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Synopsis

The National Company Law Tribunal has recently ruled that amalgamation of a sole proprietorship firm with a company is not permissible.

“The term ‘Company’ is defined under Section 2(20) of the Companies Act 2013, wherein “Company means a Company incorporated under this Act or any previous company law”. Thus, neither the “Sole Proprietorship Firm” nor “its individual Proprietor” is a “Company” in terms of Section 2(20) of the Companies Act 2013. Hence, the Merger and Amalgamation of a “Sole Proprietorship Firm” and “a Company” is not possible under Section 232 of the Companies Act 2013. Hence, we find that an amalgamation of “a Sole Proprietorship Firm” with “a Company” is not permissible under the law,” the order reads.

The division bench of the Judicial Member Ashok Kumar Bharadwaj and Technical Member LN Gupta was hearing a section 9 petition filed under IBC seeking to initiate CIRP against the corporate debtor.

The applicant was the sole distributor of the Corporate Debtor for an exclusive area, as reflected in the Distributorship Agreement, which was renewed from time to time.

After the Corporate Debtor discontinued the supply of goods, the creditor claimed a debt of Rs. 7,33,64,097.88 in the form of unsold stock, stock interest, warehouse charges, bad debt, and compensation/damages for the loss incurred due to the breach of the distributorship agreement

The creditor, who was a sole proprietor, amalgamated with a company and transferred the operational debt, in which the sole proprietor was a shareholder.

The NCLT, after referring to the provisions of amalgamation under the Companies Act 2013, noted that for an amalgamation, the entities should be companies and not sole proprietorships

“..the entities involved in the Amalgamation Scheme under Section 230-232 of the Companies Act 2013 have to be necessarily “Companies” as defined under Section 2(20) of the Companies Act 2013. In the instant case, the applicant has merged its “proprietorship firm” with a “company” in disregard to and without resorting to the provisions of Section 230-232 of the Companies Act 2013,” the order reads.

The NCLT also dismissed the claims of operational debts by the creditor while observing that the application was misconceived.

Adv. Jojo Jose & Adv. Sunitha John, Adv. Anitta & Adona LLP appeared for the applicant.

Adv. D. Bhattacharya, Adv. Deeti Ojha appeared for the respondent. 

Case title: Ms SVS Marketing Sanitaryware Private Limited vs Ms Kajaria Bathware Private Limited