Home » Between The Lines » Supreme Court: The payment of unearned increase in value payable to the lessor post a merger or amalgamation of companies upheld

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The Supreme Court (“SC”), vide its judgement dated April 5, 2024, in the case of M/s. Jaiprakash Industries Limited (Presently known as Jaiprakash Associates Limited) v. Delhi Development Authority [Civil Appeal No. 8336 of 2009], upheld the payment of unearned increase in the value to the lessor post a merger or amalgamation of companies.

Facts

Four separate perpetual lease deeds were executed by the Hon’ble President of India on August 12, 1983, in favour of M/s. Jaiprakash Associates Private Limited in respect of several plots. A joint application was made by M/s. Jaiprakash Associates Private Limited and M/s. Jaypee Rewa Cement Limited in July 1986, before the Allahabad High Court, wherein both the parties prayed for amalgamation. Resultantly, the Allahabad High Court, vide its order dated July 30, 1986, sanctioned the scheme of amalgamation and directed that some of the properties mentioned in the first, second and third parts of Schedule II of the order shall stand vested in the transferee company, that is, M/s. Jaypee Rewa Cement Limited.

In September 1986, after the amalgamation, the name of M/s. Jaypee Rewa Cement Limited was changed to M/s. Jaiprakash Industries Limited which was subsequently changed to M/s. Jaiprakash Associates Limited (“Appellant”). Hence, the Appellant is a transferee company created as a result of the amalgamation of the erstwhile M/s. Jaiprakash Associates Private Limited and M/s. Jaypee Rewa Cement Limited.

The Appellant made an application to the Delhi Development Authority (“Respondent”) for a grant of permission to mortgage the said plots in favour of the Industrial Finance Corporation of India. However, vide a letter dated March 14, 1991, the Respondent demanded an unearned increase value of INR 2,13,59,511.20. The Appellant, being aggrieved by the said demand of the Respondent, made representations, which were not favourably considered by the Respondent. Therefore, the Appellant filed a writ petition before a single judge of the Delhi High Court (“Delhi HC”). The Delhi HC, vide its order dated January 30, 2003, dismissed the said petition filed by the Appellant. Being aggrieved by this decision of the Delhi HC, an appeal was preferred by the Appellant before the division bench of the Delhi HC which was also dismissed (“Impugned Judgment”).

Hence, being aggrieved by the Impugned Judgment, the Appellant filed an appeal before the SC. Prior to proceeding further, the SC, vide an order dated January, 3, 2008 (“Interim Order”), granted an interim stay to the Impugned Judgment, subject to a condition that the Appellant deposits a sum of INR 2,13,59,511.20 with the SC. The said amount as well as the interest accrued thereon was separately invested.

Issue

Whether the amalgamation of the companies and the resulting transfer of leasehold rights amount to a transfer under the lease deed, requiring payment of unearned increase value to the Respondent.

Arguments

Contentions of the Appellant:

It was contended by the Appellant that clause II(4)(a) of the lease deed puts an embargo on the lessee not to sell, transfer, assign or otherwise part with the possession of the whole or any part of the said plots, except with the previous written consent of the lessor. Additionally, the proviso to the said clause of the lease deed entitled the lessor to impose a condition of, while granting consent, payment of a portion of the unearned increase in the value, that is, the difference between the premium paid and the market value.

The Appellant submitted that the amalgamation of the lessee with another company under the orders of the Company Court would not amount to the sale, transfer or assignment of the said plots.

It was also contended by the Appellant that the amalgamation of the two companies does not involve any transfer within the meaning of the Transfer of Property Act, 1882 (“TPA”) and the assets and liabilities of the lessee had merged and devolved on the Appellant as per the operation of Section 394 (Provisions for facilitating reconstruction and amalgamation of companies) of the Companies Act, 1956 (“Companies Act”). Additionally, the Allahabad High Court’s order sanctioning the scheme of amalgamation is an order in rem, which binds everyone.

It was further submitted by the Appellant that no sale consideration or consideration for transfer was present in the scheme of amalgamation and by virtue of the scheme of amalgamation, the transferor personality ceased to exist and merged with the transferee.

Contentions of the Respondent:

The Respondent, while relying upon the order of the Allahabad High Court wherein the said amalgamation was sanctioned, contended that clause (1) of the order provides that the transferor company’s properties, rights and powers in respect of the property described in the first, second and third parts of schedule II shall be transferred without any further act or deed to the transferee company. Therefore, the Respondent submitted that the demand for unearned increase was lawful.

Observations of the SC

The SC took into consideration clause (II)(4)(a) incorporated in all four perpetual leases and observed that the second proviso to the clause clarifies that the Respondent, which has stepped into the shoes of the lessor, would be entitled to recover a portion of the unearned increase in the value. It was noted by the SC that all the categories of transfers are covered within the ambit of clause II(4)(a), including the involuntary transfers. However, the SC observed that the present case is not one of an involuntary transfer, as the transfer was made based on a petition filed by the lessee and the transferee seeking amalgamation.

It was also noted by the SC that clause (II)(4)(a) covers transfers as well as parting with possession, so the transfer contemplated by the said clause is much wider than what is defined under Section 5 (“Transfer of property” defined) of TPA. Further, Section 5 of the TPA clarifies that nothing contained therein shall affect any law for the time being in force in relation to the transfer of property to or by companies. Thus, the SC stated that Section 5 of the TPA would not be of any assistance to the Appellant.

The SC also emphasised on clause (1) of the Allahabad High Court’s order sanctioning the scheme of amalgamation which states that the said plots stand transferred from the original permanent lessee to the Appellant.

Decision of the SC

The SC found nothing illegal about the Impugned Judgment and accordingly dismissed the appeal filed by the Appellant. Further, the SC allowed the Respondent to withdraw the principal amount along with the interest which was deposited by the Appellant pursuant to the Interim Order.

VA View:

The present judgment of the SC is a significant judicial pronouncement as the SC has rightly held that any merger or amalgamation of two companies resulting in transfer of a property may lead to payment to the lessor of an unearned increase in the value of the assets being leased, subject to the contractual arrangement between the lessor and lessee. The SC has also examined the scope of Section 5 of the TPA vis-à-vis the terms of the perpetual lease deeds in the present case which provided for the recovery of a portion of the unearned increase in the value of the assets at the time of sale, transfer, assignment, or parting with the possession.

Additionally, SC by the virtue of this judgement provided clarity which could be used as a precedent in respect to similarly placed lease or arrangements which is commercial in nature and where an entity enters into such commercial arrangement with a government entity, being the lessor.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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