No separate Application is required where 100% Subsidiary seeks Amalgamation with its Holding Company: NCLT Bengaluru Bench

In the recent ruling of National Company Law Tribunal[1]Bengaluru Bench (‘the Hon’ble NCLT’), the Bench has held that no separate application is required to be filed by the transferee company in case of merger of a wholly owned subsidiary company with its parent company by virtue of scheme of amalgamation.

Below we discuss the same in details along with analysis of the impact of the ruling.

Brief fact of the Case

ORCC Solutions Private Limited (‘the Company/ Transferor Company’), a company incorporated under the Companies Act, 1956 and having its registered office in the State of Karnataka, was a wholly owned subsidiary of ACI Worldwide Solutions Private Limited (‘Parent Company’/Transferee Company’) and was engaged in the business of software development support services for the software products and solutions in the area of online banking and e-commerce sector.

Pursuant to section 391 to 394 of the Companies Act, 1956, the Transferee Company had filed an application before Hon’ble High Court of Karnataka at Bengaluru (‘Hon’ble Court’) for approval of the scheme of Amalgamation, wherein, the Company had proposed to get merged with its Parent Company.

Considering the fact that the Company is a wholly owned subsidiary of the Transferee Company, no separate application was filed by the Transferee Company before the Court. Upon hearing, the Hon’ble Court vide order dated April 1, 2016, had dispensed with the meeting of shareholders, secured creditors and unsecured creditors of the Transferor Company.

Subsequently, as per Notification dated 7^th December, 2016 issued by Ministry of Corporate Affairs (‘MCA’) the Petition got transferred from the Hon’ble Court to the Hon’ble NCLT.

Reference of High Court Rulings

The Hon’ble NCLT considered the following rulings pronounced by High Courts:

1. (2001) 105 Comp Cas 16 (Bombay High Court) Mahaaamba Investments Ltd Vs. IDI Ltd- [2] Wherein a learned single Judge of the Bombay High Court was of the view that where the proposed amalgamation is in respect of holding and its 100% subsidiary company and the 100% subsidiary company is sought to be merged with the holding company and when the members of the creditors of the transferee company are not affected, the petition by transferee company is not necessary.

2. (2003) 3ALD 654: (2004) 118Comp Cas 295 in the High Court of judicature of Andhra Pradesh at Hyderabad, in the matter of Andhra Bank Housing Finance Limited Vs. M/s. Andhra Bank[3]– In this case, the Hon’ble Hyderabad High Court held that the scheme to be sanctioned is the self-same scheme either for the transferor company or for the transferee company. Considering the fact that the subsidiary company is the 100% subsidiary of the Andhra Bank., there is nothing to file a separate application by the holding company seeking sanction of the scheme.

3. (2009) 150 Comp Cas 728 in the High Court of Karnataka in the matter of Nokia Siemens Network India Private Limited Vs. Nil- [4]In this case, the Hon’ble High Court of Karnataka held that where a wholly owned subsidiary is seeking to amalgamate with its holding company and the scheme of amalgamation is not detrimental to any shareholders or creditors, no separate petition is required to be filed by the transferee company.

Judgement

The Hon’ble NCLT Bengaluru Bench stated that, since the Transferor Company is a wholly owned subsidiary of the Transferee Company, there will be no re-organisation of share capital and allotment of shares by the Transferee Company, post approval of the Scheme. Further, Board of directors of both the Companies have approved the Scheme of Amalgamation and both the Companies are profit making companies. Thus, no prejudice will be caused to the members as well as creditors of the respective companies, if the Scheme is approved. Therefore, relying on the decisions taken by various High Courts under the Companies Act, 1956 wherein Transferee Company was not required to file separate petition for the approval of the scheme of amalgamation, the Hon’ble Bench approved the Scheme of Amalgamation filed u/s 230 read with section 232 of the Companies Act, 2013 (‘Act, 2013’) even though no separate application was filed by the Transferee Company.

Relevant provisions of Law

Section 2 (46) of Act, 2013

Sec 2 (46) of the Act, 2013 which pertains to definition of ‘Holding Company’ reads as follows:

 ‘Holding Company’ in relation to one or more other companies, means a company of which such companies are subsidiary.

Section 230 of Act, 2013

Section 230 of the Act, 2013 pertains to ‘Power to compromises or arrangements with creditors and members’ reads as under:

“Where a compromise or arrangement is proposed–

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them, the Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs.”

Section 232 of Act, 2013

Section 232 of the Act, 2013 pertains to ‘Merger and amalgamation of companies’ reads as follows:

“Where an application is made to the Tribunal under section 230 for the sanctioning of a compromise or an arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Tribunal—

(a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of the company or companies involving merger or the amalgamation of any two or more companies; and

(b) that under the scheme, the whole or any part of the undertaking, property or liabilities of any company (hereinafter referred to as the transferor company) is required to be transferred to another company (hereinafter referred to as the transferee company), or is proposed to be divided among and transferred to two or more companies,

the Tribunal may on such application, order a meeting of the creditors or class of creditors or the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal may direct and the provisions of sub-sections (3)to (6) of section 230 shall apply mutatis mutandis.” 

Section 233 (2) of the Act, 2013

Section 233(2) of the Act, 2013 re-produced as under:

‘The transferee company shall file a copy of the scheme so approved in the manner as may be prescribed, with the Central Government, Registrar and the Official Liquidator where the registered office of the company is situated.’ 

Rule 3 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (‘CAA Rules, 2016’)

Rule 3 of CAA Rules, 2016 pertaining to Application for order of a meeting reads as under:

“(1) An application under sub-section (1) of section 230 of the Act may be submitted in Form no. NCLT-1 (appended in the National Company Law Tribunal Rules, 2016) along with:-

(i) a notice of admission in Form No. NCLT-2 (appended in the National Company Law Tribunal Rules, 2016);

(ii) an affidavit in Form No. NCLT-6 (appended in the National Company Law Tribunal Rules, 2016);

(iii) a copy of scheme of compromise or arrangement, which should include disclosures as per sub-section (2) of section 230 of the Act; and

(iv) fee as prescribed in the Schedule of Fees.

(2) Where more than one company is involved in a scheme in relation to which an application under sub-rule (1) is being filed, such application may, at the discretion of such companies, be filed as a joint-application.

Xx.”

Analysis

Earlier when merger cases were judged upon by the High Courts under the Companies Act, 1956, various High Courts had exempted transferee companies from filing separate application in case of scheme of amalgamations which solely provided for merger of a wholly owned subsidiary with its parent company. Views taken by various High Courts were based on the fact that in case of merger of a wholly owned subsidiary with its parent company, no fresh allotment of shares will be made by the transferee company post the approval of the scheme. Thus, on the basis of the rulings pronounced by High Courts, Hon’ble NCLT held that no separate application is required to be filed by the Transferee Company.

The Companies Act, 2013 provides that merger of a wholly owned subsidiary with its holding company can be proceeded with either of the two ways:

1. As per section 232 read with section 230 of Act, 2013 (‘NCLT Route’)
2. As per section 233 of Act, 2013 (‘Fast Track Route’)

Section 233 of the Act, 2013 was introduced with an intent to provide fast track redressal of merger cases where a 100% subsidiary seek for amalgamation with its parent company. Under section 232 of Act, 2013, application shall be filed by transferor company as well as transferee company or joint application can be made by both the companies, in case both the companies falls within the jurisdiction of same NCLT. However, as per section 233 (2) of Act, 2013, application shall be made by only transferee company to the Central Government (power delegated to Regional Director) and no application is required by the transferor company.

On perusal of the above referred orders of High Courts and Hon’ble NCLT, it is clear that relaxation has been granted from filing of application by the transferee company in case of merger of a wholly owned subsidiary with its parent company u/s 230 read with section 232 of Act, 2013. However, no relaxation has been granted under section 233 of Act, 2013. Therefore, even in case of merger of a wholly owned subsidiary with its parent company, companies will prefer to opt for NCLT Route rather than fast track route. Thus, the very purpose of introducing section 233 has defeated.

[1] http://nclt.c2k.in/OtherNCLT/Publication/Bengaluru_Bench/2017/Others/80.pdf

[2] https://indiankanoon.org/doc/1196842/

[3] https://indiankanoon.org/doc/374545/

[4] https://indiankanoon.org/doc/1238567/

by CS Barsha Dikshit barsha@vinodkothari.com/corplaw@vinodkothari.com