This otherwise is a routine case of demerger, however has posed an interesting question – Whether demerger do not require court approval in view of section 180 of the Companies Act, 2013?

In Re: United Spirits Limited, 2015(2) AKR 243

In a scheme of demerger, Regional Director (Ministry of Corporate Affairs) objected that the scheme of demerger was only a hive-off by way of a slump sale. And that the sale of an undertaking is covered under Section 293(1)(a) of the Companies Act, 1956 up-to 11-9-2013 and with effect from 12-9-2013 under Section 180(1)(a) and sub-Section (4) of the Companies Act, 2013, which speaks of the restrictions of the powers of the Board. Therefore, in terms of Section 180 of the Companies Act, 2013 the approval of the Board of Directors is required. In case a sale of an undertaking required the approval of the Hon’ble High Court, then such a condition would exist in Section 180. However, Section 180 does not provide for any approval by the High Court. Therefore, the scheme does not require the approval of the High Court under Section 180.

Petitioner Company submitted that even assuming that the contention of the Regional Director is that it is not a sale or amalgamation or reconstruction but a slump sale, not only this Court but various High Courts have held that even in a case of a slump sale, the provisions of Sections 391 to 394 stand attracted requiring the approval of the Company Court. In support reliance was placed on (i) the Judgment of the Gujarat High Court in the case of Health Products Ltd.[1] and Nirma Limited[2] (ii) the unreported Judgment of Hon’ble Karnataka High Court dated 16-6-2008[3] and the unreported Judgment of Bombay High Court dated 24th January, 2014[4].

It was held that Sections 391 to 394 is a complete code by itself and hence necessarily it would have precedence over the other provisions of the Act. It is not the case where the provisions of Section 180 of the Act are not being complied with and the scheme is sought to be sanctioned otherwise than in accordance with law. Therefore, it cannot be said that the non-compliance of Section 180 would run contrary to the provisions of Sections 391 to 394. In view of the judicial pronouncements of the High Courts as well as the Supreme Court reiterating the fact that Sections 391 to 394 is a code, thereby other provisions of the Statute not forming part and parcel of the code, necessarily the provisions of these Sections would have precedence over the other provisions of the Act.

Regional Director had also objected that the appointed date should be shifted from 1-4-2013 to 1-4-2014.

Petitioner relied on the Circular No. 12 dated 21st February, 1977 issued by the Department of Company Affairs

“241/Sec 210: Annaual Accounts-General-Drawing up of final accounts in respect of companies which are under process of amalgamation-Whether obligatory.

A question has been raised whether a company which is in the presence of being amalgamated with another company is required to draw up its final accounts as required under Sections 210 and 211. This matter has been examined in the Department and it has been decided that till the amalgamation order is made by the court and the amalgamation scheme is in facts sanctioned, the transferor-company is required to continue complying with the various provisions of the Act including those relating to preparation, presentation, circulation and filing of accounts as and when they become due for compliance. The failure to do this will, among others, mean the denial to me shareholders and the public knowledge about the financial position of the company because the amalgamation petition for some reason or the other may not be decided for quite some time.”

In view of the clarification by the Department of Company Affairs, objection of RD was not sustained.

[1] 2005(62) SCL 393 (Gujarat)

[2] in Company case No. 146/2010 & 147/2010 dated 14-3-2011

[3] passed in Company Petition No. 45/2008 connected with 146/2008 and 147/2010

[4] in Company Petition No. 696/2013