Cross-Breeding of Entities: NCLT upholds the view!
Pammy Jaiswal
Partner, Vinod Kothari and Company
Background
Even though each time when law is amended, the stakeholders do expect the change will be a gap filing exercise or a step towards making it more liberal or strict, as the case may be. However, sometimes such amendment comes with a lacuna. Earlier under the Companies Act, 1956 (‘Act, 1956’), sections 391 – 394 dealt with the provisions of compromises, arrangements, amalgamation and reconstruction. The said provisions were re-casted under the Companies Act, 2013 (‘Act, 2013’) under sections 230 – 234. The said provision under the Act, 2013 suffers from a significant gap.
This write-up is an attempt to foreclose the lacuna under the new provision under law and how the quasi-judicial body has correctly interpreted the said gap in law.
Transferor and Transferee Company – Who can be?
Under Act, 1956
Section 394 (4) clause (b) expressly and clearly stated “”transferee-company” does not include any company other than a company within the meaning of this Act; but “transferor-company” includes any body corporate, whether a company within the meaning of this Act or not.”
Under Act, 2013
The sections dealing with compromise and arrangement uses 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 w.r.t. the meaning of transferor and transferee companies, Hon’ble National Company Law Tribunal has discussed the concern validly in one of the cases.
NCLT upholds the view – Bodies Corporate can be a transferor company
In the matter of M/s Real Image LLP vs. M/s Qube Cinema Technologies Private Limited[1], NCLT Chennai Bench while sanctioning the Scheme, examined the admissibility of the joint petition by both the parties. Both the Transferor LLP as well as the Transferee Company were engaged in the same line of business activities. The Scheme provided for the transfer of the whole of the undertaking of the Transferor LLP into the Transferee Company as going concern.
As the Hon’ble Bench moved on to discuss the legislative intent of the law makers for missing provision to allow bodies corporate to merge with a company, para 14 and 15 of the final order examines the intent with supporting rationale.
Para 14 and 15 of the final order states as follows:
“Council 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.”
NCLT has rightly pointed out the intent of law and has concluded to give its judgement following the rationale of substance over form. Even though the Act, 2013 has inadvertently missed putting 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 scheme 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 -234 of the Act, 2013 provided all the other conditions are complied with.
Earlier also while the Act, 1956 was quite clear on the meaning of transferor and transferee companies, Hon’ble High Court has discussed the permissibility of merger of bodies corporate with companies. In the matter of Andhra Bank Housing Finance vs. Andhra Bank; 2003 (3) ALD 654, 2004 118 CompCas 295 AP, 2003 47 SCL 513 AP[2] and further in the matter of Patrakola Tea Co. Ltd. vs. Unknown; AIR 1967 Cal 406, 70 CWN 971[3], the Hon’ble High Courts have specifically and categorically discussed that the intent of law was to allow a body corporate to merger with a company incorporated under the Act, 2013.
Conclusion
In light of the aforesaid case law as decided by the Chennai Bench of NCLT, much needed clarity has been brought for entities planning to go for such arrangements. Now since the nagging question has been answered, corporatisation prospects will be on the rise.
[1] Click here to view judgement
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