NCLAT Sets Aside NCLT Order Rejecting Demerger Scheme, Noting Unjustified Valuation Objections in Closely-Held Family Entities [Read Order]

The National Company Law Appellate Tribunal (NCLAT) has set aside an order by the National Company Law Tribunal (NCLT), which had dismissed a demerger scheme between two closely held family companies, Lincon Polymers Private Limited and Lincon Polyplast Private Limited. The NCLAT held that the NCLT’s objections to the valuation and share swap ratio were unjustified, observing that the scheme was a family arrangement with unanimous shareholder consent and backed by expert valuation.

The facts of this case relate to a proposed demerger under Sections 230-232 of the Companies Act, 1956, where Lincon Polymers sought to transfer its domestic market-focused manufacturing unit in Khatraj to Lincon Polyplast, a newly incorporated entity. The stated reason was to enable focused management for domestic and export operations, thereby enhancing efficiency. The appellants had sought dispensation of shareholder meetings for both companies, citing consent affidavits from all shareholders, and requested meetings only for secured and unsecured creditors of the demerged company.

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The NCLT rejected the application on three grounds: discrepancies in the shareholding patterns of the Patel family (the promoters), ambiguity about the issuance of 1,794 additional shares, and the absence of segmented accounts for the Khatraj unit. The tribunal noted that Pareshbhai Patel and his wife Anitaben Patel held differing stakes in the two companies, which it claimed negated the assumed uniformity in the valuation report’s swap ratio of 1:1.

The appellants argued before the NCLAT that the companies were family-owned, with all shareholders consenting to the scheme. They clarified that the 1,794-share discrepancy arose from rounding off the authorised capital, and no additional shares were to be issued. Additionally, they submitted detailed assets and liabilities of the Khatraj unit, which they claimed were before the NCLT but were overlooked.

The NCLAT, relying on various precedents, noted that courts should not interfere in schemes involving closely held family companies where shareholders unanimously approve the arrangement.

The appellate tribunal noted that the valuation here was conducted by IBBI-registered experts, Den Valuation (OPC) Private Limited, and no objections were raised against their competence or methodology. The tribunal concluded that the NCLT’s order was erroneous and directed it to issue consequential directions for convening or dispensing with meetings within three days.

The NCLAT, comprising Justice Yogesh Khanna (Judicial Member) and Mr. Ajai Das Mehrotra (Technical Member), allowed the appeal.

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