Can Sole Proprietorship firms amalgamate with a Company? NCLT says No

In a case before the NCLT, the Applicant, a company registered under the Companies Act, 2013, took over the business of a sole proprietor firm [Firm] vide an Amalgamation Agreement, and became entitled to all the business along with rights, securities and liabilities including all actionable claims including debts. 

The Firm had entered into a Distribution Agreement for distributing the products of the Corporate Debtor, on the Terms and conditions detailed therein. Disputes arose between the parties and the Applicant filed a petition under the Insolvency and Bankruptcy Code, 2016 (‘IBC, 2016’) to initiate the Corporate Insolvency Resolution Process against the Corporate Debtor.  

The Tribunal observed that in the instant case, the assignment of debt has been done by a ‘Proprietorship firm’ to a ‘Company’ on the strength of an “Amalgamation Agreement”. The Tribunal examined whether the amalgamation between a Sole Proprietorship Firm and a Company is valid as per law or not.  

The Tribunal stated that under Section 232 of the Companies Act 2013, the parties that are eligible to seek Merger or Amalgamation can file an application before NCLT, but this does not mean that the Amalgamation can take place between “a Proprietorship Firm” and “a Company” as the Section 232 (a) of the Companies Act 2013 specifically deals with the Merger and Amalgamation of two or more companies only. 

As a neither a “Sole Proprietorship Firm” nor “its individual Proprietor” is a “Company” in terms of Section 2(20) of the Companies Act 2013, the Merger and Amalgamation of a “Sole Proprietorship Firm” and “a Company” is not valid under the Companies Act 2013.  

M/s SVS Marketing Sanitaryware Private Limited …Applicant/Operational Creditor  VERSUS   

M/s Kajaria Bathware Private Limited             … Respondent/Corporate Debtor 

Company Petition No. (IB)-322(ND)2023