NCLT Approves Amalgamation of LLP with Company: Did the Legislature Intend This?

[Ritika Bharti and Siddharth Subramanya Raj Urs are 4th year B.B.A. LL.B. (Hons.) students at School of Law, CHRIST (Deemed to be University), Bengaluru]

Giving a new dimension to corporate restructuring, the Chennai Bench of the National Company Law Tribunal (“Tribunal”), in its first of a kind order dated 11 June 2018, laid down a fresh interpretation to the provisions pertaining to the amalgamation of companies. The Tribunal approved the merger of a limited liability partnership (“LLP”) named Real Image LLP incorporated under the Limited Liability Partnership Act, 2008 (“LLP Act”) with Qube Cinema Technologies Pvt. Ltd., a private limited company registered under the Companies Act, 2013 (“Act”).

Background

A joint petition was filed before the Tribunal for a scheme of amalgamation where the whole of the undertaking of the LLP would be transferred to the company as a going concern. The question of law that arose for consideration was “whether an LLP can be allowed to amalgamate with a Private Limited Company under a scheme prepared under the Companies Act, 2013.”

The submissions made by the counsels were twofold:

– the provisions of the LLP Act, 2008 that pertain to arrangement and reconstruction of LLP firms (sections 60-62) and the provisions of the Act pertaining to compromise and arrangements (sections 230 – 232) are identical.

– under Section 394(4)(b) of the erstwhile Companies Act, 1956 (“1956 Act”) there existed no legal bar for the transferor company to be an LLP. Additionally, the current Act, under section 234 provides for the merger of an Indian company with a foreign body corporate. Thus, the Act does not place any restrictions on the merger of a company registered under the Act and a foreign LLP.

Accepting the submissions of counsel, the Tribunal held that the current instance is a clear case of casus omissus. The Tribunal further added that this intention was visible as the Parliament provided for the merger for an Indian company with a foreign LLP while it confined the scope of intra-territorial arrangements to other Indian companies alone.

Ruling and Analysis

An analysis of the judgment will follow a brief description of the rules of interpretation adopted and relied on in the Tribunal’s order.

Purposive Approach

The purposive approach is an approach to statutory and constitutional interpretation under which common law courts interpret an enactment in light of the purpose for which it was enacted. The Privy Council in Owen Thomas Mangin v. Commissioner of Inland Revenue referred to the above rule and stated: “The object of the construction of a statute, be it to ascertain the will of the legislature, it may be presumed that neither injustice nor absurdity was intended. If, therefore a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted.”

Casus Omissus

The rule of casus omissus gives a court the leeway to interpret a statute in a manner that is evident from the language of the legislature. The rule can only be applied in the case of clear necessity and if the rationale for the same is found within the four corners of the statute.

Analysis

1. Intent of the legislators

The purpose of the Act is evident with regard to schemes of arrangements and compromises. The Act provides a company with the means to enter into agreements with other companies for the purposes of corporate restructuring, being a statutory right of a company. The question that is relevant for the discussion at hand is whether the legislature intended for the provisions pertaining to arrangement and compromise to be interpreted to include LLPs. The 1956 Act did not restrict the amalgamation of a company with an LLP and at the same time the current Act does not place any explicit restrictions with regard to an Indian company amalgamating with an LLP incorporated outside India. The aforementioned reasoning was the Tribunal’s justification for approving the scheme.

The authors opine that such an amalgamation, as provided for under the 1956 Act, was intentionally omitted as the remainder of the provisions have largely been kept intact and reintroduced with minimal or no changes. The provision relating to cross border mergers, titled “Merger or amalgamation of company with foreign company” goes on to define a foreign company as a “company” or “body corporate” incorporated outside India. The key portion here being “incorporated outside India”.

2. Body Corporate

The definition of a “body corporate” under the Act is an inclusive definition with only two restrictions i.e. (i) a cooperative society and (ii) any other body corporate as notified by the Central Government. Further, the definition of a body corporate under the LLP Act is also an inclusive definition, which includes an LLP registered under the LLP Act. Thus, a harmonious construction of the definition of a “body corporate” under both the Acts would result in the inclusion of an LLP under the definition of a “body corporate”.

The authors opine that the term “body corporate” as used in the provision relating to cross border mergers cannot be harmoniously construed to include LLPs incorporated in India. The reason for the same is that the term “body corporate” is followed by, or rather qualified by, the phrase “incorporated outside India” under the explanation to section 234. Thus, this implies that:

– For the purposes of this section, a company can merge with a body corporate (LLP) if and only if it is incorporated outside India.

– Further, the merger with body corporates incorporated within the territory of India will not be permitted as the provision that allowed the same has been omitted when the erstwhile 1956 Act was replaced by the existing Act.

– Lastly, it is a common practice for company law legislation around the world to use the terms ‘body corporate’ and ‘company’ interchangeably. One instance of the same is UK Companies Act, 2006 which under section 16(2) states:

The subscribers to the memorandum, together with such other persons as may from time to time become members of the company, are a body corporate by the name stated in the certificate of incorporation.”

It is evident that, in the context of the Companies Act, 2006, for practical purposes in cases of a merger, the term “body corporate” and ‘company’ can be used interchangeably in light of the above usage.

Conclusion

The Tribunal has misapplied the rules of interpretation to facilitate a transaction that clearly and intentionally was omitted under the Act. While the order has paved the way for increased ease of doing business, which ought to be the purpose of all corporate laws, the same should not be brought about by supplying meaning to words if construed in a strict sense would have resulted in an altogether contrary outcome. However, considering the practical benefits such as a conducive business environment for corporate restructuring, there is a need for clarity from the legislators on the subject as well as the tax implications on the given entities considering the Income Tax Act is silent on the transfer of an LLP to a company.

Ritika Bharti & Siddharth Subramanya Raj Urs

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