The Ministry of Corporate Affairs, Government of India (MCA) recently notified the provisions of Chapter XV of the Companies Act, 2013 (2013 Act) and the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (Scheme Rules) with effect from December 15, 2016. Chapter XV of the 2013 Act and the Scheme Rules lay down the framework for compromises, arrangements and amalgamations (Schemes).
One major bottleneck under the Companies Act, 1956 in respect of Schemes was the protracted timelines and high costs coupled with the absence of relaxations for intragroup restructurings. In this regard, a notable change from the regime as it stood under the Companies Act, 1956 is the introduction of an alternative fast track mechanism under Section 233 of the 2013 Act read with Rule 25 of the Scheme Rules for Schemes between small companies (i.e. companies having paidup share capital of up to Rs. 50 lakhs and turnover of up to Rs. 2 crore) or between a wholly owned subsidiary and its holding company. Such Schemes do not require Court (and now the NCLT) involvement and are intended to take significantly lesser time as compared to the NCLT-driven process. This has indeed been a welcome step.
On paper, the fast track schemes’ regime appears to be a significantly streamlined process. Briefly put, the applicant companies are required to serve a notice of the proposed scheme to the Registrar of Companies (ROC) and the Official Liquidator (OL) of the state(s) where their registered offices are situated and to the ‘persons affected by the scheme’, for inviting comments and suggestions to be provided within thirty days. After considering the objections and suggestions received, the scheme is required to be approved by the members holding at least 90% of the total number of shares and creditors representing 9/10th in value, of each company. As far as seeking members’ approval is concerned, while the provision on the NCLT-driven process clarifies that members may vote through postal ballot, Section 233 of the 2013 Act dealing with fast track schemes is silent on this aspect. Therefore, clarity may be required in this regard.
On obtaining approval from the members and creditors, the approved scheme is then required to be filed with the relevant ROCs, OLs and Central Government (CG) within seven days from the meetings. If there are objections, the same are to be made by the ROCs and, or OLs in writing to the CG. In such an event, the CG has sixty days to file an application with the NCLT if it is of the opinion that based on the objections received, the Scheme is not in public interest and, or creditors’ interest, and such Scheme should be brought under the NCLT-driven regime. Here is where a few questions arise. The ROC, OL and the CG are effectively the judge, jury and execut(ion)er in this process based on whose wisdom, the consummation of the Scheme could potentially get derailed irrespective of the fact that the members and creditors have accorded their approval. Further, sending the scheme to the ROC and OL on two separate occasions and giving them the opportunity to express reservations on both occasions is something that could have been avoided. If the intent is to fast track the process, then why give the ROC and OL two separate opportunities to block the process which could eventually land up before the NCLT. While there is ample jurisprudence of the Hon’ble Supreme Court of India (SC) on general guidelines to determine whether a scheme is detrimental to public interest (viz. Hindustan Lever Employees’ Union v. Hindustan Lever Limited and Others), it will be interesting to see how the ROC and OL will balance these interests while formulating their suggestions and objections, if any.
Another aspect that should not be ignored is the requirement to notify ‘persons affected by the scheme’ to seek their suggestions on the Scheme. This being a new introduction in the 2013 Act may require more clarity on who all could be considered ‘persons affected by the scheme’. For example, would employees be considered in this category? Therefore, unless more clarity is provided, identifying ‘persons affected by the scheme’ and reconciling the suggestions and objections from different ROCs, OLs and ‘persons affected by the scheme’ could get challenging for the companies.
The fast track schemes’ regime offers some relaxations from provisions that would ordinarily need to be complied with by applicant companies following the NCLTdriven regime. These include the requirement to furnish an auditor’s certificate in respect of compliance of the proposed scheme with the applicable accounting standards, subsequent annual filings in respect of compliance with the scheme and to send the draft scheme to regulators (such as the Reserve Bank of India, income tax authority, Securities and Exchange Board of India and sector based regulators) for their observations, as may be applicable.
Various judgments of the SC and High Courts come to mind where it has been clarified that the provisions on Schemes constitute a code in itself for the purposes of the Companies Act, however, requirements under other sector specific regulations would need to be complied with separately. Therefore, it would need to be seen practically, how the fast track regime plays out while dealing with other regulators. For instance, listed companies and companies in the telecom or the insurance space require prior approvals for undertaking a Scheme and also provide for other steps and compliances. Therefore, unless the intent to fast track Schemes as envisaged under the 2013 Act finds place in other sector based regulations as well, this noble intent under the 2013 Act may lose steam soon.
The migration of the fast track Scheme regime into an NCLT-driven process may get triggered under three scenarios. First, where the companies opt for it; second, when the CG files an application on grounds of protecting the public and, or creditor interest; and third, where the companies fail to obtain approval from the creditors as envisaged under Section 233. In the latter two scenarios, it becomes very important that the Scheme is backed by a strong rationale which is not detrimental to any stakeholders whose approval is required and the applicant companies are generally not viewed in a negative light by the concerned ROCs and OLs due to past dealings. Therefore, it will be interesting to note how the ROC and OL will examine the Schemes on one hand and keeping creditors happy assumes more importance on the other hand, to ensure that the Scheme does not get shot down; otherwise, the risk of being thrown at the NCLT’s mercy may become a reality
With the introduction of the fast track schemes’ regime, one can expect a significant reduction in time and cost assuming the Scheme goes through without NCLT intervention. However, there are certain ancillary aspects which may need to be revisited. One such aspect is the registration requirement and payment of stamp duty on Schemes especially in instances where the applicant companies are situated in different states. A noteworthy observation made way back in 2005 under the Report on Company Law prepared by the Dr. J.J Irani led committee comes to mind. It was recommended that there should be an independent central electronic registry for registering the approved schemes coupled with a Constitutional amendment introducing a uniform regime for stamp duty payments (of reasonable amounts) on Schemes to put to rest any ambiguities on the requirement to make stamp duty payments in multiple states. This could help in reducing costs significantly and make restructuring a much smoother exercise especially in the global competitive context.
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