Merger of Partnership Firm with Company through scheme of Merger/Amalgamation

The following question arose for consideration before 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]

 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?

Hon’ble NCLT vide its 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. The brief facts of the matter are as under:-

An application was filed by Kediya Ceramics (the applicant) inviting a finding from the NCLT on the aspect whether a partnership firm, being a body corporate, is entitled to maintain the application under section 230-232 of the Companies Act, 2013. The applicant is partnership firm consisting of eight partners, registered under the Indian Partnership Act, 1932 and is formed on 05.02.2015.

The applicant mentioned in their application that a company is body corporate and a partnership firm is also a body corporate with the following contentions.

• The definition of ‘Body Corporate’ is there in Section 2(11) of the Companies Act, 2013, which read as under:-

“2(11) “body corporate or corporation” includes a company incorporated outside India, but does not include-

(i) A co-operative society registered under any law relating to co-operative societies; and

(ii) Any other body corporate (not being a company defined in this Act), which the Central Government may, by notification, specify in this behalf.”

• It was stated that in view of section 2(95) of the Companies Act, 2013, “words and expressions used and not defined in the Act but defined in the Securities Contract (Regulation) Act, 1956 or the Securities and Exchange Board of India act, 1992 or the Depositories Act, 1996 shall have the meanings respectively assigned to them in those Act.”
• Further, it was stated that Section 27(2), Explanation-A(a) of the SEBI Act defined ‘Company’ for the purpose of the said provision as under:-

“(a) “company” means anybody corporate and includes a Firm or other association of individuals.”

• It was also stated that a similar definition is there in Section 21, Explanation (a) of the Depositaries Act, 1996, which reads as under:-

“(a) “company” means anybody corporate and includes a Firm or other association of individuals.”

• It was further stated that a similar definition is contained in Section 24(2), Explanation (a) of the Securities Contracts (Regulation) Act, which reads as under:-

“(a) “company” means anybody corporate and includes a Firm or other association of individuals…”

• Section 366 of the Companies Act, 2013 deals with entities authorised to register as a “Company”. It includes any partnership firm, limited liability partnership, co-operative society, society or any other business entity formed under any other law for the time being in force which applies for registration under PART I of Chapter XXI.
• It was also stated that Explanation (b) of sub-section (4) to Section 375 stipulates that the expression “unregistered company” shall include any partnership form consisting of more than seven members.
• It was also pointed out that Section 394(4)(b) of the Companies Act, 1956 stipulated that the transferee company does not include any company other than a company within the meaning of the Act, whereas a transferor company includes anybody corporate within the meaning of the said Act or not.
• It was further stated that Section 234(2) of the Companies Act, 2013 stipulates merger of a foreign company (a body corporate) into a company registered under the Act or vice versa. In this context it is contended that both the foreign company and the Indian Company are body corporates.
• In the explanation to sub-section (2) of Section 234 of the Companies Act, 2013, it was stated that the expression “foreign Company” means any company body corporate incorporated outside India whether having a place of business in India or not.

Regarding the above contentions of the applicant, NCLT observed that-

• The applicant cannot rely of definition of company given under other laws when the same has been specifically defined under section 2(20) of the Companies Act, 2013. A company has been defined under the Act as:

“(20) “company” means a company incorporated under this Act or under any previous company law;”

Therefore, without hesitation it can be straightway said that the applicant is not a company within the meaning of sub-section (20) of Section 2 of the Act.

• Now, coming to the definition of “body corporate”, a “body corporate” is defined in Section 2(11) of the Companies Act, 2013. It says that a “body corporate” or “corporation” includes a company incorporated outside India.

It is specifically says that It does not include a  co-operative society registered under any law relating to co-operative societies; and any other body corporate (not being a company defined in this Act), which the Central Government may, by notification, specify in this behalf.

No notification by the Central Government specifying that a registered partnership firm shall not be included in the definition of “body corporate”. Therefore, the applicant being a registered partnership firm, it can be treated as a “body corporate”.

• Further regarding the definition of company provided by the applicant under Section 2(95) of the Companies Act, 2013,  Explanation A(a) to Section 27(2) of SEBI Act, Explanation (a) to Section 21 of the Depositaries Act, 1996 and Explanation (a) to Section 24(2) of Securities Contract (Regulation) Act, 1956, it is pertinent to mention here that “company” is defined in the Act in Section 2(20) of the Companies Act, 2013. Therefore, the applicant is not entitled to refer the definition of “company” in the Act referred to above since there is a definition of “company” in Section 2(20) of the Companies Act, 2013.
• There is no dispute about the fact that a “company” is a body corporate. Section 366 of the Companies Act, 2013 only contemplates which entities are authorised to be registered as a company under the Companies Act, 2013. No doubt, it says that a partnership firm is entitled to get itself registered under the Companies Act, 2013. That itself shows that a partnership firm unless registered under the Companies Act, 2013 by making the use of section 366 of the Companies Act, 2013 cannot be included as a company and if such adventure is made, it goes against the definition of “company” in sub-section (20) of Section 2 of the Companies Act, 2013. No doubt, explanation (b) of sub-section (4) of Section 375 of the Companies Act, 2013 says that for the purpose of that Part, expression “unregistered company” includes a partnership firm. PART II of Chapter XXI of the Companies Act, 2013 deals with the winding up of unregistered companies.  It starts from Section 375 and ends with Section 378. The relevant provisions relating to Compromise, Arrangements and Amalgamation are inserted in Chapter XV of the Companies Act, 2013 from Section 230 to Section 240.  Moreover, even from the understanding of Section 375, the applicant -registered firm can only be treated as an unregistered company. An unregistered company cannot be called as a “company” within the meaning of Section 2(20) of the Companies Act, 2013.
• Here it is necessary to refer to Section 394(4)(b) of the Companies Act, 1956. The said Act specifically says that a “transferee company” does not include any company other than a company within the meaning of the said Act but a “transferor company” includes anybody corporate, whether a company within the meaning of the Act or not. Therefore, as per the said proviso, even in the old Act, a transferee company must be a company registered under the Companies Act, but a transferor company includes anybody corporate. In view of the said proviso of old Act, a transferor company need not be a company registered under the Companies Act, 1956. It is sufficient it is a body corporate. There is no dispute about the fact that a partnership firm is a body corporate. Therefore, in view of Section 394(4)(b) of the Companies Act, 1956, there can be a scheme of amalgamation between a transferor company registered as a partnership firm and a transferee company registered under the Companies Act, 1956 but not vice-versa.
• Now coming to Section 230 – 232 of the Companies Act, 2013, there is no similar provisions of the Companies Act, 2013. Therefore, the Legislature in its wisdom thought it fit to make the provisions of Compromises, Arrangements, etc, only available to companies registered under the Companies Act, 2013 or under any previous Company Law, as defined in sub-section (20) of Section 2. If really the Parliament intended to apply the provisions of Section 230-232 to body corporates other than companies registered under the Companies Act, there would have been such provision in Section 230-232 of the Companies Act, 2103. In the absence of such provisions in the Companies Act, 2013 relating to amalgamation, it cannot be said that even a body corporate can participate in the scheme of amalgamation.
• Coming to Section 234(2), which exclusively deals only with foreign companies, it says that a “foreign company” means any company or body corporate incorporated outside India whether having a place of business in India or not. That means in case of foreign companies, even a body corporate incorporated outside India can participate in the scheme of amalgamation. Section 234 of the Companies Act, 2013 deals with the merger or amalgamation of a company with foreign company. It cannot be made applicable to body corporate incorporated in India when the amalgamation is not with a foreign company. Therefore, the applicant is not entitled to derive any benefit out of explanation to sub-section (2) of Section 234 of the Companies Act, 2013.

In view of the above, NCLT decided that the applicant, being a registered partnership firm and a body corporate, is not a company within the meaning of the Companies Act, 2013 and therefore, it cannot participate in the amalgamation proceedings that are initiated under the provisions of Section 230-232 of the Companies Act.

Conclusion:

1. If any partnership firm desires to participate in a scheme of amalgamation under Section 230-232 of the Companies Act, it can do so only after converting itself into a company under section 366 of the Companies Act, 2013.

2. There was a provision in Section 394(4)(b) of the Companies Act, 1956, for partnership firm to participate in a scheme of amalgamation. In view of Section 394(4)(b) of the Companies Act, 1956, there could be a scheme of amalgamation between a transferor company registered as a partnership firm and a transferee company registered under the Companies Act, 1956 but not vice-versa.

3. Pursuant to the provisions of Section 368 of the Companies Act, 2013, the vesting of properties and liabilities of such partnership firm to the company is by operation of law, therefore, succession of partnership firm by a company, is exempt from capital gains tax pursuant to the provisions of section 47(xiii) of the Income Tax Act, 1961 subject to adherence to the conditions stated in that section.

4. When partnership firm was transformed into private limited company, there was no distribution of assets and as such, there was no transfer and therefore, assessee was not liable to pay any tax on capital gains under Section 45(4) of the Income Tax Act, 1961.

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.