In this article, Shivani Jain discusses why the Companies Act, 2013 needs a definition of the terms ‘transferor company’ and ‘transferee company’ for the purposes of Chapter XV.
In India, the Companies Act, 2013 (2013 Act) does not define the terms ‘transferor company’ and ‘transferee company’ for the purposes of Chapter XV of the 2013 Act (Chapter XV- Compromises, Arrangements and Amalgamations). While the 2013 Act continues to use the terms in the various provisions of the Chapter as was used in the Companies Act, 1956 (1956 Act), the 2013 Act has specifically omitted to define the terms. This deliberate omission in the 2013 Act has created a non-liquet about the meaning of the terms. A clarity around corporations permitted to amalgamate into a company under the existing scheme of law will, while reducing the bulk of avoidable disputes before the courts, facilitate viable business combinations.
An unambiguous prior law which has given way to an ambiguous subsequent law has led to the addition of an unresolved void. The rationale for omitting such clarity in the 2013 Act particularly, in view of the changes made to the legislation, remains unanswered. In this regard, it is important to note that the 1956 Act defined the terms ‘transferor company’ and ‘transferee company’ differently for different provisions of the same Chapter V (Chapter V of the 1956 Act- Arbitrations, Compromises, Arrangements and Reconstructions) which is analogous to Chapter XV of the 2013 Act. The definition of the term ‘transferor company’ applicable to Section 394 and 395 of the 1956 Act was not applicable to Section 391 and 393 and was provided a separate interpretation.
Section 394(4)(d) of the 1956 Act provides that ‘transferor company’ includes any body corporate whether a company within the meaning of this Act or not, while a ‘transferee company’ does not include any company other than a company within the meaning of this Act. In view of this, for the purposes of facilitating amalgamation, the 1956 Act provided that the resultant company must have been a company within the meaning of the Act i.e. a company formed and registered under this Act or any of the previous company laws. However, the company/companies which was/were being merged with the resultant company need not necessarily be a company as defined in the 1956 Act, but could be any body corporate. A ‘body corporate’ was defined in Section 2(7) in the 1956 Act as follows:
“body corporate” or “corporation” includes a company incorporated outside India but [does not include –
(a) a corporation sole;
(b) a co-operative society registered under any law relating to co-operative societies; and
(c) any other body corporate (not being a company as defined in this Act) which the Central Government may, by notification in the Official Gazette, specify in this behalf]
Hence, under the 1956 Act, a foreign company has also been treated as a transferor company, further, in strict sense, a Limited Liability Partnership could also be treated as a transferor company. The same was clear and unambiguous. Further, Section 395(5)(b) of the 1956 Act provided that- in this section, ‘transferor company’ and ‘transferee company’ shall have the same meaning as in section 394.
As aforementioned, definition of ‘transferor company’ provided in Section 394(4)(b) of the 1956 Act, applicable to Section 394 and 395 was different from the definition in Section 390(a) applicable to Section 391 and 393. In this connection, attention is to be drawn to the comments on the definition of the term ‘company’ given in Section 390(a) of the 1956 Act. Under Section 390(a), a ‘company’ has been defined to mean any company liable to be wound up under the Companies Act. This specific meaning to the term ‘company’ was made applicable only to the interpretation of Section 391 and 393. Section 390(a) uses the words ‘in section 391 and 393’ and section 394 uses the words ‘in this section’. The implication of the same is that section 394(4)(b) includes any body corporate whether or not a company within the meaning of the Act, and while section 390(a) also includes any body corporate whether or not a company within the meaning of the Act in the definition of a ‘company’, those bodies corporate must satisfy the additional requirement of having a place of business in India, and be capable to be wound up under the Act.
Thus, the legislature deemed it necessary to distinguish the meaning of the ‘transferor company’ within different sections of the same Chapter on mergers, compromises and arrangements under the 1956 Act. The 2013 Act has not distinguished the meaning of the term ‘transferor company’ across different provisions of the same Chapter, unlike the 1956 Act. It has further completely omitted to define the said terms for the purposes of the Chapter. In the absence of such an express definition of the term ‘transferor company’, two contrary interpretations are possible- firstly, since the term has not been defined specifically for the purposes of the Chapter, the general definition of the term ‘company’ as given in the definitions chapter of the Act is to be relied on. The term ‘company’ has been defined as a company incorporated under this Act or under any previous company law. This would result in giving a very restrictive meaning to the term and would limit arrangements and amalgamations only between companies incorporated under the Companies Act.
However, it is to be noted that the plausible rationale for a wide definition of ‘transferor company’ under the 1956 Act could be that the 1956 Act did not specifically provide for a merger between a foreign company (i.e. companies incorporated under other jurisdictions) and a company incorporated under the Companies Act, unlike the 2013 Act which specifically includes the merger or amalgamation of a company with a foreign company vide Section 234 of the 2013 Act. This could also be a rationale for omission of the definition of ‘transferor company’ under the 2013 Act for the purpose of a wide definition was solved when the Act specifically provided for a merger with a foreign company. This interpretation rests on the premise that the rationale for a wide definition of ‘transferor company’ was only to facilitate a foreign company merger.
The other possible interpretation could be that the intention of the legislators cannot be to prohibit merger of an Indian Company with any other bodies corporate. This was observed by the NCLT in a recent decision in the case of M/s Real Image LLP with M/s Qube Cinema Technologies Private Limited. The case concerned a proposed Scheme of Amalgamation of a Limited Liability Partnership with a Private Limited Company that was submitted to the NCLT. The issue raised was whether a Limited Liability Partnership can be allowed to amalgamate with a Private Limited Company under a Scheme of Amalgamation filed before the NCLT. The Counsel for the Petitioners submitted a three fold argument in favour of such amalgamation, the relevant excerpts are summarised below:
Firstly, that both sections 60 to 62 of the LLP Act 2008 and sections 230 to 234 of the Companies Act, 2013 that deal with the merger, amalgamation and arrangements are almost identical and both the Acts empower only the NCLT to sanction the scheme proposed by the LLP or Company.
Secondly, that there was no bar for a transferor in a Scheme of Amalgamation to be a body corporate including a LLP, under Section 394(4)(b) of the Companies Act, 1956. The requirement was that only the resultant company should be a company as defined under the Companies Act and such prohibition was not imposed on the transferor.
Thirdly, that Section 234 of the 2013 Act permits a foreign company to merge into a company registered under the Companies Act 2013 or vice versa. Foreign company as defined under the Act also includes a body corporate incorporated outside India including a foreign LLP. Therefore, as per section 234 of the 2013 Act, foreign LLP and Indian Company can merge with each other. So, there is no rationale for preventing a merger between an Indian LLP with an Indian Company.
The Chennai Bench of the NCLT answered the question in affirmative holding that an LLP can amalgamate with a private limited company. It observed that the legislative intent behind the two Acts was to facilitate the ease of doing business and create a desirable atmosphere for companies and LLPs. In the absence of an express prohibition in the 2013 Act barring such mergers, it became an appropriate situation for the application of casus omissus. It was observed, “ 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.”
Thus, in view of the growing litigations, separate definition of ‘transferor company’ for different provisions of the same Chapter under the 1956 Act and addition of an express foreign company merger as a separate section altogether under the 2013 Act, collectively, makes it of paramount significance to address the uncertainty around the meaning of the term ‘transferor company’, created by the omission in the 2013 Act.
