A sanctioned demerger cannot be recalled after implementation to avoid statutory liability.

In brief

The question

Whether the court should recall its order sanctioning the demerger scheme after the scheme had been implemented and resulting entities had been formed, including two entities that later converted into LLPs.

The court held

The court held that the applicants had not established grounds for recall of the demerger order, particularly because the scheme had been implemented and the applications sought to avoid a statutory liability.

It also directed

It dismissed COMP.A. Nos. 235 to 238 of 2024, with no order as to costs.

01Facts

Bharani Pictures Pvt. Ltd. obtained an order sanctioning a demerger scheme in 2015, under which three resulting entities were formed.

pp. 4–7, 10

The scheme was implemented, and two resulting companies later converted into limited liability partnerships.

pp. 4–7, 10

Following Tamil Nadu Government Orders introducing stamp duty and registration charges in connection with schemes of arrangement, the applicants sought recall of the sanction order, asserting that the resulting liability made the scheme commercially unviable.

pp. 4–7, 10

The Regional Director and Registrar of Companies opposed recall, noting that the scheme had been implemented and that the application sought to avoid statutory dues.

pp. 4–7, 10

02Issues

i.Whether the court should recall its order sanctioning the demerger scheme after the scheme had been implemented and resulting entities had been formed, including two entities that later converted into LLPs.

pp. 6–8, 10–11

ii.Whether recall should be granted where the stated reason was to avoid stamp duty and registration liabilities introduced by subsequent changes in law.

pp. 4–5, 7, 12–13

03Law Applied

The court considered the Companies Act framework under which the demerger scheme had been sanctioned, and the Limited Liability Partnership Act, 2008, which governed the two resulting entities after their conversion into LLPs.

pp. 4–7, 11–13

It also considered the Tamil Nadu Government Orders introducing stamp duty and registration charges for schemes of arrangement.

pp. 4–7, 11–13

The court recognised the existence of an inherent power to recall an order, referring to a Division Bench decision in O.S.A. Nos. 152 and 153 of 1996, but held that the decision was distinguishable on its facts.

pp. 4–7, 11–13

It further stated that a scheme need not be accepted where illegality or fraud is involved, and that the court should not permit its process to be used to circumvent statutory liability.

pp. 4–7, 11–13

04Reasoning

The court found that the demerger had been fully implemented: the resulting companies had been registered, and two had subsequently converted into LLPs.

pp. 8–9, 11–13

It distinguished the Division Bench decision because, in that case, the amalgamation had not been given effect and the respondents had conceded that recall would cause no prejudice or affect public interest.

pp. 8–9, 11–13

Here, the applicants sought recall after benefiting from the scheme, and the court considered the application to be motivated by the later statutory charges.

pp. 8–9, 11–13

Allowing recall in those circumstances would facilitate avoidance of a statutory liability and make the court a party to that result.

pp. 8–9, 11–13