Requirement of Deed of Assignment of lease hold rights ncase of Reverse Merger

[Vaibhav Soni]

Sir,
As per the subject, I wanted to understand that whether execution of a deed of assignment of lease hold rights is necessary when reverse Merger takes place I.e. when a profit making company gets merged with a loss making company and lease hold rights are possessed with the loss making company. For simplicity, suppose if A company,which is a loss making company, is a lessee of a property and another company B which is a profit making company and this profit making company merges with A company by way of scheme of amalgamation approved by High Court, which results into the situation that B company now is merged in A and has lost its existence.

[Dr. Ashok Dhamija]

Please read the Supreme Court judgment in the case of Singer India Ltd. v. Chander Mohan Chadha, (2004) 7 SCC 1 : AIR 2004 SC 4368 : (2004) 122 Comp Cas 468.

It appears that your question is covered in this judgment.     

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Dr. Ashok Dhamija is a New Delhi based Supreme Court Advocate and author of law books. Read more about him by clicking here. List of his Forum Replies. List of his other articles. List of his Quora Answers. List of his YouTube Videos.

[Vaibhav Soni]

Sir the case cited by you was quite enlightening however issue in my question is a little bit different from the situation of the cited case as in the referred by me the lessee company has not gone into merger with other company rather some other company has merged into the lessee company and thereafter as a consequence of a condition of scheme of amalgamation, lessee company has changed its name through registrar of companies into the name of the company merging with the lessee company. Now whether in such a situation whether deed of assignment of lease hold rights is required to f executed or not?

[Dr. Ashok Dhamija]

So, as per your question, we can consider the whole situation in two steps:

(1) Company A is the lessee of a property. Another company B merges with A. This basically implies that the undertaking, property or liabilities of the transferor company (i.e., B) are being transferred to the transferee company (i.e., A). This also implies that the property and liabilities of A are NOT transferred anywhere and remain with A itself (since it is a merger of B into A).

(2) After the said merger, A changes its name to B.

I hope I have understood your question correctly.

In this situation, the lease property was in the name of A and it continued to remain in the name of A itself after merger. There is no transfer of the lease property to any other company. Only issue here is that after the merger, there is a change of name of A to B (after the merger). But, I think mere change of name does not affect the right of that company in respect of a lease property.

So, I think there should be no need for assignment of lease hold rights, since no transfer of that particular lease property has taken place and it continues to be with the transferee in the merger process (both before and after the merger) and there is only a change of name of the company after the process of merger. Since a company is an independent legal person, irrespective of change in its shareholding pattern after the merger, the company A retains its independent legal status, and likewise, a subsequent change of its name should not change its independent legal status. However, it may still be advisable to take the lessor in confidence since at least there is a change of name of the lessee in the whole exercise.     

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Dr. Ashok Dhamija is a New Delhi based Supreme Court Advocate and author of law books. Read more about him by clicking here. List of his Forum Replies. List of his other articles. List of his Quora Answers. List of his YouTube Videos.

[Vaibhav Soni]

Sir this was a masterpiece in making the situation crystal clear and I think there remains no doubt at all as far as the issue of deed of assignment is concerned.
But this explanation has led me a further query to the statement made by you that the lesee company remains same both before and after the merger. My query is regarding the post merger scenario and more specifically it is that whether the share holding pattern post merger would never affect position of the transferee company as a lessee.This query is because you have referred that irrespective of the shareholding pattern the transferee situaiton as lessee is same. In this regard please peruse Civil Appeal No.2 731 of 2005 UP State industrial Dev corpv. Monsanto manufacturers of supreme court which specificall deals with the change of hands of a comapny by change in the shareholding patten of companies post merger.

[Dr. Ashok Dhamija]

See, the general rule is what I have mentioned in my previous reply. A company has its own separate legal status independent of its shareholders. The celebrated case of Salomon v Salomon & Co Ltd., decided by the House of Lords in 1896 established this principle beyond doubt. However, over several decades since that decision, certain exceptional circumstances have been delineated, both by legislatures and the judiciary, when courts can legitimately disregard a company’s separate legal personality, for example, where crime or fraud has been committed. Earlier, certain exceptions to this rule were considered under a legal principle known as “piercing the corporate veil” or “lifting the corporate veil”. But, now, the courts have even started distinguishing between cases of truly “piercing the corporate veil” and situations where it was held that the company was essentially an agent for a wrongdoer or held property on trust.

All said and done, the basic principle of a company having a separate legal status independent of its shareholders still continues, though there are some exceptions to it.

The case of U.P. State Industrial Development Corpn. Ltd. v. Monsanto Manufacturers (P) Ltd., (2015) 12 SCC 501 decided by the Supreme Court may also perhaps be called such an exception coming under the category of “piercing the corporate veil”, but I think more than that this exception is more because of the specific terms of contract between the two parties to the lease agreement.

It was a specific contention of the appellant Corporation that the respondent Company has violated Clause 3(p) of the lease deed dated 5-9-1979 entered into between the said Company and the appellant Corporation inasmuch as its “memorandum of association” and “article of association” were altered without the written consent of lessor i.e. the appellant Corporation.

I am sure you would have seen the provisions of the said contract between the parties, which have been reproduced in the SC judgment. These provisions make the issues very clear.

The relevant extract of the said lease agreement, qua the lessee which is a company, is as under:

“The lessee being a company shall not make or attempt to make any alterations, whatsoever in the provisions of its memorandum and articles of association or in its capital structure without the written consent of the lessor, first had and obtained, and the lessee hereby undertakes to get registered the prescribed particulars of the charge hereunder created with Registrar of Joint Stock Companies under Section 126 of the Companies Act, 1956, within stipulated period.

While granting its consent as aforesaid the lessor may require the successor-in-interest of the lessee to enter into a binding contract with the lessor to abide by and faithfully carry out the terms, conditions, stipulations, provisos and agreements herein contained or such other terms and conditions as the lessor may, in its discretion, impose including the payment by the successor-in-interest such additional premium and/or enhanced rent as the lessor may in its discretion think proper. In the event of breach of this condition the agreement shall be determined at the discretion of the lessor.

Provided that the right to determine this agreement under this clause will not be exercised if the industry at the premises has been financed by the State Government or Industrial Finance Corporation of India or Industrial Credit and Investment Corporation of India, or U.P. Financial Corporation or Pradeshiya Industrial and Investment Corporation of Uttar Pradesh or any scheduled bank (including State Bank of India) and the said financing body or bodies mentioned above decide to take over possession or sell, or lease or assign the mortgaged assets in exercise vesting in it or them by virtue of the deeds or deed executed in its or their favour by the lessee as provided herein above, or under any law for the time being in force.”

Thus, if there was a change as aforementioned, additional payment could be taken and even the lease agreement could be terminated at the discretion of the lessor.

Then, in addition, Clause 6.01(E) of the guidelines issued by the appellant Corporation specifically prescribes transfer levy and Clause 6.01(F) defines transfer, as follows:

“6.01(E) Transfer levy.— per square meter @ 5% to 15% of the rate of premium in fast moving areas and 2.5% to 7.5% of the current premium in slow moving areas prevailing on the date of issuance of transfer approval letter will be charged as applicable. While calculating the transfer levy the locational charges of a particular plot will not be considered and only basic premium will be taken into account.

6.01(F) Transfer.— means disposal of controlling interest in the venture by the existing allottee. In the case of reconstitution, the existing allottee retains controlling interest except in case, where interest is transferred to family members as defined in Clause 6.3(iv)(a) below or where there is change in the constitution of the allottee due to inheritance, succession or operation of law.”

Therefore, it was specifically mentioned in the above guidelines that “disposal of controlling interest in the venture by the existing allottee” will be considered as “transfer”.

Likewise, as observed by the Supreme Court (in para 23 of SCC), Clause 4(h) of the licence agreement prohibits licensee’s acts to directly or indirectly transfer, assign, sale, encumber or part with its interest under the benefit of the said agreement without previous consent in writing of the grantor, relevant portion of which reads as follows:

“4.(h) That the licensee will not directly or indirectly transfer, assign, sell, encumber or part with its interest under or the benefit of this agreement or any part thereof in any manner whatsoever without the previous consent in writing of the grantor and it shall be open to the grantor to refuse such consent or grant the same subject to such conditions as may be laid down by the grantor in that behalf.”

In view of these peculiar facts of the case, the Supreme Court held as under:

“In this case, the ownership of a huge industrial plot measuring 14,533 sq ft in the prestigious and economically affluent area of Sahibabad (Ghaziabad) has been transferred from the Goyal family to the Mehta-Lamba family for material financial gains, by adopting clever means that too without taking written consent of the lessor i.e. the appellant Corporation. There are many instances/examples in which the lessee gets allotment of huge industrial plots and thereafter sells the same for huge monetary gains. This adversely affects the aims and objectives of appellant Corporation i.e. the planned development of industrial areas in the State of Uttar Pradesh. The Hon’ble High Court ought not to have interfered in the matter looking into the public interest involved and Clause 3(p) of the lease deed.”

Therefore, this case has been decided on the peculiar facts of the case, in view of the specific clauses in the lease agreement and also in public interest to ensure that a party to whom a huge industrial plot was allotted, should not get undue advantage by way of a sham transaction by flouting the terms of the agreement.

As pointed out by the Supreme Court, it is quite common nowadays for people who are close to political party in power to get allotment of precious land or other scarce resources (may be, by creating a company) due to the political connections, and then sell the same at huge premium.

You would have noticed that (as quoted in para 21 of SCC), the arguments on behalf of the counsel for the respondent were that as the Company has got separate legal status and the Corporation has allotted the industrial plot to it by name and not in the name of its Directors, the Directors being only officials working on behalf of the Company, mere change of names of the Directors or shareholders does not in any way or manner affect the legality or status of the respondent Company. It was further contended that change of names of the Directors, shareholders duly done within the purview of the Companies Act, 1956, does not affect the legal status of the respondent Company and much less there has been any transfer of the site by the Company to any other individual person. In fact, the High Court had accepted these arguments and had decided the case in favour of the respondent company. But, the Supreme Court went into details of the lease agreement, and rightly so, and exposed sham transaction as an exception to the above general rule.

Therefore, the general rule quoted by me in my previous reply remains intact for general application. However, there may be some exceptions where the terms of the lease agreement have to be seen, or where the principle of “piercing the corporate veil” has to be applied, or where the company was essentially an agent for a wrongdoer or held property on trust, etc.

If your case also comes within one of these (or other few exceptions), then you’ll have to apply your mind to the factual matrix and decide for the proper course of action. In fact, in your case, a loss-making company was the lessee, and a profit-making company merged in it, and then the name of company was changes to that of the profit-making company; all these may become suspicious if the impugned lease was the only or a substantial consideration or motive for such reverse merger or this whole arrangement, in which scenario you may have to look into details where the devil ordinarily lies. What I mentioned in the previous reply is basically for the general application of the law.

     

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Dr. Ashok Dhamija is a New Delhi based Supreme Court Advocate and author of law books. Read more about him by clicking here. List of his Forum Replies. List of his other articles. List of his Quora Answers. List of his YouTube Videos.

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