Powers of NCLT under Section 230 of the Companies Act, 2013
POWERS OF NCLT UNDER SECTION 230 OF THE COMPANIES ACT, 2013
As affirmed by the NCLAT, the NCLT cannot exercise its inherent powers to go beyond the scope and purview of the provision, and therefore, cannot pass an in junction order, in the absence of any specific provision for the same
In a recent judgment passed in the matter of the Reserve Bank of India vs. SREI Equipment Finance Limited ("Judgment")1, the National Company Law Appellate Tribunal ("NCLAT") has adjudicated upon an integral aspect of the scope of powers of the National Company Law Tribunal ("NCLT") under Section 230 of the Companies Act, 2013("Act"). Briefly, NCLT, Kolkata while allowing the application for convening the meeting of creditors and shareholders, passed orders directing all creditors and regulatory authorities to maintain a 'status quo' with respect to the accounts of the applicant companies. The NCLAT by its Judgment while examining the powers of NCLT under Section 230 of the Act, set aside such direction.
This article discusses the scope of powers of NCLT in the context of Section 230 of the Act and specifically if NCLT by passing interim injunction order can circumscribe the powers of statutory authority on account of pendency of approval of a scheme.
Voluntary Arrangement between parties
While a scheme of merger or demerger is a voluntary arrangement between creditors and members of the company, it is required to pass the dual tests of approval of the shareholders, creditors as well as no- objections from relevant statutory authorities such as the RoC, RD, Income Tax, SEBI, RBI, CCI and other sectoral regulators. The underlying rationale of any scheme of arrangement is primarily to provide companies, with the participation of its stakeholders, an opportunity to enter into contractual arrangements which are mutually beneficial.
Section 230 of the Act is a complete code
To understand and examine the scope of the powers of NCLT, it is important to understand that Section 230 is a complete code in itself. In order to comply with the requirements, any orders that are passed under such section must be in conformity with the same. Simply put, no exemption can either be sought nor granted in compliance of the same. On a perusal of Section 230 of the Act, it is evident that NCLT is not conferred with the power to pass injunctions under the said provision. If the NCLT proceeds to pass any direction/order which is outside the realm of Section 230 of the Act, then such orders are non-est. The NCLT simply cannot derive its powers from any other provision of the Act or rules to pass orders which are not specifically provided under Section 230 of the Act.
Lacks similar powers as under 1956 Act
Under the Companies Act, 1956 ("1956 Act"), Section 391(6) specifically 'powered the court to pass an order directing stay on the commencement or continuation of any suit or proceeding against the company during the pendency of an approval of a scheme. Such a provision, however, is conspicuously absent from Section 230 of the Act. This implies that the legislative intent behind Section 230 of the Act was to not incorporate a provision corresponding to Section 391(6) of the 1956 Act. If the legislative intent was specifically not to in corporate a provision under the Act conferring powers as granted under Section 391(6) of the 1956 Act, in the absence of an enabling provision, the power to injunct cannot be treated to be implied under Section 230 of the Act.
Inherent Powers/ Jurisdiction
The question to be examined whether NCLT can exercise in herent jurisdiction to pass protective order(s) in a case of a scheme of arrangement. NCLT is a creature of the statute and it cannot transcend the powers bestowed upon it by virtue of the law. It is settled law that that there cannot be any exercise of inherent powers by atribunal on an issue which is otherwise dealtwithinthemainstatute.2 NCLT cannot pass such protective order(s) by exercising its inherent powers which are both, limited and which cannot be exercised against entities performing statutory functions, and mere filing of a scheme of arrangement under Section 230 of the Act cannot exempt a company from the oversight of governmental bodies exercising statutory function.
No injunction on discharge of statutory functions
The Judgment, inter alia, stated that NCLT under Section 230 of the Act, cannot pass injunctions against the discharge of statutory functions or to act in accordance with law. Governmental and regulatory authorities are not private parties and instead, are discharging their roles and functions in their respective statutory domain.3
Section 230 of the Act is not a beneficial legislation
One argument that maybe made is that protective orders are sometimes necessitated on account of the peculiar nature of facts relating to a company. For example, sometimes a company may envisage scheme of arrangement to thwart regulatory action like declaration of a company's account as an NPA, since a declaration of such kind brings with itself an entire gamut of restrictions on further borrowing(s), enforcement actions etc. It is also important to highlight that all statutes which envisaged providing an interim protection or a 'moratorium' to further the process of revival/resolution of a company, categorically provides for inter improtections / moratorium in the statute itself. Atribunal cannot trump the lack of specific provisions for protective order(s) by relying on its inherent powers. Section 230 of the Act is not a beneficial legislation but a contractual arrangement between private parties which is usually entered for better management and efficient utilisation of resources. Therefore, the principles which guide the granting of reliefs aimed at revival/resolution of a company cannot be granted under Section 230 of the Act.
It is therefore evident from the established jurisprudence on the subject that there must be absolute and due compliance of Section 230 of the Act, with the limited scope for review of the scheme in question. As affirmed by the NCLAT, the NCLT cannot exercise its inherent powers to go beyond the scope and purview of the provision, and therefore, cannot pass an in junction order, in the absence of any specific provision for the same. It was also observed that Section 230-232 of the Act cases limited obligation on NCLT to satisfy that the scheme is not contrary to public policy and not prejudicial to the company's creditors and members.
1 Judgment dated September 07, 2021 in CA (AT) 43 of 2021 2 Embassy Property Developments (P) Ltd. v. State of Karnataka,(2020)13SCC308; see also Gujarat Urja Vikas Nigam Limited vs. Solar Semiconductor Power Company (India) Private Limited and Ors.(2017)16SCC498; Super Cassettes Industries Ltd. vs. Music Broadcast Pvt. Ltd., (2012)5SCC488. 3 Hindustan Lever v. State of Maharashtra, (2004) 9 SCC438.
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.