In today's modern business environment, re-organization of businesses has become very critical, especially where businesses look for creative opportunities to grow inorganically by way of mergers and acquisitions.
Pursuant to its order dated June 11, 2018 the Chennai Bench of the National Company Law Tribunal (NCLT Chennai) has approved a scheme of amalgamation contemplating a merger of a private limited company with a limited liability partnership (LLP), the company being the surviving combined entity (Scheme).
By way of a brief background, pursuant to the Scheme, Real Image LLP (Transferor LLP) comprising its entire business, including all assets and liabilities, all rights, title and interest in the immovable properties, was proposed to be merged with Qube Cinema Technologies Private Limited (Transferee Company) on a going concern basis. The Transferor LLP was incorporated under the provisions of the Limited Liability Partnership Act, 2008 (LLP Act) and the Transferee Company was incorporated under the provisions of the Companies Act, 2013 (2013 Act). The moot question before the NCLT Chennai was whether amalgamation of an LLP with a company was permissible under the provisions of section 230 to 232 of the 2013 Act?
In terms of the relevant legal provisions, Sections 230 to 232 of Chapter XV to the 2013 Act, relate to compromises, arrangements and amalgamations between 'companies' and its creditors and/or members. Section 234 of the 2013 Act relates to merger or amalgamation of a 'company' with a 'foreign company'. The expression 'foreign company' is defined to mean any company or body corporate incorporated outside India whether having a place of business in India or not. Since an LLP incorporated outside India would fall within the meaning of body corporate, therefore, going by a literal interpretation of the abovementioned provisions of the 2013 Act, it appears that only a foreign LLP is permitted to merge or amalgamate with an Indian transferee company under the 2013 Act.
Interestingly, under the previous regime i.e. the Companies Act, 1956 (1956 Act), Sections 391 to 394 provided for compromises, arrangements and amalgamations between companies and its creditors and/ or members. Section 394(4)(b) provided an inclusive definition of 'transferor company' and it was defined to include any body corporate, whether a company within the meaning of the 1956 Act or not and could thus be said to include merger of an LLP with a company. Further, Sections 60 to 62 of Chapter XII of the LLP Act relating to compromise, arrangement or reconstruction of LLPs, are identical to the provisions of sections 230 to 232 of the 2013 Act.
The provisions of the 2013 Act and the LLP Act provide for amalgamation of companies with other companies and LLPs with other LLPs respectively. However, a combination of the two i.e. merger of an LLP with a company or vice versa is neither specifically permitted nor prohibited.
The NCLT Chennai examined the matter and held that the legislative intent behind enacting both, the LLP Act and the 2013 Act was to facilitate ease of doing business and create a desirable business atmosphere for companies and LLPs and for this purpose, both the LLP Act and the 2013 Act provided for merger or amalgamation of two or more LLPs or companies. The absence of any specific provision corresponding to Section 394(4)(b) of the 1956 Act in the 2013 Act was a clear case of casus omissus (omission in law).
Moreover, the NCLT Chennai observed that since Section 234 of the 2013 Act permitted merger of a foreign LLP with an Indian transferee company, it would be wrong to presume that the 2013 Act prohibited merger of an Indian LLP with an Indian transferee company. There did not seem to be any express statutory bar to prohibit such a merger. Otherwise on facts the Scheme appeared to be fair, reasonable, not contrary to public policy and did not violate any provisions of law. Taking into consideration all the factors, the NCLT Chennai held that there is no express legal bar to sanction a merger of an LLP with a Company and approved the proposed Scheme providing for a merger of the Transferor LLP with Transferee Company including dissolution of the Transferor LLP without being wound up.
Under the 1956 Act, there have been cases of mergers where the transferor entity has been an LLP or a partnership firm. The provisions of Section 394(4)(b) of the 1956 Act clearly supported that. However, in the few instances where such cases have come up for consideration after the coming into force of the 2013 Act, the concerned NCLTs have taken differing positions.
In 2017, the NCLT Ahmedabad Bench (NCLT Ahmedabad), had the occasion to consider a similar issue wherein a registered Indian partnership firm was proposed to be merged with an Indian company pursuant to a scheme of amalgamation, and took a contrary view to that taken by NCLT Chennai. The NCLT Ahmedabad held that since a registered partnership firm did not fall within the ambit of the term 'company' as per the 2013 Act, it should not be permitted to be merged with another company. It further observed that if the legislative intent was to provide for a specific provision for a 'body corporate' to participate in the scheme of amalgamation the same would have been incorporated under the provisions of Sections 230 to 234 of the 2013 Act and that the provisions of Section 234 of the 2013 Act (which as noted above, allow such mergers in case of a foreign company) cannot be extended to a partnership firm, not being a body corporate incorporated outside India. Accordingly, NCLT Ahmedabad answered the issue under consideration in the negative.
This decision of the NCLT Chennai certainly seems to be a pragmatic interpretation of the applicable legal provisions. It seems to have applied the principle of casus omissus constructively and most importantly, consistent with the overall scheme of the enactments. Arguably, this decision widens the scope for undertaking mergers, arrangements, reconstruction, etc. amongst the companies, limited liability partnership, partnership firms and other body corporates. However, this issue would be conclusively decided only pursuant to a legislative clarification/amendment or a ruling from the Hon'ble Supreme Court of India, when such a matter comes up in appeal.
Another extremely important related aspect that will need clarity will be taxability of transactions involving merger of an LLP (whether with another LLP or with another company). At present, under the Income-tax Act, 1961 (IT Act), an 'amalgamation' has been defined only in the context of companies and does not deal with a situation of amalgamation of a firm/ LLP with a company. Therefore, the specific exemptions provided under the IT Act may not be available and thus tax neutrality on transactions involving amalgamation of firm/ LLP into a company seems, prima facie, doubtful.
Given that tax implications of mergers and acquisitions as well as re-structuring transactions are of great significance in assessing the commercial viability of such transactions, clarity on tax neutrality aspects of such transactions will also be of great importance.
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