COMPROMISES, ARRANGEMENT AND AMALGAMATION

[Mr. M. GOVINDARAJAN]

Introduction

Section 230 of the Companies Act, 2013 (‘Act’ for short) provides for compromise, arrangements and amalgamation.  This section (except sub clause (11) and (12) ) came into effect from 15.12.2016.  For this purpose the Central Government made ‘The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (‘Rules’ for short) which came into effect from 15.12.2016.  Explanation to Section 230(1) provides that arrangement includes a reorganization of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both of those methods.

Filing application

Section 230(1) 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

an application may be submitted  by the company or of any member of the company or in the case of a company which is being would up of the liquidator, in Form No. NCLT-1 along with-

• A notice of admission in Form No. NCLT – 2;
• An affidavit in Form No. NCLT-6;
• A copy of the scheme of compromise or arrangement, which should include disclosures as detailed below-

• 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 proceeding 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 in Form CAA -1;
• 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 quality 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, moveable and immovable, of the company by a registered valuer;

Decision of the Tribunal

Upon hearing the application, the Tribunal shall, unless it thinks fit for any reason to dismiss the application, shall 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;
• 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;
• 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.

Notice of meeting

Section 230(3) provides that where a meeting is proposed to be called in pursuance of an order of the Tribunal, a notice of such meeting shall be sent to all the creditors or class of creditors and to all members or class of members and the debenture holders of the company, individually at the address registered with the company.    The notice shall be in Form CAA – 2.  The notice shall be sent by the Chairperson appointed for the meeting, or if the Tribunal so directs, by the company or its liquidator or any other person as the Tribunal may direct, by registered post or speed post or by courier or by e-mail or by hand delivery or any other mode as directed by the Tribunal.    The notice shall be sent at least one month before the date fixed for hearing. 

The service of notice of meeting shall be deemed to have been effected in case of delivery by post, at the expiration of 48 hours after the letter containing the same is posted.

The notice shall be accompanied by a copy of the scheme of compromise or arrangement and a statement disclosing the following details of compromise or arrangement, if such details are not already included in the said scheme-

• the  details of the order of the Tribunal directing the calling, convening and conducting of the meeting-

• the date of the order;
• date, time and venue of the meeting.

• details of the company including-

• Corporate Identification Number (CIN) or Global Location Number (GLN) of the company;
• Permanent Account Number;
• Name of the company;
• Date of incorporation;
• Type of the company;
• Registered office address and email address;
• Summary of main object as per the memorandum of association; and main business carried on by the company;
• Details of change of name, registered office and objects of the company during the last five years;
• Name of the stock exchange(s) where securities of the company are listed, if applicable;
• Details of the capital structure of the company including authorized, issued, subscribed and paid up share capital; and
• Names of the promoters and directors along with their address;

• If the scheme of compromise or arrangement relates to more than one company, the fact and details of any relationship subsisting between such companies who are parties to such scheme of compromise or arrangement including holding, subsidiary or of associate companies;
• The date of the board meeting at which the scheme was approved by the board of directors including the name of directors voted in favor of the resolution, who voted against the resolution and who did not vote or participate on such resolution;
• Explanatory statement disclosing details of the scheme of compromise or arrangement including-

• parties involved in such compromise or arrangement;
• in case of amalgamation or merger, appointed date, effective date, share exchange ratio (if applicable) and other considerations, if any;
• summary of valuation report (if applicable) including basis of valuation and fairness opinion of the registered valuer, if any, and the declaration that the valuation report is available for inspection at the registered office of the company (till the registration of persons as valuers is prescribed under Section 247 of the Act, the valuation report shall be made by an independent merchant banker who is registered with SEBI or an independent Chartered Accountant in practicehaving a minimum experience of 10 years);
• details of capital or debt restructuring, if any;
• rationale for the compromise or arrangement;
• benefits of the compromise or arrangement as perceived by the Board of Directors to the company, members, creditors and others, as applicable;
• amount due to unsecured creditors.

• Disclosure about effect of compromise or arrangement on material interests of directors, Key Managerial Personnel and debenture trustee;
• investigation or proceedings, if any, pending against the company under the Act;
• details of the availability of the following documents for obtaining extract from or for making or obtaining copies of or for inspection by the members and creditors, namely-

• latest audited financial statements of the company including consolidated financial statements;
• copy of the order of Tribunal in pursuance of which the meeting is to be convened or has been dispensed with;
• copy of scheme of compromise or arrangement;
• contracts or arrangements material to the compromise or arrangement;
• the certificate issued by Auditor of the company to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the Accounting Standards prescribed under Section 133 of the Companies Act, 2013; and
• such other information or documents as the Board or Management believes necessary and relevant for making decision for or against the scheme;

• details of approvals, sanctions or no-objection(s), if any from regulatory or any other governmental authorities required, received or pending for the proposed scheme of compromise or arrangement;
• a statement to the effect that the persons to whom the notice is sent may vote in the meeting either in person or by proxies, or where applicable by voting through electronic means.

Notice in the web site

The proviso to Section 230(3) provides that such notice and other documents shall also be placed on the website of the company, if any, not less than 30 days before the date fixed for the meeting.   In case of a listed company these documents shall be sent to the SEBI and stock exchange where the securities of the companies are listed, for placing on their web site.

Notice to statutory authorities

Section 230(5) provides that the said notice along with all the documents in Form CAA 3 shall be sent to-

• the Central Government;
• the Income Tax Authorities;
• the Reserve Bank of India;
• the Securities and Exchange Board of India;
• the respective Stock Exchanges;
• the Official Liquidator;
• the Competition Commissioner of India; and
• all such other sectoral regulators or authorities which are likely to be affected by the compromise or arrangement.

The notice  to the above authorities shall be sent after the notice is sent to the members or creditors of the company by  registered post or speed post or by courier or by hand delivery at the office of the authority.

If the authorities desire to make any representation the same shall be sent to the Tribunal within a period of 30 days from the date of receipt of such notice and copy of representation shall be simultaneously sent to the concerned companies.   In case no representation is received within the stated period of 30 days by the Tribunal, it shall be presumed that the authorities have no representation to make on the proposed scheme of compromise or arrangement.

Advertisement of notice

The second proviso to Section 230(3) provides that where the notice for the meeting is also issued by way of an advertisement.  The advertisement shall indicate the time within which copies of the compromise or arrangement shall be made available to the concerned person free of charge from the registered office of the company.  The notice shall be advertised in Form No.CAA-2.  The notice shall be advertised at least one English newspaper and in at least one vernacular newspaper having wide circulation in the State in which the registered office of the company is situated, or such newspapers as may be directed by the Tribunal. 

Voting

Rule 9 provides that the person who receives the notice may within one month from the date of receipt of the notice vote in the meeting either in person or through proxy or through postal ballot or through electronic means to the adoption of the scheme of compromise and arrangement.

For the purpose of this section, the term ‘shareholding’ means the shareholding of the members of the class who are entitled to vote on the proposal.  The term ‘outstanding debt’ means debt owned by the company to the respective class or classes of creditors that remain outstanding as per the latest audited financial statement, or if such statement is more than six months old, as per provisional financial statement not preceding the date of application by more than 6 months.

Proxies

Rule 10 (1) provides that voting by proxies shall be permitted, provided a proxy in the prescribed form duly signed by the person entitled to attend and vote at the meeting is filed with the company at its registered office not later than 48 hours before the meeting. 

Rule 10(2) provides that where a body corporate which is a member or creditor of a company authorizes any person to act as its representative at the meeting, of the members or creditors of the company, or of any class of them, as the case may be, a copy of the resolution of the Board of Directors or other governing body of such body corporate authorizing such person to act as its representative at the meeting, and certified to be a true copy by a director, the manager, the Secretary or other authorized officer of such body corporate shall be lodged with the company at its registered office not later than 48 hours before the meeting.

Rule 10 (3) provides that no person shall be appointed as a proxy who is a minor.

Rule 10 (4) provides that the proxy of a member or creditor blind or incapable of writing may be accepted if such member or creditor has attached his signature or mark thereto in the presence of a witness who shall add to his signature his description and address.  All insertions in the proxy are in the handwriting of the witness.  Such witness shall have certified at the foot of the proxy that all such insertions have been made by him at the request and in the presence of the member or creditor before he attached his signature or mark.

Rule 10 (5) provides that the proxy or a member or creditor who does not English may be accepted if it is executed in the manner prescribed in the preceding sub rule and the witness certifies that it was explained to the member or creditor in the language known to him and gives the member’s or creditor’s name in English below the signature.

Copy to be furnished by the company

Rule 11 prescribes that every creditor or member entitled to attend the meeting shall be furnished by the company, free of charge, within one day on a requisition being made for the same, with a copy of the scheme of the proposed compromise or arrangement together with a copy of the statement required to be furnished under Section 230 of the Act.

Affidavit of service to Tribunal

Rule 12 provides that the Chairperson appointed for the meeting of the company or other person directed to issue the advertisement and the notices of the meeting shall file an affidavit before the Tribunal not less than 7 days before the date fixed for the meeting or the date of the first of the meetings, as the case may be, stating that the directions regarding the issue of notices and the advertisement have been duly complied with.  In case of default, the application along with the copy of the last order issued shall be posted before the Tribunal for such orders as it may think fit.

Result of meeting

Rule 13 provides that the voting at the meeting on all resolutions shall take place by poll or by voting through electronic means.  The report of the result of the meeting shall be in Form No. CAA – 4.  The report shall state accurately the number of creditors or class of creditors or the number of members or class of members, who were present and who voted at the meeting either in person or by proxy or electronic means, their individual values and the way they voted. 

Report of the result

Rule 14 provides that the Chairperson of the meeting or where there are separate meetings, the Chairperson of each meeting shall, within the time fixed by the Tribunal or where no time limit has been fixed, within 3 days after the conclusion of the meeting, submit a report to the Tribunal on the result of the meeting in Form No. CAA – 4.

Sanction of the scheme

Rule 15 provides that where the proposed compromise or arrangement is agreed to by the members or creditors or both, with or without modification, the company or its liquidator shall, within 7 days of the filing of the report by the Chairperson, present a petition to the Tribunal in Form CAA – 5 for sanction of the scheme of compromise or arrangement.  The petition shall pray for appropriate orders and directions under Section 230 read with Section 232 of the Act.  Where the company fails to present the petition it shall be open to any creditor or member with the leave of the Tribunal to present the petition and the company shall be liable for the cost thereof.

Rule 16 provides that the Tribunal shall fix a date for the hearing of the petition and notice of the hearing shall be advertised in the same newspaper in which the notice of the meeting was advertised or in such other newspaper as the Tribunal may direct, not less than 10 days before the date fixed for the hearing.  The notice of the hearing shall also be served by the Tribunal to the objectors or to their representatives and to the Central Government and other authorities who have made representation and have desired to be heard in their representation.

Rule 17 provides that where the Tribunal sanctions the compromise or arrangement, the order shall provide for all or any of the following matters as per Section 230 (7) of the Act, namely-

• 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 any proceedings before BIFR 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.

No compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the company’s auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme is in conformity with the accounting standards prescribed under Section 113.

The order shall direct that a certified copy of the same shall be filed with the Registrar of Companies within 30 days from the date of receipt of the copy of the order, or such other time as may be fixed by the Tribunal.  The order shall be in Form No. CAA – 6 with such variations as may be necessary.

No compromise or arrangement in respect of any buy back of securities shall be sanctioned by the Tribunal unless such buy back is in accordance with the provisions of this Act. 

Take over

Any compromise or arrangement may include takeover offer made in such manner as may be prescribed.  In case of listed companies take over offer shall be as per the regulations framed by SEBI.  If any person is aggrieved with respect to the takeover offer of companies other than the listed companies, such person may make an application to the Tribunal in such manner as may be prescribed.  The Tribunal may, on application, pass such order as it may deem fit. 

Power of Tribunal to enforce compromise or arrangement

Section 231 provides where the Tribunal makes an order sanctioning a scheme in respect of a company, it-

• shall have power to supervise the implementation of the scheme; 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 it necessary for the proper implementation of the compromise or arrangement.

If the Tribunal is satisfied that the compromise or arrangement sanctioned 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.  Such an order shall be deemed to be an order made under Section 273.