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Jayant M Thakur
As more and more transactions of mergers, acquisitions and takeovers (M&A) take place, experience is gained as to the peculiar problems that arise. M&A transactions often involve shuffling of business units. Business units are a mixture of assets such as land, buildings and machinery (in working condition), debtors, stock, creditors, workers, and so on. While transfer of individual items such as land, buildings, or even debtors, is a regular happening, transfer of all of these as a single unit on a going concern basis raise questions for which answers are not easily forthcoming. One peculiar item which is posing problems is of statutory tenancies.
Statutory tenancies are the result of rent control laws of individual states which are aimed at freezing or controlling rents and giving a statutory right to the tenant to stay as long as he likes and till he pays the frozen rent. Such a tenancy becomes substantially close to an ownership premise. However, an important difference is that if one of the conditionsof such tenancy is contravened, the protection of law is removed so that the tenant can be simply evicted. Some of such conditions are prohibition of sub-letting, physical damage to the premises, etc. Above all, the tenancy cannot be transferred without the permission of the landlord. If such a transfer is made, the landlord may be legally entitled to evict the tenant.
If one of the assets in a business undertaking is a tenancy, the question is how can such tenancy be transferred. The most logical course is to approach the landlord and take his permission. However, this may not always be forthcoming. Further, in case of a mere internal restructuring, it may be a costly proposition.
In an amalgamation under Section 394 of the Companies Act, 1956, the court has been given vast powers as a result of which the order of the court sanctioning the amalgamation results, without further act or deed, in the transfer of the assets and liabilities in the business undertaking being transferred. In other words, thetransfer does not require the permission of each of the parties, so long as the prescribed procedure is followed. In this background, the question that arises is that when the tenancy is practically an asset of the company and when land and buildings could be transferred without further act or deed, can tenancy be also so transferred. More importantly, will the landlord's permission not be required for such transfer.
The answer is in the negative. The legal requirement of taking the permission of the landlord is necessary to be complied for the transfer to be effective. If the transfer is made without such complying with such legal requirement, the landlord can evict the tenant even if the court had sanctioned the scheme in which it was clearly stated that the tenancy would be transferred along with other assets and liabilities. The reason for this is simply that the court while sanctioning such a transfer of undertaking, has no powers to override the provisions of the state laws relating to tenancy. Thiswas admitted to and held by the Supreme Court in General Radio and Appliances Co Ltd vs MA Khader (1986) 60 Com Cases 1013 (SC).
At the same time, it has also been held (in Brooke Bond Lipton India Ltd, Re, (1998) 15 SCL 81 (Cal)) that if a scheme of amalgamation comes before the court which contains transfer of a tenancy, it will not hold back sanction merely because the prior permission of the landlord was not obtained. It held that so long there was no other problem, it will sanction it and thereafter, it would be a matter between the landlord and the transferor/transferee companies.
There is, however, a peculiar decision recently (Hotel Kandath International Pvt Ltd vs Official Liquidator (1997) Comp LJ 416 (Ker)). In this case, the facts were as follows. A company which ran a hotel was being restructured whereby the acquirer would do the necessary acts to revive the company. The company had a tenant. One of the conditions of the acquirer was that it should get free and vacant possession of theproperty as a part of the scheme. In other words, the tenant was to be evicted. Protected by the tenancy law, it would be difficult to achieve this. However, the court held despite the provisions of the state Rent Act, the tenant could be asked to vacate the premises and it accordingly so ordered.
It is respectfully submitted that this decision needs to be reconsidered. This decision is clearly against the ratio of the Supreme Court as described earlier. It is true that the intention of the court was to further the scheme and, for this, it held that tenancy can be forcibly transferred. However, if the court does have powers to forcibly transfer a tenancy, it would mean it has all the powers to sanction transfer when the transferor and transferee are in agreement. And this is what the Supreme Court has, as stated earlier, said that it cannot be permitted. The court has no power to override the clear provisions of law.
In conclusion, it must be said that transfer of tenancy imposes an important hurdletowards restructuring through amalgamation. The solution for this, considering that tenancy laws are state laws, is not easy. While much can be said for and against tenancy laws in general, some amendments need be made if restructuring transactions are to be encouraged.
The author is a Mumbai-based chartered accountant
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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