- Aaj Sikri and Arnav Ghai
'Public Interest' A Scope for Adjudication from the Lens of the Scheme of Amalgamations
Introduction
The legal jurisprudence vis-à-vis jurisdiction of National Company Law Tribunals and National Company Law Appellate Tribunal ("NCLT" and “NCLAT”) has always been in a state of a conundrum. Recently, the Supreme Court ("SC") recognized the principle of 'inherent lack of jurisdiction’ and ruled that matters involving public law domains are beyond the jurisdiction of the NCLT. Through this article, the author seeks to answer whether the NCLT has exceeded their jurisdiction when issues involving 'public interest' arise'. This issue is yet to be addressed by the SC; therefore, it becomes significant to analyze this position of law to avoid any scope for confusion in the subsequent judgments. This article focuses on the role of Tribunals in sanctioning the scheme of amalgamations. At the outset, the Tribunal has to sanction the scheme of amalgamation only after considering the statutory requirements. However, the Tribunals have often gone a step further and taken 'public interest' into consideration. It is significant to analyze this factor of consideration because it remains an unexplored territory in legal jurisprudence vis-à-vis corporate law.
The Law of the Land
In the landmark judgment of Miheer H. Mafatlal v. Mafatlal Industries Ltd ("Miheer H. Mafatlal"), the SC answered various questions in relation to the Company Courts' jurisdiction and scheme of amalgamations. The Court ruled that:
It has to only consider whether the scheme is following the statutory requirements and the requisite meetings have been held as under Section 391 (1) (a) of the Companies Act, 1956 (“Act”).
The scheme is supported by the requisite majority as contemplated by Section 391(2) of the Act.
The majority decision of the concerned parties/creditors is fair and reasonable.
As per Section 393 (1) (a) of the Act, the requisite material is placed before the voters at the meetings.
The scheme of amalgamation should not be violative of any provision of law and should not be inconsistent with public policy.
The members, creditors acted in good faith and in a bona fide manner.
The scheme as a whole should be fair, reasonable, and just.
Further, the Court held that it could not minutely scrutinize the scheme and come to an independent conclusion when most creditors have approved the scheme. For that matter, the Court cannot delve into the substance of the parties' decision because that falls within the commercial and corporate wisdom. Therefore, the Court cannot act as an appellate authority, and the jurisdiction is limited to being peripheral and supervisory.
The Role of Public Interest
In the judgment of Hindustan Lever Employees' Union v. Hindustan Lever Limited (“Hindustan Lever Employees”), the Supreme Court held that Section 391 of the Act casts an obligation upon the Courts to consider public interest before sanctioning a scheme of amalgamation. Thus, if a scheme runs contrary to the interests of the public, then the Court has the power not to approve the scheme. This contrasts with Miheer H. Mafatlal, wherein the Court recognized an exhaustive understanding of the ambit and scope of the jurisdiction of the company Courts. The implication of this conflicting jurisprudence can be highlighted by the case of Wiki Kids Limited and another v. Regional Director and Other (“Wiki Kids Ltd.”).
In this case, the NCLT rejected the scheme because no public interest is involved and it only sought to benefit the common promoters. An appeal was preferred before the NCLAT; it was argued by the appellants that all statutory requirements were met and the concerned authorities (BSE and SEBI) raised no objections. It should be noticed that the appellants used a similar line of reasoning as it was held in Miheer H. Mafatlal. It was further argued that NCLT's jurisdiction is limited to only reviewing whether the proper procedure has been followed or not. Surprisingly, the appellants placed reliance on Hindustan Lever Employees and submitted that the NCLT's role is limited to only checking whether all stakeholders have been consulted during the procedure.
The Ruling in Wiki Kids Ltd.
The NCLAT rejected all these arguments and delved into the material considerations of the procedure that was followed. Dealing with NCLT's jurisdiction, the Tribunal noted that it is equipped with both judicial and technical members. Therefore, they were well endowed to adjudicate upon the pith and substance of a scheme. The Tribunal further added that even if every procedure had been followed or statutory requirements had been fulfilled, and there were no objections raised by the shareholders, creditors, or any other class of members, it would not necessarily mean that the scheme was in the public interest.
The Takeaway
This ruling is inconsistent with the SC judgment in Miheer H. Mafatlal, wherein the Court specifically laid down certain principles that ought to be followed while scrutinizing the scheme of amalgamations. In the present case, the NCLT has gone one step ahead to include 'public interest' as one of the criteria to be considered, even when there are no objections to the same. This is contrary to Miheer H. Mafatlal as it has exceeded the jurisdiction by acting as a Court of appeal. Ideally, the NCLT should have only reviewed whether there was any objection by any class of members of either the transferor or the transferee company. Since there was no objection, the Tribunal should not have delved into the parties' commercial wisdom. The Tribunal failed to appreciate the ratio decidendi in Miheer H. Mafatlal, and it is wrong to suggest that the aforesaid decision can be distinguished based on facts. Even if we consider that ‘public interest’ is an essential factor for the Courts to consider, then there has to be an extent to which the principle can be followed. As per Hindustan Lever Employees, the Court mentioned that the scheme would not be sanctioned if it runs contrary to the public interest. There is a difference between a ‘scheme running contrary to public interest’ and ‘an absence of public interest’. The NCLAT in Wiki Kids Ltd. failed to appreciate this difference and included the latter to be a matter for consideration.
Further, the NCLT has applied the principle of 'public interest' in various matters. For instance, in 2017, the NCLT rejected the proposal for a scheme of amalgamation by Ajanta Pharma Limited and Gabs Investment Private Limited[i](shareholders of Ajanta Pharma Ltd.),the scheme being contrary to the public interest.The scheme was directed for the joint promoters to benefit from the scheme as they would hold an equal number of shares even after the amalgamation. This also runs contrary to the judgment in J.K. Agri Genetics Ltd. v. Union of India, wherein the Court stated that even if a scheme of amalgamation is directed to an advantage for the promoters, the scheme cannot be rejected provided the requisite majority has approved it of the shareholders.
Recently, the NCLAT reiterated that while sanctioning a scheme, the Tribunal has to only examine whether the statutory requirements as per the Companies Act, 2013 have been met. It begs the question as to how the Court in Wiki Kids Ltd. implicated the ‘absence of public interest’ to be a statutory requirement. The Tribunal failed to provide an explanation for the same.
Conclusion
It can be reasonably concluded that the Tribunals have often exceeded their jurisdiction while considering the scheme of amalgamations concerning 'public interest.' We have earlier seen in the landmark judgment of Miheer H. Maftlal that the SC specifically ruled upon the jurisdiction of the NCLT and recognized an exhaustive understanding of pre-requisites of the scheme of amalgamation. However, the Court did not deal with 'public interest' specifically, which possibly created confusion. The Court in Wiki Kids Ltd. acted contrary to the current judicial position in as much by ignoring the fact that neither were any objections raised nor were there any irregularities with the scheme of amalgamation. Further, it failed to strike a difference between a ‘scheme running contrary to public interest’ and ‘an absence of public interest,’ which is a result of a misinterpretation of Hindustan Lever Employees' .Consequently, it extended the scope and ambit of its jurisdiction by interfering in the aspect of commercial wisdom, which has been held to be largely immune from judicial scrutiny. The Court conveniently rejected the authority of the Miheer H. Maftlal by distinguishing based on facts.
There exists no clarity in the application of ‘public interest’, especially at the Tribunal level, and the author has highlighted various instances where one judgment is inconsistent with the other. For these reasons, there is a need for the SC to address this issue at the earliest.
References:
[i] In Re: Gabs Investments Pvt. Limited and Ors , CSP No. 995 of 2017 and CSP No. 996 of 2017 in CSA Nos. 791, 792 of 2017