Discretionary powers of RD are not unbridled: Bombay High Court
Introduction
The Fast Track Merger process, as introduced under Section 233 of the Companies Act, 2013, (‘Act’) represented a significant reform aimed at streamlining the merger process for certain classes of companies. This process can be opted for by small companies, start-up companies or merger of a holding company and their wholly owned subsidiary. Fast track mergers eliminate the need for the involvement of the National Companies Law Tribunal (‘Tribunal’). The merger scheme is instead approved by the Central Government i.e. the Regional Director.
The judgment of the Bombay High Court in Asset Auto v. UoI[1] reviews the discretionary power provided to the Regional Director and exercise of such discretionary power without following due process. The limitation of the Regional Director’s powers is discussed in relation to the companies complying with the conditions as laid down in Section 233. This raises a question on the powers of Regional Director to review and provide comments on the solvency of the company. In this article, we will be providing a detailed discussion of the court order and the reasoning behind the same:
Facts and background
Asset Auto India Private Limed (‘Petitioner 1’) and its four wholly owned subsidiaries (‘Petitioners 2 to 5’), have approached the Bombay High Court by filing a writ petition to challenge the order of the Regional Director, Western Region, Mumbai (‘Regional Director’) rejecting the scheme outrightly after complying with all the conditions of sub-sections (1) to (4) of Section 233. The Regional Director in its order dated November 12, 2018 (‘Order’) had rejected an application of the Petitioners for processing the scheme of amalgamation between Petitioners 2 to 5 with Petitioner 1 under Section 233 on the ground that the companies are not solvent as per the balance sheet filed along with the application.
Issue
The Petitioners contended that the Regional Director has no authority under law to outrightly reject the fast-track merger scheme under Section 233 of the Act.
Legal provisions and analysis of the Court
The Court analysed Section 233 of the Act in detail.
Section 233(1) of the Act lays down the pre-conditions that parties need to comply with before entering a scheme of merger or amalgamation, such as notice inviting objections and suggestions, if any, from the Registrar and Official Liquidators, filing of declaration of solvency and obtaining approval of creditors/shareholders etc. The Petitioners had complied with the pre-conditions as laid down in sub-clause (1).
Section 233(2) prescribes that the transferee company is required to file a copy of the approved scheme, with the Regional Director, the Registrar and Official Liquidator, where the registered office of the company is situated. This condition was adhered to in the present case.
Section 233(3) provides that the Regional Director has to register the scheme and issue a confirmation to the companies if the Registrar or the Official Liquidator has no objections or suggestions to the scheme. In the present case, there were no objections or suggestions that the Regional Director had received from the Registrar or the Official Liquidator. Considering the same, sub-section (4) which states that objections of Registrar or the Official Liquidator will have to be communicated to the Regional Director within 30 days, was not applicable to the facts of this case.
As per Section 233(5), the Regional Director, if after receiving objections/suggestions or for any other reason opines that a scheme of amalgamation is against the larger public interest or the interest of the creditors; may file an application before the Tribunal within 60 days of receipt of scheme. This application would have to state the objection and request the Tribunal to consider the scheme under Section 232 of the Act. Section 233(5) is as follows:
‘(5) If the Central Government after receiving the objections or suggestions or for any reason is of the opinion that such a scheme is not in public interest or in the interest of the creditors, it may file an application before the Tribunal within a period of sixty days of the receipt of the scheme under sub-section (2) stating its objections and requesting that the Tribunal may consider the scheme under section 232’
Opinion to be formed as required under Section 233
In the present case, the Court, after analysing the facts and sequence of events, stated that the Regional Director had erred in complying with the provisions of Section 233(5) in relation to forming the opinion and recording the opinion / reasons for such decision. The adequacy of reasoning of the order was questioned.
Analysis of the phrase ‘may’
The Court in the present case analysed the phrase ‘may’ as used in Section 233 (5). The Court stated that, on a conjoint reading of sub-sections (2), (3), (4) and (5), the word ‘may’ would have to be construed as mandatory. Therefore, if the Regional Director, after receiving the objections or suggestions or for any reason, is of the view that a scheme is not favourable to the creditors or is detrimental to public interest, then the same should be decided and adjudicated upon by the Tribunal.
The Court also went on to state that if the provision of the Regional Director to approach the Tribunal when they are of the opinion that that scheme is not in the public interest or in the interest of the creditors, was considered optional, then the companies involved in the amalgamation scheme, would face rejections for their schemes without any formal adjudication or without following due process of law. This will be in violation of principles of natural justice
Conclusion
Therefore, it was held that if the Central Government, i.e., the Regional Director, is of the opinion that a scheme would go against the interest of the creditors or is against public interest or any of the conditions are not satisfied, an application would have to be made to the Tribunal to adjudicate and consider the scheme under Section 232 of the Act. The Regional Director does not have the power to outrightly reject the scheme. The Court held that the Regional Director should form an opinion that the scheme is not in public interest or in the interest of creditors and strictly follow the conditions to file an application before Tribunal instead of outrightly rejecting.
LKS Comments
This decision of the Bombay High Court sheds light on the discretionary power of the Regional Director during fast-track mergers. Since the judgment has clarified that the Regional Director does not have the power to directly reject the scheme, the Tribunal will now properly adjudicate schemes in case of any objections or suggestions to the scheme, or if any opinion is being formed by the Regional Director that the scheme is against the public interest or the interest of the creditors.
In the present case, the scheme was rejected by Regional Director on the ground that the companies are not solvent as per the balance sheet filed with the application. However, the Court did not address whether the Regional Director can decide on matters of solvency, and other related matters which are ordinarily under the jurisdiction of the Official Liquidator or any other authority, when no objection has been raised by such authorities. Additionally, whether the Regional Director can take any action for the interest of the creditors when the creditors themselves have no opposition and have approved the scheme, is another aspect of the Regional Director’s discretionary power which needs to be pondered upon.
Curtailing the discretionary power of the Regional Director throughout the various stages of the process of fast-track mergers will encourage more eligible companies to opt for this process and ultimately reduce the burden of Tribunal as well and brings certainty to the process.
[The authors are Partner, Principal Associate and Associate, respectively, in Corporate and M&A practice at Lakshmikumaran & Sridharan Attorneys]
- [1] 2024 SCC OnLine Bom 2494
