The Sun Pharma Orders: NCLT Confounds The Law On Cross-Border Demergers?

Author:Mr Shinoj Koshy and Mayank Labh
Profession:L&L Partners
 
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Introduction

On 19 December 2019, the Ahmedabad bench of National Company Law Tribunal ("NCLT") passed the order in which it rejected an application made by Sun Pharmaceutical Industries Limited ("Sun Pharma") for proposed demerger and transfer of its two specified investment undertakings to two overseas resulting companies ("Outbound Demerger Order"). The order raises an interesting issue as to whether cross-border demerger is allowed under Section 234 of Companies Act, 2013 ("CA 2013") read with Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

It is further interesting to note that the Outbound Demerger Order contradicts another order passed by NCLT, Ahmedabad on 31 October 2018 ("Inbound Demerger Order") wherein the NCLT had approved an application made by Sun Pharma for inbound demerger involving transfer of a specified undertaking of Sun Pharma Global FZE ("Global FZE"), incorporated under the provisions of United Arab Emirates, with Sun Pharma. This article seeks to critically analyze Section 234 of CA 2013 in light of the two above-mentioned orders.

THE SUN PHARMA NCLT ORDERS

Inbound Demerger Order

In the Inbound Demerger Order, as stated above, the NCLT had to decide on whether the demerger and transfer of a specified undertaking of Global FZE (an indirect wholly owned subsidiary of Sun Pharma) to Sun Pharma should be sanctioned under Section 230 and Section 232 read with Section 234 of CA 2013. While adjudicating on the matter, the NCLT had to evaluate the objection raised by the Regional Director that Section 234 of CA 2013 only refers to cross-border mergers and amalgamations and does not refer to refer to demergers.

However, the NCLT observed that the permissible transfer of part of the undertaking under Section 232 (1) (b) of CA 2013 implies demerger and all other applicable provisions of CA 2013 for merger or amalgamation can also be applied to a scheme of demerger involving transfer of any part of the undertaking of a company. Further, it noted that Section 234(1) of CA 2013 confirms the above understanding as it provides that the provisions under the 'Compromise, Arrangements and Amalgamation' chapter of CA 2013 apply mutatis mutandis to schemes of mergers and amalgamations between companies registered under CA 2013 and foreign company. Furthermore, according to the NCLT, the above view that transfer of part of the undertaking under Section 232 (1) (b) of CA 2013 implies demerger gets...

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