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Section 390 to 395 of Companies Act, 1956 deal with arrangements, amalgamations, mergers and the procedure to be followed for getting the arrangement, compromise or the scheme of amalgamation approved.  The business people or the MBA students look at the issue of mergers in a different angle to that of legal professionals. It is very often been criticized by legal professionals that the sections providing for amalgamation etc. are being misused and it may be true to some extent, but, its not wholly true. But, when we discuss the issue of mergers with business people and MBA graduates, then, they talk about business strategies like market penetration strategy etc. Its true that when a company is not doing well and its financial position is weak, then, the Act itself guides the Company to go for settlement with creditors or go for some arrangement instead of winding-up the Company. The Act can not force the company to go for compulsory merger or settlement and it all depends upon the commercial wisdom and viability of a Company. While the Act facilitates the arrangement or settlement with creditors etc. when the Company is not doing well, it is for the creditors and other stake-holders to decide as to whether they agree for settlement etc. or not. The act facilitates arrangement, settlement, amalgamation and merger etc. If it is a private company or a public limited company, the Company has to follow the procedure laid down under the Companies Act apart from the Central Government rules in this regard. If it is a listed public company, then, the company has to comply with the SEBI regulations too and its all in the nature of giving prior relevant information to the stake holders/public or giving further material information when the deal is over.

    Dealing with the issue of mergers and amalgamations elaborately is a bigger and complicated affair.

          In this article, I would like to deal with, in brief, as to whether it is right to say that the amalgamation provisions as provided in the Act are being misused and the procedure to be followed while getting the scheme of amalgamation approved under the provisions of Companies Act, 1956. 

Is it correct to say that the provisions dealing with the arrangement and amalgamations will be useful for the unscrupulous as an escape route? 

          There is a general assumption that the provisions of Act especially provisions providing for compromise, arrangement or amalgamation, are getting misused. Even though, there is nothing in law even by implication to suggest that the provisions will get misused, it is general thought that the persons charged with will take the plea that the application has been filed for sanctioning the scheme and the proceedings will automatically get abated. Law is very clear in this regard that the criminal proceedings against the persons connected with the affairs of the company will not get abated just because an application seeking sanction of scheme is filed or scheme is being implemented. Only the proceedings, to some extent, sought to be stayed when a scheme is filed and implemented. It is based on the logic that if the civil proceedings are going on simultaneously when the scheme is being approved, then, the scheme could not be worked out. Dealing with the same, the High Court of Bombay, in State of Tamilnadu Vs. Uma Investments Pvt. Ltd (1977) 47 Com Cases 242, was pleased to observe that “it is in respect of these classes of creditors that a proposal is put forward by the company for a compromise or arrangement. The compromises or arrangements are, therefore, concerned with civil liabilities where a creditor will accept a lesser payment or receive less on distribution or grant time or waive interest and work out other kindred things. It is not possible to take the view that section 391 is meant for freezing criminal proceedings which may be instituted either by a creditor or a member of a company or by the State either against the company or its officers. The section does not provide an umbrella to a company or its directors and officers for a thing which is an offence or an infringement or violation of any law, rule or regulation punishable by imprisonment or fine or both. Such criminal proceedings can be commenced or continued notwithstanding the fact that a scheme for compromise or arrangement has been initiated under section 391”.  

Procedure to be followed while approving the scheme of amalgamation: 

          The procedure to be followed while getting the scheme of amalgamation is approved will depend upon sections 391 to 394A. Though, section 391 deals with the issue of compromise or arrangement which is different from the issue of amalgamation as deal with under section 394, as section 394 too refers to the procedure under section 391 etc., all the section are to be seen together while understanding the procedure of getting the scheme of amalgamation approved.  Again, it is true that while the procedure to be followed in case of amalgamation of two companies is wider than the scheme of compromise or arrangement though there exist substantial overlapping. The procedure to be followed while getting the scheme of amalgamation and the important points, are as follows:

     (1)    Any company, creditors of the company, class of them, members or the class of members can file an application under section 391 seeking sanction of any scheme of compromise or arrangement. However, by its very nature it can be understood that the scheme of amalgamation is normally presented by the company.  While filing an application either under section 391 or section 394, the applicant is supposed to disclose all material particulars in accordance with the provisions of the Act.

     (2)    Upon satisfying that the scheme is prima facie workable and fair, the Tribunal order for the meeting of the members, class of members, creditors or the class of creditors.  Rather, passing an order calling for meeting, if the requirements of holding meetings with class of shareholders or the members, are specifically dealt with in the order calling meeting, then, there won’t be any subsequent litigation. The scope of conduct of meeting with such class of members or the shareholders is wider in case of amalgamation than where a scheme of compromise or arrangement is sought for under section 391.

     (3)    The scheme must get approved by the majority of the stake holders viz., the members, class of members, creditors or such class of creditors. The scope of conduct of meeting with the members, class of members, creditors or such class of creditors will be restrictive some what in an application seeking compromise or arrangement.

     (4)    There should be due notice disclosing all material particulars and annexing the copy of the scheme as the case may be while calling the meeting.

     (5)    In a case where amalgamation of two companies is sought for, before approving the scheme of amalgamation, a report is to be received form the registrar of companies that the approval of scheme will not prejudice the interests of the shareholders.

     (6)    The Central Government is also required to file its report in an application seeking approval of compromise, arrangement or the amalgamation as the case may be under section 394A.

     (7)   After complying with all the requirements, if the scheme is approved, then, the certified copy of the order is to be filed with the concerned authorities.


          Please note the pendency of new companies bill before Lok Sabha.

Published by

Durga Rao
Category Corporate Law   Report

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