NCLT Delhi: Amalgamation Of “Sole Proprietorship Firm” With “Company” Is Not Permissible Under Law.

Background Facts

M/s. Kajaria Bathware Private Limited (“Respondent/Corporate Debtor”) is a Company incorporated on 22.05.2013 under Companies Act, 1956.

A distribution agreement was executed between SVS Marketing (“Proprietorship Firm”), a Sole Proprietorship Firm through Mr. Shibu M and the Corporate Debtor. By the terms of the agreement, Mr. Shibu was prohibited from transferring or assigning part of the agreement to others. Mr. Shibu M was also a shareholder/member in another company i.e., M/s SVS Marketing Sanitaryware Pvt. Ltd. (“Applicant'/ 'Operational Creditor”).

An Amalgamation Agreement was entered between Proprietorship Firm and the Applicant. The Proprietorship Firm assigned its actionable claims to a Private Limited Company i.e., the Applicant. The Applicant was thereby allowed to pursue debt on the behalf of the Proprietorship Firm.

Following this, the Respondent defaulted in payment of Rs.7.33 Crores to the Proprietorship Firm.

On 13.12.2022, the Applicant sent a demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to the Respondent. Failing which, an application under Section 9 IBC was filed for initiation of Corporate Insolvency Resolution Process (“CIRP”).

Issue

Whether the amalgamation between a Sole Proprietorship Firm (i.e., M/s SVS Marketing) and a Company (i.e., M/s SVS Marketing Sanitaryware Pvt. Ltd) is valid in the eyes of the law?

Contentions of Applicant

The Applicant argued that the Agreement never prohibited transfer of business or the assigning of actionable claims. It only prohibited the transfer of “obligation”.

The Applicant further argued that the claims of the proprietorship was transferred to the Applicant as the promoter of both were same. Moreover, only the “actionable claims” was transferred.

The Applicant referred to “M/s Consolidated Construction Consortium Limited Vs. M/s Hitro Energy Solutions Private Limited”, the Supreme Court while defining the term "operational debt" has held that claim would include good or services both supplied to and received from the Corporate Debtor.

Contentions of Respondent

The Respondent opposed the submissions of the Applicant and said that the transfer between the Proprietorship and the Company is illegal and the same is not allowed by law.

The Respondent pointed out that the Distributorship Agreement itself prohibited Mr Shibu M from transferring or assigning services without prior written consent under Clause 8(iii) of the Agreement.

The Respondent further argued that they had no obligation to purchase the unsold inventory. The relationship between the Applicant and Respondent was solely that of the seller and a purchaser on a principal-to-principal basis. The claims of the Applicant, therefore, at best are claims for specific performance.

NCLT Verdict

NCLT referred to Section 2(20) of the Companies Act 2013 (“Companies Act”) observing that, “company means a company incorporated under this Act or any previous company law”. The Bench pointed out that for the purpose of Amalgamation under Section 230-232 of Companies Act, the entities must necessarily be “Companies” as defined under Section 2(20) of the Companies Act.

“However, as regards “Merger or Amalgamation” under Section 232 of the Companies Act 2013, the parties that are eligible to seek Merger or Amalgamation can file an application before NCLT, but this does not mean that the Amalgamation can take place between “a Proprietorship Firm” and “a Company” as the Section 232 (a) of the Companies Act 2013 specifically deals with the Merger and Amalgamation of two or more companies only.”

The Court, therefore, concluded that neither a “Sole Proprietorship Firm” nor “its individual Proprietor” is a “Company” in terms of Section 2(20) of the Companies Act. Hence, the Merger and Amalgamation of a “Sole Proprietorship Firm” and “Company” is not possible under Section 232 of the Companies Act.

NCLT dismissed the application.

Case Title: M/s SVS Marketing Sanitaryware Private Limited vs M/s Kajaria Bathware Private Limited

Case No.: Company Petition No. (IB)-322(ND)2023

Counsel For the Applicant: Adv. Jojo Jose & Adv. Sunitha John, Adv. Anitta & Adona LLP

Counsel For the Respondent: Adv. D. Bhattacharya, Adv. Deeti Ojha

Click Here To Read/Download Order