COMPANY LAW ASSIGNMENT

Submitted by.
Amritam Shankar yadav
SAP- 500071424
Roll- R760218115
Q1. Analysis of prov iso of section 232(3) (b) r/w section 19 and 67 of companies act, 2013?
Ans1. The Companies Act, 2013 (2013 Act) has seen the light of day and replaced the 1956
Act with some sweeping changes including those in relation to mergers and
acquisitions (M&A).

The new Act has been lauded by corporate organizations for its business-friendly corporate
regulations, enhanced disclosure norms and providing protection to investors and minorities,
among other factors, thereby making M&A smooth and efficient. Its recognition of interse
shareholder rights takes the law one step forward to an investor-friendly regime. The 2013
Act seeks to simplify the overall process of acquisitions, mergers and restructuring, facilitate
domestic and cross-border mergers and acquisitions, and thereby, make Indian firms
relatively more attractive to PE investors.

The term ‘merger’ is not defined under the Companies Act, 1956 (“CA 1956”), and under
Income Tax Act, 1961 (“ITA”). However, the Companies Act, 2013 (“CA 2013”) without
strictly defining the term explains the concept. A ‘merger’ is a combination of two or more
entities into one; the desired effect being not just the accumulation of assets and liabilities of
the distinct entities, but organization of such entity into one business.

On 7th November, 2016 Central Government issued a notification for enforcement of section

230-233, 235-240, 270-288 etc w.e.f. 15th December, 2016. But still rules were not available
till date for CAA.

MCA vide notification dated 14th Dec, 2016 has issued rules i.e. The Companies
(Compromises, Arrangements and Amalgamations) Rules, 2016. These rules will be effective
from 15th December, 2016. Consequently, w.e.f. 15.12.2016 all the matters relating to
Compromises, Arrangements, and Amalgamations (hereafter read as “CAA”) will be dealt as
per provisions of Companies Act, 2013 and The Companies (Compromises, Arrangements,
and Amalgamations) Rules, 2016.

Where a compromise or arrangement is proposed for the purposes of or in connection with

scheme for the reconstruction of any company or companies, or for the amalgamation of any
two or more companies, the petition shall pray for appropriate orders and directions under
section 230 read with section 232 of the Act.

Where more than one company is involved in a scheme, such application may, at the
discretion of such companies, be filed as a joint-application.
However, where the registered office of the Companies are in different states, there will be
two Tribunals having the jurisdiction over those, companies, hence separate petition will have
to be filed.

On 7 December 2016 MCA notified certain sections which included sections pertaining to

compromises, arrangements and amalgamations. Following these notifications, it was stated
that for all matters pertaining to restructuring, the National Company Law Tribunal (NCLT)
would now be the sanctioning authority in place of the High Court and accordingly the NCLT
will be seized of such matters.

The following is an analysis of the key restructuring sections as read with rules that were
notified. The changes brought about by the Act against the erstwhile Companies Act 1956
are: 

1. Section 230 is a principal section empowering compromises or arrangements with

creditors and members, Section 232 is a carved out section governing mergers and
amalgamations.
2. Section 232 provides for three types of restructuring namely merger, amalgamation
and division. Under section 394 of the erstwhile Companies Act, 1956, the wording
'reconstruction of any company' had a broader meaning as compared to the wording
used in section 232 which states 'reconstruction of the company or companies
involving a merger or an amalgamation'.
3. Section 232, for the first time, provides an explanation for mergers by way of
absorption, mergers by formation of a new company and schemes involving division.
4. NCLT is empowered to dispense with the calling of a meeting of the creditors having
at least 90% value agreed and confirmed by way of an affidavit. The Act and Rules
are silent on dispensation of meeting of shareholders.
5. Treasury stock and holding shares in the name of transferee company are prohibited.
6. The scheme should clearly indicate an appointed date from which it shall be effective.
7. It is mandatory to file the statutory auditor's certificate stating that accounting
treatment proposed in the scheme is in conformity with accounting standards
prescribed under the Act.
8. A majority, representing 3/4th in value, of the creditors or members or class thereof
present and voting is required to approve the scheme and the voting must be done
either in person or proxy or postal ballot.
Q2. Analysis of Public Interest viz-a-viz Section 233(5) and Section 237 of Companies Ac,
2013?

Ans2. Amalgamation is a combination of two or more entities forming into a new entity. It
is, however, different from merger as neither of the entities involved survives as a legal entity
but there is formation of an entirely new entity. Assets and liabilities of both the entities are
combined into this one entity. The term amalgamation is not been defined under the
Companies Act 2013, however as per Section 2(1B) of the Income Tax Act 1961,
amalgamation, in context to companies, indicates the merger of one or more companies with
other company or the merger of two or more companies to form one company in a way that
(i) all property of amalgamated company becomes property of the amalgamated company; (ii)
all liabilities of the amalgamated company becomes the liabilities of the amalgamated
company; and (iii) shareholders holding not less than 3/4th shares in the amalgamating
companies become shareholders in the amalgamated company.

Purpose of amalgamation between companies

Companies can choose to amalgamate with different companies for a number of reasons,
included but not restricted to, gaining synergy, avoiding competition in the market, increasing
the efficiency of their business, expanding the business, to build up goodwill, to reduce the
degree of risk by way of diversification, saving of taxes, and increase shareholders value.

Types of Amalgamation

 Amalgamation in nature of merger

In it is in this category of amalgamation, not only assets and liabilities are transferred from
the amalgamating company to the amalgamated company but also, there is transfer of
shareholders’ interest and businesses of both the companies.  The business of this
amalgamated company commences after the amalgamation is concluded, with no adjustments
that are to be made in the book value. Shareholders that hold a not less than 90% of the face
value of equity shares of the amalgamating company, become equity shareholders in the
amalgamated company.
  Amalgamation in nature of purchase

By this mode of amalgamation, one company is acquired by the acquiring company. The
shareholders, holding shares in the Target Company (or acquired company) do not continue
to have proportionate share in the equity of combined company or business.

Q3. Whether transfer of assets under scheme of amalgamation amount to assignment of

leasehold interest by the transferor company.

Ans3. As Merger transactions generally involve transferring of all the assets & liabilities of
Transferor Companies. This generally includes land, buildings, machinery, debtors, stock,
workers, creditors, borrowings and so on.

In some cases assets transferred include Tenancy Rights, which are transferred to the merged
company by the transferor company on a going concern basis. This can create some issues
when there is assignment of tenancies, as part of the scheme in merger transaction.

Implication of Assignment of Tenancies

Under the Indian Constitution, provision of housing is a state subject. Thus, the enactment
and enforcement of rent control laws is the responsibility of the individual states.

Though the “National Company Law Board ” order judgment in rem, but, the sanctioning of
such transfer has no powers to override the provisions of the state laws relating to tenancy.
Therefore, tenancy rights cannot be transferred without the permission of the landlord. If such
a transfer is made, the landlord may be legally entitled to evict the tenant.

In conclusion, the consent of the landlord is necessary to continue to use the tenanted
premises of the amalgamated company.
So, the best way to avoid any legal hassles in Rent Control issues in amalgamation is to take
NOC from the landlord.

Case Law: General Radio and Appliances Co Ltd vs MA Khader (1986) 60 Com Cases 1013
(SC)
But, at the same time “High Court” or “Company Law Tribunal” is not bound to hold back its
sanction for the prior approval of the Landlord. This was observed in the scheme of merger
before the Hon’ble High Court, which did not hold back sanction merely because the prior
permission of the landlord was not obtained. It held was held that – so long there was no
other problem, it will sanction it and thereafter, it would be a matter between the landlord and
the transferor/ transferee (merged) companies.

Case Law: Brooke Bond Lipton India Ltd, Re, (1998) 15 SCL 81 (Cal)
So, assignment of tenancy rights is not automatic but a deed of assignment of leasehold rights
will have to be executed as Transferee entity (merged company) will be different from
Transferor entity.

There are some peculiar cases where the Company (Transferor Company) engaged in hotel
business, was being restructured whereby the acquirer (transferee/ merged company) would
undertake necessary acts to revive the company. This included getting the premises vacant as
a part of the scheme. In other words, the tenant was to be evicted. Protected by the tenancy
law, it would be difficult to achieve this. However, the court held despite the provisions of
the state Rent Act, the tenant could be asked to vacate the premises and it was accordingly so
ordered.

Q4. Whether power of NCLT to sanction scheme of arrangement trespasses with commercial
wisdom?

Ans4. In India, the provisions for schemes of compromises/arrangements have formed a part
of the Indian Companies Act, 1913 and then the successors – the Companies Act, 1956/2013
following the English law.

After Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’) was enacted, it was
not possible to invoke the provisions relating to the schemes of compromise/arrangement for
companies under BIFR[1].  However, the Insolvency and Bankruptcy Code, 2016 (‘Code’)
made amendments[2] in section 230 of the Companies Act, 2013 so as to include a liquidator
appointed under the Code as eligible to propose a scheme under that section.  Later, the
Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016
(‘Regulations’) were amended[3] to facilitate schemes under section 230 of the Companies
Act, 2013. Given that the company gets a fair chance of resolution under the Code before
being pushed to liquidation, the window for completion of scheme has been provided only for
the initial duration of 90 days from the liquidation order.
As the Code makes references to section 230, for operative provisions, one has to refer to
related provisions of the Companies Act, 2013. There might be inconsistencies in between
the two laws – as to timelines, eligibility as to being a proposer of scheme, etc. As such, it
would be important to harmonise the provisions under both the laws; consequentially,
mechanics of a scheme framed under the Code read with the Companies Act, 2013 might be
slightly different from a scheme framed only under the Companies Act, 2013.

Also, given that the scheme will have to pass the sanction of the National Company Law
Tribunal (‘NCLT’), the scheme has to adhere to the principles which the courts/NCLTs had
been following while approving/rejecting the scheme.

The law under section 230 of the Companies Act, 2013 or that under the predecessor do not
explicitly deal with the principles which the court should follow in sanctioning a tabled
scheme.  The principles, however, have evolved over time by judicial interpretations and
perspectives.

In Miheer H. Mafatlal v. Mafatlal Industries Ltd., (1997) 1 SCC 579, the SC propounded

fundamental parameters for sanctioning a scheme, though not specific to a company in
liquidation; not being discussed here for the sake of brevity.  Once the broad parameters are
met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom
of the majority even if in the view of the Court there can be a better scheme for the company
and its members or creditors for whom the scheme is framed. The Court has only supervisory
jurisdiction over the scheme and not appellate jurisdiction.
Later, in Meghal Homes Pvt. Ltd v. Shree Niwas Girni K.K.Samiti & Ors., (2007) 7 SCC 753,
the SC dealt specifically with the interplay between the provisions of sections 391 to 394A
and section 466[6] of the Companies Act, 1956 with respect to a company in liquidation, and
acknowledged not-so-exhaustive application of Mihir H. Mafatlal (supra) to companies in
liquidation, and held  –
When a Company is ordered to be wound up, the assets of it, are put in possession of the
Official Liquidator. The assets become custodia legis. The follow up, in the absence of a
revival of the Company, is the realization of the assets of the company by the Official
Liquidator and distribution of the proceeds to the creditors, workers, and contributories of the
company ultimately resulting in the death of the company by an order under Section 481 of
the Act, being passed. But, nothing stands in the way of the Company Court, before the
ultimate step is taken or before the assets are disposed of, to accept a scheme or proposal for
revival of the Company.