Dark Horse Portfolio Investment Limited (2018) SCC OnLine NCLT 298

The court discusses section 14 of Companies Act, 2013, allows alterations to be made to the articles of the company which will allow a Company to convert from a Public Company to Private Company and vice versa, the section is conditional on the approval from the concerned Tribunal regarding such conversion of status of the company from a “Public” to a “Private” Company.

Introduction

As section 14 of Companies Act, 2013, allows alterations to be made to the articles of the company which will allow a Company to convert from a Public Company to Private Company and vice versa, the section is conditional on the approval from the concerned Tribunal regarding such conversion of status of the company from a “Public” to a “Private” Company.

The company M/s. Dark Horse Portfolio Investment Limited (hereinafter referred as “Petitioner Company”) was incorporated under the provisions of The Companies Act, 1956 and continued to further exist within the purview of The Companies Act, 2013. Thus, the existing Articles of Association (hereinafter referred as “AOA”) were structured as per the Companies Act, 1956 and such the clauses/regulations in the AOA contains references to specific sections of The Companies Act 1956 which after Companies Act 2013 does not seem to be necessary. Thus, the Petitioner Company that was functioning as a Public Limited Company, under this petition was seeking for conversion as a Private Limited Company under the Companies Act 2013, with adhering with the necessary alterations to AOA and Memorandum of Association (hereinafter referred as “MOA”).

However Companies Act, 2013 allows such alterations to the Articles of the Company, there are various provisions of other Statutes that will be applied in this process, and the Tribunal will be taking into consideration all such possibilities which the Tribunal deems fit to ensure there is no such injury caused to any of the party interested or any such party who is likely to be affected by such change in the status of the company from a “Public Company” to a “Private Company”. Thus, we can further learn which aspects the Tribunal took into consideration and the observations of the Tribunal under the said appeal.

Facts

  1. The Petitioner Company was incorporated as a Private Company Limited by shares, on 04 July 1991, as under the provisions of Companies Act, 1956 with the registered name of “Dark Horse Portfolio Investment Private Limited”. Furthermore, the petitioner company was officially converted into a Public Limited Company on 10 January 1995, with its registered office located at “India House, 1443, Trichy Road, Coimbatore – 641018”.
  2. At the time of making this application to the tribunal, the Company’s Authorised share Capital was Rs. 8,90,00,000/- (Rupees Eight Crore and Ninety Lakhs) which was divided into 55,00,000 Equity Shares of Rs. 10/- (Rupees Ten) each and 34,00,000 9% Redeemable Cumulative Preference Shares of Rs. 10/- (Rupees Ten) each. The Company’s issued, subscribed and Paid up share Capital was Rs. 2,93,25,910/- (Rupees Two Crore Ninety-Three Lakhs Twenty-Five Thousand Nine Hundred and Ten) which were divided into 29,32,591 Equity Shares of Rs. 10/- (Rupees Ten) and the Petitioner Company was engaged under the business of dealing in all kinds of securities being a member of the Stock Exchange and further to act as share, stock and investment brokers and thus to carry on the business of portfolio Investment in the equity shares, preference shares, stock, debentures and also in the business to deal in government bonds, National Saving Certificates Schemes and to render as Financial and Investment Consultants, etc. The Board of Directors of the Petitioner Company consisted of 3 (Three) Directors and had 9 (Nine) shareholders. The company had started its business operations during the petition was made to the tribunal.
  3. The Board of Directors of the petitioner Company had lawfully passed the resolution at meeting of the Board on 31 August 2017, where the proposed alteration of the Articles of Association and Memorandum of Association of the Company were approved and further decided to call an Extraordinary General Meeting (hereinafter referred as “EOGM”) consisting of the Members of the Company, on 23 October 2017, for obtaining consent on in this regard. After serving the notice to the members, an EOGM was called on 23 October 2017, wherein a Special Resolution was passed in accordance with the provisions contemplated under section 18 read with section 13 & Section 14 of the Companies Act, 2013 and such other applicable provisions inclusive of rules made thereunder, for such conversion of the Petitioner Company to be a “Private Limited Company” and thus the name of the Petitioner Company to be changed from “Dark Horse Portfolio Investment Limited” and to be “Dark Horse Portfolio Investment Private Limited” by replacing the word “Public” with “Private” before the word “Limited”. Such necessary alterations to AOA and MOA, which is applicable to a Private Limited Company, was also approved by the Members.
  4. The reason for conversion as stated by the Petitioner Company under the petition, into Private Limited Company, is to eliminate onerous compliances which are mandated to be performed by a Public Limited Company and also to avail the privileges which are allowed to the Private Limited Companies as under the new Companies Act, 2013 and it was also expected that such conversion would help the Petitioner Company to increase efficiency in its functioning.
  5. It was also stated under the petition that the company had started its business operations, and it was a closely held public company limited by shares with nine shareholders, and the company did not further intend to raise any such funds from the public, the company being a limited Company and thus such conversion into Private Limited Company will not be affecting any debts, liabilities, obligations or the contracts incurred or entered by or on behalf of the Petitioner Company.
  6. The Petitioner Company also contemplated that any of the related parties of the company will not be further affected by such conversion and there will be no prejudice regarding the interest of none of the member, creditor, or third party if the conversion is approved. The company not being registered under section 8[1] of the Companies Act, 2013 and also there was no such secured creditor nor unsecured creditors as on 30 September 2017. The Petitioner Company did not issue any debenture, secured or unsecured. The company had made a profit of Rs. 3,06,53,131/- (Rupees Three Crore Six Lakh Fifty-Three Thousand One Hundred and Thirty-One) for the financial year-end as on 31 March 2017. The company had also duly filed the Special Resolution with the Registrar of Companies (hereinafter referred as “ROC”), at Coimbatore in e-form MGT-14.

Issues

  1. Initially, the concerned Bench directed the Petitioner Company to file its affidavit, stating that the advertisement of the intentions of change in the status of the company has been published. The publication was made in “Financial Express” (Tamil Nadu Edition) in English Language and one in “MaalaiMurasu” (Coimbatore Edition) in vernacular language on 17 February 2018.  They filed the affidavit to the Bench, directions and further also served notices to the Regional Director, Southern Region, also to the ROC at Coimbatore. Further, a fresh affidavit was to be filed stating that the company has not received any objection in response to the public advertisement, which was duly fulfilled by the petitioner.
  2. The ROC at Coimbatore had stated in its report dated 05 January 2018 that:
    1. The Petitioner Company was a closely held company and had no intention or any such proposal to make any offer of shares to the general public through any such issue of prospectus immediately or in future.
    2. The Petitioner Company to pace the functioning and ease the management of affairs of the company.
    3. No prosecutions have been filed against the company and its Directors, and there is no such pendency of cases against them.

Contentions

The Counsel for the Petitioner Company contended that, the required mandate of National Company Law Tribunal Rules, 2016 (hereinafter referred as “NCLT Rules”) under Rule 68 was been complied and also the Board of Directors with all the shareholders of the company had unanimously approved the proposed transformation of the Petitioner Company to be a Private Limited Company, also the company was not registered under section 8 of the Companies Act, 2013, thus, the prayer for approval of such proposed conversion of the Petitioner Company from Public Limited Company to a Private Limited Company to be accorded, which the Special Resolution passed on at the EOGM held on 23 October 2017 was concerned.

Summary of Court Decision and Judgement

  1. Section 14 of the Companies Act, 2013,[2] which came into force w.e.f. 01 June 2016 contemplates that where a Company either a Public Limited Company or a Private Limited Company can alter its MOA and AOA by a Special Resolution, including alterations having the effect of conversion from a Public Limited to Private Limited Company, where such conditions are inclusive in its MOA and also with respect to the provisions of the Act, such alteration, for the purpose of the said section, has the effect of conversion of a public company into a private company. Also the second proviso under the section 14 (1) contemplates that, any such alteration having the effect of conversion from a Public Company to a Private Company shall be ineffective unless the approval of the Tribunal, which on the request of the company shall make such order as it may deem fit.
  2. Under the NCLT Rules, 2016, Rule 68,[3] contemplates the procedure for the filing of the petition before the Tribunal for the required approval under section 14 of the Companies Act, 2013, for conversion of the status of a Company from a Public Company to Private Company and vice or versa. Such a company intending of converting its status is, thus, required to adhere and comply with the requirements as stipulated under Rule 68 of the NCLT Rules, 2016.
  3. Having regard to the facts and circumstances the tribunal observed that, all the requisite statutory compliances having been duly performed by the Petitioner Company, thus the conversion of the company from “Public Limited” to “Private Limited” as per The EOGM approved with the Special Resolution on 23 October 2017, it was approved in the interest of the company and further also stated that, as such change of status of the company shall further not cause any such prejudice either to the creditors or the members of the Petitioner Company.
  4. The petitioner was hereby directed by the concerned Tribunal to file with the ROC, Coimbatore, a certified copy of this order in the prescribed e-form annexed with a printed physical copy of the altered AOA as also inclusive of the requisite fees to be fulfilled within a period of 15 days with absolute adherence of the provisions of section (2) of section 14 of the Companies Act, 2013 read with Rule 161 of NCLT Rules, 2016,[4] to be executed

Analysis

  1. When a Private Company is desirous of changing its status from a Private Company to a Public Company, with  the prescribed alteration to the articles of the company such company shall no longer be under the restrictions and limitations which are mandated to be inclusive in the articles of a private company under the Companies Act, 2013, and the company shall, since the date of such alteration, cease to be a private company, however when a Public Company if desirous of changing its status from a Public Company to a Private Company can do such as per the Act, but in such case the company requires the approval from the Tribunal which shall order as it may deem fit.[5]
  2. The Tribunal while passing the approval in the latter case, descry a wider aspect considering remote ramifications of such a conversion of the status of the company. The Tribunal corroborates there is no injury caused to any party also there is no such person to whom such decision of the company is subconsciously harming or causing any kind of injuring any rights or interests of such party.
  3. The Tribunal adhering to the statute under the Companies Act, 2013, also cogitate on the basis of the National Company Law Tribunal Rules, 2016, which acts as a procedural statute in such cases where the Tribunal has to ratiocinate the matters relating to the Companies Act.
  4. The Registrar of Companies has a crucial function under such cases where the ROC has to conduct the background investigation upon the concerned company and submit the findings to the Tribunal which are considered by the Tribunal in passing the order.
  5. The Tribunal may also order the Petitioner Company to make a Public Announcement in the form of publishing such notice in a manner as may be prescribed, to be published by the Petitioner Company for inviting any objections regarding such change of status of the company, and in case where there are no such objections received, then to convey it, through submitting an affidavit to the concerned Tribunal.

Conclusion

  1. The Tribunal while passing an Order makes necessary observations of the business of the company and make the order on the basis of the circumstances of the business of the company. Along with the business of the company the Tribunal also considers whether the company has defrauded any party during the functioning.
  2. Section 14 of the Companies Act, 2013, allows alterations of the companies Articles, in a manner to change the status from a Public Company to a Private Company, subject to the requirements contemplated under the provisions of the said Section, however, the Tribunal may pass the order as it deems fit, there is no such mandate on the Tribunal under which it is obligated to pass the order, the order may differ from case to case as per the respective circumstances.
  3. The necessary changes to be made by the company and approved by convening an Extra Ordinary General Meeting and proposing such changes in the status of the company, considering the opinion of Shareholders.
  4. Such change in the Status of the Company is permitted when all the dues, debts or any such payables by the company are settled, any such pecuniary pendency, this provision to change the status of the company not to be exploited for the purposed of waiving any monetary  liabilities by the company.
  5. The NCLT Rules, 2016, contemplates the process which shall be duly executed by the company applying for such necessary approvals from the Tribunal. Also, the Petitioner Company has to adhere with the provisions of the Companies Act, 2013.
  6. The said case of Dark Horse Portfolio Investment Limited[6] did not mention any precedents in its petition to the Tribunal, but it set a precedent by contemplating the procedure to follow and the Statutes to adhere when the company is desirous of changing its status from being a Public Company to a Private Company.

Also read William Marbury v. James Madison, Secretary of State of the United States


[1] Formation of companies with charitable objects, etc

[2] Section 14 – Alteration of articles, Companies Act, 2013

[3] Rule 68 – Petition under Section 14 of the Companies Act 2013, NCLT Rules, 2016

[4] Rule 161 – Filing of Order of the Tribunal with the Registrar of Companies, NCLT Rules, 2016

[5] Section 14, Companies Act, 2013

[6](2018) SCC Online NCLT 298