2020 (12) TMI 1091 - Tri - Law of Competition

Tribunal Approves Apparel Division Demerger; Assets and Liabilities Transferred with Compliance Obligations.

Splash Fashions India Pvt. Ltd. Versus Lifestyle International Pvt. Ltd.

The Tribunal sanctioned the Scheme of Arrangement between the Transferor Company and the Resulting Company, effective from April 1, 2019. The demerger ... Approval of Scheme of Arrangement - Sections 230 to 232 of Companies Act, 2013, R/w Companies (Compromises, Arrangements and Amalgamation) Rules, 2016 - HELD THAT:- In his report, the Regional Director, MCA has concluded that the Scheme appears to be fair, reasonable and not detrimental against the Members or Creditors or contrary to public policy and the same can be approved. The issue of CIN has been satisfactorily explained. The minor discrepancy has occurred due to the year of incorporation and year of transfer only, and would not come in the way of sanction of the Scheme of Arrangement. It appears that the Scheme will enable better control and visibility over the resources of the dormant entities, since pursuant to the merger they shall be consolidated into the Resulting Company and will help in reducing the costs and efforts involved in performing statutory compliances for multiple entities, etc. Hence, the Scheme appears to be guided by commercial expediency. On a consideration of the facts, which are not elaborated again here to avoid duplication and repetition, we are satisfied that the procedure specified in sub-sections (1) and (2) of section 232 of the Companies Act, 2013 has been complied with, and hence the Scheme of Arrangement, as approved by the Boards of both the Transferor Company and the Resulting Company, is hereby sanctioned. The scheme is sanctioned - application allowed. Issues Involved:1. Approval of the Scheme of Arrangement.2. Compliance with statutory requirements.3. Observations from the Registrar of Companies (ROC) and Regional Director (RD).4. Compliance with Corporate Social Responsibility (CSR) obligations.5. Related party transactions.6. Tax implications and compliance with Section 188 of the Companies Act, 2013.7. Clarification on the paid-up capital of the Transferor Company.8. Requirement of approval from the Competition Commission of India (CCI).9. Role of the Official Liquidator.10. Compliance with procedural requirements and statutory filings.Issue-wise Detailed Analysis:1. Approval of the Scheme of Arrangement:The Company Petition was jointly filed by M/s. Splash Fashions India Private Limited (Transferor Company) and M/s. Lifestyle International Private Limited (Resulting Company) under Sections 230 to 232 of the Companies Act, 2013, seeking the sanction of the Scheme of Arrangement by the Tribunal. The Scheme involves the demerger of the apparel business of the Transferor Company into the Resulting Company.2. Compliance with statutory requirements:The Petitioners filed CA (CAA) No.62/BB/2019 seeking directions for convening meetings of Shareholders and Creditors to consider the proposed Scheme. The Tribunal directed the issuance of notices to various authorities and publication in newspapers. Compliance affidavits confirmed that notices were served, and no objections were received.3. Observations from the Registrar of Companies (ROC) and Regional Director (RD):The ROC and RD raised several observations, including discrepancies in paid-up capital, related party transactions, and CSR compliance. The Petitioners responded with clarifications and undertakings to address these issues.4. Compliance with Corporate Social Responsibility (CSR) obligations:The ROC observed that the Resulting Company had unspent CSR amounts for the financial years 2017-18 and 2018-19. The Petitioners provided explanations and undertakings to ensure compliance with Section 135 of the Companies Act, 2013.5. Related party transactions:Both the ROC and RD noted related party transactions between the Demerged and Resulting Companies. The Petitioners assured compliance with Section 188 of the Companies Act, 2013, obtaining necessary approvals and maintaining arm's length transactions.6. Tax implications and compliance with Section 188 of the Companies Act, 2013:The Tribunal emphasized that tax implications arising from the Scheme, especially related to Section 188, are subject to the final decision of the concerned Income Tax Authorities. The decision of these authorities will be binding on the Resulting Company.7. Clarification on the paid-up capital of the Transferor Company:The ROC observed discrepancies in the paid-up capital figures. The Petitioners clarified that the figures mentioned in the Scheme were as of March 31, 2019, and provided details of subsequent allotments, ensuring accurate representation of the current capital structure.8. Requirement of approval from the Competition Commission of India (CCI):The CCI informed that notice for combination is mandatory subject to meeting thresholds. The Petitioners submitted that the demerged undertaking's assets and turnover did not exceed the thresholds, thus exempting them from prior CCI approval.9. Role of the Official Liquidator:The Official Liquidator stated that the Scheme of Arrangement is a demerger case and does not involve dissolution without winding up, hence no role for the Liquidator. The Tribunal accepted this position.10. Compliance with procedural requirements and statutory filings:The Tribunal directed the Petitioner Companies to ensure compliance with all applicable provisions of the Companies Act, 2013, and to submit quarterly/annual status reports. The Transferor Company was instructed to hand over books of accounts and relevant documents to the Resulting Company.Judgment:The Tribunal sanctioned the Scheme of Arrangement with the Appointed Date as April 1, 2019. The sanction does not exempt the companies from payment of stamp duty, taxes, or other charges. All assets, liabilities, and legal proceedings related to the Apparel Division of the Transferor Company are transferred to the Resulting Company. The Tribunal also directed the Registrar of Companies to rectify the CIN and required the Petitioner Companies to file statutory returns and ensure compliance with all provisions of the Companies Act, 2013. The order is limited to the Scheme of Arrangement and does not preclude any authority from taking appropriate action for any violations. The petition stands disposed of, and all pending IAs are also disposed of.