Schemes of Compromise, Arrangement and Amalgamation: Recent Updates
A. Clarification on indication of specific calendar date as ‘Appointed Date’ under a Scheme of Merger and Amalgamation
Ministry of Corporate Affairs(“MCA”) vide a Circular No. 09/2019 (“Circular“) has provided clarification on the interpretation of S 232(6)of the Companies Act, 2013 (“Act“) which lays down the requirement toindicate the ‘Appointed Date’ in a Scheme of Merger and Amalgamation (“Scheme“) under the Act.
S 232 (6) of the Act states as under:
“The scheme under this sectionshall 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 at a date subsequent to the appointed date.”
The Circular seeks to clarify two aspects viz. requirement to mandatorily indicate a specific calendar date as the ‘Appointed Date’ and confirmation if the ‘Acquisition Date’ for the purpose of Ind‐AS 103 (Business Combinations) would be the ‘Appointed Date’ referred to in S 232(6) of the Act.
MCA while relying upon the judgments of Supreme Court in Marshall Sons & Co. India Ltd. v. ITO, 223 ITR 809 and of High Court at Madras in Equitas Housing Finance Limitedand Equitas Micro Finance Limited with Equitas Finance Limited,C.P. Nos. 119 to 121 of 2016, clarified that:
i. The ‘Appointed Date’ could either be a specific calendar date or a date tied to the occurrence of an event or fulfillment of certain pre‐conditions, which is mutually agreed upon by the parties to the Scheme and is relevant to the Scheme;
ii. In case of the ‘Appointed Date’ being contingent upon a pre‐condition or occurrence of an event, such pre‐condition or occurrence of an event would have to be indicated in the Scheme itself. Further, a separate intimation has to be provided to the Registrar of Companies within 30 (thirty) days of the Scheme coming into force, if such event is pursuant to the date of filing a certified copy of the order sanctioning the Scheme with the Registrar of Companies under S 232(5) of the Act;
iii. A specified calendar date as the ‘Appointed Date’ can precede the date of filing of the Scheme;
iv. In case ‘Appointed Date’ is significantly ante‐dated, beyond a year from the filing of the Scheme, proper justification should be provided in the Scheme for selection of such date and the same should not be against public interest;
v. ‘Appointed Date’ would be the ‘Acquisition Date’ and the date of transfer of control for the purpose of conforming to accounting standards (including Ind‐AS 103 Business Combinations);
B. Ineligibility of Promoters to initiate Schemes of Compromise and Arrangement during Insolvency and Liquidation
A Scheme of Compromise and Arrangement under S 230 to 232 of the Act (“Scheme“) is a tool that has traditionally been used for restructuring of assets. However, with the advent of the Insolvency and Bankruptcy Code, 2016 (“IBC“) such Schemes are being used as a revival apparatus for companies in cases where the insolvency resolution process fails. This school of thought was endorsed in the case
S.C. Sekaran v Amit Gupta, Company Appeal (AT) (Insolvency)No. 495 & 496 of 2018 (“S.C. Sekaran“) wherein the adjudicating authority encouraged the parties to adopt a Scheme as an attempt to revive the company and thereby preserved the objective of IBC which is to ensure continuation of the corporate.
Although S.C. Sekaranproved to be a prudent judgment in its own right, nevertheless, it did not clarify whether promoters barred under S 29 Aof the IBC can be permitted to file a Scheme under S 230 to 232of the Act when a company is undergoing liquidation under the IBC. Light was shed upon this aspect in the case Jindal Steel and Power Limitedv Arun Kumar Jagatramka and Ors, Company Appeal (AT) No. 221 of 2018where the National Company Law Tribunal (“NCLT“) had ordered liquidation of Gujarat NRE Coke Limited, the corporate debtor. The promoter preferred an appeal before the National Company Law Appellate Tribunal (“NCLAT“) as he was ineligible to present a resolution plan under the IBC. In the meantime, the promoter also initiated a Scheme under S 230 to 232 of the Act before the NCLT between the promoters and creditors and the same was passed. It is against this order that the creditor moved the NCLAT by way of an appeal.
Two integral issues were placed before the NCLAT on appeal:
(i) Whether in liquidation proceeding under the IBC, the Scheme can be made under S 230 to 232 of the Act?
(ii) If (i) is permissible, whether the promoter is eligible to file an application for such Scheme despite being ineligible under S 29A of IBC to submit a resolution plan?
The first issue of whether in liquidation proceeding under the IBC, a Scheme can be initiated under S 230 to 232 of the Act was a matter which had already been considered by S.C. Sekaran and was a settled position of law. It was thus held that an application under S 230 to 232 of the Act is maintainable even if the company is going for liquidation. The NCLAT opined that IBC is a beneficial legislation which puts the corporate debtor back on its feet and is not a mere recovery legislation for creditors, hence, only on failure of revival could the Adjudicating authority proceed with Liquidation.
The second issue of whether the promoter is eligible to file a Scheme despite being disqualified under S29A of IBC to submit a resolution plan was not delved into by S.C. Sekaran and needed to be deliberated upon. The NCLAT concluded that a promoter, who is ineligible under S 29 A of the IBC would not be entitled to propose a Scheme under S 230 to 232 of the Act. The NCLAT placed reliance upon Swiss Ribbons Pvt. Ltd & Anr v Union of India & Ors., Writ Petition (Civil) No. 99 of 2019 which upheld that the primary focus of IBC is to ensure revival of corporate debtor by protecting the corporate debtor from its own management. Another ground on which the NCLAT relied upon was the provisoto S 35(f) of IBC which prohibits the liquidator to sell the immovable and movable property or actionable claims of the corporate debtor in liquidation to any person who is not eligible to be a resolution applicant. Thus, the NCLAT reflected a sound understanding of the objectives of IBC and maintained the sanctity of S 29A of IBC.