Ahemdabad Bench of National Company Law Tribunal (“NCLT”), in a recent case Kediya Ceramics [IA No. 254/NCLT/AHM/2017 in CA(CAA) No. 95/NCLT/AHM/2017] vide order dated 22.09.2017 has held that a partnership firm cannot participate in amalgamation proceedings under section 230-232 of the Companies Act, 2013 (“Act”). The brief facts of the said case are as follows:
Kediya Ceramics, a registered partnership firm entered into amalgamation proceedings as a transferor company. During the course of proceedings, a question arose for consideration of NCLT:
“Whether a registered partnership firm, being a body corporate, can be treated as a company for the purpose of section 230-232 of the Companies Act, 2013?”
Kediya Ceramics placed reliance on definition of body corporate or corporation given under section 2(11) of the Act. As per the said provision, an entity which is a registered co-operative society or a other body corporates notified by Central Government is not a body corporate. The Central Government has not notified anything in this regard yet; section 2(95) of the Act which provides for reference of meaning of words not defined under Act to the words or expressions defined under SEBI Act, 1992, Securities Contract (Regulation) Act, 1992 and Depositories Act, 1996 and accordingly relied on definition of “company” given under the said laws as a company means any body corporate and includes a firm or other association of individuals; section 366 ( Part I of Chapter XXI) of the Act (companies authorized to registered under the Act) according to which company for the purposes of Part I includes partnership firms, cooperative societies, society or any other business entity; explanation (b) to section 375(4) of the Act – wherein the expression “unregistered company” includes any partnership firm consisting of more than 7 members; and explanation to section 234(2) of the Act wherein the expression “foreign company” means any company or body corporate incorporated outside India whether having a place of business in India or not.
NCLT observed that applicant cannot rely of definition of company given under other laws when the same has been specifically defined under section 2(20) of the Act. A company has been defined under the Act as:
“(20) “company” means a company incorporated under this Act or under any previous company law;”
Section 366 of the Act only contemplates which entities are authorized to register under the Act and unless a partnership firm is registered under the Act, the same cannot be included as a company in section 2(20) of the Act. Further, an unregistered company cannot be called as a company under section 2(20) of the Act. The applicant cannot take benefit of explanation given under section 234(2) of the Act as the same is applicable for foreign companies.
It is pertinent to state that section 394(4)(b) of the Companies Act, 1956 specifically provided that a “transferee company” does not include any company other than a company within the meaning of the said Act but “transferor-company” includes any body corporate, whether a company within the meaning of this Act or not. As a consequence of this provision, partnership firms and other body corporates which were not companies under the Companies Act, 1956 were allowed to be amalgamated with a company only. However, absence of the said provision under section 230-232 of the Act makes it clear that the Legislature did not intend to extend the applicability of section 230-232 of the Act to entities other than a company defined under section 2(20) of the Act. Therefore, in the absence of such provision in the Act, even a body corporate cannot participate in the scheme of amalgamation.
In view of the aforesaid judgement, a partnership firm can participate in a scheme of amalgamation only after converting itself into a company under section 366 of the Act. Since the vesting of properties and liabilities of such partnership firm to the company is by operation of law [Section 368 of the Act], the succession is exempt from capital gains tax pursuant to the provisions of section 47(xiii) of the Income Tax Act, 1961 (“IT Act”) subject to adherence to the conditions stated in that section. One of the condition prescribed under section 47(xiii) of the IT Act is that the aggregate of the shareholding in the company of the partners of the firm should not be less than 50% of the total voting power in the company and their shareholding continues to be as such for a period of 5 years from the date of the succession. If a company fails to comply with the conditions stated in section 47(xiii) of the IT Act, then, in terms of section 47A (3) of the IT Act, the amount of profit or gains arising from the transfer of capital assets of partnership firm to the company on succession are deemed as income in the hands of the company.
In case of mergers and amalgamations, a partnership firm so converted into a company can only be a transferee company and minimum shareholding of the partners of the firm in the merged company should be at least 50% of the total voting power in order to continue to avail exemption under section 47(xiii) of the IT Act. If it is a transferor company, then as a consequence of the Court order the transferor company will be dissolved or where the minimum shareholding of partners in the transferee company is below 50% of total voting power, then the provision of section 47A(3) of the IT Act will come into play and capital gains tax will be levied.