Judicial Clarification in Fast Track Mergers: Asset Auto India Pvt. Ltd. and Ors. v/s The Union of India and Ors.

The Article has been authored by Suman Kumar Jha (Founder & Managing Partner), Afnaan Siddiqui (Co-Founder & Partner) & Visakha Raghuram (Associate) and Gurpreet Kaur

Introduction

The Companies Act, 2013 provides the option of ‘fast track mergers’ for a certain class of companies viz. small companies, holding and its wholly owned subsidiary company or start-ups. The process of Fast Track Mergers under Section 233 of the Companies Act, 2013 states that an application shall be made to the Central Government i.e. the Regional Director instead of the National Company Law Tribunal.

The process of getting a fast-track merger approved is slightly different from the regular process stated in Section 230 of the Companies Act, 2013 and is intended to expedite the approval for mergers and amalgamations for specific class of companies.

The case under discussion is a writ petition decided by the Hon’ble High Court of Bombay. It involves an order by the Regional Director, Western Region, Mumbai (Respondent No. 2), which rejected the Petitioners’ application for a Scheme of Amalgamation under Section 233 of the Companies Act, 2013. The rejection was based on the reason that Petitioners Nos. 2 to 5 were insolvent according to their balance sheet as of 31st March 2017. This decision came after the equity shareholders of Petitioner No. 1 and Petitioners Nos. 2 to 5 had approved the Scheme in their respective general meetings, and all necessary documents, including those from the Official Liquidator and Registrar of Companies, were submitted.

Issue before the Hon’ble Court

In the present case issue was whether Respondent No. 2 i.e. the Central Government had the authority to reject the scheme of amalgamation based on the grounds of alleged insolvency, or whether Respondent No. 2 was required to follow a specific procedure under Section 233 of the Companies Act, 2013. Specifically, the issue before the court was to determine if Respondent No. 2 was mandatorily obligated to file an application with the National Company Law Tribunal (‘NCLT’) for adjudication if was of the opinion that the scheme was not in the public interest or in the interest of creditors, rather than outrightly rejecting the scheme.

Decision of the Hon’ble Court

The Hon’ble High Court of Bombay examined the phrase “may” in Section 233(5) of the Companies Act, 2013, and determined that it must be construed as mandatory. This section allows the Central Government i.e. the Regional Director to file an application with the NCLT within sixty days if it believes that the scheme is not in the public interest or in the interest of creditors. If this phrase were considered optional, companies could be unfairly at the mercy of the Central Government’s discretion without proper adjudication. Thus, the court emphasized that it is mandatory for the Central Government to seek adjudication on such issues.

In this case, Respondent No. 2 had received the scheme on 28^th September 2018, with the sixty-day period expiring on 27^th November 2018. Respondent No. 2, however, rejected the application without filing an application before the NCLT or seeking adjudication. The Regional Director had not received any objections or suggestions from the Registrar or the Official Liquidator. The Hon’ble Court emphasized that despite the lack of such objections, the Central Government was required to follow the prescribed procedure, which involved filing an application with the NCLT if there were concerns about public interest or creditor interests.

The Hon’ble Court noted that the Section 233 does not grant the Central Government the authority to reject the declaration of solvency directly. Instead, if Respondent No. 2 believed any conditions were not satisfied, it should have filed an application with the Tribunal to address those concerns within the prescribed period.

Conclusion

In conclusion, the Hon’ble High Court of Bombay held that the Central Government had acted beyond its authority by rejecting the scheme of amalgamation without following the mandatory procedural requirements under Section 233 of the Companies Act, 2013. The court quashed and set aside the impugned order dated 12^th November 2018, declaring it to be invalid.

The case underscores the necessity for adherence to statutory procedures and the mandatory nature of Tribunal adjudication when objections arise concerning the public interest or the interests of creditors. The petition was disposed of with directions for the appropriate legal consequences to follow.