In the case of merger and demerger, 2 dates are important, the “Appointed Date” and secondly the “Effective Date”. Corporate managers spend a massive amount time to arrange the actual timing of these dates.’ Appointed Date’ is usually placed to secure the interests & items of the respective companies. And’ Effective Date’ is finalized by High Court hinges on upon filing of a final order of High Court with Registrar of Companies.
Importance of’ Appointed Date’ &’ Effective Date’:
Any scheme of arrangement or maybe compromise need to identify a day inside the scheme itself as’ Appointed Date’. This’ appointed date’ is crucial for arriving at values of assets and liabilities showing up in the books of Accounts all for the intent of the transfer to the Transferee company and also for arriving at the value of shares due to the transferor and transferee company viz. exchange ratio. By and large, the very first day of monthly or the first day of a financial year is labeled as the’ appointed date’, even thought the Court has the discretion to decide some date as’ transfer date’.
Autism Dating ‘ on another hand could be the date on which the transferee company files the sale of the High Court sanctioning the pattern with the Registrar of Companies for registration and when the sale has and so filed the amalgamation or maybe agreement becomes effective or perhaps having come into force from the’ Appointed date’. The effective date is the company and down below date does not have any control over it.
Issues regarding’ Appointed Date’ &’ Effective Date’ as well as their benefits on Various Aspects of Restructuring:
1. Identification of Liabilities and assets of Transferor Company:
As per the demands of Section 391 to 394 of the Companies Act, 1956 the Transferor company must certanly locate and quantify the assets as well as liabilities which are usually sought for being transferred to the transferee company under demerger or merger. This identification & quantification of assets and liabilities must be done as on Appointed Date.
The specifics of such liabilities and assets might be annexed as a routine on the plan. Certainty is given by this identification into the system, as members of both the companies get a clear idea about what is likely to be transferred?
2. Changes in the name/status of the company after Appointed Date:
Generally there may be some modifications in name, status or address of the business after the appointed date. Normally such changes do not affect the sanction of the pattern before High Court unless they adversely impact the rights & interests or obligations of the business as well as its creditors and members.
3. Accounting Treatment:
Normally the Transferee Company must, upon the Scheme coming into effect on good date record the assets & liabilities of the Transferor Company vested in it pursuant to the Scheme, at the fair values thereof during the close of business of the morning immediately preceding the Appointed Date.
4. Increased amount of share capital & Appointed Date:
The shares are assigned only after the program is sanctioned by the court and never previously. Additionally, the increase of authorised share capital is usually upon sanctioning of the design. Hence any objection to the pattern on the ground that on appointed date the share capital of the Transferee Company wasn’t adequate to provide outcome on the program can’t be sustained.
5. Nature of Business:
From the Appointed Date and till the Effective Date transferor small business should act as a trustee of a transferee company.
The Transferor Companies should continue all their respective activities and company and really should be deemed to have held or stood possessed of and really should hold and also remain possessed all of the mentioned Assets for and also on account of and also in trust for the Transferee Company.
Most of the earnings or income accruing or arising to the Transferor Companies or perhaps losses or expenditure arising as well as incurred by the Transferor Companies should for all reasons be treated and accrued as the profits and also income or expenditure or even losses around the Transferee Company, as the case could be.
The Transferor Companies ought to go on the respective business activities of theirs with reasonable diligence, business prudence and should not alienate, mortgage, charge, encumber or perhaps normally deal with the said assets or perhaps in any part thereof except within the run course of business or maybe pursuant to your pre existing obligation undertaken by the Transferor Companies prior to the Appointed Date except with prior written consent of the Transferee Company.
The Transferor Companies should not, without prior written consent of the Transferee Company, tackle almost any brand new business.
The Transferor Companies should not, without prior written consent of the Transferee Company, take a main policy choices in admiration of the relief of the Company and also for the company on the Company and shouldn’t change their present capital structure.
6. Employee Transfer:
Normally in any merger/amalgamation, all employees of the Transferor Company in service on the Effective Date might become people of the Transferee Company on that date without the interruption or break in service and also on conditions and terms not less favorable than those subsisting with reference to the Transferor Company as on the effective date. The principle item of transfer of any undertaking beneath the system is seeing the continuance of business, at that undertaking, under the influence of Transferee Company. Therefore the transferor company ought to arrange to retain the cadre and also number in service on the real date who are willing to get transferred to the transferee company
7. Declaration of Dividend: Transferee Company
Dividend declared by the transferee company, after the Appointed Date, is payable to members of the transferor company as well. And also this does not violate the provisions of section 205 of Companies Act, 1956. While it’s accurate that unless court sanctions the system, it would not be successful, but once the court accords its sanction, it would be successful from the Appointed Date. Therefore the shareholders of Transferor Company become shareholders of Transferee Company from’ Appointed Date’ itself. Hence they are worthy to any dividend declared by Transferee Company after’ Appointed Date’.
As this is a sensitive issue to the shareholders, any ambiguity in this specific regard could be avoided by providing a clause in the Scheme declaring that the transferor company’s shareholders need to be permitted to that low dividend, other benefits and rights as and from’ Record Date’ to be repaired by the Board of transferee company upon scheme getting efficient as per the court sanction..
8. Dividend, Profit And Bonus/Rights Shares: Transferor Company
The Transferor Company shouldn’t without the prior written consent of the Transferee Company declare any dividend, whether final or interim, for the fiscal year ending on or perhaps after the Appointed Date and the following financial years.
The Transferor Company should not issue or perhaps allot any Bonus Shares or perhaps Right Bonus Shares using it is Unissued or authorised Share Capital on or even after the Appointed Date.
Ordinarily, the revenue of the Transferor Company from the appointed date ought to belong to and function as the profits around the Transferee Company and also will be accessible to the Transferee Company for being disposed of in any fashion as it thinks fit.
The Transferor Company should not, except with the written consent of the Board of Directors of the Transferee Company, modify its paid up capital structure by creating a preferential allotment of shares or even otherwise, once the Scheme is approved by the Board of Directors of the Transferee Company.
9. Tax Liability:
The basic principle behind figuring out cut off dates for direct or indirect tax liability may be described as under,
For day to day activities, the liability shifts merely upon highly effective date and also for any other action like annual assessment etc., the cut off date is appointed date.
10. Indirect Tax Implications:
Indirect taxes are often levied upon activities as services, manufacturing/production of items, a purchase of merchandise etc. After the’ appointed date’; though these tasks are concerned with’ transferred undertaking’, the best effect of theirs on financial position will normally be shown in the books of account of Transferee Company just after the real date. So for an indirect taxes cut off date is’ Effective date’. Till effective date, Transferor Company is liable to pay the indirect taxes if any.
Sales Tax Deferral Scheme:
The location where the transferor business which had been enjoying a deferral scheme, transferred as a unit the entire company without obtaining prior authorization from the given power, the transferee isn’t permitted to continuation of deferral. As such deferral schemes are planned for specific parts and for certain industries with certain pre conditions so it is necessary that prior approval from the concerned authority may be obtained. Further for a continuance of such deferral scheme the transferee company should meet all the demands for such continuance.
1. Excise Duty:
On amalgamation, on highly effective date Transferee Company takes over the production activity of Transferor Company and subsequently, the transferor business should surrender its registration under Excise Rules. Further Transferee Company is required to use and obtain new registration of the premises for having on production activity. On sanction of a program, any acknowledgement on inputs availed through the transferee company on or even after Appointed Date, which might be often he is lying in stock or perhaps might be found inside the work in progress. On sanction of a system, such recognition is additionally to be transferred to the transferee company. Such transfer of credit is allowed only if the stock of inputs or work in progress is transferred together with the factory in the new web site or perhaps brand new ownership. The standard state would be that the processing unit is still intact and will continue to make similar commodities with the equal inputs.
2. Liability for evasion of Excise Duty:
Normally the responsibility for penalties will continue to be the responsibility of those who committed the offense as a manufacturer and also can’t be transferred in law to a successor. So any sort of responsibility for evasion of Excise Duty after Appointed Date and till Effective Date must be discharged by the manufacturer under the command of Transferor Company.
3. Re- assessment and refilling of assessment:
During the intervening period of time from Appointed Date to Effective Date, both transferor & transferee small business will have filed several declarations for classifications and charges, review of tax liabilities, claimed exemptions so on as independent entities. These declarations may not stay so on scheme getting effective. The Supreme Court in the situation of Marshall Co. and sons (India) Ltd. vs. ITO (1997  ITR 809) has held that the particular date of amalgamation/transfer is definitely the date specified in the date or the scheme specified by the Courts. Therefore, as soon as the formalities are completed, the transfer can become effective and related back to the day of transfer specified by the parties/court. A logical corollary of this is that the activities of both the entities would be clubbed efficient from that date and as a result, there could be a difference in facts. Hence these earlier declarations would want to be re-determined.
Though it’s not legally binding on the businesses, the concerned departments must be educated about such proposed Amalgamation or Arrangement well beforehand. In the event of omission of that low notice of amalgamation, the department may allege the company for suppression of facts with an aim to evade responsibility and also invoke extended period of five years for assessment.
4. Income Tax Issues:
Quite frequently on the groundwork of the’ appointed date’ the rights and liabilities of the transferor as well as transferee are segregated. This particular date is the date by which the merger takes place for the uses of the Income Tax Act. So while computing assessment of Income Tax cut-off date is’ appointed date’. So till efficient date’ TDS’ will be the task of Transferor Company.
The choice in Union of India v. Ambalal Sarabhai (55 Comp. Cas. 623) clearly illustrates the significance of the’ appointed date’ of the merger. In this specific instance, the appointed date in the initial scheme of amalgamation of 2 companies was July 1, 1981. Under the modified scheme the appointed particular date was shifted to April one, 1980, which was the initial day of the accounting year of the transferor company. The IT department objected to the pattern on the floor that will by switching the date the transferee company was seeking to set-off, by circumventing the provisions of S.72A, the losses belonging to the transferor provider for the accounting year 1980-81 against the income belonging to the transferee company. The High Court, dismissing the objections of the Income Tax department, held that, “It is true that moreover as a consequence of changing the date, the transferee small business is certain to get the advantageous asset of setting off the loss but that could hardly be seen as good or sufficient ground for declining to sanction the modified scheme. When the transferee organization is shooting over liabilities in conjunction with the assets of the transferor company there’s nothing if the transferee company evolves a scheme in order to take so much advantage as you can as may be okay based on law.”
And so the business enterprises should look at the goals of theirs from the program and then decide the actual date where the merger should take effect.
5. Stamp Duty Assessment:
As in other cases of conveyance, the responsibility is levied on the foundation of true market value on the date of execution of the instrument. But in the cases of merger/amalgamation of listed company stamp duty is levied with reference to the market value of shares on appointed date. For unlisted companies, it could be sometimes appointed date as stated in the scheme or maybe date of an order of high court or perhaps date of registration of the purchase.
Though market value as on appointed day is usually to be referred for examination of duty, the companies may trust in the Supreme Court’s judgment in Marshall case and is likely to request the values as on particular date of valuation which may be much after appointed date. The companies may additionally argue simply refer to the effective date to lay claim to more depreciation specifically in the market value of the immovable properties.
The companies must embrace the appropriate particular date that will give a far more beneficial assessment of duty.
The companies are totally free to figure out any’ Appointed Date’ for their programs. As this’ appointed date’ acts as a cut-off date for a lot of aspects of merger/demerger, more stress must be given on this before finalizing some scheme. So any error in finalizing’ Appointed Date’ may affect adversely to the interests of Company and its shareholders. At the identical time judicious choice of’ Appointed Date’ may make more value by reducing Tax liability, resolving employee’s issues and bringing certainty towards the asset liability structure of transferee business after the merger/demerger. It can also help to watch selective pick & drop selection for just about any distribution of dividend or bonus shares to the shareholders. So from this, we may possibly conclude that’ Appointed Date’ if selected well can guarantee good M & A, simultaneously any error in selecting appropriate’ Appointed Date’ might ruin an otherwise sound merger deal.