NCLT – A FORUM TO PROVE PROFESSIONAL COMPETENCE

[Mr. M. GOVINDARAJAN]

Introduction

With effect from 31.05.1991 vide Companies (Amendment) act, 1988, the Company Law Board was established under of the Companies Act, 1956 to exercise and discharge such powers and functions as may be conferred on it.  The Company Law Board is given power to inquire into various matters as conferred in Companies Act, 1956.  However the matters such that winding up, merger, amalgamation etc., are handled by the High Court, designated as Company Court.

Vide   Companies (Amendment) Act, 2002, Part IB and Part IC were inserted in the Companies Act which deal with the constitution of National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT).   Part IB, containing Sections 10FB to 10FP provides for the constitution of NCLT and the matters related there at.   Part IC, containing Sections 10FQ to 10GF provides for the constitution of NCLAT and the maters related thereat.  It was proposed that NCLT will perform all the functions vested on Company Law Board and Company Court. 

Judicial journey

The provisions of the constitution of NCLT and NCLAT were challenged by the Madras Bar Association on the ground that the Administration tried to usurp the functions of judicial in Tribunals.  The Supreme Court quashed the provisions relating to the constitution of NCLT and NCLAT but it gave directions to do suitable modifications as directed by the Supreme Court. 

The Companies Act, 2013 was enacted replacing the Companies Act, 1956 which came into effect from September 2013. All the provisions have not yet been notified.  The provisions relating to constitution of NCLT and NCLAT are also found in the new Act.  The Madras Bar Association again challenged the provisions relating to NCLT and NCLAT before the Supreme Court.  The Supreme Court upheld the validity of the provisions but gave directions to modify the terms of the appointment of Technical member. 

NCLT & NCLAT come true

Vide Notification NO. S.O. 1932 (E), dated 01.06.2016, the Central Government constituted the National Company Law Tribunal  to exercise and discharge the powers and functions as are, or may be, conferred on it by the Companies Act, 2013 , with effect from 01.06.2016.  Vide Notification No. S.O.1933 (E), dated 01.06.2016, the Central Government constituted the National Company Law Appellate Tribunal (NCLAT) for hearing appeals against the orders of the National Company Law Tribunal with effect from 01.06.2016. Vide Notification No. S.O.1934 (E), dated 01.06.2016 the Central Government appointed the 01.06.2016 as the date on which the provisions relating to Tribunal shall come into force. 

Dissolution of Company Law Board

Section 466 which provides for dissolution of Company Law Board has also come into effect from 01.06.2016.  Vide Notification No. 1936(E), dated 01.06.2016 the Central Government appointed the 01st day of June, 2016, on which all matters or proceedings or cases pending before the Board of Company Law Administration (Company Law Board) shall stand transferred to the National Company Law Tribunal and it shall dispose of such matters or proceedings or cases in accordance with the provisions of the Companies Act, 2013 or the Companies Act, 1956.

Transfer of cases to NCLT

 The transfer of cases to the Tribunal is being done in three phases from the existing bodies to NCLT-

• First Phase – All cases of Company Law Board have been transferred to NCLT;
• Second Phase – BIFR cases will be transferred to NCLT;
• Third Phase – The cases pending before the High Court are to be transferred to NCLT.

Appearance before NCLT

Chapter XXVII of the Companies Act, 2013 provides for the constitution of National Company Law Tribunal vide Section 408 and National Company Law Appellate Tribunal vide Section 408. 

Section 432 of the Act provides for the right to legal representation.  The said section provides that a party to any proceeding or appeal before the Tribunal or the Appellate Tribunal, as the case may be, may either appear in person or authorize one or more-

• Chartered Accountants; or
• Company Secretaries; or
• Cost Accountants; or
• Legal practitioners; or
• Any other person

to present his case before the Tribunal or Appellate Tribunal, as the case may be.

Thus the above said professionals are eligible to appear before the NCLT as well as NCLAT.  The difference between the erstwhile Companies Act, 1956 and the present Companies Act, 2013 is that before the Company Court for the purposes of merger and amalgamations and winding up proceedings only Advocates can appear or practice.   Now the scenario has been changed and the professionals may appear before the NCLT for the matters dealt with by Company Court previously.  Therefore, in the view of the author NCLT and NCLAT are the fora, for the professionals to prove their professional competence. 

The following matters were dealt with by Company Court/High Court under Companies Act, 1956-

• Section 75 – Returns as to allotments;
• Section 101 – Reduction of Share Capital;
• Section 102 – Reduction of Share capital;
• Section 103 – Registration of order and minutes of reduction;
• Section 104 – Liability of Members in respect of reduced shares;
• Section 107 – Rights of dissenting shareholders;
• Chapter V – Arbitration, Compromise and arrangements;
•  

The corresponding sections in the new Companies Act, 2013 are-

• Section 39(4) – Returns as to allotments;
• Section 48 – Rights of dissenting shareholders;
• Section 66- Reduction of Share Capital;
• Chapter XV – Compromises, arrangements and amalgamations;
• Chapter XX – Winding up.

The above said provisions have not yet notified since the cases pending before the Company Court/High Court have not yet been decided to be transferred.  It is expected that the above said provisions will be notified at the earliest possible and the NCLT will handle the cases that have been dealt with by Company Court/High Court. 

Professional competence                                                                                         

Definitely NCLT will be a challenge to the professionals  to exhibit their professional competence in all matters to be dealt with NCLT.  As discussed there are some areas which are being dealt with by Company Court/High Court. 

Among them the author chose the area of ‘Merger and Amalgamations’ which would be the better area for the professionals in practice to show their professional competence.

Merger and amalgamations

Mergers and amalgamations have become a big part of the corporate world, and are among the most strategic and tactical decisions made by the company.  In the last decade, the merger and amalgamation deals have been increasing significantly which could be worth of hundreds of millions or even billions of dollars.  M&A may dictate the fortunes of the companies involved for years to come.

With the current trends of globalization more and more M&A happened nationally and internationally.  The international transactions are dealing with more complicated situations when compared to national M&A.  The cultural differences, trading barriers, different national policies are some among them. 

Reasons for M&A

The following are some of the reasons that can be considered for M&A-

• Size is a great advantage in relation to costs.It assists in enhancing profitability, through cost reduction resulting from economies of scale, operating efficiency and synergy;
• Through business combination risk is diversified, particularly when it acquires businesses whose income streams are not correlated;
• M&A helps to limit the severity of competition by increasing the company’s market power where a company takes over the business of the competitor;
• A company is allowed to carry forward its accumulated loss to set off against its future earnings for calculating its tax liability;
• The business combination can result into financial synergy and benefits;
• Growth is essential for sustaining the viability, dynamism and value enhancing capability of a company.The company can grow externally by combining its operations with other companies through M&A;
• A business with good potential may be poorly managed and the assets underutilized, thus resulting in a low return being achieved.Such a business is likely to attract a takeover bid from a more successful company, which hopes to earn higher returns.

Types of M&A

The following are the various types of M&A-

• Horizontal merger – two companies that are in direct competition and share the same product lines and markets;
• Vertical merger – a customer and company or a supplier and company;
• Market extension merger – two companies that sell the same products in different markets;
• Product extension merger – two companies selling different but related products in the same markets;
• Conglomeration – two companies that have no common business areas.

All M&A have one common goal i.e., they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts.  The success of a merger or amalgamation depends on whether this synergy is achieved.

Objectives of M&A

The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies.   Two companies together are more valuable than two separate companies.  Except the obvious synergy effect, the other important motives for M&A are-

• Operating synergy;
• Financial synergy;
• Economic motives;
• Horizontal integration;
• Vertical integration;
• Tax motives.

Provisions relating to M&A

• Section 230 - The power to compromise or make arrangements with creditors and members;
• Section 231 - Power to Tribunal to enforce compromise or arrangement;
• Section 232 - Procedure of merger and amalgamation of the companies;
• Section 233 – Merger or amalgamation of certain companies;
• Section 234 – Merger or amalgamation of company with foreign company;
• Section 235 – Power to acquire shares of shareholders dissenting from scheme or contract approved by majority;
• Section 236 – Purchase of minority shareholding;
• Section 237 – Power of Central Government to provide for amalgamation of companies in public interest;
• Section 238 – Registration of offer schemes involving transfer of shares;
• Section 239 – Preservation of books and papers of amalgamated companies;
• Section 240 – Liability of offers in respect of offences committed prior to merger, amalgamation etc.,

Procedure

The merger and amalgamation involves the following procedure-

I stage

• To identify industry;
• To select sector;
• To choose companies;
• To find comparative costs and returns with the selected companies;
• To short list good companies;
• To assess the suitability;

II Stage

• To negotiate with the selected company;
• To approve the proposal by the Board of Directors of the companies;
• To prepare the draft scheme of merger or amalgamation;
• To adopt the scheme by the directors of the merging company;

 III Stage

• To apply to Tribunal for directions to hold the meeting of shareholders/creditors;
• Order of court for meeting;
• To holdmeeting as per the directions of Court order;
• Scheme to approved by 75% of the secured creditors;
• Scheme to be applied for sanction of the court;
• Court approval;
• To file the court order approving the scheme with Registrar of Companies;

Each stage involves much work in its process. 

Section 232(1) of the Act provides where an application is made to the Tribunal  showing that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of the company or companies involving merger or the amalgamation of any two or more companies and that under the scheme the whole or any part of the undertaking, property or liabilities of any company is required to be transferred to another company the Tribunal may on such application, order a meeting of the creditors or class of creditors or the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal may direct. 

Section 232(2) provides that the merging companies shall be required to circulate the following for the meeting so ordered by the Tribunal, namely-

• The draft of the proposed terms of the scheme drawn up and adopted by the directors of the merging company;
• Confirmation that a copy of the draft scheme has been filed with the Registrar;
• A report adopted by the directors of the merging companies explaining effect of compromise on each class of shareholders, key managerial personnel, promoters and non promoter shareholders laying out in particular the share exchange ratio, specifying any special valuation difficulties;
• The report of the expert with regard to valuation, if any;
• A supplementary accounting statement if the last annual accounts of any of the merging company relate to a financial year ending more than six months before the first meeting of the company summoned for the purposes of approving the scheme.

Expertise is to be shown in the preparation of the scheme.  Valuation is the must for the preparation of the scheme.  Expertise is also to be shown in the valuation methods. 

The Tribunal, after satisfying itself that the procedure specified, has been complied with, may, by order, sanction the merger or amalgamation scheme.    The order of the Tribunal shall be filed with the Registrar by the company within a period of 30 days of the receipt of the certified copy of the order.  The scheme shall clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date. 

Registered Valuers

Chapter XVII of the Act deals with Registered Valuers.  Section 247(1) of the Act provides that where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liability under the provisions of the Companies Act, 2013, it shall be valued by a person having such qualifications and experience and registered as a valuer in such manner, on such terms and conditions as may be prescribed and appointed by the audit committee or in its absence by the Board of Directors of that company.

Duties of Valuer

Section 247(2) of the Act that the valuer appointed shall-

• make an appeal, true and fair valuation of any assets which may be required to be valued;
• exercise due diligence while performing the functions as valuer;
• make the valuation in accordance with such rules as may be prescribed; and
• not undertake valuation of any assets in which he has a direct or indirect interest or becomes so interested at any time during or after the valuation of the assets.

Valuer

Section 247 has not yet been notified.  The practicing professionals  may act as a valuer according to the provisions of the Companies Act.  The role of valuer in merger and amalgamation is very important.  Considering the importance of ‘valuation’ the Institutes are on the move to conduct various Courses in valuation, in order to build the skills of the professionals in carrying out valuation assignments relevant to today’s business environment. 

Benches of NCLT

Vide Circular dated 07.06.2016 the Ministry of Corporate Affairs furnished the list of benches constituted.  The Principal Bench will be situated at New Delhi.  The other benches may be in New Delhi, Ahmadabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata and Mumbai.  The NCLAT will be at New Delhi.   In the view of the author the number of benches is not sufficient to deal with the company law matters.  Each State is to have one bench of NCLT.

Conclusion

As discussed the area of practice for the practicing professionals, such as Chartered Accountant in practice, Company Secretary in practice, Cost Accountant in practice, is widening after the constitution of NCLT and NCLAT.  The Institutes are on the way to equip the members in meeting the current challenges. The members are also to be keen in updating their knowledge, talent in showing their professional competence in this area.