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.
In Idea Cellular Limited v Union of India, Department of Telecommunications (2012), Delhi High Court held that high court approval to a scheme is a single window clearance for the matters covered in the Companies Act. However, that does not mean that if some permission is required under any separate statute or licence, that permission should not be obtained.
In sanctioning a scheme, the high court’s jurisdiction is peripheral and supervisory and not appellate. The court’s role includes ensuring that statutory provisions have been complied with, relevant material was presented at the meetings for the shareholders/creditors to take an informed decision, and the scheme is fair and not contrary to public policy. The court is not empowered to order the transfer of licences and approvals held by the transferor entity under other laws, or of contracts entered into with third parties.
Upon sanction of a scheme of amalgamation, the corporate identity of the transferor entity ceases to exist and the business licences of the transferor company are deemed to belong to the transferee company. However, the transferee company still has to follow necessary procedures prescribed under applicable laws for transfer of the transferor company’s licences so that it can lawfully continue to carry on the business of the transferor company that it has acquired under the scheme.
The position is similar for third party contracts. If, as per the terms of a contract, the transferor company is permitted to transfer the contract pursuant to a scheme, the transferor company may do so without having to seek approval from the counterparty. If the transferor company is required to seek consent of the counterparty for transferring the contract pursuant to a scheme of arrangement, such consent will need to be sought.
In Re PMP Auto Industries Ltd, Re S S Miranda Ltd, Re Morarjee Goculdas Spinning & Weaving Co Ltd (1994), Bombay High Court held that the approval of schemes under sections 391 to 395 of the Companies Act, 1956, should be granted in the manner of a single window clearance. When various proposals are envisaged as an integral part of the scheme, the procedures prescribed under the Companies Act need not be separately undertaken. For example, an increase in the authorized share capital of a company or a reduction of share capital can be undertaken as a part of the same scheme of arrangement, without the transferee company having to duplicate steps and effort. Thus, the court approved scheme acts a complete code for all requirements under the Companies Act that need to be complied with.
To summarize, a court approved scheme acts as a single window clearance only in terms of requirements under the Companies Act. For transfer of operational licences and third party contracts, the transferee company has to approach the licensing authorities and contracting parties to seek their consent after the high court sanctions the scheme. The position, therefore, is similar to a contractual slump sale. Nonetheless, practically, a court approved scheme that provides for transfer of licences and contracts carries a persuasive value for seeking approval of government authorities for transfer of the operational licences to the transferee company.
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.
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