15 October, 2021
In an order dated 29 September 2021, the National Company Law Tribunal (“NCLT”) approved a scheme of arrangement and amalgamation, which included conversion of equity shares of the company into preference shares, stating that the scheme of arrangement and amalgamation appeared to be fair and reasonable, and not contrary to the public policy.
The proposed scheme was objected on a number of grounds by the ROC, which included the existence of pending litigation and certain inconsistencies in relation to annual filings of the transferee company. The NCLT rejected the ROC’s arguments in this regard, stating that as the transferee company was proposed to continue after the scheme of amalgamation, the objections on the above grounds were devoid of merit.
The ROC was also of the view that the conversion of equity shares into preference shares as envisaged under the scheme may not be permissible since the value, terms, rights attached to these shares were distinct from each other. In this regard the ROC also placed reliance on a letter, issued by MCA which stated that the conversion of equity shares into preference shares and vice versa had already been rejected by ROC, Delhi on an earlier instance. Based on this precedent, the ROC contended that the conversion of equity shares into preference shares may not be considered desirable.
The petitioners argued that the conversion of equity shares into preference shares was not specifically barred under any provision of the Companies Act, 2013 including section 61, which provides limited companies with the power to reorganize its share capital. The petitioners also relied earlier Supreme Court judgments whereby it has held that as a matter of general principal a prohibition cannot be presumed, and that every procedure must be understood to be permissible till it is shown to be prohibited under law. 1.2.5. Further, rebutting the argument of the ROC, that the scheme was undesirable as per an opinion given by the MCA, the petitioners argued that such executive action cannot be binding on judicial authorities at the time of interpretation of the statutes. This is also a settled principle of law as per several SC judgments.
The NCLT concluded that the conversion of equity shares into preference shares as sought by the petitioner companies under the present scheme cannot be deemed to be impermissible. The NCLT accordingly, allowed the petition and approved the scheme, after taking note of the official liquidator’s report, that the affairs of the company were not being conducted in a manner prejudicial to the interests of the members or to the public interest.
Please click here to read the order.
For further information, please contact:
Souvik Ganguly, Partner, Acuity Law
