APPLICATION FOR COMPROMISES, ARRANGEMENT AND AMALGAMATION

[Mr. M. GOVINDARAJAN]

 Compromise, arrangement and amalgamation

The terms ‘compromise’, ‘arrangement’ and ‘amalgamation’ are not defined in the Companies Act, 2013 or in the Companies (Compromise, arrangement and amalgamation) Rules, 2016.

A Compromise refers to an agreement between two or more parties to settle a dispute or a claim. Under the Companies Act, 2013, a compromise refers to an arrangement between a company and its creditors or members or any class of them. The main objective of a compromise is to restructure a company’s debts or share capital without winding up the company. A company can reorganize or restructure itself partially or completely by internal or external reconstruction. Internal reconstruction includes compromise and arrangement.

An Arrangement is similar to a compromise. However, the difference lies in the fact that an arrangement can be between the company and any other person or entity. Under the Companies Act, 2013, an arrangement refers to a reorganization of the company’s share capital or its business or a merger or acquisition of the company with another company or entity. Arrangement is a kind of Internal reconstruction in which a company-made arrangement in which adjustments are made (inside the company) to the assets/liabilities of the firm to improve the company’s profitability. For example, share capital reduction, share conversion to stock or vice versa, share consolidation, and so on.

So According to Section 230 of the Companies Act, 2013, arrangement comprises reorganizing the company’s share capital through consolidation of distinct classes of shares or division of shares into separate classes of shares, or both.

Amalgamation is a formal process that unites two or more corporations into one corporation that keeps all the amalgamating corporations’ assets and liabilities. It is a corporate restructuring instrument designed to make combining the businesses of two or more firms as straightforward and efficient as possible. The amalgamation procedure comprises the transfer of the amalgamating firms’ assets and liabilities to the amalgamated company. The shareholders of the amalgamating companies get shares in the amalgamated company in return for their shares in the amalgamating companies.

 Who can file application?

Section 230(1) of the Act provides that where a compromise or arrangement is proposed-

• between a company and its creditors or any class of them; or
•  between a company and its members or any class of them.

The application for compromises, arrangement and amalgamation may be filed before the National Company Law Tribunal (‘NCLT’ for short) by-

• Company; or
• Any creditor or member of the company; or
• In case of company being wound up the liquidator appointed by the Court under the Act or under the Insolvency and Bankruptcy Code.

Application

The application under Section 230(1) of the Act may be filed in Form No. NCLT – 1 along with-

• a notice or admission in Form No. NCLT-2;
• an affidavit in Form No. NCLT-6;
• a copy of scheme of compromise or arrangement, which should include disclosures as per sub-section (2) of section 230 of the Act.
•  Rs.5000/- is payable as fees for compromise, arrangement and amalgamation.

No compromise or arrangement in respect of any buy-back of securities under this section shall be sanctioned by the Tribunal unless such buy-back is in accordance with the provisions of section 68. Any compromise or arrangement may include takeover offer made in such manner as may be prescribed. In case of listed companies, takeover offer shall be as per the regulations framed by the Securities and Exchange Board.

Disclosure

The applicant shall disclose the following in the application-

• 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 seventy-five per cent of the secured creditors in value, including-

•  a creditor's responsibility statement in the CAA-1;

(In CAA – 1, the creditors shall indicate that the proposed corporate debtor restructuring scheme is in the best interest of the creditors and they consented to the scheme; further declare that the debt is owed to him by the company or the liability is created by the company in his favor in good faith and in the ordinary course of the company; he believes that the scheme does not give him any fraudulent preference at the cost of any secured/unsecured creditors)

• safeguards for the protection of other secured and unsecured creditors;
• report by the auditor that the fund requirements of the company after the corporate debt restructuring as approved shall conform to the liquidity test based upon the estimates provided to them by the Board;
• where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India, a statement to that effect; 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.

Order

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.

 The Tribunal shall, unless it thinks fit for any reason to dismiss the application, give such directions as it may think necessary in respect of the following matters: -

• determining the Class or classes Of creditors or of members whose meeting Or meetings have to be held for considering the proposed compromise or arrangement; or dispensing with the meeting or meetings for any class or classes of creditors in terms of sub-section (9) of section 230;
• fixing the time and place of the meeting or meetings;
• appointing a Chairperson and scrutinizer for the meeting or meetings to be held, as the case may be and fixing the terms of his appointment including remuneration;
• fixing the quorum and the procedure to be followed at the meeting or meetings, including voting in person or by proxy or by postal ballot or by voting through electronic means;
•  determining the values of the creditors or the members, or the creditors or members of any class, as the case may be, whose meetings have to be held;
• notice to be given of the meeting or meetings and the advertisement of such notice;
•  notice to be given to sectoral regulators or authorities as required under sub-section (5) of section 230;
•  the time within which the chairperson of the meeting is required to report the result of the meeting to the Tribunal; and
• such other matters as the Tribunal may deem necessary.

Reference:

1. www.cacmg.com.