LI Network
Published on: December 19, 2023 at 12:05 IST
The National Company Law Tribunal (NCLT), Delhi Bench, comprising Shri Ashok Kumar Bhardwaj (Judicial Member) and Shri L.N. Gupta (Technical Member), has rejected an application, declaring that the amalgamation of a “Sole Proprietorship Firm” with a “Company” is not legally permissible.
Background:
The case involves M/s. Kajaria Bathware Private Limited, a company incorporated under the Companies Act, 1956. A distribution agreement was executed between SVS Marketing, a Sole Proprietorship Firm, and the Corporate Debtor.
The agreement restricted the transfer or assignment of parts of the agreement by Mr. Shibu M, the proprietor of SVS Marketing. Mr. Shibu M was also a shareholder/member in another company, M/s SVS Marketing Sanitaryware Pvt. Ltd.
Subsequently, an Amalgamation Agreement was entered into between the Proprietorship Firm and the Applicant, where the Proprietorship Firm assigned its actionable claims to the Applicant, a Private Limited Company. The Applicant was then allowed to pursue debt on behalf of the Proprietorship Firm.
The Respondent, failing to make payments, received a demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 (IBC), followed by an application under Section 9 for the initiation of Corporate Insolvency Resolution Process (CIRP).
Issue:
The central question was whether the amalgamation between a Sole Proprietorship Firm (M/s SVS Marketing) and a Company (M/s SVS Marketing Sanitaryware Pvt. Ltd) is valid under the law.
Arguments:
The Applicant contended that the agreement only prohibited the transfer of “obligation” and not the transfer of the business or the assigning of actionable claims. They argued that since the promoter of both entities was the same, and only “actionable claims” were transferred, the amalgamation was valid.
The Respondent countered, stating that the transfer between the Proprietorship and the Company was illegal, citing the Distributorship Agreement’s prohibition on transfer or assignment without written consent.
NCLT Verdict:
The NCLT, referring to Section 2(20) of the Companies Act 2013, clarified that for amalgamation under Sections 230-232 of the Companies Act, the entities involved must be “Companies” as defined under Section 2(20) of the Companies Act.
The Court concluded that neither a “Sole Proprietorship Firm” nor its individual proprietor qualifies as a “Company” under Section 2(20), making the amalgamation of a “Sole Proprietorship Firm” and a “Company” impossible under Section 232 of the Companies Act.
As a result, the NCLT dismissed the application.
Case Title: M/s SVS Marketing Sanitaryware Private Limited vs M/s Kajaria Bathware Private Limited