Amalgamation Scheme Backed by 9/10th Value of Creditors Can’t Be Rejected by RD Over Transferor Companies’ Insolvency | HC

Case Details: Asset Auto India (P.) Ltd. v. Union of India - [2024] 167 taxmann.com 461 (HC-Bombay)

Judiciary and Counsel Details

• K.R. Shriram & Jitendra Jain, JJ.
• Akshay Petkar, Pranav Shah, Aniket Malu, Venkatesh Shinde for the Petitioner.
• Parag Vyas, Ms Karuna Yadav for the Respondent.

Facts of the Case

In the instant case, petitioner nos. 2 to 5 were the wholly-owned subsidiary companies of petitioner no.1. The petitioner no. 1-transferee company submitted an application before the Central Government, i.e., respondent no.2-Regional Director, for processing a scheme of amalgamation under section 233 (1) of the Companies Act, 2013, between transferor companies and transferee companies.

Respondent no.2, by an impugned order, rejected the application of the petitioners on the sole ground that petitioners nos.2 to 5 were not solvent as per the balance sheet as on 31st March 2017.

It was noted that the scheme had also been approved by a majority representing nine-tenths in the value of creditors or class of creditors of the respective companies. Undisputably, there were no objections/suggestions that the Central Government, which would be respondent no.2, had received from the Registrar or Official Liquidator.

Further, on a conjoint reading of sub-sections (2), (3), (4) and (5), the phrase “may” used in sub-section (5) will have to be construed as mandatory. If the Government is of the view that the scheme is not in the public interest or in the interest of the creditors, then the same is to be decided by the Tribunal. If the phrase “may” in sub-section (5) is used as optional, then the company involved in the amalgamation scheme would be at the mercy of the Central Government if the scheme is rejected without any adjudication. Therefore, it is mandatory for the Central Government to apply before the Tribunal and get adjudication on said issue.

High Court Held

The High Court observed that in this case, the declaration of solvency had been filed. Further, the said section did not empower respondent no.2 to reject the declaration filed, but if at all respondent no. 2 was of the opinion that any of the pre-conditions as quoted in Section 233(1) was not satisfied, then appropriate application had to be made to the Tribunal within the prescribed period objecting to the scheme.

The High Court held that Respondent No. 2’s failure to follow the mandatory procedure prescribed made the impugned order bad in law, and it was to be quashed and set aside.