‘Single window clearance’: Reality or a misnomer?

An important issue that often arises in a restructuring exercise is the choice between a court approved scheme of arrangement and a private contractual slump sale. A scheme of arrangement has to be prepared and filed before the relevant high court, after obtaining approval of the shareholders and creditors, as applicable. A slump sale entails transfer of an undertaking as a going concern, on an “as is where is” basis, for a lump-sum consideration without assigning individual values to the business and assets.

Usually, a court approved scheme of arrangement is assumed to act as a “single window clearance”, where all operational licences and approvals and contracts of the transferor company are deemed to be transferred to the transferee company by operation of law. In a contractual slump sale, the parties have to individually approach the licensing authorities and the contracting parties and seek their approval. Court restructuring is typically preferred by a company engaged in a highly regulated sector holding several approvals and licences as it is perceived to have the benefit of a single window clearance.

Indian courts have dealt at length with the position of law in relation to transferability of approvals and licences and contracts pursuant to a court approved scheme of arrangement.

The Supreme Court in General Radio & Appliances Co Ltd v MA Khader (Deceased) (1986) held that “a scheme of arrangement cannot be used to bypass other statutes”. In this case, the transferor company entered into a rent agreement which was governed by laws which prohibited transfer of the right of the landlord under the lease without the written consent of the landlord. Under the scheme of amalgamation, all assets of the transferor company including the tenancy passed to the transferee company. As the written consent of the landlord was not obtained, the transferee company was held liable to be evicted from the premises.

Shruti Kinra is a partner and Vyom Dave is an associate at Shardul Amarchand Mangaldas & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.