Mergers and acquisitions (“M&A”) in India have seen tremendous growth since the turn of the millennium. Although the past couple of years have witnessed a slump, transactions are projected to increase as the economy recovers from the Covid-19 pandemic. The impact of the pandemic has invariably affected the functioning of businesses, with many having to close shop due to rising costs and decreased revenue. A conducive atmosphere for such failing businesses to be revived is imperative, and this inter alia requires an effective M&A regime where entities can amalgamate without much hassle or cost. In light of this backdrop, this article is a critique of cross-entity amalgamations between domestic companies and limited liability partnerships (“LLP”) under the Indian M&A regime.
Current Legislative Framework
Section 232(1)(a) of the Companies Act, 2013 (“2013 Act”) specifies that both transferor and transferee entities must be companies that satisfy the statutory requirements for a valid amalgamation. A pertinent difference in the scheme under the 2013 Act and the erstwhile Companies Act, 1956 (“1956 Act”) is that the latter required only the transferee entity to be a company by definition. As per Section 394(4) of the 1956 Act, a transferor company includes “any body corporate, whether a company within the meaning of this Act or otherwise”, implying that Indian LLPs could amalgamate with companies. This is not reflected in the 2013 Act, however, Section 234 sanctions cross-border amalgamations defining a foreign company as “any company or body corporate”, thereby including an LLP. Sections 60-62 of the Limited Liability Partnerships Act, 2008 (“LLP Act”) that deal with M&A between LLP firms also remain silent on this cross-entity amalgamation.
The first time this incongruity came into limelight was when there was a purported scheme of amalgamation between a transferor LLP and a transferee private company, both incorporated in India, before the Chennai Bench of the National Company Law Tribunal (“NCLT”) in the case of In Re: Real Image LLP (“NCLT judgement”). The legislative anomalies influenced the NCLT to permit the amalgamation using the principle of casus omissus. The NCLT opined that, in light of the object of the 2013 Act to promote ease of doing business, it was not reasonable to afford only foreign LLPs the benefit of amalgamating with Indian companies. Further, the permissibility under the 1956 Act drove the NCLT to believe the legislators had overlooked this aspect and the 2013 Act amalgamation prohibition was unintentional. Accordingly, the NCLT sanctioned the scheme.
The National Company Law Appellate Tribunal (“NCLAT”) took a contrary view in Regional Director, Southern Region, MCA & Anr. v. Real Image LLP & Anr. (“NCLAT judgement”), noting that despite the change in wordings, the 2013 Act permits cross-entity amalgamation through conversion. Indian LLPs can be registered as companies under Chapter XXI and the LLP Act also permits company to LLP conversion under Chapter X. The NCLAT opined that it cannot be said that the 2013 Act does not contemplate said cross-amalgamations and rejected NCLT’s decision to apply casus omissus.
Implications of Judicial Interpretation
The procedure propounded in the NCLAT judgement requires the transferor entity to convert to the transferee’s form, which in essence becomes an amalgamation between two companies or two LLPs, changing the transaction’s colour. The question arises whether it may even be termed as a cross-entity amalgamation. The 1956 Act was clear in permitting direct amalgamations but the 2013 Act sought to upgrade company law in the country, causing ambiguity in this aspect.
This conundrum has placed the judiciary in an uneasy position. The rule of casus omissus is not regarded as a welcome tool of statutory interpretation as it affords overarching powers on judges. Its usage has been limited to dire situations, where the statute affords no remedy. In this backdrop, the 2013 Act has provided a remedy by way of Indian LLPs registering themselves as companies. Even though the remedy is not apposite, it was a solution within the statute and therefore, the application of casus omissus would be misplaced, as duly opined in the NCLAT judgement. Needless to state, this decision has had significant ramifications on M&A activity in the country.
(i) Accumulation of Procedural Burden
Before amalgamating, the entities have to convert into transferee’s form. Thus, an Indian LLP would have to go through the process of registering as a company under Chapter XXI of the 2013 Act. This implies registration as a company limited by shares, guarantee or as an unlimited company by fulfilling their respective criteria and with the assent of the majority members at the general meeting. For complying with these requirements, the LLP would have to undergo corporate restructuring by altering its capital structure, appointing board of directors and so on. The certificate of registration from the Registrar of Companies required for incorporating the LLP as a company can be procured only after payment of requisite fees.
In case of companies amalgamating with transferee LLPs, the transferor company would have to convert itself into an LLP by complying with requirements under Chapter X of the LLP Act and registering itself with the Registrar of Firms. The transferor company must also meet the requirements under the Third Schedule of the LLP Act which involve furnishing of incorporation documents, shareholder statements and prescribed fees to the Registrar and also mandates that no security interest must subsist in the assets of the transferor company at the time of applying for conversion.
The conversion process is futile since the transferor entity is going to end up amalgamating with the transferee company. The restructuring during the conversion will be altered due to the amalgamation, exemplifying redundancy. The procedure is not only time-consuming but also financially illogical, and resultantly, is a red flag against ease in doing business.
(ii) Dichotomy in Statutory Procedure
There is an apparent dichotomy in the amalgamation procedure for Indian LLPs and foreign LLPs under the 2013 Act. While the NCLAT prescribed Indian LLPs to convert to companies first, the 2013 Act permits direct amalgamation between foreign LLPs and Indian companies once Reserve Bank of India’s (“RBI”) approval is obtained. The Foreign Exchange Management (Cross Border Mergers) Regulations, 2018 have also brought in deemed approval of RBI which further eases the process for cross-border amalgamations between foreign LLPs and Indian companies. There exists no intelligible differentia in prescribing a faster route for foreign LLPs while depriving Indian LLPs of the same. The object of the 2013 Act is to facilitate business in India but in reality, Indian entities have to jump higher hurdles to restructure, grow and save their business.
(iii) Taxation of Such Amalgamations
The Income Tax Act, 1961 (“IT Act”) exempts certain amalgamations from the capital gains tax. However, the exemption is available only when requirements under Section 2(1)(b) are satisfied (all parties to the amalgamation are companies) and the amalgamated entity is an Indian company. The NCLT judgement acknowledged the aspect of taxation and held that the amalgamation would be taxable since it did not satisfy the criteria of exemption under the IT Act. The NCLAT, however, did not deal with this aspect while overruling the procedure propounded by the NCLT.
Since the NCLAT judgement has mandated that LLPs be registered as companies first, the question arises whether the transaction would still be exempt from income tax liability. A literal interpretation of the exemption provisions would indicate that since the LLP would be registered as a company, the transaction would indeed be exempt from capital gains tax. Although this may act as a relief for businesses, on a macro level, this entails in loss of revenue for the government and may not be a favourable outcome for the state and its economic recovery.
(iv) Cross-Entity Amalgamations Across Jurisdictions
In the United Kingdom, Rule 45 of the Limited Liability Partnerships (Application of Companies Act, 2006) Regulations, 2009 permits amalgamations between “any two or more relevant bodies corporate (where one or more of them is an LLP)”. The wide ambit of this provision includes domestic LLP-company amalgamations. The procedure to be followed remains the same as in the case of an amalgamation between LLPs or companies and there is no requirement for conversion. Similar provisions are found in American state legislations. For instance, the Delaware Code, 2014 permits domestic LLPs to amalgamate with “other business entities” which include limited liability companies as per Section 15-902. There are separate legislations elucidating the interplay between LLPs and companies permitting direct amalgamations between domestic LLPs and companies. The absence of such legislative clarity in India is the biggest culprit in this predicament.
The conundrum over the permissibility of Indian company-LLP amalgamations is yet to receive significant closure in India because the scheme purported by the 2013 Act and the LLP Act is not efficient. With the advent of the second wave of the Covid-19 pandemic, businesses may be looking for exit options or restructuring facilities, making it all the more imperative for these provisions to be amended. The authors recommend adopting the United Kingdom approach wherein exact contours of the interplay between companies and LLPs are laid out through a standalone statute and cross-entity amalgamations are permitted without conversion therein. Promulgating such a legislation in India will not only clear the fog over this matter but will prevent such ambiguities from arising that end up negatively influence on the ease of doing business in the country.
This article has been written by Anirudhan Balajee and Swathi Gopinath, students at Symbiosis Law School, Pune.