NCLT Order Facilitates Cross-Breeding of Entities

[Pammy Jaiswal is a Partner at Vinod Kothari and Company]

Background

Earlier under the Companies Act, 1956 (the ‘Act, 1956’), sections 391 to 394 dealt with provisions relating to compromises, arrangements, amalgamation and reconstruction. The said provisions were re-cast under the Companies Act, 2013 (the ‘Act, 2013’) under sections 230 to 234. The statutory provisions under the Act, 2013 suffer from a significant gap.

This post is an attempt to foreclose the lacuna under the new provision of law and to consider how the quasi-judicial body enforcing company law in India has correctly interpreted the law so as to fill the gap.

Identity of the Transferor and Transferee Companies

Under Act, 1956

Clause (b)  of section 394 (4) expressly and clearly stated “”transferee-company” does not include any company other than a company within the meaning of this Act; but “transferor-companyincludes any body corporate,whether a company within the meaning of this Act or not.”

Under Act, 2013

The sections dealing with compromise and arrangement use the word ‘company’ for both transferor and transferee company. However, section 234 allows foreign companies to merge with a company incorporated under the Act, 2013. The explanation to sub-section (2) of section 234 states: “For the purposes of sub-section (2), the expression “foreign company” means any company or body corporate incorporated outside India whether having a place of business in India or not.”

Even though the law makers had missed the explicit mention of the corresponding provision of section 394(4)(b) of Act, 1956 under the Act, 2013 in relation to the meaning of transferor and transferee companies, the National Company Law Tribunal has discussed the concern validly in a recent case.

NCLT Clarifies that a Body Corporate can be a Transferor Company

In Real Image LLP v. Qube Cinema Technologies Private Limited (11 June 2018), the National Company Law Tribunal (‘NCLT’) Chennai Bench, while sanctioning the Scheme, examined the admissibility of a joint petition by both the parties. Both the transferor, a limited liability partnership (‘LLP’) as well as the transferee, a company, were engaged in the same line of business activities. The scheme of arrangement provided for the transfer of the whole of the undertaking of the LLP into the company as going concern.

As the NCLT moved on to discuss the legislative intent of the law makers for missing a statutory provision to allow bodies corporate to merge with a company, paragraphs 14 and 15 of the final order examine the intent with supporting rationale. The NCLT states:

[Counsel] for the petitioner companies submitted that Sections 60 to 62 of the LLP Act 2008 and Sections 230 to 234 of the Companies Act 2013 deal with the merger, amalgamation and arrangements. The wordings used in both these provisions are almost identical and both the Acts empower only the National Company Law Tribunal to sanction the scheme proposed by the LLP or Company. He has further submitted that under Section 394(4) (b) of the Companies Act, 1956, there was no bar for a transferor in a Scheme of Amalgamation to be body corporate including a LLP. The underlying rationale was to ensure that the resultant company out of a scheme of amalgamation is only a company as defined under the Companies Act and such prohibition was not imposed on the transferor. However, Section 232 of the Companies Act 2013 does not contain the same clause as has been stipulated under Section 394(4) (b). He further submitted that Section 234 of the Companies Act 2013 permits that the foreign company may merge into a Company registered under the Companies Act 2013 or vice versa and the foreign company as defined under the said section, within its ambit, also includes a body corporate incorporated outside India including a foreign LLP. Therefore, as per section 234, foreign LLP and Indian Company can merge with each other but such benefit has not been provided under Section 232 of the Companies Act 2013 for permitting an Indian LLP to merge with an Indian Company.

After hearing the counsel for the petitioners, it is concluded that the legislative intent behind enacting both the LLP act 2008 and the Companies Act 2013 is to facilitate the ease of doing business and create a desirable business atmosphere for companies and LLPs. For this purpose, both the Acts have provided provisions for merger or amalgamation of two or more LLPs and Companies. The issue involved in the present petition has been categorically dealt with by the Companies Act, 1956 but there is no specific provision in the Companies Act 2013. Therefore, this is the clear case of casus omissus. If the intention of the parliament is to permit a foreign LLP to merge with an Indian Company, then it would be wrong to presume that the Act prohibits a merger of an Indian LLP with an Indian Company. Thus, there does not appear any express legal bar to allow/sanction merger of an Indian LLP with an Indian Company.”

The NCLT has rightly pointed out the intent of law and has decided to render its judgement following the rationale of substance over form. Even though the Act, 2013 has inadvertently omitted to include the provisions of section 394(4)(b) of the Act, 1956, the wider outreach of allowing foreign companies and bodies corporate incorporated outside India to enter into schemes of amalgamation in India has made the intent quite obvious to allow bodies corporate incorporated in India to enter into similar arrangements. Therefore, as long as the transferee company is a company under the Act, 2013, there does not seem to be any legal restriction on allowing cross-breeding of entities for the purposes of section 230 to 234 of the Act, 2013, provided all the other conditions are complied with.

Earlier too, while the Act, 1956 was quite clear on the meaning of transferor and transferee companies, High Courts have discussed the permissibility of mergers of bodies corporate with companies. In Andhra Bank Housing Finance v. Andhra Bank, [2004] 118 Comp Cas 295 (AP) and inPatrakola Tea Co. Ltd. v. Unknown, AIR 1967 Cal 406, the Courts have specifically and categorically discussed that the intent of law was to allow a body corporate to merge with a company incorporated under the Companies Act.

Conclusion

In light of the aforesaid case law as decided by the Chennai Bench of the NCLT, much needed clarity has been brought in for entities planning to go for such arrangements. Now that this question has been answered, corporatisation prospects are likely to be on the rise.

Pammy Jaiswal

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