The proviso to Section 232(3) of the Companies Act, 2013 ("the Act") imposes a condition that is deceptively simple in its text but absolute in its operation: the National Company Law Tribunal ("NCLT") shall not sanction a scheme of amalgamation or demerger unless the company's auditor has filed a certificate stating that the accounting treatment proposed in the scheme is in conformity with the accounting standards prescribed under Section 133. The word "shall" is mandatory, and the NCLT has treated the absence of the certificate as a jurisdictional defect that warrants rejection of the scheme.
The Statutory Text and Its Two Dimensions
The certificate requirement operates on two levels. The first is documentary: the certificate must be filed with the NCLT before the sanction hearing. The second is substantive: the certificate must state that the proposed accounting treatment is in conformity with the applicable accounting standards. An auditor who certifies conformity without examining the scheme's accounting clauses, the appointed date, and the treatment of reserves, goodwill, and capital reserves has not discharged the statutory function.
The NCLT, in Karam Chand Thapar & Bros., rejected a scheme at the threshold because the petitioner had not furnished the auditor's certificate contemplated by the proviso to Section 230(7) and Section 232(3). The Tribunal did not treat the omission as a curable irregularity; it treated the certificate as a condition precedent to the exercise of the sanction jurisdiction.
The Interface with Ind AS 103 and the Appointed Date
The accounting treatment in a scheme is not a matter of free choice. For a business combination that is not under common control, Ind AS 103 requires the acquirer to identify the acquisition date and to recognise and measure the identifiable assets acquired and liabilities assumed at fair value as of that date. The Ministry of Corporate Affairs' General Circular No. 09/2019 clarifies that the appointed date specified in the scheme may be a specific calendar date or a date based on the trigger of a specified event, and that the appointed date is the acquisition date for Ind AS 103 purposes where the scheme so provides.
The auditor's certificate must therefore address the acquisition date, the fair value exercise, the treatment of goodwill or capital reserve, and the accounting for the transferor's accumulated losses. A certificate that states only that "the accounting treatment is in conformity with the accounting standards" without identifying the specific standards and the specific treatment is a certificate that does not meet the statutory purpose.
The Consequences of a Defective Certificate
A certificate that is issued by a person who is not the company's auditor, or that is issued without an examination of the scheme, is not a certificate under Section 232(3). The NCLT has the power to direct the company to file a proper certificate, but it also has the power to reject the scheme where the defect is not cured. The practical consequence is delay, and in a contested scheme, delay can be fatal to the commercial rationale.
The auditor's role under Section 232(3) is not an audit of the scheme's commercial merits. It is a certification of accounting conformity. But the certification has a gatekeeping effect: a scheme that cannot be certified is a scheme that cannot be sanctioned.
Call to Action
Anuj Desai & Associates advises companies and statutory auditors on the Section 232(3) certificate—from the review of the scheme's accounting clauses and the Ind AS 103 acquisition date to the drafting of a certificate that the NCLT will accept. If your scheme is approaching the sanction stage and the accounting treatment is complex, we can help you ensure that the certificate withstands scrutiny.
📧 office@anujdesaiassociates.com
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