‘A New Avenue For Restructuring’- Merger of a LLP With a Company

Mergers and acquisitions have played an important role in India.

Mergers and acquisitions (M&A) are the transactions in which the ownership of companies, other business organizations, or their operating units are transferred or consolidated with other entities. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.

There have been a large number of mergers between companies, but it’s rare to come across a proposition of a firm or an LLP merging into a company.

This write-up is an attempt to foreclose the lacuna under the new provision under law and how the quasi-judicial body has correctly interpreted the gap in law.

BACKGROUND:

ISSUES BEFORE THE TRIBUNAL:

A Limited Liability Partnership (LLP) is a corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership.

A LLP is regarded as a body corporate under the provisions of the Limited Liability Partnership Act, 2008 (LLP Act). The Companies Act, 2013 deals with business restructuring of the companies and a provision for amalgamation of LLPs is mentioned in the LLP Act but both the laws are silent on whether a LLP can merge into a Company and vice versa.

Under the LLP Act, a LLP is regarded as a body corporate and wherever the LLP provisions are silent, a LLP would be governed by the provisions of the Companies Act. Thus, effectively LLP was de facto regarded as a company.

An interesting question came before the National Company Law Tribunal (Tribunal or NCLT), Whether a LLP can be allowed to amalgamate with a private limited company under a Scheme of Amalgamation filed before the Tribunal pursuant to section 230 to 232 of the Companies Act, 2013?

The NCLT answers this question in affirmative taking into consideration the purposive interpretation of the Companies Act, 2013 in a recent judgment dated June 11, 2018, NCLT, Single Bench, Chennai allowed Scheme of Amalgamation between M/s. Qube Technologies Private Limited (Transferee Company) and M/s. Real Image LLP (Transferor LLP). Here the Transferor is a LLP which is getting merged with a Company.

This order could potentially pave the way for new avenues of restructuring involving LLP and a company.

> Prologue:

A petition was filed before the NCLT proposing merger of a LLP, being transferor, with a company, being transferee, pursuant to provisions of Sections 230-232 of the Companies Act, 2013. In accordance with the process of law, the statutory authorities (viz. the Registrar, Regional Director and Official Liquidator) filed their report with the NCLT signifying their no objection to the proposed merger. Thereafter, when the petition came up for final hearing, the question arose for consideration of the Tribunal whether a Limited Liability Partnership can be allowed to amalgamate with a Private Limited Company under a Scheme of Amalgamation?

> Analysis of the Tribunal’s order:

During the course of the hearing, inter alia, the following submissions were made before the Tribunal:

♦ The Companies Act, 2013 and the LLP Act, contain the provisions dealing with merger and amalgamation.

♦ The wordings of relevant provisions under above statutes used are almost similar and empowers NCLT as the competent authority to sanction the scheme proposed by a LLP or a Company.

♦ It was submitted that under Section 394(4)(b) of the erstwhile Companies Act, 1956, there was no bar for a transferor in a Scheme of Amalgamation to be a body corporate (including a LLP).

♦ The rationale for such provision under the erstwhile law was that the resultant company out of amalgamation is a company defined under the Companies Act, and there was no such stipulation imposed on the transferor.

♦ Whereas a similar clause is absent in Section 232 of the Companies Act, 2013, as had been stipulated under Section 394(4)(b) of the erstwhile company law.

♦ However, Section 234 of the Companies Act, 2013, allows foreign company (defined as body corporate which would include a LLP) to merge into an Indian Company.

After carefully considering the arguments submitted before it, the Tribunal, inter alia, concluded that:

♦ The intent of the Companies Act, 2013, and LLP Act is to facilitate the ease of doing business and create a desirable business atmosphere for companies and LLPs, thus, both the Acts provided for provisions relating to merger and amalgamations.

♦ Whilst the erstwhile provisions of the Companies Act, 1956, categorically provided for merger of LLP with a company, the provisions of the Companies Act, 2013, are silent on this aspect, thereby, interpreted this as case of ‘casus omissus’ i.e. a situation omitted from or not provided for by statute through inadvertence.

♦ It also held that if the intention of the parliament is to permit a foreign LLP to merge with an Indian company, then it would be wrong to presume that the Act prohibits merger of an Indian LLP with an Indian company.

♦ The Tribunal thus held that there does not appear any express legal bar to allow/sanction merger of an Indian LLP with an Indian company. Accordingly, the petition for the merger of LLP with the company was allowed.

> Conclusion of NCLT:

Hon’ble Tribunal held that the legislative intent behind enacting both LLP Act, 2008 and the Companies Act, 2013 is to facilitate ease of doing business and create a desirable business atmosphere for Companies and LLPs. For this purpose, both the Acts have provided provisions for merger or amalgamation of two or more LLPs and Companies. The issue involved in present petition has been categorically dealt with by Companies Act, 1956 but there is no specific provision in Companies Act, 2013. Therefore this is clear case of “CASUS OMISSUS”. If the intention of the Parliament is to permit a foreign LLP to merge with an Indian Company, then it would be wrong to presume that the Act prohibits a merger of an Indian LLP with an Indian Company. Thus, there does not appear any express legal bar to allow/sanction merger of Indian LLP with an Indian Company.

Legal Definition of Casus Omissus – ‘A situation omitted from or not provided for by statute or regulation and therefore governed by common law.’

THE TAKEAWAYS:

The decision of NCLT Chennai is an evolutionary step in the jurisprudence of corporate law which has recognized the importance of ease of doing business and creation of a more conducive business environment. The decision is also important from a perspective that since now a LLP could possibly be amalgamated with a company this will be available as a new avenue for restructuring.

The fact is that business restructuring has become very critical in the challenging environment that we live in today, especially where business houses continue to grow inorganically by way of mergers and acquisitions and therefore, the need for clarity on the legal and tax aspects is very crucial. In this context, it should be appropriately clarified/ amended (possibly with certain conditions to safeguard economic interest of the Government as is provided in case of amalgamation/ demerger between companies) to address the issues that may arise on account of such business restructuring which would reduce the difficulties being faced today on account of ambiguity; clearly this would be an important step in the Government’s agenda of improving ease of doing business.

BIBLIOGRAPHY:

• https://www.corporateprofessionals.com
• https://economictimes.indiatimes.com
• https://www.livelaw.in
• https://vakilno1.com

CONTRIBUTED BY:

Ms. Jaya Sharma

Ms. Nishita Gandhi

Jaya Sharma and Associates, Practising Company Secretary Firm, Mumbai.

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