Division Of Companies. Detailed Explanation With Case Laws
Meaning of Division of Companies
Division of a company refers to a form of corporate restructuring in which a company’s business, undertaking, assets, or liabilities are split into two or more distinct parts, and those parts are transferred to:
One or more existing companies, or
One or more newly formed companies
The original company may:
Continue with reduced operations, or
Be dissolved without winding up.
Under Indian law, division is typically implemented through a scheme of arrangement under Sections 230–232 of the Companies Act, 2013 (previously Sections 391–394 of the Companies Act, 1956).
2. Forms of Division
(a) Demerger
Transfer of one or more undertakings to another company
Shareholders of the original company receive shares in the resulting company
(b) Spin-off
Creation of an independent company from a business segment
Original shareholders receive proportionate shares
(c) Split-up
Entire business divided into two or more companies
Original company ceases to exist
(d) Hive-off
Partial transfer of business while the transferor continues operations
3. Legal Framework Governing Division
Sections 230–232, Companies Act, 2013
NCLT approval
SEBI regulations (for listed companies)
Income Tax Act provisions (for tax-neutral demergers)
Stamp duty and accounting standards
4. Procedure for Division of a Company
Step 1: Board Approval
Approval of draft scheme of division
Appointment of valuers and professionals
Step 2: Application to NCLT
First-motion application seeking directions for meetings
Disclosure of:
Asset allocation
Liability apportionment
Share exchange ratio
Step 3: Shareholder and Creditor Approval
Majority in number and 75% in value
Separate meetings if interests differ
Step 4: Regulatory Approvals
Notices to:
ROC
Official Liquidator
Income Tax Department
SEBI (if applicable)
Step 5: Final NCLT Sanction
Tribunal examines:
Fairness of division
Protection of creditors
Public interest
Absence of fraud or tax evasion
Step 6: Implementation
Transfer of assets and liabilities
Issue of shares
Accounting entries
Filing of NCLT order with ROC
5. Key Legal Principles Governing Division
Commercial Wisdom of Shareholders
Fair and Reasonable Allocation of Assets
Creditor Protection
No Diminution of Shareholder Rights
Tribunal’s Supervisory Role, Not Appellate
6. Important Case Laws (At least 6)
1. Miheer H. Mafatlal v. Mafatlal Industries Ltd.
Principle:
Courts will not interfere with a scheme of arrangement unless it is unfair, unreasonable, or contrary to law.
Relevance:
Foundational case governing approval of division schemes.
2. Hindustan Lever Employees’ Union v. Hindustan Lever Ltd.
Principle:
Valuation and share exchange ratio fall within the commercial judgment of experts unless proven mala fide.
Relevance:
Applies to asset and share allocation in division.
3. Sesa Industries Ltd. v. Krishna H. Bajaj
Principle:
Division must not prejudice minority shareholders.
Relevance:
Protects minority interests during corporate split.
4. Re: Girdharilal Sugar & Allied Industries Ltd.
Principle:
Tribunal must ensure creditors are not adversely affected.
Relevance:
Creditor safeguard in demergers and split-ups.
5. Re: Scheme of Demerger of Reliance Industries Ltd.
Principle:
Demerger valid when statutory requirements and transparency are met.
Relevance:
Modern application of division under corporate law.
6. Marshall Sons & Co. (India) Ltd. v. ITO
Principle:
Effective date in a scheme determines tax consequences.
Relevance:
Critical for tax treatment of divided undertakings.
7. Re: Asian Hotels (North) Ltd.
Principle:
Accounting treatment must reflect true financial position post-division.
Relevance:
Ensures post-division transparency.
7. Advantages of Division
Unlocks shareholder value
Focused management of businesses
Risk segregation
Strategic restructuring
Regulatory compliance facilitation
8. Challenges and Risks
Valuation disputes
Minority shareholder litigation
Stamp duty and tax exposure
Operational disruption
Regulatory delays
9. Conclusion
Division of companies is a powerful restructuring tool allowing businesses to realign operations, improve efficiency, and unlock value. Courts consistently emphasize commercial wisdom, fairness, transparency, and stakeholder protection, intervening only when schemes violate legal or public interest norms.
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