[Rahul Ranjan is a third-year law student at National Law University Odisha]
Introduction
The definition of amalgamation has not been given in the Companies Act, 2013 (Act), however it can be traced to Section 2(1B) of the Income Tax Act, 1961 wherein it is referred to as merger of one of more companies with another. The process of amalgamation is outlined under Sections 230-232 of the Act as part of the Scheme of Arrangement (SOA). Once the hearings for the petition and objections are concluded, the National Company Law Tribunal (NCLT) issues an order for amalgamation under Section 232 of the Act during the final hearing. This essentially entails transfer of all properties to the amalgamated company.
A significant concept that plays out during transfer of immovable properties is the doctrine of lis pendens. It a legal principle that comes into the picture during pendency of a suit. Corpus Juris Secundum defines it in terms of power, jurisdiction or control which a court acquired over property involved in a suit pending continuance of the action. This principle has been incorporated in Indian law, taking the shape of Section 52 of Transfer of Property Act, 1882 (TOPA). The objective of the section is to make such transfers subjected to the decree/order passed in the suit effectively making it subservient to the concerned decree /order.
The interplay of Section 52 and SOA becomes evident in situations wherein immovable properties that ought to be transferred during amalgamation become subjects of a pending suit instituted before the execution of an application under Section 230 of the Act for amalgamation by the NCLT. However, an essential question arises if TOPA and by extension, lis pendens, is applicable in SOA.
In this post, the author explores various judgements that decided upon the applicability of TOPA in SOA. Additionally, arguments against TOPA's applicability are re-evaluated in light of a recent Supreme Court (SC) judgement, offering new perspectives and interpretations that can influence future legal approaches to lis pendens in SOA.
Dissecting the SC Judgement
In the case of Hindustan Lever and Ors. v. State of Maharashtra and Ors. (Hindustan Lever), the SC entertained a peculiar matter involving a challenge to the constitutional validity of Section 2(g)(iv) of the Bombay Stamp Act, 1958which defined conveyance. The case emanated from the imposition of stamp duty on the order of amalgamation passed under the Companies Act, 1956. The court herein while deciding upon the applicability of the stamp duty, delved into the nature of SOA. It concluded that the SOA is built on the foundation of a voluntary agreement between two or more companies which is sanctioned by the court, effectively making it an instrument within the meaning of Section 2(l) of the Bombay Stamp Act and resultantly, bringing it within the ambit of conveyance and subjected to the stamp duty.
In respect to the definition of conveyance, it was argued that Bombay Stamp Act entails transfer of property, whether movable or immovable, to any other person, inter vivos (living persons) and since in SOA, the transaction did not take place between living persons, there would no transfer of property. The court while deciding otherwise, held that companies fall within the ambit of living person under Section 5 of TOPA. Additionally, it noted that the phrase inter vivos, in the context of SOA extends to transfers between juristic persons, like companies, which are inherently legal entities capable of such transactions.
This verdict clarified that the transfer of property, as defined under TOPA, can occur between two companies, including transfers of immovable properties from a transferor company to a transferee company during SOA. Consequently, Section 52 can be made applicable by law based on the specific facts and circumstances of the case. However, a subsequent judgement by the Calcutta High Court decided otherwise.
Delving into the High Court Rulings
The High Court in the case of Madhu Intra Limited and Ors. v. Registrar of Companies and Ors. (Madhu Intra), decided whether an order sanctioning SOA is liable to be stamped under the Indian Stamp Act, 1899. The court observed that Section 2(10) of the Indian Stamp Act would entail transfer of property between parties under Section 5 of TOPA. It held that since SOA is purely by an operation of law which is excluded by virtue of Section 2(d) of TOPA, amalgamation is not liable to stamp duty.
This judgement suffered from certain infirmities as there was no reference to Hindustan Lever case. The court disregarded arguments of Registrar of Companies (ROC) who had advocated that a court order merely sanctions a transfer under SOA without changing the nature of the scheme and act as mere facilitator in its implementation. Furthermore, it refused to consider the proposed case laws owing to its relation with Bombay Stamp Act which in turn differed from provisions of Indian Stamp Act applicable in West Bengal.
This judgement led to a deviation from the conciliation between TOPA and SOA as established earlier. This, however, was corrected in later judgement of the Calcutta High Court in Maan Concast Pvt. Ltd. v. West Bengal Industrial Development Corporation Ltd. and Ors., wherein the court while recognising the differences in the precedents held that the Madhu Intra judgement would have to be read in the context of Hindustan Lever ruling effectively upholding the arguments of respondent in the former case.
Fresh Insight on Lis Pendens
On 3 May 2024, SC in the case of Chander Bhan (D) through LRS. Sher Singh v. Mukhtiar Singh and Ors., decided upon the applicability of Section 52 in the state of Punjab. Referring to the judgement of Punjab and Haryana High Court, the court noted that though provisions of TOPA are not applicable in Punjab owing to Section 1 of TOPA which bars its application in a few states, doctrine of lis pendens can still be made applicable since the explanation to Section 52 is based on justice, equity and good conscience. Thus, in cases wherein the section cannot be applied in the strict sense, the doctrine can certainly be invoked like in court sale etc.
Analysis
Coming back to the moot question raised in the first part of this post, it can be concluded that Section 52 of TOPA can be invoked on the transfer of immovable properties during amalgamation under SOA. This is substantiated by the fact that provisions of TOPA are applicable in transactions pertaining to such transfers between companies who by nature are juristic persons. This effectively triggers the application of the doctrine of lis pendens in such circumstances.
Arguments against applicability of TOPA majorly stems from Section 232(3) of the Act wherein it has been granted power to the NCLT to sanction the compromise or arrangement proposed in the application made under Section 230 of the Act. As discussed above, it has been argued that this would make SOA, an operation of law which would put it outside the ambit of TOPA by virtue of its Section 2(d). However, this argument falls flat upon analysis of Section 232(3) of the Act, wherein it is evident that the power of sanction has been granted to the tribunal simply to ensure procedural compliance with the provisions of Sections 232(1) and 232(2) of the Act. This is on line of the arguments given by the ROC in Madhu Intra case that the tribunal acts merely as a facilitator in the SOA which, in turn, serves only as an instrument to document the compromise arrived between two or more companies.
Furthermore, with the recent SC judgement, it has been settled that the doctrine of lis pendens will be applicable in situations where the provisions of the TOPA are not applicable because it is founded on principles of equity, justice, and good conscience. The doctrine applies in the state of Punjab despite the bar imposed by Section 1 of TOPA, and on same lines, it would apply to transfers made by operation of law despite the restriction imposed by Section 2(d) of TOPA.
Thus, if in future, TOPA and SOA are found to be incompatible, lis pendens can come to rescue to the parties, effectively establishing the doctrine as a remedy for the parties.
Conclusion
The interplay of SOA and TOPA underscores the application of lis pendens in transactions involving immovable properties during amalgamation. With the Hindustan Lever case, SOA has been affirmed as an agreement between two or more companies which, in turn, are juristic persons. This settled the application of TOPA and resultantly, lis pendens in SOA. Subsequent rulings underscore the evolving understanding of SOA in the context of TOPA, ultimately reaffirming the judgement in the Hindustan Lever case.
The recent SC decision has further clarified that the doctrine applies even where TOPA does not as it is based on principles of equity, justice, and good conscience. Thus, it remains a crucial safeguard during amalgamations which ensures that the transfer of immovable properties is subject to pending litigation, and thereby, protecting rights of the concerned parties.
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