With robustness and Transparency which New Companies Act offers, it has also bought lot of ambiguity and unnecessary issues which needs to be clarified by MCA. The New Act has introduced many new concepts as compared to the existing Act and made material changes to the provisions under the existing Act before adopting the same. The New Act proposes constitution of a "National Company Law Tribunal" (NCLT) to replace the 'Company Law Board' (CLB) and also assume the jurisdiction of the High Court, inter alia, as the sanctioning authority in relation to Restructuring. It will facilitate speedy disposal of cases.
However the proposal for this change was already inserted in the existing Act, but this proposal never became operational. Further, even under the New Act there is no clarity as to how long it will take the NCLT to be constituted and become operational. This is another factor which creates a lot of uncertainties, especially regarding Restructuring. The New Act provides that all Restructuring in progress, at the time when the NCLT becomes operational, shall be transferred from High Court to NCLT and NCLT will continue from the stage before transfer and complete it, however, the New Act has not specified that NCLT will complete those transferred cases under the provisions of the old or new Act. A Scheme of Restructuring typically takes a time of 3 to 6 months to complete but New Act does not provide for any transitional provisions to govern Restructuring in progress at the time of the replacement of the existing Act. Therefore there is no clarity as to whether such process will be continued and completed under the provisions of the existing Act or under the provisions of the New Act.
Further if the restructuring is to be continued under the New Act, than how to deal with any non-conformity of the portion of the process completed under the existing Act, with the provisions of the New Act. In order to remove procedural aspects, certain changes have been also introduced such as NCLT may dispense with holding of meeting of creditors only if creditors holding 90 percent in total value of creditors file affidavit confirming their approval to sanctioning of the Scheme of Compromise or Arrangement.
However, prima facie, obtaining dispensation of Creditor's meeting would be difficult and most arrangements, if not all, will involve convening of creditor meetings. Further this provision is applicable to creditors meeting only and not to Shareholders meeting. New Act provides for a wider circulation of Notice as once a meeting is ordered, notice of the meeting is to be sent individually to all the members, creditors and debenture holders. As a result, the notice is to be sent to all, irrespective of the fact that the meeting in relation to that class is dispensed with. e.g. the meeting of creditors is ordered and meeting of members is dispensed with, still the Notice should be sent to all members. In order to bring shareholders democracy, concept of class action suits have been introduced which provides that objections shall only be made by persons holding at least a 10 percent in the shareholding or having outstanding debt of at least 5 percent of the total outstanding debt as per the latest audited financials.
The term "voting" seems to suggest that the negative votes can be casted only by members/creditors complying with the above. However, it may be unintended and, therefore it should be read as applicable only for objections to be raised at the time of hearing of the Petition. Therefore clarification needs to be sought from MCA to avoid unnecessary claims. Where a meeting is held, the arrangement is required to be approved by a majority of persons, representing 3/4th in value of creditors/members/or any class however condition of "present and voting" is replaced by "voting". Present and voting means that the majority is to be computed with reference to number of persons who have voted and value of shares held by such persons/credit balance on account of such person.
Further Company needs to file a certificate from its auditor to the effect that the accounting treatment, if any, specified in the Scheme is in conformity with the prescribed accounting standards. There is a conceptual shift in provisions relating to amalgamations since New Act provides for entirely separate procedures for Compromise or Arrangements involving Amalgamation. Once an application under Section 230 dealing with an Compromise or Arrangement involving an Amalgamation is made, the process prescribed under Section 232 needs to be followed and orders are to be passed under Section 232 and not under Section 230 as in the case of Arrangements not involving Amalgamation. However there is no clarity about how to deal with a composite Scheme involving Arrangements being subject matter of Section 230 and Amalgamations being subject matter of Section 232. MCA needs to clarify whether such Scheme will be governed under both the sections or it will be governed only under Section 232. Creation of Treasury Shares/Stocks is now completely prohibited as shares of the transferee company should not be held in the name of the transferee company or under a trust for the benefit of the transferee company or its subsidiary or an associate company, but should be cancelled or extinguished.
The New Act has also introduced a new concept of a Fast Track merger which, at the option of the companies involved, can be used for merger of two or more small companies, or merger between holding company and its wholly owned subsidiary company, or such other classes of companies as may be prescribed where Small Company is defined as non-public company and having paid-up capital < INR 5 million or turnover< INR 20 million as per the last audited financials.The principal benefit of the Short form merger over Amalgamation is approval of NCLT is not required as a consequence, the companies may not be required to file documents required to be filed under clause 24(f) of the listing agreement, in the case of listed companies. Other benefits include shorter timeline and relaxation from requirement of auditor's certificate of compliance with applicable accounting standards. Issues in the Short form merger which may make it less attractive are CG's power to transfer the Scheme to the NCLT for application of normal Amalgamation provisions.
Further Positive confirmation required from 90 percent of shareholders and creditors holding 90 percent value. There is no clarity whether Short Term Merger will be allowed prior to NCLT becoming operational or not. The New Act has amended the definition of subsidiary company. Besides other changes, it provides that a company in which the holding company holds >50 percent of the total share capital. The existing Act provided for holding > 50 percent of the equity share capital. This is a major shift in the definition. The existing Act allowed merger of a foreign company with an Indian company, but not vice versa. The New Act provides for Amalgamation of/Demerger from a foreign company, whether having its place of business in India or not, with an Indian company and vice versa but subject to certain requirements as Prior approval of the Reserve Bank of India is necessary.
The Scheme may provide for payment in cash or in Depository receipts or both. As per the existing applicable provisions, a company can be declared sick if its net worth is eroded completely/ potentially as prescribed under the Sick Industrial Companies Act, 1985 (SICA).
The Bill seeks to amend the existing provisions applicable to sick companies and among other, has changed the applicability as well as the exiting criteria for determining sickness from "net worth erosion" to "inability to pay debt". Dependency of other statues on Existing act will also need to be amended due to change in this statutory Act like Section 2(19AA) of the Income-tax Act, 1961 which defines demerger with reference to order under Section 391 of the existing Act. The tax neutrality to Demerger is linked to this definition. Relevant provisions of the New Act or respective enactments are amended; operation of provisions under those enactments/regulations may become difficult or impossible or may lead to unwanted litigation.
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Tags Corporate Law