2022 (1) TMI 716 - AT - Companies Law

Appeal Success: Unsecured Creditors' Consent Vital in Scheme of Amalgamation

In Re : Ericsson India Private Limited, Ericsson India Global Services Private Limited

The Appellate Tribunal addressed the appeal against the NCLT's dismissal of the application under Sections 230 to 232 of the Companies Act, 2013, related ... Approval of the Scheme of Amalgamation - Sections 230 to 232 of the Companies Act, 2013 - HELD THAT:- Section 230(2)(a) of the Act read with Rule 6(3)(viii) of the Rules shows that the scope and intent is to require Companies to disclose all investigations/proceedings which are ‘material’ and relating to the Company. We are of the considered view that the wording of Section 230(2)(a) should be interpreted as “all material facts relating to the Companies, such as, pendency of any investigation of any proceeding against the Company” - as per Clause 6 of the Scheme upon this implementation, all proceedings in the name of the ‘Transferor Company’ shall be continued and enforced against the ‘Transferee Company’ and such proceedings shall not be discontinued or prejudicially affect anyone by reason of the Scheme. Accordingly, the requirements of Section 230(2)(a) of the Act read with Rule 6(3)(viii) of the Rules are met. This Tribunal in a catena of Judgements has dispensed with the Meeting of the Shareholders wherein the case is of a merger of a Wholly Owned Subsidiary and Parent Company, wherein, the net worth of both Companies is positive and ‘Unsecured Creditors’ are paid off in the ordinary course of business and their liability is not affected as it is neither reduced nor extinguished - the material disclosed in the Affidavit is in compliance of Section 230(2)(a) of the Act read with Rule 6(3)(viii) of the Rules. Appeal allowed - decided in favor of appellant. Issues:1. Dismissal of application under Sections 230 to 232 of the Companies Act, 2013 by NCLT.2. Requirement of consent of unsecured creditors for approval of Scheme of Amalgamation.3. Interpretation of Section 230(2)(a) of the Companies Act, 2013 and Rule 6(3)(viii) of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.4. Dispensation of meeting of shareholders in the case of a merger of a Wholly Owned Subsidiary and Parent Company.Issue 1: Dismissal of Application under Sections 230 to 232 of the Companies Act, 2013 by NCLT:The Appellate Tribunal addressed the appeal against the NCLT's order dismissing the application under Sections 230 to 232 of the Companies Act, 2013, related to the Scheme of Amalgamation between two companies. The NCLT observed the significant outstanding unsecured debts of both companies and emphasized the necessity of obtaining approval from unsecured creditors to prevent prejudice. The Tribunal cited Section 230(9) of the Companies Act, 2013, which requires the consent of creditors for schemes of compromise or arrangement. Referring to the judgment in Nathi Devi v. Rahda Devi Gupta, the Tribunal concluded that the affidavits filed were incomplete and dismissed the application.Issue 2: Requirement of Consent of Unsecured Creditors for Approval of Scheme of Amalgamation:The Tribunal highlighted the importance of unsecured creditors' consent in approving the Scheme of Amalgamation. It emphasized that the creditors should be well-informed and allowed to express their views on the merger, especially regarding the transfer of liabilities. The Tribunal held that the explicit approval of unsecured creditors from both companies is necessary and cannot be evaded, as mandated by Section 230(9) of the Companies Act, 2013. The judgment stressed the significance of creditors' consent to avoid causing prejudice to any party involved in the scheme.Issue 3: Interpretation of Section 230(2)(a) of the Companies Act, 2013 and Rule 6(3)(viii) of the Companies Rules, 2016:The Tribunal analyzed Section 230(2)(a) of the Companies Act, 2013, and Rule 6(3)(viii) of the Companies Rules, 2016, regarding the disclosure of material facts by companies. It concluded that the companies must disclose all material investigations and proceedings related to them. The judgment clarified that the affidavits filed by the appellant companies adequately disclosed the necessary financial and investigative details, meeting the requirements of the Act and Rules. The Tribunal emphasized the importance of full disclosure to ensure transparency in the amalgamation process.Issue 4: Dispensation of Meeting of Shareholders in the Case of a Merger of a Wholly Owned Subsidiary and Parent Company:The Tribunal allowed the appeal against the NCLT's decision, setting aside the Impugned Order dated 23.09.2021. It referenced previous judgments where meetings of shareholders were dispensed with in cases of merger involving a Wholly Owned Subsidiary and Parent Company. The Tribunal considered factors such as positive net worth, payment of unsecured creditors, and no dilution in shareholding to support its decision. By applying the principles established in earlier cases, the Tribunal concluded that the material disclosed by the appellant companies complied with the Act and Rules, leading to the allowance of the appeal.This detailed analysis of the judgment provides insights into the legal intricacies and considerations involved in the decision-making process of the Appellate Tribunal.