India: Merger Of Company And LLP: Path Breaking Ruling

Last Updated: 22 August 2018
Article by Gagan Kumar, Disha Kapoor and Runjita Das

The National Company Law Tribunal Chennai Bench ("NCLT") through its recent landmark decision in M/s Real Image LLP with M/s Qube Cinema Technologies Private Limited has paved the way for amalgamation of a Limited Liability Partnership ("LLP") into a Private Limited Company, an issue which has not been expressly dealt with under the Companies Act, 2013 ("Act 2013"). 

Brief Facts

The brief facts of the case are that a joint company petition was made under the Section 230-232 of the Act 2013 read with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.  The petition sought the approval of the proposed amalgamation between a LLP and a Private Limited Company as a going concern. Both the entities involved in the present case dealt in audio and video laboratories. Both the entities complied with the requisite procedures of obtaining consent of the members and creditors and the statutory requirements of both the entities were in compliance, as was confirmed by the reports of the Regional Director and Official Liquidator. The proposed amalgamation aimed towards consolidating business operations and providing efficient management system. 

Issue At Hand

The quintessential issue which arose in the present petition was whether a LLP could be allowed to amalgamate with a Company incorporated in India under a scheme of amalgamation filed before the NCLT? While determining the same, NCLT scrutinized various provisions of the relevant laws.

Relevant Laws

The provisions pertaining to Compromises, Arrangements and Amalgamation are dealt with by the Act 2013 under Chapter XV, Section 230-240. The said provisions are dealt with by the LLP Act under Chapter XII, Section 60-62. It is important to note that the aforesaid provisions of both the Acts are worded similarly.

NCLT Ruling

Considering the submissions of the counsel and the relevant provisions, the NCLT viewed that the legislative intent behind the Act 2013 and LLP Act is to facilitate ease of doing business and create a desirable business atmosphere for companies and LLPs. While on a reading of Section 394 (4) (b) of the Companies Act, 1956 ("Act 1956") which is as follows:

"(b) "transferee-company" does not include any company other than a company within the meaning of this Act; but "transferor-company" includes any body corporate, whether a company within the meaning of this Act or not."

It appears that the issue involved in the present petition has been categorically dealt with by the Act 1956 but there is no similar provision under the Act 2013. However, NCLT observed that there is no bar in merging an Indian company with a foreign LLP. Therefore, NCLT observed it as a clear case of casus omissus. The view taken was that while legislature has expressly permitted a foreign LLP to merge with an Indian Company, then it would be wrong to presume that the Act prohibits merger of an Indian LLP with an Indian Company. It was further observed that in the absence of any express legal bar to sanction amalgamation of an Indian LLP with an Indian Company, there is no reason to deny the approval.

The NCLT also viewed that the present scheme of amalgamation is not in violation of any provision of relevant law(s) or public policy. With the above reasoning the NCLT allowed the scheme of amalgamation from LLP to a Private Limited Company.

Our Observation

As observed by the NCLT, we share the view that although there is no clear provision facilitating merger/amalgamation of a LLP into a company yet at the same time, there is no explicit bar or prohibition on the same.

It is also observed that under the erstwhile Act 1956, there was almost no restriction on the classification of the transferor and it included within its ambit, any body corporate whether the same is incorporated in India or not. However, it was prescribed that the transferee-company must be a Company incorporated in India. Therefore, it can be safely inferred that amalgamation of a Foreign Company into an Indian Company was contemplated under the Act 1956. 

It is noted that the Act 2013 vide Section 234 specifically provided for merger or amalgamation of an Indian Company into a Foreign Company. 

The term "Foreign Company", as explained in the aforesaid section, includes a company as well as body corporate which are incorporated outside India. The term body corporate includes LLP as well. Considering such an argument, merger of an Indian Company with Foreign LLP and vice versa is not precluded under the Act 2013. 

Therefore, from one perspective it appears that the NCLT, through its ruling has filled the vaccum inadvertently created under the Act 2013 regarding the cross entity amalgamation. 

However, from the wording of the ruling it is not clear that whether following aspects were considered: 

  • Did NCLT consider the relevant provisions of the LLP Act while effectively dissolving it?
  • Whether the provisions for dissolution of a LLP which mandates a specific procedure stands overridden by the Act 2013 through this decision?

The NCLT in this case has based its finding on the maxim casus omissus. It appears that NCLT has invoked its inherent power while sanctioning the merger or amalgamation of an LLP into a company, it may be debatable if the NCLT could have extended its jurisdiction to casus omissus under inherent power vested in it vide Rule 11 of the National Company Law Tribunal Rules, 2016. It may not be out of place to mention that the Hon'ble Supreme Court of India has cautioned time and again on exercising of inherent powers of the courts/tribunal which is to be invoked only to meet the ends of justice. 

Though even under the erstwhile Company Law Board regime, such powers have been invoked. Case in point is Shaw Wallace and Co. Ltd. v. Union of India, where the following view was taken on the nature of inherent power of Company Law Board:

"... Even if, having regard to reg. 44 of the Company Law Board Regulations, 1991, the Company Law Board is vested with inherent powers to make such orders as may be required for the ends of justice or to prevent abuse of the process of the Board, such power cannot be exercised in excess of the powers flowing from the statute itself. Such power has to be exercised by the Board in aid of and not de hors the provisions of the Statute and, in any event, such exercise of power conferred by reg. 44 cannot override the provisions of the Statute." 

Therefore, the issue that while sanctioning the present scheme NCLT stretched itself beyond the interpretation of the relevant provisions to more than what has been expressed or unambiguously indicated by the Act 2013 remains an open question. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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