The proviso to Section 230(4) of the Companies Act, 2013 ("the Act") restricts the right to object to a scheme of arrangement. An objection may be made only by persons holding not less than ten per cent of the shareholding or having outstanding debt amounting to not less than five per cent of the total outstanding debt as per the latest audited financial statements. The threshold is not a procedural nicety; it is a jurisdictional condition, and an objection that does not meet the threshold is not maintainable.
The Computation of the Threshold
The ten per cent shareholding threshold is computed on the aggregate shareholding of the objecting person. The five per cent debt threshold is computed on the total outstanding debt as per the latest audited financial statements. The reference to the audited financial statements is significant: the objector cannot rely on unaudited figures or on a debt that is disputed and not reflected in the audited accounts.
The NCLT has applied the threshold strictly. In Microtek International, the applicant's holding was 4.80 per cent of the debt, below the five per cent threshold, and the application was dismissed as not maintainable. The Tribunal did not examine the merits of the objection because the objector lacked standing.
The Rationale and the Critique
The threshold is designed to filter out frivolous objections and to prevent a small creditor or shareholder from holding up a scheme that has the support of the overwhelming majority. The rationale is that a person who holds a negligible stake does not have a sufficient interest in the scheme to justify the cost and delay of a contested hearing.
The critique is that the threshold can operate harshly where the objector's grievance is genuine but the objector's stake is small. A shareholder who holds 9.9 per cent and who has evidence of undervaluation cannot object under the proviso, even if the scheme is unfair. The remedy lies in the class action under Section 245 or in the oppression and mismanagement jurisdiction under Sections 241 and 242, not in the scheme objection.
The Strategic Implications
A person who wishes to object to a scheme must assess the threshold before filing the objection. If the threshold is not met, the objection will be dismissed at the threshold, and the objector may be liable for costs. If the threshold is met, the objection must be supported by evidence that goes to the merits of the scheme, not merely to the procedural irregularities.
A company that is promoting a scheme should anticipate objections and should ensure that the list of creditors and the shareholding pattern are accurate. A scheme that is approved by the requisite majority but that is challenged by an objector who meets the threshold is a scheme that faces delay and uncertainty.
Call to Action
Anuj Desai & Associates advises companies and objectors on the Section 230(4) threshold—from the computation of shareholding and debt to the strategy for meeting or challenging the standing requirement. If you are considering an objection to a scheme or defending a scheme against an objection, we can help you assess the threshold and build the record.
📧 office@anujdesaiassociates.com
📞 9619456656
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