MCA vs NCLAT: Truce or war?

In the Tata-Mistry case, the issue boils down to this: The Registrar of Companies (RoC) feels that there are strictures against it although it had acted within the law. The National Company Law Appellate Tribunal (NCLAT), however, feels that it has not cast aspersions on the RoC and has not passed any strictures.

The NCLAT held conversion of Tata Sons from deemed “public” to “private” company as illegal and observed that it was done “with the help of the RoC just before filing of the appeal”. The RoC feels it has complied with the law and hence the use of the word “helped” amounts to casting aspersions on its conduct. It is a Hobson’s choice for both: The RoC cannot accept helping Tata in any manner without accepting that the conversion was illegal, whereas the NCLAT cannot expunge the word “helped” as it will make the action of the RoC compliant with law, shaking the foundation of the NCLAT’s order. Hence a royal stalemate.

Absence of law?

Can commercial and corporate function come to a standstill if lawmakers fail to make laws? How should the wheels of commerce continue to run? What is a private company? Can one form a private company at present? Can one convert a public into a private one?

Section 2(68) of Companies Act 2013 defines a “private company” as a company having a minimum paid-up share capital as may be prescribed. The RoC has stated before the NCLAT that no minimum capital has been prescribed. In that case, can the RoC register a private company? Should all companies become public? The logical answer is no.

If one goes by para 15 of NCLAT judgment of January 6, 2020, it appears that the RoC does not have any power in case the minimum capital is not prescribed.

“--- in absence of any prescription of minimum paid up share capital, the Registrar of Companies has no power or jurisdiction to carry out any changes in the Register of Companies or Certificate of Incorporation ----.”

The NCLAT judgment means that under the 2013 Act, no private company could be incorporated; all companies registered as private post the Act, would be illegal.

The NCLAT’s ruling contrasts with the ruling of the Supreme Court in Orissa State v/s. M/s Orient Paper Mills (2003.03.10) where it said:

“...Where a statute confers powers on an authority to do certain acts or exercise power in respect of certain matters, subject to rules, the exercise of power conferred by the statute does not depend on the existence of rules unless the statute expressly provides for the same. In other words framing of the rules is not condition precedent to the exercise of the power expressly and unconditionally conferred by the statute. The expression "subject to the rules" only means, in accordance with the rules, if any. If rules are framed, the powers so conferred on authority could be exercised in accordance with these rules. But if no rules are framed there is no void and the authority is not precluded from exercising the power conferred by the statute..."

Therefore no void is created and the wheels of commerce can function without any hitch; the RoC could act within its jurisdiction even though the rules had not been framed.

Conversion to private company

What is the procedure of conversion? On the procedure part, RoC Mumbai asserts that till January 30, 2019, Section 43A (2A) of the Act of 1956 was operative.

“[(2A) Where a public company referred to in sub-section (2) becomes a private company on or after the commencement of the Companies (Amendment) Act, 2000, such company shall inform the Registrar that it has become a private company and thereupon the Registrar shall substitute the word 'private company' for the word 'public company' in the name of the company upon the  register and shall alsomake the necessary alterations in the certificate of incorporation issued to the company and in its memorandum of association within four weeks from the date of application made by the company].”

While the NCLAT in para 17 has said that the RoC had omitted mention of Section 43A(4), it appears the NCLAT had overlooked the fact that Section 43A(4) was repealed way back in 2000. Should RoC follow a current law or a repealed one?

The NCLAT judgement, has quoted Section 18 of Companies Act 2013 also: “A company of any class registered under this Act may convert itself as a company of other class...”

Section 18 is not applicable to Tata Sons because it has not been registered under Act of 2013. In the 2013 Act, there is no place for hybrid companies such as Tata Sons — private by functioning and public by fiction of law. Once the fiction disappears, dual nature automatically disappears.

Contempt of NCLAT order?

NCLAT in its judgment of December 2019, under Para 187(iv), ordered RoC to issue a new certificate of incorporation to Tata Sons. There was no stay of order. The RoC has not yet carried out the required changes. It is in Catch-22 situation: If it does not appeal and change registration certificate, it would admit it acted illegally. In that case, it would be Tata Sons that would drag the RoC to the Supreme Court and there it will be in a precarious position, admitting that it acted illegally and make arguments totally opposite to that it made at the NCLAT. And if the RoC appeals in the SC, it will be continuation of war and not truce between MCA and NCLAT. That might be better as it would save the RoC some embarrassment. The MCA needs to demonstrate that it believes in the interpretation of law it has created.

Whatever the decision of the RoC, it will be an interesting battle ahead for all corporate law practitioners.
/> The author is managing director, Stakeholders Empowerment Services

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