M J Antony: The post-merger identity crisis

OUT OF COURT

The nature of a company changes after amalgamation, merger, reconstruction or any other kind of "blending" that takes place these days.

This change affects those who had dealings with the original entity as well as those who want to continue to transact business with the new avatar.

It is not just the shareholders or contractual parties; even the landlords have to rearrange their relationship with the new company. This problem was discussed in the recent Supreme Court judgement in Singer India Ltd vs Chander Mohan.

Singer Sewing Machine Company, an American concern incorporated in New Jersey, was a tenant of a prime property in New Delhi since 1966, paying Rs 1,200 a month as rent.

In 1981, the US corporation was amalgamated with a new company called Indian Sewing Machine Co Ltd, registered under the Indian Companies Act.

The business continued in the same premises. The landlord then filed an eviction petition on the ground that the US company, without getting consent from him, parted possession of the premises to the new concern. Thus, the question arose, with whom is the landlord dealing?

The US firm argued that it had to amalgamate with the Indian company under compulsion because it had to comply with the provisions of the Foreign Exchange Regulation Act (FERA).

Citing a Delhi High Court judgement in Telesound India Ltd of 1983 vintage, it asserted that an order of amalgamation passed under Section 394 of the Companies Act resulted in the rights, properties and liabilities of the transferor company becoming the rights, properties and liabilities of the transferee company.

On amalgamation, the transferor company merges into the transferee company, shedding its corporate shell, but for all practical purposes remaining alive and thriving as part of the larger whole.

In this case, only the corporate shell of the US company has been shed or removed, but it is still alive and thriving as part of the Indian company. Therefore, there was no parting of possession of the premises.

The contrary view was that the US corporation was not under any compulsion to get itself amalgamated with the Indian company. Amalgamation is only one way of reducing the foreign equity and complying with FERA requirements.

There were other ways of conforming to the Indian law. After the sanction of the amalgamation scheme, approved by the Bombay High Court, the American company completely lost its identity and it was the Indian company that came in its place.

Amalgamation or reconstruction is not precisely defined anywhere, although Section 394 of the Companies Act facilitates such process. Therefore, authoritative texts and precedents have to be relied upon. Citing one of its earlier judgements (Saraswati Industrial Undertaking vs CIT, Haryana, 1991), the Supreme Court stated that when two companies amalgamate and merge, the transferor company lost its identity as it ceased to have business.

However, their respective rights or liabilities are determined under the scheme of amalgamation. But the corporate identity of the transferor company ceases to exist with effect from the date of amalgamation.

This view was further strengthened by two other Supreme Court judgements, General Radio & Appliances Ltd vs M A Khader (1986) and Cox & Kings vs Chander Malhotra (1997). Thus, the Supreme Court concluded that the Indian company was in possession of the premises now and it should be vacated because the US corporation has violated the terms of the lease agreement and the provisions of the rent law.

There could, of course, be different circumstances. In one case, a limited company was formed with the partners of an existing tenant firm as directors.

Both the firm and the company were operating from the same premises, each acting as agent of the other. The Supreme Court held that the company was an alter ego or a "corporate reflection" of the firm and the two had, for all practical purposes, substantial identity.

If a foreign company is taken over by the government by an Act of Parliament, the situation may be different. Thus, the court has to examine the nature of the agreements for amalgamation or takeover in each case.

This process of "lifting the corporate veil" seems to be an unending onus cast upon the courts and a steady source of income for the corporate lawyers.