2020 (10) TMI 919 - AT - Companies Law

Approval of Scheme of Arrangement - Sections 230-232 of Companies Act, 2013 - HELD THAT - The proposed scheme of compromise and arrangement should not be violative of any provisions of law and is not contrary to public policy. It is apparent from the records that there were irregularities and non-compliances from a very long time due to which Stock Exchange took action against the Respondent No. 1 Company and suspended the trading of its securities in the year 2002. Nothing has been brought on record that the Respondent No. 1 Company have taken any serious actions to make the requisite compliances so that trading of the shares of the company can be resumed. Non action of the Respondent No. 1 Company have serious impact on the investors who have invested their hard money in the company. These non-compliances and irregularities or any illegal act already committed cannot be ratified under the umbrella of scheme as envisaged under Section 230-232 of Companies Act, 2013. We have also gone through the observations made by the Regional Director, Western Region, Mumbai. These objections raised by the regional directors clearly points out the irregularities and non-compliances that were present at the time of sanctioning of scheme by the NCLT. The Company must be in compliance of the provision of law and cannot act just on the basis of a legal opinion. The respondent No. 1 Company should have instantly rejected the application money for 10,375 shares as the Application applied were for less than the minimum lot size i.e. 100 shares. The assertion of the Respondent No. 1 Company that it was unaware of the BSE Rejection Letter dated 6th May, 1999 until in the year 2012 is not tenable as the company was listed and must be in touch with the Exchange for various compliances. The scheme appears to be used as a course of action to rectify the irregularities previously done/committed by the Respondent No. 1 Company. Therefore, the grounds raised by the Regional Director for dismissing the petition seems to be just and reasonable - NCLT has overruled the objections raised by the Regional Director on the ground that the objections are mere on the procedural aspects and do not raise any illegality in the scheme or that it is against public policy. Even if the objections are procedural but it is the jurisdiction of the Tribunal that such procedural aspects need to be duly complied with before sanctioning of the scheme, as it would lay down a wrong precedent which would allow companies to do whatever acts without the compliances and confirmation of the Court and other sectoral and regulatory authorities and thereafter get it ratified by the Court under the Umbrella of scheme . It should have been contemplated that compliance of law in itself is a part of public policy. It is the duty of the Tribunal or any court that their Orders should encourage compliances and not defaults. The Scheme under section 230 of Companies Act, 2013 cannot be used as a method of rectification of the actions already taken. Before the scheme gets approved, the company must be in compliance with all the public authorities and should come out clean. There must be no actions pending against the company by the public authorities before sanctioning of a scheme under section 230 of the Companies Act, 2013. Appeal allowed.

Summary

Issues Involved:
1. Legality of the Scheme of Arrangement
2. Compliance with Regulatory Authorities
3. Appellant's Locus Standi
4. Procedural Irregularities
5. Public Policy and Investor Protection

Detailed Analysis:

1. Legality of the Scheme of Arrangement:
The Appellant challenged the impugned order dated 6th July 2020, passed by NCLT, Mumbai, approving a Scheme of Arrangement under Sections 230-232 of the Companies Act, 2013. The Appellant argued that the Scheme was a mere rectification of actions already taken by the Respondent Company without obtaining necessary approvals from the Tribunal and other Regulatory Authorities. The NCLT Mumbai had stated that the scheme appeared to be fair and reasonable, did not violate any provisions of law, and was not contrary to public policy or public interest. However, the Appellant contended that the NCLT failed to appreciate the entire facts and circumstances, leading to a conclusion opposed to the principles laid down under sections 230-232.

2. Compliance with Regulatory Authorities:
The Appellant highlighted several instances of non-compliance by the Respondent Company, including failing to adhere to SEBI and BSE guidelines, not registering with depositories, and not obtaining necessary sanctions for capital reduction. The Regional Director, Western Region, Mumbai, also submitted objections, pointing out irregularities such as the company acting on legal opinion rather than the provisions of Section 100 of the Companies Act, 1956, and the failure to refund application money for shares applied for less than the minimum lot size. The Appellant argued that these non-compliances could not be ratified under the guise of a “scheme” as envisaged under Sections 230-232.

3. Appellant's Locus Standi:
The Respondent argued that the Appellant, holding only 15 shares (0.00012% of the paid-up capital), lacked the locus standi to object to the scheme under Section 230(4) of the Companies Act, 2013, which requires at least 10% shareholding to object. However, the Appellant contended that Section 230(4) does not apply when there are questions of legality, breach of law, unfairness, and non-compliance with mandatory provisions. The Tribunal noted that even if the Appellant's locus standi was questionable, the objections raised by the Regional Director, a public authority, should be given due weightage.

4. Procedural Irregularities:
The Appellant pointed out several procedural lapses, including the company's failure to act on the BSE's rejection letter dated 6th May 1999, its non-compliance with SEBI's public shareholding requirements, and the presentation of the scheme as a rectification of past actions rather than a new proposal. The Tribunal observed that compliance with procedural aspects is crucial and that the NCLT should have ensured all procedural requirements were met before sanctioning the scheme.

5. Public Policy and Investor Protection:
The Tribunal emphasized that the main objective behind SEBI's establishment is to protect investors' interests and ensure the efficient functioning of the securities market. The Respondent Company's actions, taken only after SEBI passed an adverse order, indicated an attempt to safeguard its directors and the company rather than genuinely addressing investor concerns. The Tribunal noted that compliance with laws is a part of public policy, and the NCLT's order should encourage compliance, not defaults.

Conclusion:
The appeal was allowed, and the impugned order dated 6th July 2020, passed by NCLT, Mumbai, was set aside. The Tribunal directed the Respondent Company to undo all actions taken in line with the scheme sanctioned by NCLT, Mumbai. The Regional Director, Western Region, Mumbai, was instructed to observe the compliances. No order as to cost.