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is there any legal provisions for demerger of a private limited company??

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CA Sunil Kumar (Chartered Accountant) (4524 Points)
Replied 16 July 2018

Demerger under the a scheme of arrangement with approval by the Court under Companies Act

In order to affect a demerger, there must be a provision in the Memorandum of understanding of the principle company. The scheme of such arrangement has to be submitted in the respective High Courts of the states where the head office of the principle as well as resulting company is registered.

The procedure for demerger by this method is as follows-

Preparation of Scheme of Arrangement

The scheme of arrangement is prepared after consulting the interested parties and stakeholders. Such arrangement is approved by the board of directors. Also, the share exchange ratio is determined while balancing the interest of all the parties.

Application to court for direction to hold meetings of Members/Creditors

The summons is issued under section 391 by a judge of the concerned High Court after an application is filed in Form 33 accompanied by an affidavit in support in Form 34. The scheme of such arrangement must also be annexed. Additional documents that are to be filed before the High Court are:

a) Memorandum and articles of association of the Company;

b) Latest Audited Balance Sheets ;

c) List of Shareholders and Creditors;

d) Extract of Board Resolution approving the Scheme, and

e) Draft notice of Meeting, Explanatory Statements and Proxy.

Obtaining court’s order for holding meeting of Members/Creditors

The court examines the fairness of the scheme submitted by the applicants and subsequently issues summons in Form 35 of the Court Rules. The court has to ensure that the scheme is capable of being implemented.

Notice of meeting of Members/Creditors

A notice in Form 36 is sent to the interested parties by the persons authorized by the courts at least twenty one days before the date of the meeting accompanied by the proposed scheme and proxy forms. Such notice shall also be advertised in Form 38 in such newspapers that are well circulated among the interested parties.

Holding meeting of Members/Creditors

A meeting shall be held according to the directions of the court and the result of such meeting shall be decided by separately counting votes in favor and against the motion. The chairperson of each meeting shall submit a report in Form 39 within the time prescribed by the court.

Petition to the Court for sanctioning the scheme of Demerger

A petition in Form 40 has to be submitted to the court for sanctioning the scheme of demerger. It has to be approved by three-fourths of members/creditors in order to file a petition to sanction the same.

Court’s order on petition sanctioning the scheme of Demerger

After hearing the objections, the Court may pass an order approving the scheme of scheme of demerger in the same newspaper in which the notice of meeting was advertised.

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