Following is a summary of some of the major provisions of the Companies Act, 1994 (“the Act”), which allow judicial intervention by the Company Bench of the High Court Division, Supreme Court of Bangladesh (“the Court”) in the affairs of companies, shareholders, and other relevant aspects.
This is Part Two of the article, which illustrates 3 (three) major litigations in the Company Court. You may also find it worthwhile to review Part One of the Article here for the remaining litigations under the Companies Act, 2023.
7. Amalgamation of two Companies or adoption of a Special Scheme of restructuring (Merger/Demerger etc.)
Reference: Section 228-229 of the Companies Act, 1994
Section 228 of the Act states that if a company wants to make a deal with its creditors or members, or if it’s going through a winding-up process, the court can order a meeting to discuss and decide on the terms of the deal. This meeting will be held as directed by the court. If a majority of creditors or members, representing three-fourths in value, agree to the deal, and the court approves it, the deal becomes binding on all creditors, members, and the company itself if it’s being wound up. The court can also temporarily stop any lawsuits against the company until the application for the deal is settled.
Furthermore, section 229 of the Act states that when a company proposes a deal under Section 228, and it’s shown that the deal is part of a larger plan for reconstructing or merging companies, the court may make orders to: (a) Transfer the assets and liabilities of one company (transferor) to another (transferee); (b) Allocate shares, debentures, or other interests in the transferee company; (c) Continue legal proceedings involving the transferor company with the transferee company; (d) Dissolve the transferee company without winding it up; (e) Provide for dissenting individuals; and (f) address other necessary matters to ensure the reconstruction or merger is successful. If the court orders the transfer of property or liabilities, it automatically transfers them to the transferee company. The court can also free the transferred property from any existing charges based on the terms of the deal.
Procedural aspects:
- Proposal and Consent by Majority Shareholders: Compromise or arrangement is proposed between two companies/Scheme of amalgamation/merger consented by more than fifty percent of the shareholders and/or creditors;
- EGM: Extra-ordinary General Meeting (EGM) with Creditors and Shareholders of both the transferor company and transferee company for the adoption of a special resolution. The Resolution should be passed by owners of three-fourths of shares and/or credits approving the scheme of amalgamation.
- Application to Court: Once the Resolution is adopted, an application can be made to the Court under section 229 of the Act. The Court will then assess the merit of the scheme/restructure proposed and pass an order thereby. Moreover, the Court can approve resorting to inherent power u/s 151 of CPC and Rule 8 of Company Rules, 2009.
It is notable to mention that the Audited Financial Statements for both the companies should be in consonance with the guidelines of International Accounting Standard [IAS].
8. Protection of Minority Shareholders
Reference: Section 233 of the Companies Act, 1994
Section 233 of the Act illustrates the provisions for protecting the interests of Minority shareholders. It states that any member or debenture-holder of a company, who meets the minimum conditions specified in section 195(a) and (b) of the Act, can inform the court through an application if: (a) the company’s affairs are being managed in a way that harms one or more members or debenture-holders or ignores their interests; (b) the company is acting or likely to act in a way that discriminates against the interests of any member or debenture-holder; or (c) A resolution has been passed or is likely to be passed that discriminates against the interests of one or more members or debenture-holders. In such a situation, the minority shareholders can request that the Court make an order that, in their opinion, is necessary to protect their interests and the interests of other members or debenture holders. After hearing the concerned parties, if the court believes that the interests of the applicant or applicants are, or likely to be, adversely affected as stated in the application, it can make an order as requested or any other appropriate order. This order may include – (a) Cancelling or modifying a resolution or transaction; (b) Regulating the company’s future conduct as specified; (c) Amending any provision of the company’s memorandum and articles.
Who may make the application:
Any shareholder aggrieved by an act/omission of the Company in the manner as mentioned above.
Key determining factors for the Court
- Whether the Petitioner is acting in good faith;
- Whether there is any alternative remedy;
- Whether any offer was made to the petitioner;
- Whether motives of those in control of the Company are truly detrimental to the interest of the petitioner(s), or they are bonafide commercial decision in the interest of the Company;
- Whether any delay has been made in presenting the petition;
- Whether the affairs of the Company are running in any manner that affects the interest of the minority: this may encompass company’s goodwill, profit and losses, its contracts and assets including its shareholding in and ability to control the affairs of a subsidiary company;
- Whether the action results in the Petitioner’s exclusion from management;
- Whether any fraud is committed on the minority;
- Whether the Petitioner is being forced out of the Company (by adopting a resolution to expropriate the shares of the Petitioner)
9. Winding-up of Company by judicial intervention
Reference: Section 241 of the Companies Act, 1994
A company may be ordered to be wound up by the court in the following situations:
(a) The company itself decides through a special resolution that it should be wound up by the court; (b) Default occurs in submitting the statutory report or holding the statutory meeting; (c) The company doesn’t start its business within a year of incorporation or suspends business for a whole year; (d) the number of members falls below two for a private company or below seven for any other company; (e) The company is unable to pay its debts; and (f) The court believes it is just and equitable to wind up the company.
Section 242 provides the explanation as to when it will be regarded as the Company is deemed unable to pay its debts, which includes: (1) if a creditor, owed more than five thousand taka, serves a demand requiring payment; and if the company neglects to pay or secure the debt to the creditor’s reasonable satisfaction for three weeks, it’s deemed unable to pay; (2) Execution on a court decree in favor of a creditor is returned unsatisfied, in whole or in part; (3) The court is satisfied that the company cannot meet its debts, taking into account its current and potential future liabilities; (4) The demand from the creditor is considered valid if signed by an authorized agent or legal adviser, or, in the case of a firm, by an agent, legal adviser, or one member of the firm on behalf of the firm.
Who may make the application:
Any shareholder or creditor of the Company
Factors for the Court to wind-up on the grounds of Inability to pay debts
While winding-up of a company under section 241 is a discretionary power of the Court, the Court may consider the following aspects while considering the inability of the Company to pay its debt:
- Debt must be determined or definite sum of money payable at a future date;
- Debt must be undisputed, if there is a bonafide dispute or counterclaim, the petition for winding up will fail;
- Even if the Company acts as a guarantor, it the principal defaults, the amount guaranteed become a debt for the Company;
- Winding up petition must not be used as a means for realization of money;
It is important to note that as per the decision of the Appellate Division of the Supreme Court in Agrani Bank vs. Bangladesh Tyres Ltd. and Others (43 DLR (AD) 164), the Company must be found to be commercially insolvent when its existing and possible assets are insufficient to meet the existing liabilities, it is heavily indebted to various creditors, all its assets being in mortgage or in pledge and there is not possible chance of profit being made or its business carried out.
Factors for the Court to wind-up on the just and equitable grounds
While winding-up of a company under section 241 is a discretionary power of the Court, the Court may consider the following aspects while considering the inability of the Company to pay its debt:
- A complete deadlock situation that cannot be resolved in any manner as per the articles of association of the Company;
- Mismanagement of the Company by the current board;
- Justifiable lack of confidence in the management;
- Company is conceived and brought forth in fraud;
Procedural Aspects
- Application to the Court under section 241 of the Act; [in some situations, an advanced legal notice is required to be given];
- Admission and appointment of Provisional Liquidator;
- Hearing;
- Allowing the application with the appointment of an Official Liquidator;
However, there may be instances where the Court, upon its satisfaction and for the greater good of the Company/sha, may choose to appoint a provisional liquidator without even admitting the application (MM Structural and Holdings Ltd. vs. International Leasing and Finance Services Ltd.) 26 BLC (HCD) 711).