‘Demerger’ only defined under Income Tax Act, 1961:
The term demerger is a reorganization plan in which a standalone company is separated into two or more organizations, each of which is legally registered as a separate corporate entity and operates independently.
The term demerger is not defined under the Companies Act of 2013 (“Act”), however Sub-Section (19AA) of Section 2 of the Income Tax Act, 1961 lays down the definition of demerger. Before ascertaining the concept of demergers under the provisions of the Act, it’s important to assess the whether the definition of ‘demerger’ provided under Sub-Section (19AA) of Section 2 of the Income Tax Act, 1961 would have applicability in matters related to the Act.
In the matter of Renuka Datla v. Dupahar Interfran Ltd [(2002) 1 Comp LJ 318], the Hon’ble Bombay High Court recognized the official acknowledgment of the term of demerger in Indian law by its inclusion in the Income Tax Act, 1961. The Hon’ble Court held that:
“Though this is a special definition contained in the provisions of the Income Tax Act and is not of universal application, it gives an indication of the general concept of demerger which has been noticed and formally introduced into the Income Tax Act”.
In terms of the above, the meaning of the term ‘demerger’ can be determined from Sub-Section (19AA) of Section 2 of the Income Tax Act, 1961.
Concepts of Demerger and Merger of companies under the Companies Act, 2013 not distinguished:
Chapter XV of the Act prescribes the provisions in relation to compromise, arrangements and amalgamation Section 232 of the Act in relation of merger and amalgamation of companies states as follows:
“232. Merger and amalgamation of companies:
(1) Where an application is made to the Tribunal under section 230 for the sanctioning of a compromise or an arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Tribunal—
(a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of the company or companies involving merger or the amalgamation of any two or more companies; and
(b) that under the scheme, the whole or any part of the undertaking, property or liabilities of any company (hereinafter referred to as the transferor company) is required to be transferred to another company (hereinafter referred to as the transferee company), or is proposed to be divided among and transferred to two or more companies”
The permissible transfer of part of the undertaking i.e. division or transfer of a company in terms of Sub-Clause (b) of Sub-Section (1) of Section 232 of the Act falls under the realm of the term demerger and not merger and amalgamation. It is a well settled principle of interpretation of statutes that headings are like a preamble which helps as a key to the mind of legislature but do not control the substantive section of the enactment.
Clearly, notwithstanding that the headings speak of mergers and amalgamations, the provisions of Section 232 of the Act contemplate all kinds of scheme for the reconstruction of the company or companies involving merger or the amalgamation of any two or more companies which would include within its fold a scheme of demerger involving transfer of any part of the undertaking and therefore the provisions of Section 232 of the Act would extend to mergers and other reorganizations such as demergers and the extent of Section 232 of the Act would not be restricted to only mergers merely because the heading does not speak of demerger or other reorganization of companies.
In the matter of Frick India Ltd. v. Union of India, AIR 1990 SC 689, the Supreme Court of India has expressed as follows:
“It is well-settled that the headings prefixed to sections or entries cannot control the plain words of the provision; they cannot also be referred to for the purpose of construing the provision when the words used in the provision are clear and unambiguous; nor can they be used for cutting down the plain meaning of the words in the provision. Only, in the case of ambiguity or doubt the heading or sub-heading may be referred to as an aid in construing the provision but even in such a case it could not be used for cutting down the wide application of the clear words used in the provision.”
Fast Track provisions apply to “merger” and “demerger” both:
Section 233 of the Act prescribes the provisions for sanctioning of a scheme of merger or amalgamation entered into between (i) two or more small companies; or (ii) between a holding company and its wholly owned subsidiary company; or (iii) such other class or classes of companies by only obtaining the approval only from the Central Government, Registrar of Companies and the Official Liquidator. There is no requirement for obtaining the approval of the Tribunal i.e. National Company Law Tribunal under Section 233 of the Act.
The question arises whether these provisions will be relevant for the purposes of demergers as well.
Sub-Section (12) of Section 233 of the Act provides for extending the application of the provisions of the said Section 233 of the Act in relation to division or transfer of a company referred to in Sub-Clause (b) of Sub-Section (1) of Section 232. As stated above, notwithstanding the heading of Section 232 of the Act, the provisions thereof extend to a scheme for the reconstruction of the company or companies involving merger or the amalgamation of any two or more companies including a scheme of demerger.
Therefore, by virtue of Sun-Section (12) of Section 233 of the Act have been extended not only to a scheme of merger but to every other scheme of compromise or arrangement under the Act including a demerger and even demergers can be processed under the fast track provisions of Section 233 of the Act.