Allahabad NCLT Sanctions Demerger Of KM Sugar Mills' Distillery Division Into KM Spirits

The Allahabad Bench of the National Company Law Tribunal (NCLT) on 19 August sanctioned a Scheme of Arrangement under Sections 230 to 232 of the Companies Act, 2013, approving the demerger of the Distillery Division of KM Sugar Mills Limited into its wholly owned subsidiary, KM Spirits and Allied Industries Limited.

A Bench comprising Judicial Member Praveen Gupta and Technical Member Ashish Verma sanctioned the Scheme after noting that the objections raised by the statutory authorities had been addressed through undertakings and clarifications. It held:

“The Scheme of Arrangement appears to be in conformity with the provisions of Sections 230 to 232 and other applicable provisions of the Companies Act, 2013, and does not appear to be contrary to law or public policy. No surviving objection remains for consideration before this Tribunal.”

KM Sugar Mills Limited, a listed public company, proposed to hive off its Distillery Division into KM Spirits and Allied Industries Limited on a going-concern basis. The first motion petition was allowed on 24 March 2026, with directions to convene meetings of the equity shareholders and unsecured creditors of the Demerged Company.

The Chairperson's report dated 30 May 2026 recorded overwhelming approval of the Scheme. While 99.99% of the equity shareholders voted in favour, 100% of the unsecured creditors approved it. Notices were subsequently issued to the Regional Director (Northern Region), Registrar of Companies (RoC), Income Tax Department and stock exchanges.

The RoC noted that KM Spirits and Allied Industries Limited was a wholly owned subsidiary of KM Sugar Mills Limited. The Regional Director reported that there were no pending prosecutions and that the statutory filings were complete. No adverse remarks were made by the RoC.

The Income Tax Department initially flagged outstanding demands for assessment years 2015-16, 2018-19, 2020-21 and 2024-25, amounting to several crores. It submitted that tax liabilities must remain enforceable against both companies and that the companies would have to comply with Section 2(19AA) of the Income Tax Act, 1961, which prescribes the conditions for a tax-neutral demerger. It added that if the conditions were not fulfilled, the tax benefit associated with the demerger would not apply.

It further pointed out that under Section 72A of the Income Tax Act, both the Demerged Company and the Resulting Company would remain jointly and severally liable for the relevant tax liabilities.

The Petitioner Companies filed rejoinders and undertook that all tax liabilities, statutory dues and proceedings relating to the demerged undertaking would transfer to the Resulting Company, while KM Sugar Mills Limited would continue to discharge the liabilities relating to its remaining business. KM Spirits and Allied Industries Limited also undertook to comply with all applicable tax laws.

The Bench noted that the objections raised by the statutory authorities had been addressed through the undertakings and clarifications furnished by the Petitioner Companies. It further noted that no response or representation had been received from the National Stock Exchange or Bombay Stock Exchange till date and presumed that the stock exchanges had no objection to the proposed Scheme. It added:

“…it is observed that the observations made by the Learned Regional Director and the Income Tax Department have been duly addressed by the Petitioner Companies, and appropriate undertakings have been furnished, wherever required, for ensuring compliance with the directions and observations made by the statutory authorities.”

Accordingly, the NCLT sanctioned the Scheme of Arrangement involving the demerger of the Distillery Division of KM Sugar Mills Limited into KM Spirits and Allied Industries Limited.