2026 (3) TMI 1649 - AT - Companies Law

Composite scheme of arrangement cannot be split to isolate demerger where amalgamation and demerger are clearly interlinked.

A composite scheme of arrangement may validly combine amalgamation and an immediately following demerger where the scheme identifies the amalgamated ... Composite scheme of arrangement - Legality of the Tribunal Order in directing to file a separate application for the demerger component of the composite scheme - modifying the scheme by limiting approval to amalgamation alone - Amalgamation and demerger - Commercial wisdom of shareholders and creditors. Composite scheme of arrangement - Amalgamation and demerger - Demerged undertaking - HELD THAT: - The Appellate Tribunal held that Clauses 1.1, 1.2 and 5.1(p) of the scheme expressly identified the Amalgamated Company, the Demerged Company upon amalgamation, the Resulting Company, and the Demerged Undertaking with sufficient specificity. The finding in the impugned order that the demerger related to an unspecified entity or undertaking was contrary to the scheme record and amounted to a perverse interpretation. Since the scheme was presented and approved as a composite scheme, and no statutory authority had suggested that demerger be considered separately, the direction to file an independent application for demerger improperly altered the scheme and was unwarranted. The Tribunal further held that a scheme including demerger could be sanctioned within the powers under Sections 230 to 232, and no separate process was required merely because demerger was to follow amalgamation under the same scheme. [Paras 31, 32, 33, 35, 38] The direction requiring a separate application for demerger was set aside, and it was held that the demerger would follow as a consequence of the sanctioned composite scheme without any independent application. Commercial wisdom of stakeholders - Terms of sanctioned scheme - Factual errors in sanction order - HELD THAT: - Relying on Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996 (9) TMI 488 - SUPREME COURT] the Appellate Tribunal held that once the board, shareholders and creditors had approved the scheme in their commercial wisdom, the Tribunal ought not to modify its structure or material terms. On that principle, the impugned order was found erroneous in recording that amalgamation would be effective from the date of the order despite the scheme defining its own effective date, and in describing Petitioner Company-3 as if it would come into existence through the amalgamation although it already existed as the Resulting Company. The further rider making approval subject to the outcome of an unadmitted petition was also held unnecessary, especially when the impugned order itself recorded that the petition had not been admitted. [Paras 34, 36] The challenged portions of the impugned order in paragraph 26(i), 26(ii) and 26(viii) were held liable to be deleted or set aside to the extent they departed from the approved scheme. While allowing the appeal on the scheme issue, the Appellate Tribunal clarified that its decision would not operate as an exception or exemption from liability to pay stamp duty, taxes, other statutory charges, or to obtain permissions and fulfil compliances required by law. Those obligations were expressly preserved against the Demerged Company and the Resulting Company. [Paras 37, 39] The appeal was allowed subject to the continued liability of the concerned companies to discharge all statutory dues and compliances in accordance with law. Final Conclusion: The appeal was allowed to the limited extent challenged. The Appellate Tribunal held that the demerger formed an integral and consequential part of the sanctioned composite scheme and did not require a separate application, while preserving all liabilities for taxes, stamp duty and other statutory compliances. Issues: Whether the Tribunal was justified in directing the appellants to file a separate application for the demerger component of the composite scheme and in modifying the scheme by limiting approval to amalgamation alone.Analysis: The composite scheme expressly contemplated two interlinked limbs: amalgamation of the amalgamating company into the amalgamated company, followed immediately by demerger of the defined demised undertaking into the result company. The scheme clauses identified the amalgamated company, the demerged company, the demerged undertaking and the result company with sufficient specificity. On a conjoint reading of the scheme, the finding that the demerged company or demerged undertaking was unspecified was inconsistent with the record. The statutory process under sections 230 to 232 of the Companies Act permits sanction of a composite arrangement, and once the scheme had been approved by the shareholders and creditors in their commercial wisdom, the Tribunal ought not to have altered the commercial structure by splitting the demerger into a separate proceeding. The challenged ancillary observations on effective date and related recital were consequential to the same erroneous truncation of the composite scheme.Conclusion: The direction requiring a separate demerger application was not sustainable, and the demerger component was held to be consequential to the sanctioned composite scheme without need for independent proceedings.Ratio Decidendi: Where a composite scheme of arrangement clearly and specifically provides for amalgamation followed by demerger of an identified undertaking, the Tribunal cannot sever the scheme or insist on a separate application for the demerger component unless the scheme is ambiguous or statutory non-compliance requires such bifurcation.