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Power of the Tribunal to make Modifications to the scheme of Compromise or Arrangement - MMJC
Introduction:
Chapter XV of the Companies Act 2013 outlines the process for mergers and amalgamations, including the rights and duties of stakeholders. According to this chapter, a scheme of compromise or arrangement is presented to the Tribunal for approval by the company, its members, creditors, or the liquidator. Upon receiving the application and necessary documents, the Tribunal may order meetings of members/creditors as deemed fit. Once the scheme is approved by the requisite majority of the creditors, or class of creditors or members or class of members, as the case may be, the Tribunal may either sanction or reject the scheme. Additionally, the Tribunal has the authority to modify the scheme of compromise or arrangement during or after the scheme has been sanctioned to ensure proper implementation.
Provisions concerning modification of the scheme under the Companies Act 2013:
The Tribunal can approve or reject the scheme proposed under section 230. Section 231(1) read with Rule 17 of The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, states that the Tribunal may, at the time of making such order or anytime thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for proper implementation of the compromise or arrangement.
Definition of Modification:
Section 2(29)1 of the Companies Act, 1956 defined modification as, “modify” and “modification” shall include the making of additions and omissions. However, it must be noted that this definition of “modify” and “modification” was not incorporated in the Companies Act 2013. Therefore, references have to be made to dictionaries to find the meaning of modification. The Black’s Law Dictionary defines “modification” as “Modification” is not exactly synonymous with “amendment,” for the former term denotes some minor change in the substance of the tiling, without reference to its improvement or deterioration”.. In contrast, the Cambridge dictionary defines “modification” as, “to change something such as a plan, opinion, law, or way of behaviour slightly, usually to improve it or make it more acceptable.”
Analysis of all the above definitions suggests that modification refers to a minor change in the scheme made to increase its efficiency.
This article explores various aspects of modification, such as when the Tribunal feels the need to modify the scheme and to what extent. Analyzing some important judgements will help us understand why the Tribunal resorts to modification.
Factors considered by the Tribunal while making any modification to the scheme:
The Act permits the Tribunal to modify the scheme of compromise or arrangement during or after approval but does not specify the circumstances or extent. Judicial pronouncements provide guidance to address these ambiguities. In one such pronouncement, the Honourable Bombay High Court outlined certain factors to be considered when determining whether the scheme can be modified as requested by the petitioners.
In the case of T. Mathew v. Smt. Saroj G. Poddar 2
A winding-up order was issued against the company following a petition by Mahindra Ugine Ltd., and the official liquidator took possession of its assets. While several assets were sold, a leasehold land remained pending for auction. Saroj G. Poddar and others proposed a compromise and arrangement to revive the company and exit liquidation. The court stayed the auction and directed meetings of various creditor classes. The majority of creditors and shareholders subsequently approved the scheme.
T. Mathew sought to modify the Podar scheme and introduce a new one, proposing a denim manufacturing unit, better worker payments, and re-employment. However, the court ruled that he lacked the legal standing to propose changes, as he was neither a shareholder, creditor nor official liquidator. Legal precedents allow modifications only if essential for the scheme’s functioning. The court also found that Mathew had a vested interest in the valuable land and had influenced workers to form a new union. As a result, his proposal was rejected.
The court found that the Podar scheme also lacked genuine intent to revive the company and was instead driven by profit from rising land prices, misusing the Companies Act. Key information was withheld, such as payments to creditors and misfeasance summons against directors. Preference shareholders had transferred their shares beforehand, rendering their votes meaningless. Additionally, the scheme involved Bhaveshwar Estate Private Limited purchasing Podar-held shares at an unjustified high price of Rs. 40,125 per share, with no supporting valuation provided.
It is important to note that though the scheme of Podar’s was approved by the requisite majority, the court was also required to satisfy itself that it was not only fair and reasonable but also in the public interest.
During the hearing, multiple orders were discussed, and the Court listed the following factors to be considered while modifying the scheme
- “that scheme can be modified by the Court before, i.e. at the time of sanction or after the sanction of the Court
- that such modification would include substitution of a sponsor also
- that the modification/substitution should be necessary for the proper, efficient and smooth working of the scheme, which is of paramount consideration
- that only persons mentioned in section 391(1) will be entitled to propound a scheme
- that whether the substitution of a sponsor affects the basic fabric of the scheme or not is a question to be determined in the facts and circumstances of the case
- that modification can be made at the instance of any person interested in the affairs of the company, and the Court itself can even take such action suo moto; and
- that the Court should examine the bona fides of the person applying to be substituted as a sponsor, his capacity, his interest qua the company and other relevant considerations.”
The honourable Bombay High Court rejected both schemes as they were sponsored with the sole objective of acquiring the said land. The Court delivered this judgment under the Companies Act, 1956.
Let us now examine these situations through cases where the Court/Tribunal modified the scheme during the sanctioning process, after sanctioning the scheme, and instances where modifications were rejected.
Modifications made by the Court/Tribunal while sanctioning the scheme:
In the case of Panchmahal Steel Ltd. 3
The petitioner company initiated a Steel Melt Shop (SMS) project but failed to achieve financial closure due to a recession in the steel sector. The company’s accumulated losses exceeded its net worth, classifying it as a sick industrial company under SICA. The company’s cost-cutting measures and focus on value-added products showed positive results. In 2004 and 2006, ARCIL acquired debts from certain banks and proposed a restructuring scheme in consultation with the petitioner company.
The Court had directed the petitioner company to convene separate meetings between secured lenders and equity shareholders. In compliance with the court’s order, a meeting of the secured creditors was held on. Three secured lenders, representing Rs. 142.55 crore, attended through authorized representatives. ARCIL proposed modifications to the restructuring, and GIIC objected to both the modifications and the scheme. Despite this, the modifications were approved by the requisite statutory at the meeting of creditors and unanimously at the meeting of shareholders.
GIIC raised several objections to the modified scheme -petitioner-company had not correctly considered its outstanding dues, interest rates proposed under the scheme (5% and 0%) were significantly lower than the Reserve Bank of India’s bank rate, scheme was silent on interest payable for the year 2004-05 and demanded its inclusion further the objection raised were not discussed during the meeting of secured creditors. GIIC further claimed they should be treated as a separate class of creditors from ARCIL as ARCIL had purchased the debts at a much lower value than their actual outstanding amounts, giving it the financial flexibility to accept larger sacrifices under the restructuring scheme.
However, as the Court found substantial force in the objections raised by the (GIIC) second creditor, sanction was granted to the scheme with further modifications considering the objector’s interest. The court further stated that once ARCIL stepped into the shoes of the original lenders, it had the same rights and voting power as any other secured creditor. The Court modified the scheme while granting its approval and highlighted the caution that is required to be exercised while modifying the scheme.
“The “Act” as well as the “hon’ble Supreme Court” cast a duty on the sanctioning Court to satisfy itself that the members or class of members or creditors or class of creditors, as the case may be, are acting bona fide and in good faith and are not coercing the minority to promote any interest adverse to that of the latter comprising the same class whom they purported to represent.”
Modifications made by the Court/Tribunal after the scheme was sanctioned:
In S.K. Gupta v. K.P. Jain 4
The court approved and sanctioned a scheme of compromise/arrangement between the company and its unsecured creditors, after which an application was filed to modify the scheme and substitute the proponent/sponsor. The Honourable Supreme Court highlighted the following when approving the substitution of the sponsor.
The Honourable Supreme Court considered the meaning of the word “modification” as defined under the Companies Act 1956. “The noticeable feature is that it is an inclusive definition, and wherein a definition clause the word ‘include’ is used, it is so done to enlarge the meaning of the words or phrases occurring in the body of the statute and when it is so used, these words or phrases must be construed as comprehending not only such things which they signify according to their natural import, but also those things which the interpretation clause declares that they shall include“
A key consideration was that the court, when sanctioning the scheme, may not foresee the challenges that could arise during its implementation. When unforeseen situations occur, seeking approval from the concerned parties for modifications would be burdensome. Therefore, the court is granted the power to make necessary modifications to ensure the scheme’s smooth functioning.
The Honourable Supreme Court held that substituting the proponent/sponsor would not change the scheme’s basic fabric. Section 392 of the Companies Act 1956 empowers the honourable High Court to make necessary changes to the scheme to the extent that it remains workable and ensures that the modification does not change the scheme’s basic fabric.
Modifications rejected by the Court/Tribunal after the scheme was sanctioned:
In Reliance Natural Resources Limited v. Reliance Industries Limited 5
Reliance Industries Limited (RIL) and Reliance Natural Resources Ltd (RNRL) were legally contending over the gas supply from the D6 block in the Krishna-Godavari basin.
The primary reason for the dispute was the MOU entered between the two brothers, the details of which were not made available to the stakeholders. The MOU was a private family arrangement, and it was neither approved by the shareholders nor attached to the scheme. Hence, the MOU was not part of the scheme approved by shareholders and hence was not legally binding.
The honourable Supreme Court relied on the order in the case of S.K. Gupta v. K.P. Jain [1979] 49 Comp. Case 342
The position derived from S.K. Gupta (supra) was that the power of the Court under section 392 was wide enough to make suitable changes to the scheme’s workings. Further, it was also made clear that the power of the Court does not extend to rewriting the scheme in any manner.
As the terms and conditions of the supply of gas specified in the MOU entered between the parties were not disclosed to all the shareholders and stakeholders, including in this case, the Government of India (as a party to the Production Sharing Contract), such a document could not have been read into and incorporated in the scheme propounded by the Board, approved by the shareholders and sanctioned by the Company Court. This would tear apart the basic fabric of the scheme and hence was not permitted.
The term ‘fabric of the scheme’ has been frequently discussed in various rulings but lacks a formal definition. To broadly understand its meaning, reference can be made to an argument presented by the petitioner in the Reliance Industries Limited case. Although this explanation is not part of the decision itself, it provides insight to the term “basic fabric”, as described below:
“What does the expression “basic fabric” mean? “Fabric” can imply both the end result and also, equally importantly, the processes, procedures and steps that were taken to weave the “fabric” of the scheme. During the course of weaving the “fabric “, decisions could be taken to leave out certain aspects as unacceptable to the board or the shareholders and stakeholders or the Court. Further, those processes necessarily involved certain steps in obtaining shareholders’ permissions. Such processes are the very essence of the fabric and not just some technicalities that are to be consigned to history and ignored when making modifications. Whatever changes are made can only be minor ones which would not tamper with the essence of the scheme.”
Essentials for modification:
A conjoint reading of the above cases highlights key considerations for modifying a scheme during approval or post-approval. These points are relevant for petitioners requesting modifications and the Tribunal granting them. They can be summarised as follows:
- The proposed or approved modification should not alter the essence of the scheme; the fundamental processes and intended outcomes must remain unchanged
- Modifications that fundamentally change the scheme approved by members and creditors require fresh approval from them.
- Modifications should aim solely at facilitating the scheme’s smooth implementation by addressing the practical difficulties in its execution.
Conclusion:
The Tribunal is vested with powers to modify a scheme of arrangement that the shareholders or creditors approve without hampering its fundamental structure. However, while making such modifications, the Tribunal must also ensure that the changes are necessary for properly implementing the scheme. Where the Tribunal is satisfied that the sanctioned compromise or arrangement under Section 230 cannot be effectively implemented, with or without modifications, and the company cannot pay its debts as per the scheme, it may order the company to be wound up. This order will be considered as one made under Section 273.
The article is written by Ms. Kavita Dosani – Associate – kavitadosani@mmjc.in
The article is published in the taxmann and can be accessed at the following link: