A scheme of arrangement is approved by the requisite majority of the members and creditors, but the minority within each class may object to the scheme. The proviso to Section 230(4) restricts the right to object to persons holding not less than ten per cent of the shareholding or having outstanding debt of not less than five per cent of the total outstanding debt. The threshold is a jurisdictional condition, and an objection that does not meet it is not maintainable.
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 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 Grounds of Objection
A minority shareholder who meets the threshold may object on the grounds that the scheme is unfair, that the valuation is inadequate, that the scheme is a device to oppress the minority, or that the procedural requirements have not been complied with. The NCLT examines the objection on merits, but it is conscious of the commercial wisdom of the majority that approved the scheme.
The NCLT’s approach is to examine whether the scheme is fair and whether the statutory requirements have been complied with. The Tribunal does not substitute its own commercial judgment for the judgment of the majority, but it will intervene where the scheme is unconscionable or contrary to public policy.
The Remedies
The objecting minority may seek the rejection of the scheme, a modification of the scheme, or an exit opportunity. The NCLT’s power to modify the scheme is limited, and the exit opportunity is available only where the scheme provides for it or where the law requires it.
A minority shareholder who intends to object must act promptly. The objection must be raised at the meeting, and it must be supported by the evidence. A belated objection is less likely to succeed.
Call to Action
Anuj Desai & Associates advises minority shareholders and companies on the objections to a scheme—from the Section 230(4) threshold and the grounds of objection to the NCLT’s approach and the remedies. If you are considering an objection or defending a scheme, we can help you assess the position.
📧 office@anujdesaiassociates.com
📞 9619456656
🌐 https://anujdesaiassociates.com
🔗 linkedin.com/in/ca-anuj-desai-122547230
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