the NCLT exercising respective territorial jurisdiction. However, proceedings which have been reserved for orders, will not be transferred;
- Winding Up Proceedings: While, proceedings pending in relation to voluntary winding up shall continue to be heard before the respective High Courts, other winding up proceedings have been further subdivided into 2 buckets: (i) pending proceedings for winding up on the ground of inability to pay debts; and (ii) pending proceedings for winding up matters on the grounds other than inability to pay debts:
- On grounds of inability to pay debts: These winding up proceedings would be transferred from the High Court to the relevant NCLT. Such petitions would be treated as applications under the Insolvency and Bankruptcy Code 2016 (Bankruptcy Code), subject to: (i) the petition, though filed before the High Court, has not been served upon the respondent, and (ii) the petitioner complying with certain requirements as prescribed by the Bankruptcy Code. However, for cases of winding up initiated under the Sick Industrial Companies (Special Provisions) Act, 1985, where the High Court has been forwarded an opinion for winding up by the BIFR, and no appeal is pending, the matter will continued to be heard by the High Court under the Companies Act 1956;
- On grounds other than inability to pay debt: These are proceedings as a result of petitions filed under Section 433(a) (special resolution passed by company to be wound up) and Section 433(f) (tribunal is of the opinion that the company should be wound up for just and equitable reasons), and where such petition has not been served on the Respondent, the winding up proceedings would be transferred from the High Court to the relevant NCLT. Such petitions would be treated as petitions under the Companies Act, 2013;
- It should be noted that all remaining cases of winding up, other than those which may be transferred to the NCLT (as identified above), would continue with the respective High Courts.
Premise and Intention of the Difficulties Order
The objective of the Difficulties Order is to bridge gaps that may arise under certain pending proceedings, which if transferred from the High Court to the NCLT, would result in delay or which may adversely affect the rights of the parties concerned.
To meet this, it records: (i) first, all non-winding up matters that are not reserved for orders of the High Court would be transferred to the NCLT; and (ii) second, that the Companies Act, 1956 and rules thereunder would continue to apply to (a) non-winding up matters that are reserved for orders of the High Court; and (b) winding up matters that have not been transferred from High Court in accordance with the Transfer Rules.
Given the rather unsatisfactory functioning of the Company Law Board in discharge of the judicial functions transferred to it, the jury is still out on whether the NCLT will achieve the stated objective of quick and effective resolution of the matters transferred or to be initiated before it.
Further, the following matters must also be considered. First, with the Supreme Court’s judgement in Madras Bar Assn. v. Union of India, (2015), Section 409(3) (a) and (e) and 411(3) of the Companies Act, 2013 relating to constitution of NCLT, have been held invalid on various grounds inter alia that appointment as members (in the manner contemplated in such sections) is diluting the independence of the Judiciary. The NCLT must be carefully constituted to meet with the specific criteria set out by the Supreme Court.
Second, given the way in which the benches of the NCLT have been structured, matters pending in State A’s High Court may need to move to an NCLT bench in State B. This may create complexities in relation to manner and quantum of stamp duty payable.
There are likely to be further teething issues while trying to achieve an effective transition. In such a scenario, the baton may then shift to the MCA, to address such concerns.