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31 May 2016

Amalgamation – Distinction between an instrument and instrument amounting to conveyance

In its recent judgment in Chief Controlling Revenue Authority v. Reliance Industries Ltd., Bombay High Court has taken the view that stamp duty is payable on a High Court (‘HC’) order sanctioning a scheme of merger/reconstruction (‘scheme’), as an instrument of ‘conveyance’. The bench of three judges of the Court came to the conclusion that it is the order of the High Court under Section 391-394 that constitutes an instrument as it results in the merger and vesting of properties inter se the merging parties. In addition to the above, the Bombay High Court has further taken the position that where a scheme of amalgamation requires sanction from multiple High Courts in India, (due to the registered offices of the merging companies being in different states), every order of the High Courts concerned sanctioning the same scheme would amount to a separate instrument for the purposes of the levy of stamp duty. In taking this view, the High Court rejected the contention that the scheme of amalgamation was itself the instrument.

 

Difficulties in the position that each order of each High Court is a separate instrument

There are certain obvious difficulties in the position taken by the Larger Bench of the Bombay High Court. The most prominent of them being the stamp duty outcome of a situation wherein the same scheme of amalgamation stands sanctioned by one High Court and rejected by another. The recent contest of the Indian Income Tax department against one such scheme pertaining to M/s Vodafone Ltd. in the Gujarat High Court is an example of the same. The High Courts of Bombay, Delhi, Calcutta and Madras had approved the scheme of merger between several telecom companies owned and controlled by the Vodafone group. However, a single judge of the Gujarat High Court had decided not to sanction the said scheme based on certain contentions of the Income Tax department. While this order was reversed in appeal, this is clearly a situation wherein four High Court orders sanctioned the particular scheme and one High Court order rejected the same.

In such a situation, as per the provisions of the Companies Act, and generally from express clauses in the scheme itself, the scheme of merger would not stand approved, on account of lack of approval of all the High Courts concerned. It would be difficult to imagine that in such infructuous mergers, the orders of the High Courts that sanctioned/approved the scheme would still amount to ‘instruments’ resulting in ‘conveyance’ of any property. While any such order of the High Court under Sections 391-394 could possibly still amount to an instrument, it would certainly not automatically amount to a ‘conveyance’.  

Section 2(14) of the Indian Stamp Act, 1899, inclusively defines an ‘instrument’ to mean every document by which any right or liability is, or purports to be, created, transferred, limited, extended extinguished or recorded. This is an extremely wide definition and would include High Court orders that sanction/approve schemes of amalgamation, even where another High Court rejects the same scheme. It is possible to argue that such orders would amount to ‘a document by which rights and liabilities are purported to be created.’

However, ‘conveyance’ is separately defined under Section 2(10) of the Act, as including every instrument by which property, whether movable or immovable is transferred inter vivos and which is not otherwise specifically provided for in Schedule I.  ‘Conveyance’ is similarly defined under Section 2(g) of the Bombay Stamps Act, 1958 to include all instruments and particularly every High Court order made under Section 394 of the Companies Act, 1956 by which transfer or vesting of property takes place. Therefore, while an order of the High Court may itself amount to an ‘instrument’, it can only amount to an instrument in the nature of ‘conveyance’ if the said order is capable of transferring or vesting properties inter se the merging parties.

 

Distinction between an ‘instrument’ and ‘an instrument of conveyance’

The relevance of the distinction between an ‘instrument’ and ‘an instrument of conveyance’ lies in the fact that ad valorem stamp duty (i.e. on the value of the transaction) is payable only on the latter. Practically, in an ineffective merger due to contrary views taken by two different High Courts, the transaction is ineffective. However, to the extent that one High Court has accorded sanction to such an ineffective merger, an instrument comes into existence. Such instrument will however not be of the nature that results in the vesting of properties since the merger as a whole will be ineffective.

Contra distinctly, where there is an approval of two High Courts and the merger is effected, there will be two instruments that would have collectively resulted in the vesting of properties. The question put before the Bombay High Court was to be answered in a manner so as to identify which of the High Court orders would amount to an ‘instrument’ and which would amount to an ‘instrument of conveyance’. The High Court has indirectly answered this question while also providing some scope for a contracting party to attempt mitigating the payment of stamp duty. The High Court held as follows:

“…the order of this court sanctioning the Scheme was not a conditional order, which was to operate after the scheme was also sanctioned by the Hon'ble Gujarat High Court. By this Order dated 7.6.2002 of this Court itself, it could be considered that the transfer was effected and therefore the said Order of this Court is the 'order made by the High Court under Section 394 of the Companies Act 1956..............’ as contemplated by Section 2(g) (iv) of the said Act.

For the same reason the order dated 7.6.2002 of this Court is the 'instrument', as contemplated by the provisions of the said Act…

Thus, the implementation of the order of this court was not made dependent upon passing of an appropriate order sanctioning the Scheme by the Hon'ble Gujarat High Court. This is the step contemplated by the provisions of sub-section 3 of section 394 of the Companies Act.”

Therefore, the High Court fell back on the fact that the single judge of the Court had not made its order conditional. Indirectly, the Court stated that the order of approval of the Bombay High Court itself resulted in a transfer or vesting of properties, as far as the petitioners to that order were concerned. Since the Gujarat High Court had also sanctioned the scheme, and none of the two orders were conditional, it leads to the peculiar position that both High Court orders independently resulted in a transfer or vesting of properties. This is despite the fact that the order of the Gujarat High Court was made or executed after the order of the Bombay High Court.

Section 394 being within the domain of company law, the question has never arisen as to which of the High Court orders sanctioning a scheme have a greater legal effect vis a vis the other, as long as all High Courts sanctioned the same. Therefore, it has been held that both High Court orders are instruments in the nature of conveyance. The High Court accordingly laid considerable emphasis on the fact that the order of the High Court was not conditional to that of another. This would be one arguable method of determining which of the two or more orders would take precedence as being the more complete instrument of conveyance.

It is not uncommon to notice many High Court orders sanctioning a scheme of amalgamation expressly made conditional to the sanction to be obtained from another High Court. For example see Delhi High Court Order dated 23-12-15 in CP No. 430/2015 – LMS India Engineering; Gujarat High Court Order dated 2-7-2015 in CP No.112/2015 – Tanti Holdings Pvt. Ltd.; Karnataka High Court Order dated 9-1-2013 in CP No. 175/2012 – Ingersoll Rand Industrial Products Pvt. Ltd.; Madras High Court Order dated 27-4-11 in CP No. 54/2011 – Claro India Ltd.

In such a case, the order and accordingly the instrument would be conditional. The final or the last of the orders of the relevant High Courts concerned would therefore become the instrument of conveyance by which the vesting of properties took place. The slight flaw in the above approach is that the nature of the direction made by the Single judge of the High Court would determine the amount of stamp duty leviable on an instrument of merger. However, there is some theoretical support for the same. Since the Bombay High Court has implied that the High Court is the executing party to an instrument of merger, it could theoretically be imagined that the Single Judge of the High Court is also postulating a term or stipulation of the instrument of merger and therefore making a material condition in the instrument itself. Accordingly, the Single Judge can be theoretically seen to be making the instrument conditional and consequently, that expression will decide whether or not the instrument is one of conveyance.

However, on a practical note it is impossible to predict as to whether or not a judge will make such a condition in an order under Section 391, as there appears to be no uniformity of practice on the same. Obviously, the regular approach of changing the registered offices of all the merging entities to one state, will bypass the entire controversy. This is of course subject to the application of the unfortunate legal principle of ‘looking through the instrument’ as done by the Supreme Court in Chief Controlling Revenue Authority v. Coastal Gujarat, wherein the Supreme Court determined the amount of stamp duty payable based on what the instrument should have or could have been, and not simply on the basis of the instrument before the court.

While there are many obvious flaws in the above approach, the same may be used advantageously by parties in leading to the following conclusions:

  • That in a case of ineffective mergers, no stamp duty will be payable on any of the sanctioned/approved High Court orders as ‘instruments of conveyance’.
  • That stamp duty will be payable only on one of the High Court orders as an ‘instrument of conveyance’ by seeking a request to record a direction in all other HC orders that the latter are expressly made conditional to the orders of  one High Court. 
  • In the extreme fortuitous situation where one High Court order is conditional to the order of a High Court where stamp duties on mergers is exempt or not at ad valorem basis (for ex: Delhi), no ad valorem stamp duty will be payable anywhere.

[The author is an Advocate, Lakshmikumaran and Sridharan, Mumbai]

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