‘Appointed Date’ versus ‘Effective Date’
A scheme of arrangement is usually conditional upon the satisfaction of specified conditions. The date on which the conditions to a scheme are satisfied is referred to as the ‘effective date’ of the scheme. Schemes often provide that once all conditions are satisfied, they shall be deemed to have become effective on an identified date (which is not necessarily the same as the effective date) – this is usually referred to as the ‘appointed date’ of the scheme. Accordingly, while the conditions to a scheme are satisfied on an effective date, the transactions under the scheme are deemed to have occurred on an appointed date.
The jurisprudence relating to the ‘appointed date’ and ‘effective date’ historically evolved through case law and market practice, with parties to a scheme identifying an appointed date based on accounting requirements, tax considerations and commercial objectives such as the ease of identifying assets and liabilities of the transferor and transferee, segregation of profits/ losses etc. Companies ordinarily choose the first or the last date of a financial year as the appointed date. This is also driven by the requirement to restate accounts of a company as of an ‘acquisition date’ under Accounting Standards 103. The ‘acquisition date’ under the Accounting Standards is the date on which an acquirer acquires control of assets or an entity. While judicial precedents recognise that an appointed date should not be identified in a manner that seeks to circumvent legal requirements (e.g. by specifying a significantly antecedent appointed date for tax avoidance) or in a manner that contravenes public interest, courts typically held off from imposing other material restrictions on parties while identifying an appointed date.
Section 232(6) of the Companies Act, 2013 (“Companies Act”) included a statutory requirement for identifying an appointed date in a scheme for the first time. Following the enactment of this requirement, therefore, schemes formulated under the Companies Act must specifically indicate an appointed date.
A frequently litigated question (even prior to the enactment of the Companies Act) was whether an appointed date may be prospective or alternatively, whether the appointed date may be linked to the occurrence of events with uncertain dates (e.g. the date of conditions to the scheme being satisfied). Courts have delved into this question in myriad ways – examining, for example, whether a scheme can provide an appointed date that precedes the date of incorporation of one or more parties to the scheme, whether an appointed date can occur several months after the effective date, whether an appointed date may be linked to receipt of a government approval post sanction of the scheme, whether an appointed date can be the same as the ‘effective date’ in a scheme. While the findings in individual cases differ, the judicial trend until recently was for courts to allow parties to have the flexibility to identify a prospective appointed date (such as Re: UltraTech Cement Limited and the Scheme of Arrangement between Idea Cellular Limited, Vodafone India Limited and Vodafone Mobile Services Limited) or a retrospective appointed date (such as the composite scheme of arrangement between Strides Shasun Limited, SeQuent Scientific Limited and Solara Active Pharma Sciences Limited and the composite scheme of arrangement and amalgamation between Geometric Limited, HCL Technologies Limited and 3DPLM Software Solutions Limited) within reasonable bounds, with the matter largely being left to the parties’ discretion and commercial or accounting considerations. Schemes commonly provided for a combined appointed date and effective date – i.e. the transfer of the undertaking pursuant to the scheme is deemed to occur on the date on which the scheme becomes effective.
A recent decision of the NCLT, Mumbai, in Scheme of Arrangement between East West Pipeline Limited and Pipeline Infrastructure Private Limited (“Pipeline Order”) revisited this issue and led to parties questioning the practice followed thus far. Earlier, the Supreme Court, in the case of Marshall Sons & Co. [India] Ltd. Vs. Income Tax Officer, has held that every scheme is required to state the date on which the amalgamation is to take effect and such date may precede the date of sanction of the scheme by the court. The Supreme Court also held that the court should give effect to the amalgamation or transfer from the appointed date listed in the scheme. The Madras High Court has in the case of Equitas Finance Limited vs C.I.T. held that a scheme of transfer could have an appointed date tied to a future event. However, the NCLT in the Pipeline Order held that the appointed date must mandatorily be the same date as the date of valuation of the companies. In support of its view, the Pipeline Order noted that this approach would help authorities assess tax and stamp duty payable on a transfer pursuant to a scheme – presumably, since all such calculations and valuations would be based on the same appointed date and valuation date. The Pipeline Order also decried the practice of linking the appointed date to uncertain events (e.g. the date of approval or effectiveness of the scheme) and included a requirement for parties to identify a definite calendar date as the appointed date. More specifically, the NCLT held in the Pipeline Order that since the Companies Act does not require the effective date of a scheme to be the date on which the scheme is filed with the Registrar of Companies, the effectiveness of a scheme will always relate back to the appointed date and cannot be the same as a future effective date.
The Pipeline Order diverged from the market practice and positions accepted by High Courts and NCLT in other jurisdictions. The Pipeline Order may be viewed as an aberration which does not indicate the final view of the NCLT – for example, a subsequent order of the Mumbai bench of the NCLT allowed parties to a scheme to identify an appointed date after obtaining the sanction of a governmental authority. The scheme in this particular case contemplated a prospective appointed date, to which the NCLT has not raised objections.
With a view of addressing various queries received in this regard, MCA issued a clarification on Section 232(6) of the Companies Act through its General Circular no. 09/2019 dated August 21, 2019. MCA clarified:
- Section 232(6) is an enabling provision which allows the companies to decide an ‘appointed date’ from which the scheme will come into force. The date may be a specific calendar date or may be tied to the occurrence of an event or fulfilment of any pre-conditions or other requirements agreed by the parties – which are relevant to the scheme.
- The appointed date should also be deemed to be ‘acquisition date’ and date of transfer of control for the purpose of the accounting standards (including Ind AS 103 Business Combinations).
- The appointed date (where it is a specific calendar date) may precede the date of filing of the application for scheme before the NCLT. However, if the appointed date is significantly antedated beyond a year from the date of filing, the scheme should set out the justification for the same. Antedating the appointed date in the scheme should not be against the public interest.
- The appointed date may be based on the occurrence of a trigger event (which should, in such cases, be specified in the scheme itself) which is key to the scheme and agreed by the parties. If an event-based appointed date is drafted as a date subsequent to the date of filing the order of the NCLT sanctioning the scheme with the Registrar of Companies, then the company should file an intimation with the Registrar within 30 days of the appointed date occurring.
While the MCA circular provides the much-needed regulatory guidance on questions in relation to appointed date for a scheme, it has the downside of introducing conditions for determining an appointed date that are not stipulated under the Companies Act or in judicial precedents. While an argument may be made that MCA circulars are not legally binding and only provide non-binding guidance (please see an earlier post on this here), this may be immaterial given that the jurisdictional Registrar of Companies and the Regional Director, while reviewing the scheme will seek to enforce compliance with the MCA circular.