Amalgamation Will Not Necessarily Result In Vesting Of Licenses And Rights With The Transferee Company

There are various rationales that Companies have for amalgamating with each other viz. for administrative or operational efficiency, reduction in overheads and expenses, economies of large-scale operation and acquisition of cash resources. It is common for a bigger company to absorb a smaller company. Companies also amalgamate their subsidiaries and group companies.

The terms and conditions of amalgamation are recorded by way of a scheme of amalgamation (the "Scheme"). The Scheme is entered between the Transferor Company, Transferee Company and their respective shareholders. The Scheme comes into effect pursuant to receiving sanction from the NCLT under Sections 230-232 of the Companies Act, 2013.

The Scheme usually contains provisions to the effect that licenses, permits, consents and approvals held by the Transferor Company would vest with the Transferee Company. Furthermore, the rights, entitlements and obligations of the Transferor Company under agreements and contracts with third parties would vest with the Transferee Company.

The questions that arise are whether pursuant to the Scheme coming into effect (i) there is an automatic or deemed transfer of the Transferor Company's licenses and rights to the Transferee Company? and (ii) is the Transferee Company entitled to hold and operate under the licenses of the Transferor Company?

In United Breweries Ltd. v. Commissioner of Excise, Kesarvai Breweries Ltd. (Transferor Company) being a subsidiary company amalgamated into United Breweries Ltd. (Transferee Company). The excise department called upon United Breweries to pay a transfer fee for transferring Kesarvai Breweries' liquor manufacturing license. The said demand was challenged inter alia on the ground that the amalgamation of Kesarvai Breweries and United Breweries did not amount to transfer of ownership as the shareholding of both companies belonged to the same persons. The Bombay High Court rejected the above contention and held that the company being a juristic person is distinct from its shareholders. The amalgamation resulted in the transferor company ceasing to exist.

In General Radio and Appliances Co. Ltd. v. M.A. Khader, the landlord had leased his premises to the Appellant No. 1 company. The rent agreement stipulated that premises could not be sub-let without prior written consent of the landlord. Later, the Appellant No. 1 (the "Transferor Company") amalgamated with the Appellant No. 2 (the "Transferee Company"). The Scheme was sanctioned by the Hon'ble Bombay High Court. The Scheme provided for the Transferor Company's properties and rights in leases and tenancy to be transferred and vested in the Transferee Company. The landlord contended that the Transferor Company had acted contrary to the rent agreement and also the Andhra Pradesh Buildings (Lease, Rent and Eviction) Control Act, 1960 (the "Governing Law"). It was urged by the companies that (i) the transfer was involuntary as it was on the basis of the order of the High Court under Sections 391 and 394 of the Companies Act, 1956; (ii) the Transferor Company had not been wounded up or liquidated but was been merely blended with the Transferee Company on the basis of the High Court's order; (iii) there has been no subletting nor any assignment of Transferee Company's interest in the premises as the Transferor Company has a co-interest in the Transferee Company; and (iv) as a result of blending, the Transferor Company had merely become a division of the Transferee Company.

The Supreme Court held that: (i) the tenancy and possession of the premises was in fact transferred to the Transferee Company; (ii) the transfer was not involuntary or by operation of law as the same was made by an application to the High Court; (iii) the Transferor Company was dissolved and ceased to exist; (iv) the Governing Law does not carve out an exception for subletting by way of amalgamation of companies; and (v) the Transferor Company had acted in contravention to the rent agreement and the Governing Law and the Transferee Company was liable to be evicted from the premises.

In Singer India Ltd. v. Chander Mohan Chadha, an American company had leased a shop in 1966. In 1982, the landlord filed an eviction suit on the ground that the American company had, without prior consent, parted possession of the shop to an Indian company. The Indian company opposed the eviction on the ground that the RBI had directed the American company to reduce its share capital to 40% for carrying on business in India. Therefore, the American company amalgamated its undertaking in India with the India company. The Scheme was approved by an order of the Hon'ble Bombay High Court under Sections 391 and 394 of the Companies Act, 1956. It was urged by the Indian company that (i) the Indian company was merely a legal substitute to the American company; (ii) the lifting of the corporate veil would show that both companies are controlled by the same set of people and hence there was no sub-letting or parting of possession and; (iii) the amalgamation of American company's undertaking with the Indian company was not voluntary but was done under compulsion to secure compliance of law.

The Supreme Court held that (i) the American company had ceased to exist and the rights under the tenancy had been transferred to the Indian company; (ii) the act of sub-letting, transferring, assignment or parting with possession is a factual occurrence under law and whether such act was done voluntary or otherwise and also the reasons for doing so are irrelevant and have no bearing; (iii) it is not open to the Transferee Company to seek for lifting of the corporate veil as there is no irregularity or defrauding of others and; (iii) the Indian company was liable to be evicted.

In view of the above decisions, it is clear that when two companies amalgamate or merge, the Transferee Company loses its identity and ceases to do business. The rights, licenses and entitlements vest in an entirely different company which effectively results in transfer or assignment of the same. Such transfer or assignment, may be barred by contractual arrangements or the prevailing law.

The Scheme of amalgamation, even though sanctioned by court, does not become binding and absolute in terms of certain rights and entitlements emitting from a Transferee Company. It therefore, is imperative for companies to conduct an audit on the transferability of licences, permits, leases and rights etc. of the Transferor Company prior to entering the amalgamation process. Any legal impendent on transfer or assignment may altogether affect the business strategy and negate the purpose of amalgamation.

Views are personal.

The Author is an Advocate practising at the Bombay High Court