UNDERSTANDING THE “UNDERTAKING”
As we all know that in the case of Demerger, company transfer’s its undertaking as going concern to the resulting company which can be a new company or existing company. Interestingly, “undertaking” has not been defined under this section but under the explanation to section 180 (1)(a) which says that undertaking means in which the investment of the company exceeds twenty percent of its net worth as per the audited balance sheet of the previous financial year or an undertaking which generates twenty percent of the total income of the company during the previous financial year.
A demerged company may have secure or unsecured or both creditors, although, section 230 itself mandates that any such scheme of arrangement or compromise shall be approved by the seventy five percent of the creditors in value but it is the case when scheme is for corporate debt restructuring not a case of compromise or arrangement between the company and its members.
In case of Demerger, it is an obligation upon the company or any person who has moved an application of demerger before the tribunal to conduct a meeting as per the order of NCLT and notice of such meeting should be served upon the creditors. However, any objection to the scheme of such demerger shall be made by the person who has outstanding debt amounting to not less than five percent of the total outstanding debt as per the latest audited financial statement of the company. So, if the scheme has been objected by the requisite value of creditor/s even in that case such scheme won’t be succeed until the objection is being resolved.
IMPACT OF DEMERGER ON CREDITORS
Unsecured creditors and secured creditors shall be treated as per the scheme of demerger/arrangement, wherein, as per the customary practice alongside the transfer of undertaking such creditors shall also stand transferred to the new/resulting company. Any transfer of liabilities through scheme doesn’t require any other approval from any third party which may be the part of any such contractual or loan agreement associated to the creditor, therefore, even no consent through special resolution is required under section 180 (1) (c) which states that “consent through special resolution is required to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company’s bankers in the ordinary course of business”.
But does this mean all creditors shall stands transferred?
No, in practical sense only those creditors who are directly associated with the undertaking which is being transferred through demerger. For instance; any bank loan borrowed for the factory associated to the construction and machinery of undertaking’s factory which is being transferred to the resulting company.
HUL has described the treatment of liabilities in its scheme of demerger between HUL and kwality as follow;
“all the liabilities of the Demerged Company in relation to the Ice Cream Business Undertaking whether or not recorded in the books of the Demerged Company including the specific loans or borrowings or funds utilised solely for the activities or operations of the Ice Cream Business Undertaking (“Ice Cream Business Liabilities”) shall pursuant to the provisions of Sections 230 to 232 and any other provisions of the Companies Act and any other Applicable Law without any further act, instrument or deed, be and stand transferred to and vested in and be deemed to be transferred to and vested in the Resulting Company, and the same shall be assumed by the Resulting Company, so as to become the liabilities of the Resulting Company on the same terms and conditions as were applicable to Demerged Company, and the Resulting Company shall meet, discharge and satisfy to the exclusion of Demerged Company such that the Demerged Company shall in no event be responsible or liable in relation to any such Ice Cream Business Liabilities transferred by it. It shail not be necessary to obtain the consent of any third party who is a party to any contract or arrangement by virtue of which such debts, obligations, duties and liabilities have arisen, in order to give effect to the provisions of this Clause;”
SCOPE OF ARRANGEMENT AND RECONSTRUCTION WITH CREDITORS UNDER SECTION 230-232 OF THE COMPANIES ACT, 2013
Section 230-232 arrangement and reconstruction scope is not limited to merger and amalgamation or Demerger but it can be a scheme of arrangement or reconstruction filed before the court under section 230 of the Companies act, which is purely an arrangement between the company and its creditors. Such arrangement can be the case of debt restructuring, transfer of asset to satisfy the debt, conversion of debt into equity, one time settlement, new investor infusing funds to settle debt or combination of demerger and debt allocation etc. In the case of Gujrat NRE Coke Limited insolvency was already admitted and during the liquidation promoter submitted an scheme of arrangement with creditors under section 230 of the Companies act, 2013, which was accepted by the tribunal although it stood as a matter of debate as this resulted in the indirect interference under the proceedings of insolvency by the promoter which otherwise is prohibited under section 30 of the IBC.
-Dixit Mehta, Ductus Legal
DUCTUS EDGE 