Tribunal Approves Demerger Scheme: Compliance Required for Auditor's Certificate

The Tribunal approved the Scheme of Arrangement involving the demerger of respective investments businesses, subject to compliance with procedural requirements and the submission of an auditor's certificate confirming compliance with Accounting Standards within two weeks. The proposed re-arrangement/reduction of post-demerger capital was justified as beneficial for capital servicing without adverse effects on creditors. Failure to provide the auditor's certificate within the specified timeframe would result in petition rejection, highlighting the significance of statutory compliance and accurate accounting treatment.

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Issues Involved:

1. Approval of the Scheme of Arrangement involving demerger of respective investments business.
2. Compliance with procedural requirements and directions from the Hon'ble High Court of Delhi.
3. Objections and observations from the Regional Director and Income-Tax Department.
4. Accounting treatment and compliance with Accounting Standards.
5. Necessity and justification for the proposed re-arrangement/reduction of post demerger capital.

Issue-wise Detailed Analysis:

1. Approval of the Scheme of Arrangement involving demerger of respective investments business:
The joint petition filed by the companies sought approval for the Scheme of Arrangement which included (a) demerger of respective investments business of Transferor Companies into the Transferee Company and (b) demerger of investments business of Transferee Company into Transferor Company No. 1. The petition was initially filed before the Hon'ble High Court of Delhi, which dispensed with certain meetings and directed the convening of others. The scheme was unanimously approved in the meetings held on 2nd July, 2016.

2. Compliance with procedural requirements and directions from the Hon'ble High Court of Delhi:
The petitioners complied with the Hon'ble High Court's order dated 15.07.2016, which included publishing notices in newspapers and issuing notices to the Regional Director and Registrar of Companies. The petition was transferred to the National Company Law Tribunal (NCLT) following the notification of Sections 230-232 of the Companies Act, 2013, effective from 15.12.2016.

3. Objections and observations from the Regional Director and Income-Tax Department:
The Regional Director raised several points, including concerns from the Pr. Commissioner of Income-Tax, Delhi, who insisted that the Income-Tax Department must retain its recourse for recovery of any existing or future tax liabilities of the companies involved. The petitioners confirmed that all required income tax for the Assessment Year 2015-16 had been paid and that there were no outstanding tax liabilities, except for cases under appeal/litigation.

4. Accounting treatment and compliance with Accounting Standards:
The scheme included detailed accounting treatment for the demerger, specifying how assets and liabilities would be recorded in the books of the Transferor and Transferee Companies. However, the NCLT noted the absence of a certificate from the companies' auditors confirming compliance with Accounting Standards as required under Section 230(7) and Section 232(3) of the Companies Act, 2013. The Tribunal stressed the importance of this certificate and granted the petitioners two weeks to comply with this requirement.

5. Necessity and justification for the proposed re-arrangement/reduction of post demerger capital:
The petitioners justified the proposed re-arrangement/reduction of post demerger capital by stating that it would enable better servicing of capital. They proposed transferring a portion of the post demerger issued and paid-up equity capital to the Securities Premium Account. The Tribunal noted that this reduction would not adversely affect any creditors and would not involve the diminution of any liability in respect of unpaid share capital.

Conclusion:
The Tribunal considered the procedural compliance, objections from the Regional Director and Income-Tax Department, and the necessity for a certificate from the companies' auditors. The petitioners were granted two weeks to provide the required auditor's certificate, failing which the petition would be rejected. The Tribunal emphasized the importance of compliance with statutory requirements and the need for careful consideration of the accounting treatment envisaged in the scheme.

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