Chennai NCLAT Rules Composite Schemes Must Stand as One - Strikes Down NCLT Order Splitting Amalgamation and Demerger in Separate Scheme

 In a significant ruling, the Chennai NCLAT has held that where a Composite Scheme of Arrangement envisages amalgamation followed by an immediate demerger, the Tribunal cannot sanction only the amalgamation portion and direct the parties to file a separate application for the demerger.

The appellant companies had filed a Composite Scheme of Arrangement before the NCLT contemplating a two-step process. First, the amalgamation of the say ABC Co. (Amalgamating Company) into the XYZ Co. (Amalgamated Company), and second, the immediate demerger of a “specified undertaking” from the XYZ Co. (Demerger Company) into the PQR Co. (Resulting Company). The First Motion Petition was allowed, meetings of shareholders and creditors were duly convened, and the Composite Scheme was approved. However, while disposing of the Second Motion Petition, the NCLT sanctioned the scheme only to the extent of the amalgamation and directed that the demerger be filed as a separate application, observing that the Demerged Company emerging post amalgamation was an unspecified Demerged Company requiring independent statutory scrutiny.

The NCLAT set aside the direction, holding that

·       NCLT’s finding was contrary to the clear language of the Scheme. The relevant clauses specifically identified the Amalgamated Company as the entity which, upon amalgamation, would become the Demerged Company, and the detailed definition of the Demerged Undertaking left no ambiguity as to the identity of the demerged entity or the undertaking being demerged

·       Once the emergence of the Demerged Company as a consequence of the sanctioned amalgamation was specifically contemplated in the Scheme itself, requiring a separate demerger application would amount to an abuse of process

·       Relying on the Supreme Court ruling in Miheer H. Mafatlal v. Mafatlal Industries Ltd., the NCLAT reiterated that the commercial wisdom of shareholders and creditors who have approved the scheme by requisite majority cannot be interfered with and the Tribunal’s jurisdiction in such matters is peripheral and supervisory, not appellate.

Considering the above the NCLAT allowed the composite scheme.

The key takeaway is that a Composite Scheme of Arrangement involving amalgamation and a consequential demerger is to be viewed as an integrated whole and cannot be split where the scheme itself clearly defines the demerged company, demerged undertaking and the resulting company.