[Rudra Shankar is a fifth-year BA LLB (Hons.) student at Symbiosis Law School, Pune]
The procedure for mergers and demergers of companies in India is governed by sections 230 to 232 of the Companies Act, 2013. Companies are required to approach the National Company Law Tribunal (NCLT) to obtain its sanction to such schemes of arrangement before they can take effect. Section 232(6) of the Act provides that a scheme for a merger or amalgamation shall clearly indicate an appointed date from which it shall be effective, and the scheme shall be deemed to be effective from such date and not a date subsequent to the appointed date. The term “effective date” means the day on which the last of the requisite filings are made and the transfer is actually effectuated. The appointed date is a legal fiction, created for the purposes of setting a date from which the financial statements of the companies involved may reflect the effect of the transaction.
On 21 August, 2019, the Ministry of Corporate Affairs released General Circular 09/2019 with the subject “Clarification under 232(6) of the Companies Act 2013.” The circular notes that companies have been filing schemes with specific calendar dates as the appointed date, as well as schemes with appointed dates that are set to trigger on the happening of a specific event such as the receipt of approvals from government bodies or the grant of required licenses. The circular cites Marshall Sons and Co. India Ltd. v. ITO, where it was held that while every scheme of amalgamation must state the date with effect from which the amalgamation or transfer shall take place, and that such date may precede the date of sanctioning of the scheme by the court. It was further observed that the scheme would be given effect from the transfer date listed as the appointed date in the scheme itself. It also made reference to the case of Equitas Housing Finance Limited in which the Madras High Court held that a scheme of transfer could have an appointed date tied to some future event.
Thus, the Ministry of Corporate Affairs has clarified that companies may either choose a specific ‘calendar date’ as the appointed date, or tie it to the occurrence of a certain event. The appointed date may even be a date preceding the filing of the scheme before the NCLT. In case the appointed date is ante-dated beyond a year from the date of filing of the application, adequate justification must be provided for the same and it should not be against public interest. It has been argued that the phrase “public interest”, as it appears in the circular, may grant the tribunal enough discretion to introduce subjectivity while deciding the approval of applications. Where a scheme specifies a trigger event that is to occur following the date of filing the order of the tribunal with the Registrar, the company will have to inform the Registrar that the scheme has come into effect within 30 days of such event.
However, this circular still leaves some ambiguity as to whether a scheme of arrangement under section 232 of the Companies Act, 2013 may be sanctioned with conditions yet unfulfilled and in which a retrospective appointed date was chosen. That is to say, the circular is unclear about whether a retrospective appointed date and a prospective conditional effective date can both exist in a scheme.
A number of cases seem to answer this question in the affirmative. In each of the schemes of Diamore Diamonds Private Limited and Ad Mehta Export Pvt. Ltd. (2018 SCC OnLine NCLT 4017, at paras 4 and 21), Ayush Diaex Private Limited and Ayush Diamonds Private Limited (2018 SCC OnLine NCLT 3821, at paras 4 and 22), and Brett Plastics Private Ltd. (2018 SCC OnLine NCLT 3973, at paras 9 (c) and 10), the NCLT allowed these schemes with retrospective appointed dates, despite each of the schemes being subject to the approval of the Mauritius Supreme Court pursuant to statutory compliance requirements (each of the transferor companies were registered in Mauritius).
The NCLT has also shown willingness to sanction schemes that are subject to contractual conditions and not just statutory compliances. In the case of Gayatri Infra Ventures v. The Regional Director South East Region MCA Hyderabad (2017 SCC OnLine NCLT 12385, at paras 4 (i) and 9), the Hyderabad Bench of the NCLT considered an application for a scheme of arrangement under section 230 read with section 232 of the Act. The proposed scheme referred to in the judgement was subject to conditions detailed in clause 31 of the scheme. Amongst statutory requirements, clause 31 read with 31.4 of the scheme states as follows:
This Scheme is conditional upon and subject to:
The share purchase agreement between GPL and AMP Capital Finance Mauritius Limited for the Acquisition of 29.41% of the shareholding in GIVL by GPL, being completed and given effect.”
The tribunal sanctioned the scheme with a retrospective appointed date and a prospective effective date that would be triggered on the last of the conditions being met. Thus, the precedents indicate that a prospective effective date that is conditional may be contemplated in a scheme of arrangement in which a retrospective appointed date is specified. The flexibility provided by the courts in this regard has been a positive influence on the ease of doing business in India.
– Rudra Shankar