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SPEED BREAKERS IN GETTING NCLT CLEARANCES IN SCHEME OF MERGER/DEMERGER/CAPITAL REDUCTION - MMJC
INTRODUCTION
When it comes to getting approvals for Merger/ Demerger / Capital reduction (hereinafter “Restructuring”) from National Company Law tribunal (NCLT), things are now getting complex from the perspective of compliances under the Companies Act, 2013 and rules made thereunder.
During clearances from Regional Director and Official liquidator (Herein after “Regulator”) in case of restructuring as applicable, Companies face many queries or concerns regarding compliances and health of the company or decoding the ultimate objective of restructuring. There have been many cases wherein Regulator have raised concerns over some of the areas of Compliances under the Companies act, 2013 repeatedly.
Let’s understand some of the crucial areas of compliances under Companies act, 2013 that should ideally be taken care before proceeding for Restructuring.
A. Significant Beneficial Owner (SBO) under Section 90 of Companies Act, 2013:
SBO Concept was enacted in 2019 under the Companies act, 2013 and plays a crucial role to identify the ultimate owner / controller of Companies. Whenever any restructuring happens the ultimate beneficiary may gain the direct or indirect benefits of the restructuring and if at all if there is any ulterior motive for restructuring it will be a red flag, hence compliance of reporting of SBO has been repeatedly been raised as a concern. Therefore, it is expected that the Companies make due reporting of SBO as and when required.
B. Registered office:
INC – 22 A i.e., Active form was enacted in 2019 which mandated all the companies to validate the Registered offices. Generally Regulatory notices for queries and requirements regarding restructuring are served on Registered offices of the company and if at all the same is not delivered, it creates a hurdle in process of clearances from the regulator, also it gives doubt in the mind of Regulator that whether the company has registered office in place. Considering this Companies going for restructuring shall duly ensure about the registered office.
C. Clarification on Securities Premium:
Age old companies which are transferor or transferee often face a situation wherein they are asked clarification on how the Securities premium account has been built up through allotment of shares, having a detailed working on Issue and allotment of securities along with securities premium since inception may help companies to be ready with clarifications.
D. Mismatch of Paid-up Capital with master data:
Many a times it is seen that the paid-up capital of the company on master data on Ministry of Corporate affairs website does not matches with the paid-up capital as appearing in financials of the company for multiple reasons being previous restructurings, erroneous filing of form MGT-7 or AOC-4 and transition of online data in 2006 etc. resolving this beforehand may save time and be helpful for clearances.
E. Index of Charges:
Often it is seen that age old companies have a long list of charges open against loans, however these loans are not appearing in financials and are paid off but the process of satisfaction of these charges on MCA records is not done. This may be a hurdle wherein regulator is not satisfied whether the Banks against whom charges are open are not shown as creditors in merger applications. It is therefore required that companies take adequate steps to clear and reconcile the Index of Charges before approaching for Restructuring.
F. Public Deposits:
Public Deposits related non-Compliances are serious non compliances and not addressing the same adequately in reply to regulators have resulted into rejection of scheme of mergers by NCLT as well as NCLAT1.
The same amount of business advances appearing in financials for back-to-back years is again a concern that attracts the eyes of Regulators and has been a point of argument of becoming a public deposit.
Careful financial Due Diligence and adequate steps to compliance is utmost whenever the point related to public deposit is concerned.
G. Annual filing:
Non filing / Late filing of financials /AOC-4 and Annual Return / MGT-7 before approaching for restructuring may result into Adjudication as condition preceding before final sanction from NCLT2. Also, Director disqualification may trigger for Non filing of financials and annual returns for continuous period of 3 financial year. Therefore, it is utmost important make sure that companies going for restructuring are complied with filling of financials and Annual Returns.
H. Non-banking financial Companies Criteria:
Often the general objective of merger is to reduce compliance burden by eliminating the companies which are not operative in terms of business. However, this companies may hold some financial assets and earn dividends / interests on those financial assets, that’s where it may hit the NBFC Criteria and may become a problem in regulatory clearance. The real objective of such companies may not have been to carry out the NBFC business, but criteria would trigger pursuant to unintended actions wherein the company was operating, therefore, it is very important to keep a check on the compliance triggers while approaching for restructuring.
I. Validation of Wholly owned Subsidiaries:
In case of wholly owned Subsidiaries, it is often seen that entire capital i.e., 99.99% is held by the holding company and one nominee is appointed to hold 1 share i.e., 0.01 % for the purpose of compliance of law. However it is also important to see whether holding Company has disclosed the beneficial interest of that 1 share and has reported the same in MGT-5 or that nominee has reported the same in MGT-4 and the same has been filled in MGT-6, else it may happen that regulator may not consider it as Holding – Wholly owned subsidiary and it will appear that the 1 share is held in individual capacity by the nominee. This problem may result into loss of all the benefits of restructuring that ideally would be available in case of WOS merger. Considering this filing of MGT-4/5/6 become very important.
J. Shareholding Proof:
In case of capital reductions wherein the actual payout happens or in case of merger / demerger wherein the shareholders get shares of transferee companies, it becomes important to check whether the shareholders appearing in register of members has rightfully acquired the shares or not. In case of age-old companies which later gets acquired/ taken over, it happens that shareholders may not have the share certificates in place, or the record of acquisition may not be in place, and this may become a problem. There have been cases wherein the composite scheme of arrangement has been withdrawn/ plead for rejection by Regulator for not having shareholding proofs.
K. Appointed Date:
MCA Circular dated 21 August 2019 states that the appointed date should not be older than one year without sufficient justifications and the same shall be specifically brought out in the scheme, whenever this specific justification is missed in the scheme it may results into clarification from Regulators and therefore scheme shall be drafted carefully, and all the relevant clauses shall be taken into account.
L. Shareholders Complaints:
Any age-old complaint pending against transferor company regarding oppression mismanagement or any other complaints which later have been resolved or closed but still open with Registrar of Companies may become a challenge and be reported to NCLT during the regulatory clearances. While planning for any restructuring, considering the consequences of past and present disputes and actions over it decides the success of restructuring.
M. Details of Signatory in Correspondence with Regulator:
Rule 7 of the Companies (Registration offices and fees) Rules, 2014 requires any correspondence (Physical or electronically) and documents to be filled by any person shall contain Name, designation, address, membership number or director identification number as the case may be of the person signing such document and correctness thereof and in no case correspondence merely with signature and writing authorised signatory shall be acceptable.
This makes it very important that while submitting any documents or replying any queries with Regulator, company shall make sure the above provisions are complied with as it may become a precondition for self-adjudication while in process of restructuring2.
Conclusion:
Rounding up all the above if we observe the current trend of Regulator carefully, one can understand that petty matters / non compliances even if it may or may not have larger impact are now under scrutiny by Regulators and one should have a through due diligence of provisions of Companies Act, 2013 before going for Mergers/ Demerger/ Capital Reductions. Some of the above points may not be the showstoppers in scheme of arrangement however may become speed breakers and consume lot of time in resolving and ultimately taking sanctions from NCLT.
1 Order passed on 16 January 2023 by National Company law Appellate tribunal in the matter of Hotel City Plaza Private Ltd Vs Union of India
2 Order delivered on 14 July 2023 by National Company law tribunal in the matter of CSP No. 85 of 2021 Marathon Nextgen Townships Private Limited – Transferor Company and Marathon Nextgen Realty Limited – Transferee Company
The article is published in Taxmann.
Article is written by Mr. Omkar Dindorkar – Partner – omkardindorkar@mmjc.in – 8097092404