M J Antony: The post-merger debtor chase

OUT OF COURT

Although an agreement for merger or acquisition of companies normally deals in detail with the liabilities and obligations of the new company, this is an aspect that often leads to litigation.

The new company will try to resist the claims of creditors against the old one as far as possible. The creditors have to search in complex legal documents for the identity of the company it had dealt with earlier.

The dissolution of OMC Alloys Ltd and its amalgamation with the Orissa Mining Corporation Ltd, a state government company, led to at least two such series of litigations, starting from the subordinate courts up to the Supreme Court.

In its latest judgement (Government of Orissa vs Ashok Transport Agency), the Supreme Court sent the case back to the sub-judge in Bhubaneswar for a fresh trial after deciding the principles.

Ashok Transport Agency had filed a suit against OMC Alloys Ltd for recovery of dues with interest. While the dispute was pending, the government issued the OMC Alloys Ltd and Orissa Mining Corporation Ltd, (Amalgamation) Order 1991 under Section 396 of the Companies Act.

Under that order, the rights and obligations of the merged company were taken over by the corporation with liberty given to claimants like Ashok to continue prosecution of their suits against the corporation.

Meanwhile, the Orissa government issued a notification whereby the charge chrome division, originally known as OMC Alloys Ltd, of the corporation stood transferred and vested in the state government. The state government later sold what had vested in it to Tata Iron and Steel Company (Tisco).

This led to several complications. The original company withdrew from the suit and the sub-judge decreed the suit in favour of Ashok. The merged company also declined to satisfy the decree. Ashok proceeded against the transferee companies.

Both the new corporation and the state government challenged this move. They argued that since they were not parties to the decree, they were not bound by it.

The subordinate court ruled that both of them were liable to satisfy the decree since they were successors-in-interest. The high court upheld this view.

When the appeal was heard by the Supreme Court, there was difference of opinion between the judges and, therefore, it was referred to a larger bench. Now it has allowed the appeal of the state government and sent the case for fresh trial.

The whole exercise had to be done after 12 years because the creditor company had not joined the corporation and the state government as parties. Meanwhile, Tisco also has entered the picture. Therefore, all the three have to be impleaded and heard anew.

The same merger transaction had earlier led to a row involving the state government, Orissa Mining Corporation and Klockner & Company, some eight years ago.

It concerned the marketing agreement between Klockner and OMC, under which charge chrome produced by the government corporation would be marketed by the private firm. There were disagreements between the two companies and the arbitration clause was invoked.

In the meantime, the merger also took place, complicating the issue. The government filed a suit denying that it was successor-in-interest. Klockner got a stay against the suit arguing that the issue should be arbitrated in London according to the agreement. The Orissa High Court and the Supreme Court rejected the state government's stand.

The broad lesson for creditors in these cases is that they have to be watchful about the identity of their partners in contracts when there are mergers and acquisitions.

This moral is not just for corporations, but even for individuals. Last week, the Supreme Court dealt with a case in which the landlord was locked in legal combat with Caltex since 1981, though the company had merged with one of the government oil companies.

Recently, another landlord had to search for his contractual partner for years until the Supreme Court decided in his favour in Singer India Ltd vs Chander Mohan. The search can often be as difficult as to find some of our friends to whom we had lent money some time ago.