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Merger of Limited Liability Partnership with Private Limited Companies

November 12, 2018

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In this article, Aman Yadav discusses Merger of Limited Liability Partnership with Private Limited Companies.

Indian corporate law regime categorizes amalgamation broadly into two categories: an amalgamation of companies under the Companies Act, 2013 (Act of 2013), and an amalgamation of limited liability partnerships under the Limited Liability Partnership Act, 2008 (LLPA). However, an amalgamation of different body corporates is not expressly provided under the said Acts. Although such type of amalgamation last found mention in the erstwhile Companies Act, 1956 (Act of 1956), but after the enactment of the Act of 2013, such a provision has not been carried forward. The Chennai Bench of the National Company Law Tribunal (NCLT) through its recent landmark decision in Re M/s Real Image LLP with M/s Qube Cinema Technologies Private Limited[1] has paved the way for amalgamation of a Limited Liability Partnership (LLP) with a private limited company: an issue which has not been expressly dealt with by the Act of 2013.

Brief Facts

A joint petition was made under §230, 231 and 232 of the Act of 2013 read with the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 and National Company Law Tribunal Rules, 2016. The instant Petition is made seeking the approval of the proposed scheme of amalgamation between an LLP and a private limited company. Both the entities complied with the requisite procedure and their statutory requirements were in compliance as confirmed by the reports of the Regional Director and Official Liquidator.

Issue

The primary issue that arose was whether an Indian Limited Liability Partnership can amalgamate with an Indian private limited company. Further, if such amalgamation is possible, then whether the petition seeking approval of the scheme is maintainable before NCLT?

Relevant Provisions

The Act of 2013 under §230-240 contains provisions that deal with the issue relating to (Compromises, Arrangements, and Amalgamations). The said provision is dealt with by the LLP Act under § 60, 61, 62. Most importantly both the provision entrenched in different act is analogous.

Submission of the Petitioner

The language of the Act of 2013 and the LLPA deals with the issue of amalgamation i.e. §60 to 62 of the LLPA and 230 to 234 of the Act of 2013 are identical which empowers only the NCLT too sanction the scheme proposed by the LLP or company.
It was further submitted that prior to the Act coming into force, 394(4)(b) of the Act of 1956 allowed the transferor in a Scheme of Amalgamation to be a body corporate including a LLP under condition that the resultant company that emerges out of the proposed scheme of amalgamation is a company as defined under Act of 1956. However, this clause is missing from the Act of 2013.
It should also be noted that under 234 of the Act of 2013 a foreign company the definition of which also includes an LLP to merge into a company registered under the present legislation. Therefore it would be strange to admit that the legislature intends to allow a foreign company.

Decision of the NCLT

After carefully considering the arguments submitted before it, the tribunal concluded that:

Considering the objective behind enacting the legislation, the intent of the Act of 2013 and the LLPA is to facilitate the ease of doing business and create a desirable atmosphere for companies and LLPs. For this purpose, both the Act of 2013 and the LLPA have provided provisions for merger or amalgamation of two or more LLPs and Companies.
The Tribunal further held that the issue in this petition clearly dealt with 394 of the Act of 1956 and that has not been stipulated in the Act of 2013, which is a clear case of casus omissus.
The rule of casus omissus gives a court the scope to interpret a statute in a very manner that is evident from the language of the legislature. The rule cannot be applied by the process of judicial interpretation except in case of clear necessity and when the reason for it is found within the four corners of the statute itself.
The Tribunal also accepted the Petitioner’s argument that if the legislature has permitted a merger of a foreign LLPs with an Indian Company under 234 of the Act of 2013, then it would be incorrect to assume that the same act prohibits a merger of an Indian LLP with an Indian private limited company.
The tribunal also held that there does not appear any express legal bar to allow/sanction merger of an Indian LLP with an Indian Company.

Analysis of the Decision

It should be noted that applying literal rule of interpretation causes a situation of uncertainty which could be against the legislative intent of the above mentioned statutes. However, the NCLT in its order applied the golden rule of interpretation and changed the course of law pertaining to amalgamation. This case has based its finding on the maxim casus omissus. It appears that NCLT has invoked its inherent powers while sanctioning this merger. It may be debatable if the NCLT has extended its power to casus omissus under the inherent power vested in it vide rule 11 of National Company law Tribunal Rules, 2016. The same view was taken in Shaw Wallace and Co Ltd. v Union of India[2], even if, having regard to reg. 44 of the Company Law Regulation Board, 1991, the Company Law Board is vested with inherent powers to make such orders as may be required to meet the ends of justice or to prevent the abuse of process of the Board but such powers have to be exercised in aid of it and not in contravention of the provisions of the statute. Such exercise of a power granted by reg. 44 cannot override the provision of the statute. It is worth mentioning that the supreme court has cautioned on time and time again on exercising of inherent powers of the tribunal should only be invoked to meet the ends of justice.

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Intent of the legislators

The purpose of the act is evident with respect to schemes of arrangement and compromises. The Companies Act, 1956 states that it is a statutory right of a company to enter into agreements with other companies for the purposes of corporate restructuring. The question that arises is whether the legislature intended for the provisions pertaining to arrangement and compromise to be inclusive of LLPs. Also, it did not bar the amalgamation of a company with an LLP and at the same time, the Act of 2013 does not place any explicit restrictions with respect to an Indian company amalgamating with an LLP incorporated outside India. The tribunal justified the approval of the scheme with the aforementioned reasoning.

The author is of the opinion that such an amalgamation, as provided for under the Act of 1956, was intentionally omitted as the remainder of the provisions have largely been kept intact and reintroduced in the amended legislature with minimal or no changes. The provision relating to cross-border mergers, titled “Merger or amalgamation of the company with a foreign company” defines a foreign company as a “company” or “body corporate” incorporated outside India, with emphasis on the term “incorporated outside India”.

Body corporate

The definition of a body corporate under the LLPA is an inclusive one, i.e. it includes an LLP registered under the LLPA. Further the definition of a “body corporate” under section 2 (11) of the Act of 2013 is also an inclusive definition with only two limitations i.e. (i) a cooperative society and (ii) any other body corporate (not being a company as defined in this Act of 2013)as notified by the Central Government.

The author personally believes that the term “body corporate” as used in the provision relating to cross-border mergers cannot be harmoniously construed to include LLPs incorporated in India. The reason being that the term “body corporate” is followed by the phrase “incorporated outside India” under the explanation to section 234. Thus, inferring that:

This section provides for the merger of a company with a body corporate (LLP) in case it being incorporated outside India.
Further, the merger with body corporates incorporated within the territory of India will not be permitted as the provision that allowed the same has been omitted with the replacement of erstwhile Act of 1956 by the existing Act of 2013.

Conclusion

Although the present order assumes great significance as it paves way for the merger of LLPs with private companies and facilitate the ease of doing business in India but to facilitate the transaction that was clearly and purposely omitted under the Act of 2013 the Tribunal has misapplied the rules of interpretation.

[1] Re: M/s. Real Image LLP with M/s. Qube Cinema Technologies Private Limited in CP/123/CAA/2018 NCLT, Chennai, 11:06:2018.

[2] Shaw Wallace and Co Ltd. v Union of India,(2004) 191 CTR Cal 223.