Scheme of Merger Approved – Despite Objections from Regional Director 

Medlife Wellness Retail Private Limited (“Petitioner Company 1/Transferor Company 1) and Metarain Distributors Private Limited (“Petitioner Company 2/Transferor Company 2) filed scheme of amalgamation with Threpsi Solutions Private Limited (“Non-Petitioner Company/ Transferee Company”) before the Hon’ble National Company Law Tribunal (NCLT) Bengaluru (Bangalore) Bench.

Facts of the case: –

1. As per the Scheme, the “Appointed Date” means 22^nd January 2021, or such other date as may be fixed by the NCLT for the purpose of this Scheme;
2. For consideration part, the petitioner companies had obtained the Share Exchange Report;
3. The Regional Director and Registrar of Companies filed their common report with respect to observations to this scheme.

Observations of the Regional Director and Registrar of Companies:

1. The Appointed Date as per scheme is 22.01.2021. The significance of this odd, appointed date is to be mentioned by the Petitioner Companies. Further, Hon’ble Tribunal may be pleased to direct the petitioner Companies to change the appointed date from 22.01.2021 to 1.04.2021 or 1.04.2022 as the financial statements for the year ending 31.03.2021 may not be correct as they might be taking up to 21.01.2021, which is an odd date.
2. Both Transferor Co. 1 and Transferor Co. 2 are loss making companies and net worth of the companies have been eroded.
3. As per clause 11.1 of the scheme, the Transferee Company shall allot 3,03,112 equity shares of Rs.10 each for 2,424 equity shares of Rs.100 each to the shareholders of Transferor Co. 1 and 2,28,546 equity shares of Rs. 10 each for 1,21,25,083 equity shares of Re. 1 each to the shareholders of the Transferor Co. 2. First of all, both Transferor Companies are loss making companies and there is no rationale for issuing shares worth of Rs.30.31 lakhs for shares held with a value of Rs.2.42 lakhs in the case of Transferor Co. 1.

Provisions for appointed date as per MCA Circular No. 09/2019 dated 21.08.2019.

“Where the ‘Appointed Date’ is chosen as a specific calendar date, it may precede the date of filing of the Application for scheme of merger/amalgamation in NCLT. However, if the ‘Appointed Date’ is significantly ante-dated beyond a year from the date of filing, the justification for the same would have to be specifically brought out in the scheme and it should not be against public interest.”

Response of Petitioner companies to the queries raised by the Regional Director and Registrar of Companies:

i. Appointed Date: – The MCA Circular clearly permits the Petitioner Companies to have an Appointed Date that precedes the date of filing of the Application. The Company Application under Section 230 of the Companies Act, 2013 was filed on 27.08.2021. Accordingly, the Appointed Date of 22.01.2021 is not significantly ante-dated beyond a year from the date of filing of the Application. The Petitioners reiterate that the MCA Circular and the provisions of Section 232 (6) of the Companies Act, 2013 are duly complied and thereby this Hon’ble Tribunal may sanction the Scheme of Amalgamation with 22.01.2021 as the Appointed Date.

Further, the primary rationale for the Appointed Date being 22.01.2021 is that the Holding Company (viz. API Holdings Limited) of the Transferee Company had acquired majority stake in the Medlife International Private Limited (being the holding company of Petitioner Company 1 and Petitioner Company 2) on 22.01.2021.

Given that this date holds relevance from a group consolidation perspective, the management of the Petitioner Companies and the Transferee Company thought it may be fit to consider 22.01.2021 as the Appointed Date for the merger Scheme under consideration so as to merge the Medlife group entities into the Transferee Company from the date of their acquisition itself.

ii. Issue of shares as consideration of the scheme: – Consideration provided at clause 11.1 of the Scheme has been determined based on the valuation report sought from registered valuer. The said valuation report provides for the value per equity share of Transferor Companies and Transferee Company based on the discounted cash flows of each entity (i.e., based on the future projections of the entity).

A Swap Ratio (Certificate) was obtained to determine the share entitlement ratio for Transferor Company 1, and Transferor Company 2.

Considering the above, the negative net worth of the Transferor Companies was not a relevant factor for determining the consideration payable on the merger since the future cash flow projections of the entity were relevant for the purposes of determining the entity’s value.

Decision of Hon’ble NCLT: –

The Objections/observations to the Scheme received from RD, ROC have been adequately replied by the petitioner companies and hence there is no impediment in approval of the Scheme.

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