Ahmedabad NCLT [1] rejected the Scheme of Arrangement which envisaged a cross border arrangement for outbound demerger of two specified investment undertakings of Sun Pharmaceutical Industries Limited (‘Sun Pharma India’) into two overseas Resulting companies viz. Sun Pharma (Netherlands) B.V and Sun Pharmaceuticals Holdings USA Inc, being direct and indirect wholly owned subsidiaries of Sun Pharma India. (‘Demerger Scheme’).
Whilst Sun Pharma India submitted that it would comply with all the applicable rules and regulations under the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (‘Cross Border Regulations’), the Ahmedabad NCLT held as under:
- Provisions of section 234 of the Companies Act, 2013 which relate to the cross-border merger of Indian Companies and vice versa, mentions only about “merger” and / or “amalgamation” and do not seem to contain the words “compromise” and/ or “arrangement” and / or “demerger” (unlike section 230 and 232 of the Companies Act, 2013);
- It may be construed that the provisions of section 234 of the Companies Act, 2013 do not permit “compromise” and/ or “arrangement” and / or “demerger” with a foreign company and vice-versa, thereby restricting demerger of Indian Companies with foreign company;
- Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 is silent on “demergers” and mentions only “mergers” and “amalgamations.”;
- On further reference to Cross Border Regulations, Ahmedabad NCLT observed that the term “Cross Border Merger” which is defined to mean any merger, amalgamation or arrangement between an Indian company and foreign company has specifically excluded the term “demerger”, which was otherwise provided in the draft Regulations issued in April 2017.
Accordingly, following the ‘Literal Interpretation Rule’ Ahmedabad NCLT held that once the meaning is clear and plain, it is not the province of the Court to substitute its opinion. If any provision of law is clear beyond all ambiguity, it is to be implemented regardless of the fact that it causes hardship to a particular party.
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[1] CP (CAA) No. 79 of 2019 in CA(CAA) No. 28/NCLT/AHM/2019 dated 19 December 2019
