Merger and Acquisitions Services
| July 16
The confusion between appointed date and effective date in scheme of Amalgamation
In any scheme of merger and amalgamations, these two concepts play
a very crucial role. “Appointed date” is the date which is determined by the
Board of Directors of the concerned company or is directed by the High Court.
It is the date on which it deems the scheme to be operative after sanction of
the same by the High Court. Whereas, the “Effective Date” is a date which the
concerned companies mutually agree. They mutually agree on a date on the last
of the dates or post the last of the dates on which all the conditions and
matters such as approvals from High Court and regulatory authority and a copy
of High Court order being filed with the respective Registrar of
The effective date denotes the date when the scheme was/is sanctioned
by the NCLT or relevant authority under the 1956 Companies Act. Also included
the filing of relevant documents of the scheme with the Registrar of Companies.
As per Section 232(6) of the Companies Act, 2013 which allowed the companies,
party to such a scheme to choose an appointed date which was confused with an
event-based date, the ‘effective date’ prevalent in other schemes of similar
However, an irony persisted as the ‘appointed date’ of the scheme
could be a retrospective date on which the parties agreed to the scheme
post-adjudication by relevant authorities.
The language of the section brewed confusion between directors and
NCLT, as in marking objections if the appointed date did not specify a
particular date on a calendar year. Betwixt such confusion there were several
polarising views taken by courts in India. First, the Supreme court in 1996 in
the case of Marshall & Sons v ITO [233 ITR 890], it opined
that it was necessary to provide a date from which such a scheme shall be
operative, and such date may precede the date of sanctioning of the scheme by
the court and filings of necessary documents with RoC. The effect of such a
scheme was to be shown from the transfer date itself (appointed date).
In Equitas Finance Limited v. CIT (2016), Madras High
Court provided flexibility to the companies in delaying the effect of such
schemes by tying it to an event and its happening. In toto, the high court did
not accept that it shall specify the appointed date within a calendar. This
confusion reached its brim in the Pipeline case before NCLT Mumbai, where it
stated that the appointed date shall be the date in which the valuation of the
demerged business occurred (1 July 2018). NCLT Mumbai sanctioned the plan in
December 2018, hence making the appointed date precede the sanctioned date.
Following this weak precedent, several other schemes had their appointed dates
either ahead or behind the sanctioned date, and parties faced backlash by the
court and were told that fixing of such dates among themselves was arbitrary
and lacked justifications.
In the wake of these ongoing confusions MCA in its General
Circular 9/2019 clarifies this confusion, the confusion was settled via
pointers which cleared the air in the following terms:
1. The appointed date can be a date specified on a calendar or it may
also be tied to the occurrence of a certain event. E.g. Grant of Licenses,
Transfer of assets, etc.
2. If the appointed date is specifically mentioned it may precede the
date of sanction of such a scheme by the Court/NCLT. In case the appointed date
precedes the filing date before NCLT, for over a year, proper and reasonable
justification is to be provided.
3. If the Appointed date is based on an event, such an event shall be
specified within the scheme pending approval by NCLT, And if such date is after
the filing of the order with the RoC, intimation shall be given 30 days prior
to it coming into force.
4. The appointed date shall be the date of transfer of control to
conform to Indian accounting standards, tax considerations, etc.
Although the circular brought an air of respite for companies
looking to merge, it also carries plenty of implications within. As there
cannot be different appointed dates within a single scheme of M&A, now
contracting companies shall be more careful in fixing a mutually workable date
and need to weed out risks and potential blockades under various laws. E.g.
Competition Act, Income Tax Act, etc.
Also, flexibility in having appointed date as an event-based date,
it means the scheme will now only be effective post the acceptance and sanction
of plans by NCLT, filings with RoC. Hence, the operations and profits generated
with the interim period between these two dates shall be because of the
transferee company. In spite of knowing that the transferor company is carrying
out business on behalf of the transferee in the interim period. As there would
be no profits attributable to the transferor, the BoD of such a company may shy
away from declaring dividends on shares during the interim period. There are
also tax and accounting liabilities that would be incurred by the transferee
company which could nullify the scheme of the arrangement entered on various
These implications would need a fresh set of eyes to be looked
upon and inspected with great care and caution. However, the MCA circular
clarifying the same and providing flexibility to the companies to make the
appointed date a specific date or an event-based date is surely appreciated.