The Hon’ble National Company Law Tribunal, Mumbai Bench (“NCLT”) vide an order dated 20 September 2021, approved the Scheme of Arrangement and Amalgamation proposed by Protrans Supply Chain Management Private Limited under sections 230 to 232 of the Companies Act, 2013 (“Scheme”). The said approval has dealt with some key issues, including inter alia, meaning of the word ‘arrangement’ under section 230 of the Companies Act, 2013 (“2013 Act”) and conversion of equity shares to preference shares as part of such arrangement.
The Scheme provided amalgamation of entities and conversion of equity shares into preference shares. The rationale for the latter issue was that the small shareholders of the transferee company (approximately 21,000 out of 21,675 shareholders, in number) were requesting for regular dividends on their investments. In view of these facts, it was proposed as an integral part of the Scheme to alter the shareholding structure of the company by conversion of certain A class Equity Shares into 9% non-cumulative optionally convertible redeemable Preference Shares of INR 10 each (“Conversion Exercise”).
The Regional Director, Ministry of Corporate Affairs by his report (“Regional Director’s Report”) objected to inter-alia, the Conversion Exercise basis the report of the Registrar of Companies.
Whether in the facts of the case, conversion of equity shares into preference shares as an integral part of the Scheme can be permitted in terms of the applicable provisions under Chapter XV of the 2013 Act?
The Hon’ble NCLT accepted the contentions of the Petitioner Companies and sanctioned the Scheme including the Conversion Exercise.
The Hon’ble NCLT accepted the contention that the word ‘arrangement’ in section 230 of the 2013 Act has to be interpreted in the widest possible manner and a compromise or arrangement under section 230 of the 2013 Act can include a re-organization of share capital. This reiterated the long held position that the term ‘arrangement’ as used under section 391 of the Companies Act, 1956 is of wide import and though not defined specifically, yet has an extensive range and ambit. As held by the Hon’ble High Court of Bombay in Re Investment Corporation of India Ltd, the term ‘arrangement’ has been given an inclusive definition which is not restricted to only re-organisation of share capital but also contemplates other acts.
Having accepted the petitioner companies’ contention that conversion of equity shares into preference share is just a change in nomenclature of shares, the Hon’ble NCLT has implied that the conversion of equity shares into preference shares as part of a scheme of arrangement would not entail compliance with the provisions governing reduction of share capital. This is relevant in light of the fact that while the overall share capital has not undergone any change, there has been a reduction / cancellation of equity share capital. This would effectively mean that such conversion (and consequent reduction / cancellation of the converted shares) would only be governed as an arrangement, i.e., ‘reorganisation of share capital’ under Section 230 of the Companies Act, 2013, especially in light of the Explanation to section 230(12).
In Smartplay Tachnologies vs. NIL, the Hon’ble High Court of Karnataka had approved the conversion of equity shares into redeemable preference shares as part of a scheme of reduction of share capital governed by section 100 of Companies Act, 1956 due to the fact that the equity shares had to be cancelled. Similarly, the Hon’ble High Court of Gujarat in Re Essar Steel Limited in a section 100 petition under the Companies Act, 1956, approved a scheme of reduction where the special resolution approving the reduction provided for issuance of preference shares in lieu of the cancelled equity shares. Further, the Hon’ble NCLT, Delhi Bench has also allowed conversion of equity shares into preference shares as part of a scheme of arrangement.
The simplistic approach adopted by the Hon’ble NCLT while approving the Scheme is a welcome step. It envisages the NCLT sanction under Chapter XV of Companies Act, 2013 as a single window clearance for implementation of all acts (which are not barred under the 2013 Act and may otherwise be embodied in a separate provision) as long as the entities comply with the substantive and procedural provisions governing the arrangement.
 Hindusthan Commercial Bank Limited vs. Hindusthan General Electrical Corporation; In re Larsen & Toubro Limited.
 Company Petition No 174 of 2013.
 In Re: Integral Biosciences Private Limited.
This article was originally published in Law Street India on 3 November 2021 Co-written by: Anirudh Das, Partner; Anoop Rawat, Partner. Click here for original article
Contributed by: Anirudh Das, Partner; Anoop Rawat, Partner
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