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Mergers and acquisitions have always been a topic of corporate interest in the modern times. The complexity of the laws governing these modes of corporate restructuring makes them even more intriguing and mystifying. Chapter V comprising of Sections 390 to 396A of the Companies Act, 1956, at present, contain provisions regarding “Arbitration, Compromises, Arrangements and Reconstructions”. This chapter is a complete code in itself which contains provisions regarding all forms of compromises with creditors and arrangements with members.

Companies Bill 2012, which seeks to replace the Companies Act of 1956, has brought with it tremendous changes and new requirements in almost all spheres of corporate functioning. So is the case with compromises and arrangements. Chapter XV, comprising of Clauses 230 to 240, holds provisions regarding “Compromises, Arrangements and Amalgamations” in the Companies Bill of 2012.

In this article, we have endeavored to compile the procedure and provisions governing compromises and arrangements under the Existing Companies Act, 1956 and the changes/new requirements proposed in the Companies Bill 2012 in comparison thereat.

The article is structured keeping the provisions of the Existing Companies Act 1956 as the base and the provisions of the Companies Bill 2012, have been mentioned to the extent they are different from the provisions of the Existing Companies Act 1956.


Section 390 of the Companies Act, 1956

This section provides interpretation for the purposes of Section 391 and 393. The said Section states that –

· “Company” means any company liable to be wound up under the Act.

· “Arrangement” includes re-organisation of the share capital of the company

· Unsecured creditors who have filed suit or obtained decree are deemed to be of the same class as other unsecured creditors.

There is no corresponding clause to this effect in the Companies Bill 2012. However, under Clause 230, an explanation is provided which states that “Arrangement” includes re-organisation of a company's share capital.

Section 391 vis a vis Clause 230

Section 391/Clause 230 is the enabling section which empowers a company to contemplate a scheme of compromise or arrangement. This section talks about –

· Scheme of compromise between a company and its creditors or any class of them, or

· Scheme of arrangement between a company and its members or any class of them.

The section contains that application for the Scheme can be made either by the Company, or by any creditor, or by a member or by the liquidator in case of company which is being wound up.

The authority before whom an application has to be made is the “High Court” having jurisdiction in the State in which the registered office of the company is situated. Companies Bill 2012 proposes to authorise the National Company Law Tribunal (Hereinafter referred to as Tribunal) to sanction all schemes of compromises or arrangements except in certain specific situations discussed later in this article.

In case any of the above schemes is proposed, the Court/Tribunal may order a meeting of the creditors (or any class of them) or the members (or any class of them), as the case may be, and the meeting shall be called, held and conducted in the manner specified by the Court/Tribunal.

A scheme of compromise or arrangement has to be approved by MAJORITY IN NUMBER REPRESENTING 3/4TH IN VALUE, of the creditors or members, present at the meeting and voting EITHER IN PERSON OR BY PROXY. Companies Bill 2012 proposes voting through POSTAL BALLOT ALSO.

Section 391/Clause 230 requires the applicant to disclose, all material facts relating to the company, to the Court/Tribunal before an order is passed sanctioning a scheme. These disclosures include – latest financial position of the company, latest auditors' report, pendency of any investigation proceedings etc. Clause 230 requires an additional disclosure regarding “reduction of share capital, if any, included in the scheme. Section 391 further states that no order made by the Court shall be effective unless a certified copy of it is filed with the Registrar and it also requires that a copy of the order has to be annexed to every copy of the MOA issued after filing order copy with Registrar. Companies Bill 2012 does not contain any express provision to this effect, except that Clause 230 contains that copy of order has to be filed with Registrar within 30 days of receipt of order.

Section 393 vis a vis Clause 230

Section 393 of the Companies Act, 1956 contains provisions regarding information to be furnished and the manner of furnishing the information in relation to a scheme of compromise or arrangement. Companies Bill 2012 does not have a separate clause corresponding to Section 393, but most of the provisions of Section 393 have been included under clause 230 itself, with certain amendments.

Section 393 requires that where a notice calling for a meeting of the creditors or members or any class is sent to a creditor or a member, it shall be accompanied with a statement containing the terms of the compromise or arrangement and its effect and shall disclose the material interests of the directors, Managing Director or Manager in their capacity as such or as members or creditors, and the effect of those interests to the extent different from like interest of other persons.

In case the scheme affects the rights of debenture-holders, the Statement, as aforesaid, shall also include similar details of debenture trustees as is required to be given for directors. Clause 230 deviates from Section 393 to the effect that from the language used in Clause 230 it appears that notice has to be served on all creditors, members and debenture holders individually, irrespective of the kind of meeting. There is not much change in the requirement of the accompanying documents.

Section 393 further contains that in case a meeting is called by advertisement, it should include the information as stipulated above, and else it should indicate the place and manner in which copy of the statement can be obtained by the members or creditors, free of charge. Clause 230 contains that such a notice should specify the time within which free copy can be obtained from the Registered Office of the Company

Section 393 requires every director, managing director, manager and debenture trustee to provide to the company all details as may be necessary for the purpose of the said section. It also stipulates a penalty provision if the requirements of the section are not complied with. There is no corresponding express provision in Clause 230.


With respect to notice requirements

Where a meeting is proposed to be called in pursuance of an order of the Tribunal -

· Notice, along with documents as sent to all members and creditors, to be served on Central Government, Income Tax authorities, RBI, SEBI, ROC, Official Liquidator, respective Stock Exchanges, Competition Commission of India and such other authorities as may be effected by the scheme. Notice to state that representations to be received within 30 days else it will be presumed that there are no representations to make.

· Notice and other documents as mentioned above to be placed on the website of the company, if any and published in newspapers in the manner as may be prescribed.

· Listed companies to send notice and other documents to SEBI and Stock Exchanges for placing on their website.

· Notice to state that voting can also be done through proxy or Postal Ballot (within one month of receipt of notice)

With respect to order of Tribunal

Clause 230 contains that an order of Tribunal to be passed under this clause shall provide for all or any of the following matters –

· 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, which contains provision regarding variation of share holders rights.

· Stay of any proceedings pending before the BIFR

· such other matters including exit offer to dissenting shareholders

Other miscellaneous new provisions

· Auditors' certificate regarding compliance with accounting standards to be submitted to Tribunal before passing of order.

· Meeting of creditors may be dispensed with by the Tribunal, if at least 90% of creditors (in value) agree to the scheme by way of an affidavit.

· Any objection to the compromise or arrangement shall be made only by persons holding not less than ten per cent. of the shareholding or having outstanding debt amounting to not less than five per cent. of the total outstanding debt as per the latest audited financial statement.

Section 392 vis a vis Clause 231 

Section 392 of the Companies Act gives power to the Court to implement a compromise or arrangement. It contains that the Court has the power to supervise the implementation of a scheme and can make modifications in the scheme which are necessary for the purpose of its proper implementation. It further empowers the Court to order winding up of the company where the scheme cannot be satisfactorily implemented with or without modifications.

Clause 231 is similar to Section 392 in all respects except that the authority, as previously stated, is Tribunal and the use of language is slightly different at one or two places.

Section 394 vis a vis Clause 232

Section 394 of the Companies Act contains provisions facilitating a scheme of reconstruction or amalgamation.

The said section states that where an application is made to the Court under Section 391 and if it pertains to –

- a scheme of reconstruction or amalgamation, or

- transfer of whole or part of an undertaking of a company (transferor company) to another company (transferee company) - demerger, then the Court may, in its order, provide for the all or any of the following matters –

· the transfer of the whole or any part of the undertaking, property or liabilities of any transferor company to the transferee company

· the allotment of any shares, debentures, policies, or other like interests by the transferee 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

· the dissolution, without winding up, of any transferor company

· provision regarding persons who dissent to the Scheme

· other incidental, consequential and supplemental matters

Clause 232 of the Bill contains provision regarding Merger (including demerger) and Amalgamation of companies. The difference between Section 394 and Clause 232 is that, in Clause 232, an attempt has been made to codify separately, the complete procedure for amalgamation and demerger of companies. Clause 232 opens with the provision that where an application is made to the Tribunal under Clause 230 and if it pertains to –

- a scheme of reconstruction or amalgamation, or

- transfer of whole or part of an undertaking of a company (transferor company) to another company (transferee company) - demerger,

then a meeting of the creditors or members, or any class of each of them may be ordered by the Tribunal, to be called, held and conducted as per the directions of the Tribunal. It further states that in case of amalgamations and demergers, all provisions of Clause 230 pertaining to notice requirements, majority required for approval of scheme etc. shall apply in the same manner with necessary changes only.

Clause 232 additionally mandates circulation of following details/documents before a meeting, as aforesaid, is held –

- Copy of draft scheme approved by the Board of the merging companies

- Confirmation that a copy of the scheme has been filed with ROC

- Report by directors of the merging companies, explaining the effect of the scheme on Shareholders, Key Management Personnel .etc., laying out in particular the share exchange ratio and specifying any special valuation difficulties

- Copy of valuation report, if any

- Copy of Accounts drawn up to a date not preceding the board meeting date (held for consideration of scheme) by more than 6 months.

As regards matters to be included in the Tribunal's order sanctioning a scheme of amalgamation or demerger, Clause 232 incorporates all of the points mentioned under section 394 with the following additions – .

· Allotment of shares to Non-resident shareholders in the manner to be 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 and ) 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 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

Section 394 mandates that a report of the ROC and OL, confirming that the affairs of the company have not been conducted in a manner prejudicial to its members or public interest, has to be submitted to the Court before an order, sanctioning the scheme or confirming dissolution, is made. Clause 232 does not expressly mandate this requirement.

Section 394/Clause 232 also require that a certified copy of the order has to be filed with ROC within 30 days, with the difference that Section 394 states that order has to be filed within 30 days of making of the order whereas Clause 232 stipulates that order has to be filed within 30 days of receipt of the certified copy of the order.

Section 394 clarifies that “transferee company” does not include any company other than a company within the meaning of this Act, but “transferor company” includes anybody corporate, whether a company within the meaning of this Act or not. Clause 232 is silent on this aspect.


· Auditors' certificate regarding compliance with accounting standards to be submitted to Tribunal before passing of order.

· The scheme under this section to clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date.

· Every company in relation to which the order is made shall, until the completion of the scheme, file a statement 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

· Clause 234 explains about merger by absorption and merger by formation of a new company.

Clause 233 – Simplified procedure for Small companies and Holding – WOS companies

Clause 233 is a new inclusion in the bill which provides for a simplified procedure in relation to a scheme of merger or amalgamation 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.

The authority to sanction the scheme in this case is given to the Regional Director (Central Government) instead of the Tribunal.

Clause 234 – Merger or amalgamation of company with foreign company

Clause 234 for the first time makes provision for schemes of mergers and amalgamations between companies incorporated in India and companies incorporated in countries (to be notified by the Central Government) outside India.

The procedure mandated is same as in case of two Indian companies with the difference that prior approval of RBI will be required for entering into any scheme of merger or amalgamation and that Central Government will make rules regarding such schemes in consultation with RBI.

The scheme may provide 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, as the case may be.

“Foreign Company” is defined to mean any company or body corporate incorporated outside India whether having a place of business in India or not.

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(Practising Company Secretaries )
Category Corporate Law   Report

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