Appointed Date of Mergers Can be Delayed on Occurrence of a Pre-Decided Event – MCA
The Ministry of Corporate Affairs (“MCA”) issued a circular on August 21, 2019 clarifying the application of Section 232(6) of the Companies Act, 2013 (“Act”). Section 232 prescribes the procedure of merger and amalgamation of companies and Section 232(6) prescribes that the scheme of merger has to indicate an “appointed date” from which the merger shall be effective.
A clarification was required as there were two different views given by two separate courts over the application of Section 232(6). The Supreme Court in Marshall Sons & Co. India Ltd. v. ITO (1996) held that every scheme of merger has to necessarily provide a date with effect from which the merger shall take place, such merger may be effective before such date but not later than such date. Whereas the Madras High Court in Equitas Micro Finance Limited v. C.I.T. allowed a company to delay the appointed date of the scheme of amalgamation on the basis of occurrence of an event which was indicated in the scheme.
Further, the MCA also received queries on whether the term “acquisition date” for the purpose of the Indian Accounting Standards (“Ind-AS”) would be the same as “appointed date” referred to in Section 232 (6) of the Act.
In light of the above, the MCA clarified that –
(i) ‘Appointed date’ may be a specific calendar date or may be tied to the occurrence of an event such as grant of license by a competent authority or fulfilment of any preconditions agreed upon by the parties, or meeting any other requirement as agreed upon between the parties, etc., which are relevant to the scheme.
(ii) The scheme may identify the ‘appointed date’ based on the occurrence of a trigger event which is key to the proposed scheme and agreed upon by the parties to the scheme. This event would have to be indicated in the scheme itself upon occurrence of which the scheme would become effective.
(iii) In case such trigger event occurs on a date subsequent to the date of filing of the order of merger of the National Company Law Tribunal (“NCLT”) with the Registrar of Companies (“RoC”), the company shall file an intimation of the same with the RoC within 30 days of such scheme coming into force.
(iv) If the ‘appointed date’ is chosen as a specific calendar date, it may precede the date of filing of the application for scheme of merger in NCLT. However, if the ‘appointed date’ is significantly ante-dated beyond a year from the date of filing, the justification for the same would have to be specifically brought out in the scheme and it should not be against public interest.
(v) The ‘appointed date’ identified under the scheme shall also be deemed to be the ‘acquisition date’ and date of transfer of control for the purpose Ind-AS.
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This clarification will provide flexibility to a company to give effect to a merger. Companies can now tie the effect of the merger to the occurrence of an event. If such an event triggers, the effective date of the merger can be delayed. Additionally, the circular has harmonised the Act with accounting standards to remove doubts, thereby furthering the policy of ‘Ease of Doing Business’.
Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.