The scheme provisions of the Companies Act, 2013 ("the Act") are drafted with companies in mind. Section 232(1)(a) refers to the transferor and transferee companies, and the NCLT has held that a sole proprietorship firm and a company cannot amalgamate under Section 232 because neither a sole proprietorship nor its proprietor is a company within the meaning of Section 2(20). The same reasoning applies to a partnership firm, an LLP, and, with the exception of the cross-border route under Section 234, a foreign body corporate.
The Statutory Text and the NCLT's Interpretation
The NCLT's rejection of a sole proprietorship amalgamation is not a matter of judicial creativity. It is a reading of the statutory text. Section 232(1)(a) contemplates an amalgamation of two or more companies, and a non-company entity is not a company. The Tribunal has no jurisdiction to sanction a scheme that does not have a company as the transferor.
The position was different under the Companies Act, 1956, where the corresponding provisions permitted a body corporate to be a transferor in certain circumstances. The 2013 Act narrowed the scope, and the NCLT has applied the narrower text.
The Available Routes
A non-company entity that wishes to combine with a company has three options. The first is the Section 366 conversion route: the entity registers as a company, and the company then merges with the target company under Sections 230 to 232. The second is an asset transfer: the entity sells its business to the company, and the entity is subsequently wound up or struck off. The third is a slump sale, which transfers the undertaking as a going concern without a scheme.
The Section 366 route is the most structurally clean, because it preserves the continuity of the entity and avoids the need for a separate liquidation. But it is available only for entities that are formed under an Act other than the Companies Act, and it requires the consent of the members and compliance with the conversion rules.
The Policy Gap
The legal gap is a policy question. The NCLT's jurisdiction is limited by the statute, and the Tribunal cannot create a merger route that the legislature has not enacted. A company that is advised to attempt a non-company amalgamation under Section 232 is being advised to litigate a jurisdictional question that the NCLT has already answered adversely.
The practical lesson is that the structuring of a combination involving a non-company entity must begin with the question of the transferor's legal form, not with the commercial rationale. The form determines the route.
Call to Action
Anuj Desai & Associates advises companies and non-company entities on the structuring of combinations—from the Section 366 conversion route and the asset transfer mechanics to the slump sale alternative and the tax consequences. If you are planning a combination involving a non-company entity, we can help you identify the lawful route.
📧 office@anujdesaiassociates.com
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🌐 https://anujdesaiassociates.com
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