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A recent press report has mentioned that there are almost 21,000 cases pending in National Company Law Tribunal (‘NCLT’) and 30 member posts are vacant. The NCLT is a body that has been established under section 408 of the Companies Act 2013 (‘the Act’); it was initially mandated to look at schemes of arrangement u/s 230-232 of the Act, but after the introduction of Insolvency and bankruptcy code (‘IBC’), IBC matters have also fallen under the NCLT remit.

Clearly, the NCLT was not supposed to deal with IBC cases and it seems to be overburdened, but the fact of the matter is that mergers and acquisition schemes cannot wait endlessly and currently, there are serious delays in approval of schemes of arrangement.

Some broad statistics

Out of the approximately 21,000 cases pending in NCLT, over 13,000 are IBC cases and only 1,200 are mergers and acquisition cases (schemes); the balance (approximately 6,500 cases) fall under the residual provisions of Companies Act, such as oppression and mismanagement. The state wise break up of cases pending before the NCLT benches is not available, but presumably, Mumbai and Delhi would account for a bulk of the cases, and, to some extent, Bangalore.

Mumbai has 5 benches, Delhi has 5 benches, but Bangalore has only 1 bench. These benches are not fully staffed yet, and hence, it is imperative that positions be urgently filled and matters progressed.

Delays – key causes

There are 3 broad stages in schemes of arrangement after the Boards of directors of the intending merging or demerging companies approve the schemes. These broad stages are (a) application for admission of the scheme, (b) admission of the petition; and (c) final hearing. 

Between the initial application admission and petition admission stage, shareholders and creditors meetings are to be held unless dispensed with by the NCLT; in private companies where there are shareholders and creditors who have consented in writing, logically, these meetings should be dispensed with. In case these are not dispensed with, one often needlessly goes through processes which are not required. For example, there have been situations where creditors have been paid off after the scheme has been filed, still meetings are insisted upon; would any creditor with any commercial sense want to attend a meeting where he has been paid off? The answer is an obvious no, but the commercial reality of this seems to be lost and causes huge harassment needlessly and of no benefit to anyone. Further, in cases where majority creditors have already provided their consent, holding a meeting poses an operational challenge in terms of sending out notices, ensuring attendance etc. especially for companies which have numerous creditors. Therefore, these kind of issues (i.e. need to dispense with shareholders and creditors meetings, in case where they have consented or no prejudice is caused to their interest), need to be addressed through a circular or similar mechanism.

One of the biggest hurdles is that the time between the filing of the application and admission is very often 3-4 months, and often more. The application admission is not an approval; it is just that the NCLT acknowledges that the scheme broadly satisfies regulatory conditions and should be admitted. If this process takes 3-4 months or more, Ease of Doing Business goes out of the window at that stage itself! Let’s remember that, if the applicant is a listed company, then Stock Exchange approval is also required, and in turn, Stock Exchange has to consult SEBI and get their views and that leads to another delay.

Additionally, the fact that each bench of NCLT has their own set of requirements, since there is no pre-decided format of application and list of documentation to be submitted, adds to the paper work and causes undue delay. There needs to be uniformity across board, and this needs to be addressed by NCLT internally and communicated by a circular or notice, so that confusion is avoided.

Between the Application admission and Petition admission, in addition to the abovementioned issues, the Regional Director and Official Liquidator (if there is a merger involved) have to be served notices and they have to submit their final report to NCLT. The time frame for submitting these reports also needs to be shortened, as an important element of getting things speeded up.  Here also, it is important that the MCA comes out with some circular that the report should be more by exception and it should not be that every aspect of the scheme should be commented upon or objected to.

Summing up

Mergers and demergers are usually driven by commercial necessity. For example, two companies may merge because it makes sense to do so to tackle competition or to pool resources and reduce cost. A company may demerge two undertakings for various reasons; for example, it could be just a mirror image demerger to segregate 2 different unrelated businesses. Such initiatives are very disruptive for business anyway, and on top of that if there are long delays, it creates further business disruptions, unsettles employees and are a significant drain on management time and energy. This is even more so if there are mergers or demergers involving, completely unrelated entities; delays can also cause loss of shareholder value and investor nervousness.  One would really hope that the aspect of delays is looked into and NCLT functioning factors in this issue; time is money and the issue of delays should be looked into very seriously.

 

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