SMS Enterprises Private Limited (Operational Creditor) has filed the present petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 with a prayer to initiate the CIRP against Kaj Tiles Private Limited (Here

CS Professional · Insolvency - Law and Practice · PYQS · December 2024
SMS Enterprises Private Limited (Operational Creditor) has filed the present petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 with a prayer to initiate the CIRP against Kaj Tiles Private Limited (Hereinafter referred as 'Kaj Tiles'). The Applicant Operational Creditor has claimed the alleged debt on account of the accumulated stocks due to discontinuance/prevention of the supply of goods to the dealers of the Operational Creditor, which it had been doing pursuant to the Distributorship Agreement executed between the Kaj Tiles and SMS Enterprises (through its proprietor Mittu). As per Kaj Tiles, the said Distributorship Agreement clearly prohibited Mittu (SMS Enterprises) from transferring or assigning the same or any part thereof without the prior written consent in terms one of the clauses of the Distributorship Agreement. The Applicant Operational Creditor, in its rejoinder has admitted that the proprietorship was transferred into a Private Limited Company by virtue of an "Amalgamation Agreement" entered between M/s SMS Enterprises (Proprietorship Concern) and M/s SMS Enterprises Private Limited and the aforesaid Distributorship Agreement never prohibited the transfer of business or assigning of actionable claims. The Petitioner Operational Creditor being a Company is pursuing debt on behalf of the proprietorship firm. In the light of the above case study inputs, answer the following questions: Whether "Amalgamation Agreement" entered between M/s SMS Enterprises (Proprietorship Concern) and M/s SMS Enterprises Private Limited is tenable and valid as per the applicable law?

Answer & Explanation:

Since the Sole Proprietorship Firm has no separate legal entity of its own, and it is known only through its Proprietor who is a member/shareholder in the Applicant Company (SMS Enterprises), the provision of Section 230 of the Companies Act 2013 can be resorted to by Mr. Mittu and the SMS Enterprises Pvt. Ltd., for the purpose of "Compromise and Arrangement" by filing an appropriate Petition before NCLT by following the due procedure prescribed by law. However, as regards "Merger or Amalgamation" under Section 232 of the Companies Act 2013, the parties that are eligible to seek Merger or Amalgamation can file an application before NCLT, but this does not mean that the Amalgamation can take place between "a Proprietorship Firm" and "a Company" as Section 232(a) of the Companies Act 2013 specifically deals with the Merger and Amalgamation of two or more companies only. 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 Company" is not permissible under the law. As per the above decision 'Amalgamation Agreement' entered in the give case is not tenable in the eyes of law.

Topics: Corporate Insolvency Resolution Process (CIRP)

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