Subtext of an ‘appointed date’ under the Companies Act 2013

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Sanjay R Buch

Crawford Bayley & Co, Mumbai

sanjay_buch@crawfordbayley.com

Arvind Talegaonkar

Crawford Bayley & Co, Mumbai

arvinda@crawfordbayley.com

In India, while sanctioning mergers and acquisitions (mergers), it is open to the National Company Law Tribunal^[1] to modify an ‘appointed date’^[2] and prescribe such date from which the merger takes effect as it thinks appropriate based on the facts and circumstances of the case.

The Apex Court of India had stated that, the company court may, while sanctioning a merger, ‘modify the Appointed Date stated therein, depending on the specific facts and circumstances’.^[3] However, if the company court does not prescribe a specific date but merely sanctions a merger, the company shall follow the date specified as an appointed date of merger and not otherwise.

The provisions of section 232(6) of the Companies Act 2013 (the Act) makes it mandatory and a condition precedent to mention an appointed date to give effect to a merger. It is pertinent to note that ‘merger shall be deemed to be effective from such date and not at a date subsequent to the Appointed Date’. This is an enabling provision to allow the companies to decide and agree upon an appointed date of the merger. However, the Companies Act 1956^[4] (the Old Act) had no such mandate: the company courts were authorised to make requisite provisions, to fully and effectively carry out mergers as proposed before them. Undoubtedly, the absence of categorical provision on an appointed date of mergers conceived various judicial cross-deliberations and conflicts of views on this position of law.

In the merger of Equitas Finance Limited,^[5] the parties were unable to specify definite terms with respect to the appointed date, effective date ^[6] or share exchange ratio(s) and qua dissolution of transferor companies, as the restructuring of the group entities were contemplated only as a pre-condition to the ‘in-principal approval’ obtained by the holding company to establish a small finance bank. The merger had provided an event-based appointed date as ‘effective date’: a working day which immediately precedes the date of commencement of business of the bank by the proposed small finance bank. The High Court, upon detailed scrutiny of relevant provisions of the Old Act, was satisfied with the peculiar situation arising in the case and rejected an argument that an appointed date of merger should necessarily be a specific calendar date.

In the merger of Century Textiles and Industries Limited,^[7] the Tribunal, while sanctioning the merger, rejected the appointed date of 1 April 2019 chosen by the parties, stating that: ‘the said date is arbitrary and without proper justification’. Instead, it directed that 20 May 2018, which was the date of the valuation report and fairness opinion, be treated as an appointed date.

However, insisting on an appointed date being the valuation date may have serious consequences. The valuation date, in the case of listed companies, may be a date before the merger is approved by the board of directors and a few months before the merger is even presented before the Tribunal – which itself is conditional upon receipt of Securities and Exchange Board of India (SEBI)^[8] and stock exchange approvals.

In the merger of UFO Movies India Limited^[9], the Tribunal rejected the merger and held that:

‘it is a settled position of law that the expression “Appointed Date” is used to reflect the date on which assets and liabilities of the existing company were to be identified for the purpose of transfer to the Transferee Company/Resulting Company. The Assets and Liabilities as on the date of “Appointed Date” stand [frozen] and lawfully transferred.’

Assuming a merger to fix a calendar date as the ‘appointed date’, which may be contrary to the commercial agreement between the parties to merge, when the effectiveness of such a merger is dependent on conditions precedent, including applicable statutory, regulatory and the Tribunal approvals, may exasperate the contractual concerns of the parties.

It gets even worse if these are listed public companies, as they have to make periodic disclosures of their statements of financial accounts including their profits and losses. These may be a subject matter of inclusion on a consolidation of financial statements in their respective holding or parent companies prior to the effective date.

In the merger of East West Pipeline Limited,^[10] the Tribunal had elaborately discussed various judgments and emphasised the importance of an appointed date and interpreted section 232(6) of the Act to rule out an ‘event-based’ appointed date. In fact, the company courts and the Tribunal had always appreciated an appointed date being the prerogative of shareholders, premeditated based on a certain rationale approved by the shareholders in accordance with law and their commercial wisdom.

In the light of the provisions of the Act, applicable rules, prevalent practices and orders passed by the company courts and the Tribunal, the Ministry of Corporate Affairs of India^[11] (the 'Ministry') had made an attempt to stabilise the scattering light of judicial views with respect to an interpretation of the provision of Section 232 (6) of the Act. Clarification had been sought by on whether:

• An appointed date of merger has to mandatorily indicate a specific calendar date or not; and

• An acquisition date for Indian Accounting Standard (Ind-AS) 103^[12] ‘Business Combination’ would be the appointed date as referred under Section 232 (6) of the Act.

The Ministry addressed concerns regarding interpretation of Section 232 (6) of the Act and clarified its stand on the tenability of an appointed date as follows:

• An appointed date of merger may be a specific calendar date. It also may be tied to occurrence of ‘an event’ such as grant of licence by a competent authority, fulfilment of any preconditions agreed upon by the parties or meeting any other requirement as agreed upon between the parties which are relevant to the merger.

• An appointed date identified in the merger shall also be deemed to be the acquisition date and date of transfer of control for the purpose of conforming to accounting standards including Ind-AS 103 ‘Business Combinations’.

• Where an appointed date is chosen as a specific calendar date, it may precede the date of presentation of the merger before the Tribunal. However, if an appointed date is significantly antedated beyond a year from the date of such presentation, justification for the same would have to be specifically brought out in the merger which should not be prejudicial to the public interest.

• A merger may identify an appointed date based on the occurrence of an event which is key to the proposed merger and agreed upon by the parties to it. This event would have to be indicated in the merger itself upon occurrence of which the merger would be effective.

The Indian professional industry is still facing several teething problems relating to Section 232 (6) of the Act, as the Ministry introduced certain conditions for determining an appointed date that are not stipulated under the Act or in judicial precedents. It also leaves some ambiguity as to whether a merger under the Act may be sanctioned with conditions yet to be unfulfilled, that is to say, ‘prospective conditional effective date’ and in which a ‘retrospective appointed date’ was fixed. Although a number of the Tribunal-sanctioned mergers under the Act demonstrates an affirmative trend in this regard, as these mergers^[13] were sanctioned with retrospective appointed dates despite each of them being conditional upon an approval of the concerned courts, tribunals, ministries, and other regulatory bodies, pursuant to statutory compliance requirements under the applicable statutes in India or abroad. The Tribunal has also stepped ahead for disposition in sanctioning mergers that are subject to ‘contractual conditions’ ^[14] and not just statutory compliances. Hence, the recent trend of the Tribunal-sanctioned mergers indicates that a ‘prospective conditional effective date’ may be contemplated in a merger in which a ‘retrospective appointed date’ is specified.

The Ministry’s intervention has put repose on unnecessary misperception caused by some orders of the Tribunal that conflicted with the past practice of the company courts. However, one can still take an argument on circulars issued by the Ministry, since Parliament had enacted the Act and the Ministry had framed the rules, making company law an occupied field due to which the Ministry’s power to issue such circulars is circumscribed by the Act and the Rules. The Apex Court of India categorically stated:‘It is not the task of the government to interpret the law; that is the task of the courts […] these circulars are merely advisory in nature.’^[15]

Nevertheless, it is a responsibility of the Tribunal in India to:

• ensure the legacy of the company courts with respect to the settled position of law relating to an appointed date,

• provide necessary solutions for companies eliminating the issues related to implementation of provisions of the Act in correlation to an overlap of, or occurrence of, conflicting rulings; and

• minimise the delays in mergers, ultimately making it easy to do business in India.

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