2022 (3) TMI 1657 - Tri - Companies Law

Scheme of demerger sanctioned under Sections 230-232, Companies Act 2013 as fair, reasonable and legally compliant

NCLT, Mumbai sanctioned a scheme of demerger under Sections 230-232, Companies Act, 2013, holding the scheme fair, reasonable, legally compliant and not ... Sanction of scheme of demerger - Sections 230-232 of the Companies Act, 2013 - HELD THAT:- From the material on record, the Scheme appears to be fair and reasonable and is not violative of any provisions of law and is not contrary to public policy. Since all the requisite statutory compliances have been fulfilled, petition filed by the Petitioner Companies have been made absolute in terms of prayer made in the Company Petition. The Scheme is hereby sanctioned, and the Appointed Date of the scheme is 1st April, 2021 - petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the proposed demerger of the Pune residential real estate development business (Demerged Undertaking) from the Demerged Company to the Resulting Company on a going concern basis is fair, reasonable and can be sanctioned under Sections 230-232 of the Companies Act, 2013. 2. Whether the share allotment mechanism - issuance of 2 equity shares of Rs.10 each of the Resulting Company for every 1 equity share of Rs.100 of the Demerged Company, rounding off fractional entitlements, and ranking of new shares - is appropriate and compliant with applicable law. 3. Whether the accounting treatment and treatment of inter-company balances, and adjustment of excess/deficit against reserves/capital reserves/goodwill as set out in the Scheme, are acceptable and in accordance with applicable accounting standards and statutory requirements. 4. Whether cancellation of existing shareholding of the Demerged Company in the Resulting Company and the consequent reduction of share capital of the Resulting Company can be treated as an integral part of the Scheme and deemed to be an order under Section 66 of the Companies Act, 2013. 5. Whether the observations in the Regional Director's report (including compliance with accounting standards, service of notices to statutory authorities under Section 230(5), identity of the scheme documents, applicability of MCA circular regarding appointed/effective dates, details of under-construction projects, completeness of financial statements and protection of creditors' interests) require refusal or modification of sanction, or can be addressed by undertakings and clarifications. 6. Procedural compliance: whether statutory steps (filing, service, affidavit of service, no adverse objections on record) and conditional undertakings suffice for sanction and for consequential directions to Registrar of Companies and other authorities. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Sanctionability of the Demerger under Sections 230-232 Legal framework: Sections 230-232 of the Companies Act, 2013 permit compromise/arrangement (including demerger) between a company and its shareholders/creditors, subject to the Tribunal's satisfaction that the scheme is fair, reasonable and compliant with law and public policy. Precedent treatment: No specific precedents are cited or relied upon in the judgment; therefore no precedent was followed, distinguished or overruled in the reasoning. Interpretation and reasoning: The Tribunal considered the object and rationale furnished by the Boards (segregation to enable focussed project-wise management, customary industry practice for project-specific vehicles, efficiency, cost optimisation and stakeholder benefit). There were no objectors and no contrary material on record. The Regional Director's report raised certain observations which were addressed by the Petitioner Companies by undertaking/clarification and accepted by the Tribunal. The Tribunal found the Scheme to be fair and reasonable, not violative of any law and not contrary to public policy. Ratio vs. Obiter: Ratio - The Scheme, on the material and undertakings before the Tribunal, met statutory criteria under Sections 230-232 and was therefore sanctionable. Obiter - The policy observations concerning industry practice and managerial conveniences are explanatory and not binding precedent. Conclusion: The Scheme is sanctioned; the demerger is permissible under Sections 230-232 of the Companies Act, 2013, with the Appointed Date fixed as 1 April 2021. Issue 2 - Share Allotment Mechanism and Fractional Entitlements Legal framework: Allotment of shares pursuant to a scheme must comply with the Articles/Memorandum, statutory provisions and any conditions imposed by the Tribunal; ranking and pari passu treatment determine post-scheme rights. Precedent treatment: No precedents are invoked. Interpretation and reasoning: The Scheme prescribes allotment of 2 equity shares of Rs.10 each of the Resulting Company for every 1 equity share of Rs.100 of the Demerged Company, with rounding off of fractional entitlements to the nearest integer. The Tribunal noted that the Resulting Company shall take necessary steps to alter its authorised capital and obtain requisite approvals for issue/allotment. The new shares to rank pari passu with existing shares post-Record Date. Ratio vs. Obiter: Ratio - The specified share entitlement ratio and rounding mechanism are acceptable; necessary corporate steps (authorised capital alteration, approvals) must be undertaken. Obiter - No broader principle on rounding or shareholder choice is established beyond acceptance in this factual matrix. Conclusion: The allotment mechanism, including rounding treatment and pari passu ranking, is approved subject to the Resulting Company taking statutory steps and obtaining approvals if required. Issue 3 - Accounting Treatment, Inter-company Balances and Reserve Adjustments Legal framework: Accounting for demerger must follow accounting standards notified under Section 133 of the Companies Act, 2013 (e.g., AS-14/Ind AS-103 and other applicable standards), and generally accepted accounting principles; reserves treatment affects distributability. Precedent treatment: None cited. Interpretation and reasoning: The Scheme prescribes that assets and liabilities of the Demerged Undertaking be recorded in the books of both companies at values appearing in the Demerged Company's books as of the Appointed Date; inter-company balances to be cancelled without accrual of interest; excess/deficit to be adjusted against reserves/goodwill/capital reserves; and cancellation of investment/shareholding to be accounted for by appropriate debits/credits to Equity Share Capital and General Reserve. The Regional Director's observations sought compliance with AS/Ind AS and confirmation that such reserve adjustments shall not be available for dividend distribution; the Petitioners furnished undertakings to comply and the Tribunal accepted them. Ratio vs. Obiter: Ratio - The specific accounting treatment as provided in the Scheme is acceptable if carried out in accordance with applicable accounting standards and statutory auditors' certification; adjustment to capital reserves arising out of demerger is not available for dividend distribution. Obiter - The Tribunal's acceptance of undertakings does not set a general accounting rule beyond compliance with applicable standards. Conclusion: Accounting treatment in the Scheme is permitted provided statutory accounting standards are complied with, auditors certify the treatment, inter-company balances are extinguished as specified, and reserves credited on account of demerger are not distributable as dividend. Issue 4 - Cancellation of Shareholding and Reduction of Share Capital (Section 66 deeming) Legal framework: Reduction of share capital ordinarily requires compliance with Section 66 of the Companies Act, 2013; schemes under Sections 230-232 may effect reduction as part of the sanctioning order and the Tribunal may deem the sanction order to be an order under Section 66. Precedent treatment: Not addressed. Interpretation and reasoning: The Scheme provides that, simultaneously with issue/allotment of new shares, equity shares held by the Demerged Company in the Resulting Company shall stand cancelled and the NCLT order sanctioning the Scheme shall be deemed to be an order under Section 66 confirming the reduction. The Petitioners undertook that reduction is integral to the Scheme and the order under Sections 230-232 shall be deemed to satisfy Section 66. Ratio vs. Obiter: Ratio - Cancellation of shareholding and consequent reduction of share capital can be effected as part of the sanctioned scheme, and the sanction order is to be deemed sufficient under Section 66 in this factual matrix, subject to statutory formalities and filings. Obiter - The Tribunal's acceptance does not address scenarios where separate Section 66 compliance would be required absent such deeming. Conclusion: The reduction of share capital by cancellation is permitted as an integral part of the sanctioned Scheme and the sanctioning order is deemed to operate under Section 66; Petitioners must comply with applicable provisions and filings. Issue 5 - Regional Director Observations and Sufficiency of Undertakings Legal framework: The Regional Director's report is an admissible material for the Tribunal's consideration; where concerns are raised the Tribunal may seek clarifications/undertakings and may accept them if satisfactory. Precedent treatment: Not cited. Interpretation and reasoning: The Regional Director raised observations across accounting compliance, service on authorities, identity of scheme documents, application of an MCA circular on effective/appinted date linkage, provision of project details, and completeness of financial statements. The Petitioners provided clarifications and formal undertakings (to comply with accounting standards, confirm identity of documents, accept regulatory authority decisions post-scheme, confirm Appointed Date is a fixed date not a trigger event, provide project details already in filings, and confirm completeness of financials and protection of creditors). The Tribunal accepted these clarifications and undertakings and treated them as adequate to address the RD's concerns. Ratio vs. Obiter: Ratio - Where RD raises concerns, specific and acceptable clarifications/undertakings by Petitioners may be accepted by the Tribunal and suffice for sanction. Obiter - Acceptance of such undertakings is fact-specific and does not limit the RD/other authorities' power to act in future. Conclusion: The RD's observations were addressed by the Petitioners' clarifications and undertakings, which the Tribunal accepted; these did not preclude sanction. Issue 6 - Procedural Compliance and Consequential Directions Legal framework: Sanctioned schemes require filing of certified order and scheme with the Registrar of Companies (e-form INC-28), stamping adjudication, and compliance by regulatory authorities; interested persons may seek directions post-sanction. Precedent treatment: Not applicable. Interpretation and reasoning: The Tribunal recorded compliance with directions (affidavits of service, no objectors, statutory filings) and made the Company Petition absolute. It directed filing of certified order and scheme with ROC within 30 days (e-form INC-28) and lodging with Superintendent of Stamps within 60 working days, and permitted interested persons and authorities to approach the Tribunal for further directions or clarifications. Ratio vs. Obiter: Ratio - Sanction is subject to specified consequential filings and compliance; interested parties retain right to apply for directions. Obiter - Administrative timelines set by the Tribunal are procedural directions in this case. Conclusion: Procedural compliances were found satisfied for sanction; the Tribunal issued directions for filing with ROC and Stamps Department and left open recourse for interested parties and authorities for further clarification.