Merger of Limited Liability Partnership into a company

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Merger of Limited Liability Partnership into a company

Introduction

The Chennai Bench of the National Company Law Tribunal (‘Chennai Bench) has recently dealt with the question of merger of a Limited Liability Partnership (LLP) with a company under the Companies Act, 2013. The order of the Chennai Bench is important in the light of the fact that neither the Companies Act, 2013 nor the LLP Act envisage the merger of an Indian LLP with an Indian company.

In this update we have discussed the order of the Chennai Bench and its possible impact.

Legal provisions

The legal provisions dealing with mergers and amalgamations pursuant to Companies Act (present and erstwhile) and the LLP Act are as follows:
Companies Act, 2013: Sections 230 to 232 of the Companies Act, 2013 deal with the provisions relating to compromises, arrangements and amalgamations between companies and its members and/or creditors. Further, Section 234 of the Companies Act, 2013 allows a foreign company, including body corporates (including LLPs), incorporated outside India, to merge with an Indian Company or vice versa.

Companies Act, 1956: Sections 391 to 394 of the Companies Act, 1956 (corresponding to Sections 230 to 232 of the Companies Act, 2013) dealt with the provisions relating to compromises, arrangements and amalgamation between companies and its members/creditors. It is noteworthy that Section 394 provided for the merger of body corporates, including LLPs, with Indian companies.

LLP Act: Sections 60 to 62 of the LLP Act deal with compromises, arrangements, reconstruction and amalgamation of LLPs.

It is pertinent to note that neither the Companies Act, 2013 nor the LLP Act, specifically provide for or prohibit the merger of an LLP with a company or vice versa.

THE ORDER – Amalgamation between M/s Real Image LLP and Qube Cinema Technologies Private Limited CP/123/CAA/2018 (‘Real Image Order’)

The Chennai Bench while sanctioning the scheme of amalgamation between M/s Real Image LLP, an LLP incorporated under the LLP Act and Qube Cinema Technologies Private Limited, a company incorporated under the Companies Act, 2013 advanced the following rationale:

  • Under the Indian Companies Act, 1956, there was an express provision wherein a ‘transferor company’ included any ‘body corporate’ (including LLPs). However, there is no similar provision under the Companies Act, 2013. As the merger of a body corporate (including LLP) with an Indian company was expressly permitted under the Companies Act, 1956, the absence of a similar provision in the Companies Act, 2013 appears to be an inadvertent omission;
  • Further in terms of Section 234 of the Companies Act, 2013, merger of a foreign LLP with an Indian company is permitted. It would therefore be wrong to presume that the merger of an Indian LLP with an Indian company is prohibited under the Companies Act, 2013;
  • The legislative intent of enacting the LLP Act and the Companies Act, 2013 was to facilitate ease of doing business and creation of a desirable business environment; and
  • While there is no provision which permits a merger of an Indian LLP with an Indian company, there is no express legal bar to allow/sanction such a merger.

Impact analysis

  • By giving a green signal to the merger of an LLP with a company, the Chennai Bench has given a way for new avenues in the field of corporate restructuring.
  • The Ahmedabad Bench of the National Company Law Tribunal (Ahmedabad Bench) in its order in the matter of amalgamation of Kediya Ceramics with Crystal Ceramic Industries (IA No. 254/NCLT/AHM/2017 in CA(CAA) No. 95/NCLT/AHM/2017) (Kediya Ceramics Order) provided a contradictory view.

In this matter, while interpreting the provisions of the Companies Act, 2013 in a literal manner, the Ahmedabad Bench held that Kediya Ceramics, a registered partnership firm cannot be merged with another company under the Companies Act, 2013. This is because the Companies Act, 2013 only provides for merger between companies.

  • The Ahmedabad Bench further held that the provisions of the Companies Act, 2013 (Section 234) exclusively permit bodies corporate incorporated outside India to be merged with Indian companies and this benefit cannot be extended to a partnership firm registered in India, not being a body corporate incorporated outside India.
  • The views of the Chennai Bench and the Ahmedabad Bench are not aligned. Since both the benches are on an equal footing, one cannot be given precedence over the other. Therefore, the Real Image Order and the Kediya Ceramics Order only have a persuasive value.
  •  Till the time (i) this issue is escalated to the National Company Law Appellate Tribunal and a decision is rendered, or (ii) suitable amendments are made in the provisions dealing with mergers under the Companies Act, 2013 and the LLP Act, the Real Image Order will only have a persuasive value and the question regarding the merger of an LLP with a company will remain unanswered.

Conclusion

The Real Image Order goes a long way in facilitating the legislative intent of ease of doing business in India. It marks a progressive change in the sense that it provides another tool for M&A structuring.

However, given the fact that there are no legal provisions governing the merger of an LLP with a company, there may be some impediments in the implementation process.

Further, the tax implications of such transactions will have to be examined.

Till the time, the law is amended to provide for the merger of LLPs with companies or this issue is dealt in detail by the NCLAT (wherein the implementation procedure is laid down and tax implications are addressed), it shall continue to be a grey area.