THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER XV

Compromises, Arrangements and Amalgamations

Sections 230–240

For Judicial Service Aspirants & Law Students

RJS • DJS • PCS-J • HJS • UPJS • BJS • MPCJ

Scheme of Arrangement • Merger • Demerger • Fast-Track • Cross-Border

— Enriched with landmark judgments and illustrative case law —

Chapter XV — Compromises, Arrangements and Amalgamations

Chapter XV of the Companies Act, 2013 (Sections 230 to 240) is the statutory machinery for corporate restructuring. It governs compromises (between a company and its members or creditors), arrangements (any modification of the rights of members or creditors), mergers and amalgamations, demergers, and cross-border amalgamations. This Chapter consolidates what was spread across Sections 391 to 394 of the 1956 Act and adds substantially new provisions such as fast-track mergers (Section 233), mandatory valuation reports, and a statutory framework for cross-border mergers (Section 234).

Jurisdiction vests in the National Company Law Tribunal (NCLT) — replacing the erstwhile jurisdiction of the High Court. For the examinee, this chapter is primarily tested on (a) the tripartite machinery of meeting, sanction, and filing; (b) the statutory majority of three-fourths in value; (c) the distinction between compromise, arrangement, and amalgamation; and (d) the leading judicial authorities on the scope of the Tribunal's discretion.

Section 230 — Power to Compromise or Make Arrangements with Creditors and Members

(1) When the Tribunal May Order a Meeting

Where a compromise or arrangement is proposed —

1. Between a company and its creditors or any class of them; orBetween a company and its members or any class of them,

The Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator appointed under this Act or under the Insolvency and Bankruptcy Code, 2016, as the case may be, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held, and conducted in such manner as the Tribunal directs.

(2) Disclosures in the Application

The company or any other person, by whom an application is made under sub-section (1), shall disclose to the Tribunal by affidavit —

• All material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company and the pendency of any investigation or proceedings against the company;
• Reduction of share capital of the company, if any, included in the compromise or arrangement;
• Any scheme of corporate debt restructuring consented to by not less than 75% of the secured creditors in value, including — a creditor's responsibility statement; safeguards for the protection of other secured and unsecured creditors; a report by the auditor that the fund requirements of the company after the corporate debt restructuring shall conform to the liquidity test based upon the estimates provided; a statement declaring that the company is not, as a result of taking over of management, in a position to meet its liabilities as and when they fall due, for reasons such as default or mismanagement; and a valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and immovable, of the company by a registered valuer.

(3) Notice of the Meeting

Where a meeting is proposed to be called in pursuance of an order of the Tribunal under sub-section (1), a notice of such meeting shall be sent to all the creditors or class of creditors and to all the members or class of members and the debenture-holders of the company, individually at the address registered with the company which shall be accompanied by —

• A statement disclosing the details of the compromise or arrangement;
• A copy of the valuation report, if any;
• Explaining their effect on creditors, key managerial personnel, promoters, and non-promoter members, and the debenture-holders and the effect of the compromise or arrangement on any material interests of the directors of the company or the debenture trustees; and
• Such other matters as may be prescribed.

(6) Approval by Three-Fourths Majority

Where, at a meeting held in pursuance of sub-section (1), majority of persons representing three-fourths in value of the creditors, or class of creditors or members or class of members, as the case may be, voting in person or by proxy or by postal ballot, agree to any compromise or arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order, the same shall be binding on the company, all the creditors, or class of creditors or members or class of members, as the case may be, or, in case of a company being wound up, on the liquidator and the contributories of the company.

(7) Sanction of Tribunal — What Must Be Provided For

An order made by the Tribunal under sub-section (6) shall provide for all or any of the following matters, namely: —

1. Where the compromise or arrangement provides for conversion of preference shares into equity shares, such preference shareholders shall be given an option to either obtain arrears of dividend in cash or accept equity shares equal to the value of the dividend payable;The protection of any class of creditors;If the compromise or arrangement results in the variation of the shareholders' rights, it shall be given effect to under the provisions of section 48;If the compromise or arrangement is agreed to by the creditors under sub-section (6), any proceedings pending before the Board for Industrial and Financial Reconstruction established under section 4 of the Sick Industrial Companies (Special Provisions) Act, 1985 shall abate;Such other matters including exit offer to dissenting shareholders, if any, as are in the opinion of the Tribunal necessary to effectively implement the terms of the compromise or arrangement.

Other Important Provisions of Section 230

• Sub-section (4): Filing by objectors — only persons holding not less than 10% of the shareholding or having outstanding debt amounting to not less than 5% of the total outstanding debt can raise any objection to the compromise or arrangement.
• Sub-section (5): Notice to Central Government, Income-tax authorities, RBI, SEBI, ROC, Official Liquidator, CCI — representations can be made within 30 days; absence of representation deemed no objection.
• Sub-section (8): Order filing — order of Tribunal shall be filed with the Registrar within 30 days of receipt.
• Sub-section (9): Takeover offers — Tribunal may dispense with meeting of creditors/class of creditors where at least 90% in value of creditors agree in writing — practical relief.
• Sub-section (11) & (12): Cross-application with SEBI Regulations for takeovers in listed companies.

Section 231 — Power of Tribunal to Enforce Compromise or Arrangement

Where the Tribunal makes an order under section 230 sanctioning a compromise or an arrangement in respect of a company, it —

• Shall have power to supervise the implementation of the compromise or arrangement; and
• May, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper implementation of the compromise or arrangement.

If the Tribunal is satisfied that the compromise or arrangement sanctioned under section 230 cannot be implemented satisfactorily with or without modifications, and the company is unable to pay its debts as per the scheme, it may make an order for winding up the company and such an order shall be deemed to be an order made under section 273.

Section 232 — Merger and Amalgamation of Companies

(1) When Section 232 Applies

Where an application is made to the Tribunal under section 230 for the sanctioning of a compromise or an arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Tribunal —

• That the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of the company or companies involving merger or the amalgamation of any two or more companies; and
• That under the scheme, the whole or any part of the undertaking, property or liabilities of any company (transferor company) is required to be transferred to another company (transferee company), or is proposed to be divided among and transferred to two or more companies,

The Tribunal may on such application, order a meeting of the creditors or class of creditors or the members or class of members, as the case may be, to be called, held, and conducted in such manner as the Tribunal may direct.

(2) Documents to Accompany Notice

Where an order has been made by the Tribunal under sub-section (1), merging companies or the companies in respect of which a division is proposed, shall also be required to circulate the following for the meeting so ordered by the Tribunal, namely: —

1. The draft of the proposed terms of the scheme drawn up and adopted by the directors of the merging company;Confirmation that a copy of the draft scheme has been filed with the Registrar;A report adopted by the directors of the merging companies explaining effect of compromise on each class of shareholders, key managerial personnel, promoters, and non-promoter shareholders laying out in particular the share exchange ratio, specifying any special valuation difficulties;The report of the expert with regard to valuation, if any; andA supplementary accounting statement if the last annual accounts of any of the merging company relate to a financial year ending more than six months before the first meeting of the company summoned for the purposes of approving the scheme.

(3) Provisions in the Sanctioning Order

The Tribunal, after satisfying itself that the procedure specified in sub-sections (1) and (2) has been complied with, may, by order, sanction the compromise or arrangement or by a subsequent order make provision for the following matters, namely: —

1. The transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of the transferor company from a date to be determined by the parties unless the Tribunal, for reasons to be recorded by it in writing, decides otherwise;The allotment or appropriation by the transferee company of any shares, debentures, policies, or other like instruments in the company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person;The continuation by or against the transferee company of any legal proceedings pending by or against any transferor company on the date of transfer;Dissolution, without winding up, of any transferor company;The provision to be made for any persons who, within such time and in such manner as the Tribunal directs, dissent from the compromise or arrangement;Where share capital is held by any non-resident shareholder under the foreign direct investment norms or guidelines specified by the Central Government or in accordance with any law for the time being in force, the allotment of shares of the transferee company to such shareholder shall be in the manner specified in the order;The transfer of the employees of the transferor company to the transferee company;Where the transferor company is a listed company and the transferee company is an unlisted company, the transferee company shall remain an unlisted company until it becomes a listed company; if shareholders of the transferor company decide to opt out of the transferee company, provision shall be made for payment of the value of shares held by them and other benefits in accordance with a pre-determined price formula or after a valuation is made, and the arrangements under this provision may be made by the Tribunal;Where the transferor company is dissolved, the fee, if any, paid by the transferor company on its authorised capital shall be set-off against any fees payable by the transferee company on its authorised capital subsequent to the amalgamation; andSuch incidental, consequential, and supplemental matters as are deemed necessary to secure that the merger or amalgamation is fully and effectively carried out.

Certified Order, Annual Statement and Offences

• A certified copy of the order of the Tribunal shall be filed with the Registrar by the companies within 30 days of receipt.
• Every company in relation to which the order is made shall, until the completion of the scheme, file a statement in such form and within such time as may be prescribed with the Registrar every year duly certified by a chartered accountant or a cost accountant or a company secretary in practice indicating whether the scheme is being complied with in accordance with the orders of the Tribunal or not.
• The transferee company shall not, as a result of the compromise or arrangement, hold any shares in its own name or in the name of any trust either on its behalf or on behalf of any of its subsidiary or associate companies; any such shares shall be cancelled or extinguished.

Section 233 — Fast-Track Merger (Merger or Amalgamation of Certain Companies)

Notwithstanding the provisions of section 230 and section 232, a scheme of merger or amalgamation may be entered into between —

• Two or more small companies; or
• Between a holding company and its wholly-owned subsidiary company; or
• Such other class or classes of companies as may be prescribed,

Subject to the following: —

1. A notice of the proposed scheme inviting objections or suggestions, if any, from the Registrar and Official Liquidators where registered office of the respective companies are situated or persons affected by the scheme within thirty days is issued by the transferor company or companies and the transferee company;The objections and suggestions received are considered by the companies in their respective general meetings and the scheme is approved by the respective members or class of members at a general meeting holding at least 90% of the total number of shares;Each of the companies involved in the merger files a declaration of solvency, in the prescribed form, with the Registrar of the place where the registered office of the company is situated; andThe scheme is approved by majority representing nine-tenths in value of the creditors or class of creditors of respective companies indicated in a meeting convened by the company by giving a notice of 21 days along with the scheme to its creditors for the purpose or otherwise approved in writing.

The Central Government (through the Regional Director) shall pass an order confirming the scheme or, if it is of the opinion that the scheme is not in public interest or in the interest of creditors, it may file an application before the Tribunal within sixty days of the receipt of the scheme. Fast-track merger bypasses the NCLT and is much quicker — typically 4 to 6 months.

Section 234 — Merger or Amalgamation of Company with Foreign Company (Cross-Border Merger)

The provisions of this Chapter unless otherwise provided under any other law for the time being in force, shall apply mutatis mutandis to schemes of mergers and amalgamations between companies registered under this Act and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government. The Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and amalgamations provided under this section.

A foreign company may, with the prior approval of the RBI, merge into a company registered under this Act or vice versa. The terms and conditions of the scheme may provide, among other things, for the payment of consideration to the shareholders of the merging company in cash, or in Depository Receipts, or partly in cash and partly in Depository Receipts. The notified countries include (inter alia) USA, UK, Germany, Canada, Japan, Singapore, UAE, and jurisdictions where the securities regulator is a member of IOSCO.

Section 235 — Power to Acquire Shares of Dissenting Shareholders

Where a scheme or contract involving the transfer of shares or any class of shares in a company (transferor company) to another company (transferee company) has, within four months after making of an offer in that behalf by the transferee company, been approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved — other than shares already held at the date of the offer by, or by a nominee of the transferee company or its subsidiary companies — the transferee company may, at any time within two months after the expiry of the said four months, give notice in the prescribed manner to any dissenting shareholder that it desires to acquire his shares.

Section 236 — Purchase of Minority Shareholding (Squeeze-Out)

In the event of an acquirer, or a person acting in concert with such acquirer, becoming registered holder of ninety per cent or more of the issued equity share capital of a company, or in the event of any person or group of persons becoming ninety per cent majority or holding ninety per cent of the issued equity share capital of a company, by virtue of an amalgamation, share exchange, conversion of securities or for any other reason, such acquirer, person or group of persons, as the case may be, shall notify the company of their intention to buy the remaining equity shares. The acquirer, person or group of persons shall offer to the minority shareholders of the company for buying the equity shares held by such shareholders at a price determined on the basis of valuation by a registered valuer in accordance with such rules as may be prescribed.

Section 237 — Power of Central Government to Provide for Amalgamation of Companies in Public Interest

Where the Central Government is satisfied that it is essential in the public interest that two or more companies should amalgamate, the Central Government may, by order notified in the Official Gazette, provide for the amalgamation of those companies into a single company with such constitution, with such property, powers, rights, interests, authorities and privileges, and with such liabilities, duties and obligations, as may be specified in the order. This is a coercive power used extremely sparingly — classic examples include the nationalisation mergers of the 1970s.

Section 238 — Registration of Offer of Schemes Involving Transfer of Shares

In relation to every offer of a scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company under section 235 — (a) every circular containing such offer and recommendation to the members of the transferor company by its directors to accept such offer shall be accompanied by such information and in such manner as may be prescribed; (b) every such offer shall contain a statement by or on behalf of the transferee company, disclosing the steps it has taken to ensure that necessary cash will be available; and (c) every such circular shall be presented to the Registrar for registration and no such circular shall be issued until it is so registered.

Section 239 — Preservation of Books and Papers of Amalgamated Companies

The books and papers of a company which has been amalgamated with, or whose shares have been acquired by, another company under this Chapter shall not be disposed of without the prior permission of the Central Government and before granting such permission, that Government may appoint a person to examine the books and papers or any of them for the purpose of ascertaining whether they contain any evidence of the commission of an offence in connection with the promotion or formation, or the management of the affairs, of the transferor company or its amalgamation or the acquisition of its shares.

Section 240 — Liability of Officers in Respect of Offences Committed Prior to Merger, Amalgamation, etc.

Notwithstanding anything in any other law for the time being in force, the liability in respect of offences committed under this Act by the officers in default, of the transferor company prior to its merger, amalgamation or acquisition shall continue after such merger, amalgamation or acquisition. Personal liability does not vanish with the corporate dissolution.