| Headnote |
Companies Act, 1956: s.396 – Constitutionality of – Held: s.396 provides for compulsory amalgamation of companies in public interest – Art.31A of the Constitution envisages that any “law” providing for the amalgamation of two or more corporations in public interest is immune from challenge on grounds relatable to Art.14 or Art.19 of the Constitution of India – s.396 of the Companies Act is such a law – Constitution of India – Arts.14, 19 and 31A. Companies Act, 1956: s.396 – Derivative immunity of the Central Government order – Whether the Central Government’s order made under s.396 would also receive the protective umbrella of Art.31A, given the fact that s.396 is undoubtedly protected by Art.31A – Whether order of Central Government passed under s.396 is administrative in nature – Held: The expression “law”, as defined in Art.13(3)(a), includes an Ordinance, rule, regulation, notification, and custom or usage having in the territory of India the force of law – Obviously, therefore, when the expression “order” is used, it would take colour from Ordinance, rule, regulation, notification, which are all legislative in nature, and not administrative – Even custom or usage having the force of law refers to general rules of conduct, as opposed to administrative orders passed on the facts of a case – However, the Central Government’s order in question directly impacts the rights and liabilities of the companies, their shareholders and creditors, sought to be amalgamated under the order – Such order is not an order in general which applies to all such companies, but only to the particular companies sought to be amalgamated and does not lay down any general rule of conduct by itself, but in fact, follows the general rule of conduct laid down by s.396 – Therefore, such an order is not in the nature of legislation or delegated legislation – The fact that, under s.396(5), the Central Government order has to be laid before the Houses of Parliament does not detract from the fact that the order is administrative and not legislative in character – Constitution of India – Art.13(3). Companies Act, 1956: s.396 – Essentiality test – Held: The Central Government has to be “satisfied”, meaning thereby, that it must, on certain objective facts, come to a conclusion that amalgamation between two or more companies is necessary – This can only be done if the Central Government finds it “essential”, i.e., necessary to do so. Companies Act, 1956: s.396 – Public interest – Meaning of – In the context of compulsory amalgamation of two or more companies, the expression “public interest” would mean the welfare of the public or the interest of society as a whole, as contrasted with the “selfish” interest of a group of private individuals – Thus, “public interest” may have regard to the interest of production of goods or services essential to the nation so that they may contribute to the nation’s welfare and progress, and in so doing, may also provide much needed employment – “Public interest” in this context would, therefore, mean the combining of resources of two or more companies so as to impact production and consumption of goods and services and employment of persons relatable thereto for the general benefit of the community – Conversely, any action that impedes promotion of industry or obstructs growth which is in national or public interest would run counter to public interest as mentioned in s.396 of the Act. Companies Act, 1956: s.396(3) – Amalgamation order – Compensation – Right of shareholder or a creditor – s.396(3) speaks of a shareholder’s or a creditor’s interest in or rights against the company resulting from an amalgamation order – A shareholder or creditor gets effected by an amalgamation order if the value of his share gets depleted as a result of the amalgamation and if dividends that have been paid to him are likely to come down as a result of the amalgamation – Likewise, a creditor of a solvent company is directly effected by an amalgamation by which the amount loaned by such creditor becomes, as a result of the amalgamation, less likely to be paid back in time, than if the amalgamation did not take place – Every shareholder of a company and indeed, every creditor of a company, is concerned only with the “economic value” of his share or the loan granted to a company, as the case may be – The moment the share value, in real terms, is likely to dip, and/or loans granted are likely not to be repaid in time or at all as a result of an amalgamation, such members or creditors of the amalgamating company are equally entitled to be compensated for this economic loss as are the members and creditors of the amalgamated company, depending on the facts of each case – To the extent to which the interest or rights of such member or creditor are less than his interest or rights against the original company, post amalgamation, he shall be entitled to compensation which is to be assessed. Companies Act, 1956: ss.396(3), 396(3A) – Compensation to aggrieved person – The language used in the appeal provision, i.e. s.396(3A), is “any person aggrieved by any assessment of compensation made by the prescribed authority under sub-section (3) may…… appeal to the Tribunal, and thereupon the assessment of the compensation shall be made by the Tribunal” – The prerequisites for the application of sub-section (3A) are that a person first be aggrieved by an “assessment of compensation” “made” by the prescribed authority – Where no assessment of compensation whatsoever is made by the prescribed authority, no person can be aggrieved by an order which does not assess any compensation, which may be interfered with by the Appellate Tribunal which must then assess the compensation for itself – The statute clearly entitles such shareholders and creditors to have compensation assessed first by the prescribed authority and then by the appellate authority – The orders of “non-assessment” by the prescribed authority can more appropriately be challenged in judicial review proceedings, in which the High Court, acting under Art.226 of the Constitution of India can, if an infraction of s.396(3) is found, send the matter back to the prescribed authority to determine compensation after which the right of appeal under sub-section (3A) of s.396 would then follow. Companies Act, 1956: s.396 – Applicability of – Compulsory amalgamation of companies by a Central Government’s order in public interest – NSEL, a 99.99% subsidiary of FTIL, defaulted on nearly 5,600 crore payments to its 13,000 investors – Trading was suspended in NSEL after payments default – Order of compulsory amalgamation of NSEL with appellant (FTIL) under s.396 – Whether each of the conditions precedent for applicability of s.396 applied to the facts of the instant case – Held: There is no doubt that in July, 2013, as a result of NSEL stopping trading on its exchange, a payment crisis of Rs.5600 crore arose – The letter addressed by FMC to the Ministry of Corporate Affairs show that immediate reason for amalgamation, according to the FMC was that NSEL, as a corporate entity, was financially and physically incapable of effecting any substantial recovery from defaulting members – By the time final amalgamation order was passed, emergent situation of 2013 which required emergent step of compulsory amalgamation by the passage of time, disappeared – Decrees/awards worth Rs.3365 crore were obtained against the defaulters, with Rs. 88 crore crystallised by the committee set up by the High Court, pending acceptance by the High Court, even without using the financial resources of FTIL as an amalgamated company – What was emergent, and essential, even according to the FMC and the Government in 2013-2014, was, therefore, largely redressed in 2016, by the time the amalgamation order was made – Therefore, the essentiality test, which is the condition precedent to the applicable to s.396, was not satisfied – When it comes to public interest as opposed to the private interest of investors/traders who have not been paid, the amalgamation order at several places refers to “essential public interest” as if “essential” goes with “public interest” instead of being a separate and distinct condition precedent to the exercise of power under s.396 – All the expressions used in relation to “public interest” have relation only to the businesses of the two companies that are sought to be amalgamated – The leveraging of combined assets, capital, and reserves is for the purpose of only settling liabilities of certain stakeholders and creditors when the order is read as a whole, and given the fact that the businesses of the two companies were completely different – So far as achieving economy of scale and efficient administration is concerned, it is difficult to see how this would apply to the fact situation in this case where NSEL is admittedly a company which has stopped functioning as a commodities exchange with no hope of any revival – Government order itself reflects the net worth of NSEL as INR 8.86 crore despite its capital being INR 60 crore, inasmuch as the total reserve and surplus is a negative figure of INR 51.54 crore – As against this, FTIL’s balance sheet, as on 31.03.2015, discloses that for the same year, FTIL’s net worth is INR 2779.94 crore – Also, FTIL paid high dividends to its shareholders while NSEL never paid a single dividend ever since its inception – This would show that Post amalgamation dividend payable to the shareholders of FTIL is bound to come down – Correspondingly, the ‘marketable value’ of such shares will also fall – The ‘economic value’ of shares held in FTIL may, post amalgamation, depress the market value of shares held by such shareholder, and would also impact the dividend payable on such shares post amalgamation – Further no compensation is provided either to the shareholders or creditors of FTIL for the economic loss caused by the amalgamation which is breach of s.396(3) – This is a case where there is complete non-application of mind by the authority assessing compensation to the rights and interests which the shareholders and creditors of FTIL have and which are referred to in s.396(3) of the Act – This being the case, it is clear that s.396(3) was not followed either in letter or in spirit – The amalgamation order is, therefore, ultra vires s.396 and being arbitrary and unreasonable, violative of Art.14 of the Constitution of India. |
