NCLT Mumbai Sanctions Demerger Scheme for Kumar Agro Products and Kumar Lifespaces under Companies Act, 2013

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NCLT Mumbai Approves Demerger Scheme for Kumar Group Companies

Pune, Maharashtra – February 12, 2025 – The Mumbai Bench of the National Company Law Tribunal (NCLT) has sanctioned a Scheme of Arrangement involving the demerger of Kumar Agro Products Private Limited (KAPPL) into Kumar Lifespaces Estates Private Limited ( KLEPL ). The order, pronounced on February 12, 2025, by a bench comprising Hon’ble Smt. Lakshmi Gurung (Member - Judicial) and Hon’ble Shri Charanjeet Singh Gulati (Member - Technical), paves the way for the restructuring of the Kumar Group's business operations.

Background and Application

The petition, filed under Sections 230 to 232 of the Companies Act, 2013, sought the Tribunal's sanction for the demerger. KAPPL, the Demerged Company, aimed to transfer its renting division to KLEPL , the Resulting Company. Both companies, sharing a registered office in Pune, are engaged in the real estate sector. KAPPL’s primary business includes construction, development, and leasing, while KLEPL was specifically incorporated to focus on construction, development and to absorb the rental business from KAPPL.

The proposed demerger's appointed date is April 1, 2023, with the application filed on May 2, 2023. The scheme was approved by the Boards of Directors of both companies in April 2023 and subsequently presented to the NCLT for sanction.

Rationale for Demerger

The judgment highlights the rationale behind the demerger, emphasizing the strategic benefits for both entities. Key reasons cited include:

• Focused Management: Segregation of the renting division into KLEPL allows for dedicated management and leadership.
• Distinct Business Nature: Recognizing the different risks and management approaches required for the renting and real estate construction businesses.
• Enhanced Flexibility: Post-demerger, both companies gain independence in financial decision-making and cash flow management.
• Operational Efficiency: Creating leaner, focused organizations to enhance overall efficiency and effectiveness.
• Shareholder Value: The Board believed the demerger would enhance value for shareholders and enable focused operational strategies.

Regulatory Scrutiny and Approvals

During the proceedings, the Regional Director (RD), Western Region, Ministry of Corporate Affairs, Mumbai, submitted a report raising observations on the scheme. These observations ranged from compliance with accounting standards and statutory filings to adherence to Income Tax and GST regulations. The Petitioner Companies addressed each concern by providing clarifications and undertakings, which satisfied the RD.

Notably, the Income Tax Department also raised concerns regarding ongoing legal proceedings and potential tax implications. The Petitioner Companies clarified that all existing proceedings against KAPPL related to the demerged undertaking would continue against KLEPL , ensuring the scheme would not impact ongoing assessments or tax liabilities.

Creditor and Shareholder Approval

The Tribunal noted that meetings of secured and unsecured creditors of KAPPL were convened, and the scheme was approved by a significant majority (99.46% and 100% respectively by value). As KLEPL had no creditors, no creditor meeting was required for the Resulting Company. Furthermore, consent affidavits were received from all equity shareholders of both Petitioner Companies, dispensing with the need for shareholder meetings.

Tribunal’s Decision and Rationale

The NCLT bench, after considering the approvals from shareholders and creditors, the RD's report, and the Petitioner Companies' clarifications, found no impediment to sanctioning the scheme. The Tribunal emphasized the principle of respecting the commercial wisdom of the parties involved, citing the Supreme Court’s decision in Miheer H. Mafatlal vs. Mafatlal Industries Ltd , which states that the Tribunal should generally not interfere with the informed decisions of stakeholders.

> "It is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the Court." - Miheer H. Mafatlal vs. Mafatlal Industries Ltd [JT 1996 (8) 205]

Based on this principle and the overall reasonableness and legality of the scheme, the NCLT sanctioned the Scheme of Demerger with an Appointed Date of April 1, 2023.

Key Directions and Implications

The order includes several directions to ensure regulatory compliance and protect stakeholder interests:

• Compliance with Laws: Sanction is subject to actions against any violations of statutory rules or regulations by the companies or their officials.
• No Exemption from Duties/Taxes: The order does not grant exemption from stamp duty, taxes, or other charges.
• Income Tax Department's Rights: The Income Tax Department retains full authority to examine tax liabilities, continue proceedings, and take action against tax avoidance related to the scheme.
• Filing Requirements: The Petitioner Companies are directed to file certified copies of the order and scheme with the Registrar of Companies and other statutory authorities within specified timelines.
• Undertakings and Further Directions: The Petitioner Companies are bound by their undertakings given to the Tribunal, and all concerned authorities are directed to act on the authenticated order and scheme.

The sanctioning of this demerger marks a significant step for the Kumar Group, allowing for a more focused and efficient operational structure for its real estate and rental businesses. The judgment underscores the NCLT’s role in facilitating corporate restructuring while ensuring compliance and safeguarding stakeholder interests. ```