Kiran Raj

The National Company Law Tribunal (NCLT), Mumbai Bench, has rejected the Scheme of Arrangement proposed by Vedanta Limited and its subsidiaries, citing non-disclosure of material financial liabilities and procedural irregularities. The bench, comprising Member (Judicial) Reeta Kohli and Member (Technical) Madhu Sinha, found that the applicant company, Talwandi Sabo Power Limited (TSPL), had concealed crucial financial liabilities owed to SEPCO, a creditor, thereby violating the disclosure requirements under Section 230(2)(a) of the Companies Act, 2013.

The scheme involved the demerger of Vedanta Limited into five separate entities: Vedanta Aluminium Metal Limited, Talwandi Sabo Power Limited, Malco Energy Limited, Vedanta Base Metals Limited, and Vedanta Iron and Steel Limited. The stated objective of the demerger was to create independent global-scale companies with a focused business strategy, efficient capital allocation, and enhanced shareholder value.

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TSPL, a wholly owned subsidiary of Vedanta Limited, was to take over the Merchant Power Business following the demerger. However, SEPCO, one of TSPL’s unsecured creditors, raised objections to the proposed scheme, contending that TSPL had failed to disclose its outstanding debt of ₹1,251 crores owed to SEPCO. The creditor argued that its claim had been acknowledged in TSPL’s financial statements since 2019 and was further affirmed in a consent award issued on May 21, 2016, under arbitration proceedings. SEPCO alleged that TSPL deliberately excluded its name from the list of unsecured creditors to manipulate voting outcomes in the creditors' meeting and falsely depicted its financial health.

The tribunal took note of SEPCO’s arguments and found that TSPL’s financial disclosures lacked transparency. The court recorded: “TSPL has conveniently excluded SEPCO from the process of consideration and approval of the Scheme by not projecting SEPCO as a Creditor to the extent of ₹1,251 crores. This has been done deliberately to defeat SEPCO’s rights.” The order further noted that SEPCO’s claim would have constituted over 75% of the unsecured debt, significantly influencing voting outcomes had it been properly disclosed.

The tribunal observed that TSPL’s balance sheets from 2019 to 2023 had consistently reflected SEPCO’s debt as a financial liability. However, TSPL’s directors, while applying for a change in registered office, made a statement that any liability arising out of the dispute with SEPCO would be provided for after the arbitration outcome. The tribunal found this contradictory and noted: “At the time of approval of the Scheme by the Board of Directors on October 10, 2023, SEPCO was acknowledged as a creditor. However, upon SEPCO’s objection, TSPL unilaterally altered its financial statements, reclassifying the liability as contingent, and initiated arbitration against SEPCO post-facto to justify its omission.”

The tribunal cited precedents emphasizing the necessity of full disclosure in corporate restructuring matters. It relied on Asset Reconstruction Company (India) Ltd v. Bishal Jaiswal & Anr, (2021) 6 SCC 366, wherein the Supreme Court held that balance sheets constitute an acknowledgment of debt. The tribunal further referred to Mist Direct Sales Pvt. Ltd. & Unsecured Creditors (CA 10 of 2024), which stressed that all material facts, including pending financial obligations, must be disclosed to stakeholders for an informed decision on a scheme of arrangement.

Addressing TSPL’s contention that objections should be raised only at the second stage of the scheme approval process, the tribunal rejected the argument, stating: “This tribunal is not merely a rubber stamp to approve schemes without examining whether fundamental disclosure norms have been adhered to. The concealment of such a material liability fundamentally affects the financial viability and valuation of the demerged entities, thereby misleading stakeholders.”

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TSPL argued that its liabilities toward SEPCO were contingent upon an arbitration process and should not impact the scheme’s approval. The tribunal dismissed this assertion, noting that TSPL had acknowledged the debt in previous financial disclosures and only reclassified it as contingent post-objection by SEPCO. The court further observed: “Since 2019, the dues to SEPCO were duly reflected in the balance sheet of TSPL. The sudden reclassification after the scheme’s approval appears to be a deliberate attempt to suppress material facts.”

The tribunal also found procedural lapses in TSPL’s application. The scheme had received observation letters with no adverse remarks from the BSE and NSE in July 2024. However, these approvals were granted based on financial disclosures that excluded SEPCO’s debt. The tribunal recorded that failure to disclose material financial information to regulatory authorities undermined the integrity of the demerger process and prejudiced public interest.

In conclusion, the tribunal held that TSPL’s non-disclosure of a substantial financial liability rendered the scheme non-compliant with legal requirements under Section 230 of the Companies Act, 2013. It stated: “This tribunal deems it appropriate to reject the Scheme presented by the Applicant under Section 230 of the Companies Act, as the concealment of material financial obligations prejudices the rights of creditors and the integrity of corporate restructuring.”

Accordingly, the scheme of arrangement proposed by Vedanta Limited and its subsidiaries was dismissed.

Case Title: In the matter of Scheme of Arrangement between Vedanta Limited & Ors.

Case Number: C.A.(CAA)/MB/220/2024

Bench: Member (Judicial) Reeta Kohli, Member (Technical) Madhu Sinha

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