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RECONSTRUCTION AND AMALGAMA TION
QUESTION BANK
1. How any amalgamation of a company with another company be carried out?
2. Define reconstruction and amalgamation.
SHORT NOTES
- Regulation and amalgamation of a Company.
- Amalgamation and reconstruction.
- Table of content
SYNOPSIS
Corporate Restructuring: Compromises, Arrangements, Mergers, and Amalgamations under the Companies Act, 2013
[A] COMPROMISES AND ARRANGEMENTS
I. Conceptual Meaning
1. Compromise
2. Arrangement
3. Main Distinction from Mergers
II. Statutory Framework: Power to Compromise or Make Arrangements (Section 230)
1. Parties Involved
2. Application to the Tribunal
3. Mandatory Statutory Disclosures (Section 230(2))
4. Notice of the Meeting
5. Approval and Sanctioning of the Scheme (Section 230(6))
Exemption from Calling a Meeting:
6. Scope of Orders Passed by the Tribunal
III. Enforcement and Supervision by the Tribunal (Section 231)
[B] MERGERS AND AMALGAMATIONS
I. Conceptual Distinctions
1. Amalgamation
2. Merger
3. Reconstruction
II. Statutory Rules Governing Mergers and Amalgamations (Section 232)
1. NCLT Directed Meeting
2. Mandatory Circulated Information
III. Special Forms of Mergers and Amalgamations
1. Fast Track Merger (Section 233)
2. Cross-Border Mergers (Section 234)
3. Central Government Ordered Amalgamations in Public Interest (Section 237) .
IV. Post-Merger Corporate Responsibilities
1. Preservation of Corporate Books and Records (Section 239)
2. Continuing Liability for Past Offences (Section 240)
V. Acquisition of Corporate Shares and Minority Squeeze-outs
1. Compulsory Acquisition of Shares from Dissenting Shareholders (Section 235)
[VI] Comparative Summary: Sections 230, 232, and 233
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Corporate Restructuring: Compromises, Arrangements, Mergers, and Amalgamations under the Companies Act, 2013
[A] COMPROMISES AND ARRANGEMENTS
I. Conceptual Meaning
1. Compromise
A compromise presupposes the existence of a dispute, controversy, or litigation between a company and its creditors, or between a company and its members. It represents an agreement or settlement reached by making mutual concessions to avoid prolonged litigation.
2. Arrangement
An arrangement applies even when there is no active dispute. It is an internal reorganization mechanism utilized when a company needs to re-adjust the rights and liabilities of its members, a class of members, its creditors, or a class of creditors.
Under the Explanation to Section 230(1), an “Arrangement” includes a reconstruction of the share capital of a company by the consolidation of shares of different classes, the division of shares into different classes, or both these methods.
3. Main Distinction from Mergers
Compromises and arrangements are executed internally within the framework of an existing company. Unlike mergers or amalgamations, they do not inherently involve blending into a separate, distinct corporate entity.
II. Statutory Framework: Power to Compromise or Make Arrangements (Section 230)
1. Parties Involved
A compromise or arrangement under Section 230 is proposed between:
a. A company and its creditors, or any class of them; or
b. A company and its members, or any class of them.
2. Application to the Tribunal
An application to initiate a scheme of compromise or arrangement must be filed before the National Company Law Tribunal (NCLT). Under Section 230(1), the application can be submitted by:
a. The company itself;
b. Any creditor of the company;
c. Any member of the company; or
d. The liquidator, in the case of a company that is undergoing winding up.
Upon receiving the application, the Tribunal may order a meeting of the creditors (or class of creditors) or the members (or class of members) to be called, held, and conducted in a manner directed by the NCLT.
3. Mandatory Statutory Disclosures (Section 230(2))
The applicant must disclose to the Tribunal, by way of a sworn affidavit, all material facts relating to the company, including:
a. The latest financial position of the company and the latest auditor’s report on its accounts.
b. The pendency of any investigation or legal proceedings against the company.
c. Details regarding any reduction of the share capital included in the proposed scheme.
d. Any scheme of Corporate Debt Restructuring (CDR) consented to by not less than 75% of the secured creditors in value.
e. A statement to that effect if the company purports to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India (RBI).
f. A comprehensive valuation report concerning the shares, property, and all assets (tangible, intangible, movable, and immovable) of the company, prepared by a Registered Valuer.
4. Notice of the Meeting
Once ordered by the Tribunal, a notice of the meeting must be sent to all creditors or class of creditors, members or class of members, and debenture holders individually at their registered addresses.
The notice must be accompanied by a statement disclosing the details of the compromise or arrangement, a copy of the valuation report, and an explanation of the scheme's impact on creditors, key managerial personnel (KMP), promoters, and non-promoter shareholders.
5. Approval and Sanctioning of the Scheme (Section 230(6))
If the scheme is approved by the dual threshold test and subsequently sanctioned by an official order of the NCLT, it becomes legally binding on the company, all creditors (or classes of creditors), all members (or classes of members), and, where applicable, the liquidator and contributories.
Exemption from Calling a Meeting:
Under Section 230(9), the Tribunal has the discretion to dispense with calling a meeting of creditors or a class of creditors if creditors holding at least 90% in value agree to and confirm the scheme of compromise or arrangement via a sworn affidavit.
6. Scope of Orders Passed by the Tribunal
For the effective implementation of the sanctioned scheme, the Tribunal may pass specific orders regarding:
a. Preference Share Conversion: If preference shares are converted into equity shares, preference shareholders must be given the option to either receive outstanding arrears of dividend in cash or accept equity shares equivalent to the value of the dividend payable.
b. Creditor Class Protection: Special protective measures for any specific class of creditors.
c. Variation of Shareholders' Rights: If the scheme varies the rights of shareholders, it must comply with the provisions of Section 48.
d. Abatement of BIFR/IBC Proceedings: Upon the restructuring agreement, any corresponding pending historical corporate recovery or reconstruction proceedings before institutional boards shall abate.
e. Exit Offers for Dissenting Shareholders: The scheme must provide a fair exit offer to dissenting shareholders at a price determined by a registered valuer.
f. Compliance with Buy-back Rules: No compromise or arrangement involving a buy-back of securities will be sanctioned unless it complies strictly with the statutory prerequisites of Section 68.
g. Auditor's Certificate: The Tribunal will not sanction any scheme unless a certificate from the company's statutory auditor is filed, proving that the proposed accounting treatment conforms to the accounting standards prescribed under Section 133.
h. Takeover Offers: The scheme may include a takeover offer made in the prescribed manner. For unlisted companies, any aggrieved party may file an application with the NCLT regarding grievances related to the takeover offer.Filing with the ROC: The certified copy of the Tribunal's sanctioning order must be filed by the company with the Registrar of Companies (ROC) within 30 days of receiving the order.
III. Enforcement and Supervision by the Tribunal (Section 231)
Under Section 231, when the Tribunal sanctions a compromise or arrangement, it retains continuous supervisory jurisdiction over the company:
a. It has the power to supervise the effective implementation of the scheme.
b. It may issue directions or sanction necessary modifications to the scheme if it encounters operational difficulties in its execution.
c. Winding Up Order: If the Tribunal determines that the sanctioned compromise or arrangement cannot be implemented satisfactorily, and the company is unable to pay its debts, it may initiate compulsory winding up.
[B] MERGERS AND AMALGAMATIONS
I. Conceptual Distinctions
1. Amalgamation
Amalgamation occurs when two or more companies blend together to form an entirely new corporate entity, or when one existing company completely absorbs another. In a strict technical sense, the existing transferor companies dissolve and lose their independent legal existence, transferring all assets and liabilities to the new or surviving transferee company.
2. Merger
A merger is an absorption process where one company integrates into another existing company. The acquiring company absorbs the target company, retains its own name and identity, and acquires all assets and liabilities of the target entity. The target company ceases to exist, but no new corporate entity is created.
3. Reconstruction
Reconstruction occurs when a company transfers its entire undertaking and property to a newly formed company under a specific agreement. The old company is dissolved, and its members receive shares or financial interests in the new company. This is an alternative to structural changes within the original company frame.
II. Statutory Rules Governing Mergers and Amalgamations (Section 232)
1. NCLT Directed Meeting
Where an application is made under Section 230 and it is demonstrated to the NCLT that the compromise or arrangement is for a scheme of reconstruction, merger, or amalgamation involving two or more companies, the Tribunal will order a meeting of members or creditors. The foundational provisions of Section 230 apply mutatis mutandis to Section 232.
2. Mandatory Circulated Information
The following documents must be circulated to the stakeholders along with the notice of the meeting:
a. The draft terms of the scheme adopted by the respective Boards of Directors of the merging companies.
b. Confirmation that a copy of the draft scheme has been formally filed with the Registrar of Companies (ROC).
c. A detailed Directors' Report explaining the financial and operational impact of the scheme on each class of shareholders, key managerial personnel (KMP), promoters, and non-promoters, explicitly laying down the share exchange ratio and any valuation difficulties encountered.
d. The statutory Valuer's Report regarding asset and share valuations.
e. A supplementary accounting statement if the latest annual accounts of any merging company relate to a financial year ending more than six months before the first meeting summoned to approve the scheme.3. Contents of the Final Sanction Order (Section 232(3))
Upon approving the merger scheme, the NCLT may make provisions for the following matters via its final order:
a. Transfer of Assets and Liabilities: The transfer of the whole or part of the undertaking, property, or liabilities of the transferor company to the transferee company from a specified effective date.
b. Allotment of Shares: The allotment or appropriation of shares, debentures, policies, or other similar instruments by the transferee company to the designated persons under the arrangement.
c. Continuation of Legal Proceedings: Any legal proceedings pending by or against the transferor company on the date of transfer shall be continued by or against the transferee company.
d. Dissolution Without Winding Up: The transferor company is dissolved directly without undergoing a formal winding-up process.
e. Dissenting Provisions: Necessary provisions for tracking and paying out individuals who dissent from the scheme within the timeline directed by the NCLT.
f. Non-Resident Shareholders: If share capital is held by non-resident shareholders under Foreign Direct Investment (FDI) guidelines, the allotment of shares in the transferee company must comply with those specific statutory investment rules.
g. Transfer of Employees: The systematic transfer of employees from the transferor company to the transferee company, protecting their service terms.
h. Listed to Unlisted Merger Safeguards: If a listed company merges into an unlisted company, the transferee company shall remain unlisted until it completes regular listing requirements. If shareholders of the listed transferor company choose to exit, the scheme must provide an exit option based on a predetermined price formula or independent valuation.
i. Set-off of Authorized Capital Fees: The statutory registration fees previously paid by the transferor company on its authorized capital can be set off against the fees payable by the transferee company on its expanded authorized capital post-amalgamation.4. Penalties for Non-Compliance (Section 232(8))
If a company fails to submit a certified copy of the NCLT's order to the Registrar within 30 days of receipt, the company and its officers in default face a statutory penalty:
a. Initial Penalty: Fixed penalty of ₹20,000.
b. Continuing Default Penalty: An additional ₹1,000 per day for each day the failure continues after the first day.
c. Statutory Cap: The maximum penalty is capped at ₹3,00,000.
III. Special Forms of Mergers and Amalgamations
1. Fast Track Merger (Section 233)
Section 233 provides a simplified, expedited route for mergers that completely bypasses the NCLT approval process. This option is restricted to:
a. Two or more small companies (as defined under Section 2(85)); or
b. A holding company and its wholly-owned subsidiary company.
This fast-track scheme requires approval from the Board of Directors, a 90% majority in value of creditors, and a 90% majority of shareholders (or three-fourths in value), followed by registration with the Central Government (Regional Director), Registrar, and Official Liquidator.
2. Cross-Border Mergers (Section 234)
Subject to the provisions of any concurrent foreign exchange laws, a foreign company may merge into an Indian company, or an Indian company may merge into a foreign company incorporated in a permitted jurisdiction. Any cross-border merger requires the prior explicit approval of the Reserve Bank of India (RBI). The payment consideration to the shareholders of the merging company may be executed in cash, Depository Receipts, or a combination of both.
3. Central Government Ordered Amalgamations in Public Interest (Section 237)
If the Central Government is satisfied that it is essential in the public interest for two or more companies to amalgamate, it may issue an order notified in the Official Gazette providing for their compulsory amalgamation into a single corporate body. The order specifies the constitution, rights, privileges, liabilities, duties, and obligations of the consolidated entity.
IV. Post-Merger Corporate Responsibilities
1. Preservation of Corporate Books and Records (Section 239)
The books of account, registers, papers, and records of an amalgamated company (or a company whose shares have been acquired) cannot be destroyed or disposed of without the prior explicit written permission of the Central Government. This ensures that evidence remains intact for subsequent accountability.
2. Continuing Liability for Past Offences (Section 240)
The historical legal liability for offences committed by officers in default of a transferor company prior to the merger, amalgamation, or acquisition is not wiped clean by corporate restructuring. These personal liabilities continue uninterrupted against those officers even after the merger or amalgamation is finalized.
V. Acquisition of Corporate Shares and Minority Squeeze-outs
1. Compulsory Acquisition of Shares from Dissenting Shareholders (Section 235)
Where an acquisition scheme involving the transfer of shares to a transferee company has been approved within four months of the offer by the holders of not less than nine-tenths (90%) in value of the shares being transferred:
a. The transferee company may, within two months following the expiry of the four months, issue a formal statutory notice to any dissenting shareholder stating its desire to acquire their shares.
b. Unless the dissenting shareholder moves the Tribunal within one month from the date of the notice and obtains a restrictive stay order, the transferee company becomes entitled and bound to acquire those shares on the same terms approved by the majority shareholders.2. Compulsory Purchase of Minority Shareholding (Section 236)
If an acquirer, a person, or a group of persons acting in concert becomes the holder of 90% or more of the issued equity share capital of a company (by virtue of an amalgamation, share exchange, conversion of securities, or takeover), they have a statutory right and duty to notify the company of their intent to buy out the remaining minority shares.
The acquirer must make an explicit offer to the minority shareholders to purchase their equity shares at a fair price determined by a Registered Valuer, computed in accordance with the prescribed valuation rules under the Act.
[VI] Comparative Summary: Sections 230, 232, and 233
Statutory Provision | Scope & Core Purpose | Primary Regulatory Authority | Core Approval Thresholds |
Section 230 (Compromise & Arrangement) | Internal financial/debt restructuring, share reclassification, and settlement of active or anticipated disputes. | National Company Law Tribunal (NCLT) | Majority in number + 75% (3/4ths) in value of those present and voting. |
Section 232 (Merger & Amalgamation) | Structural reorganization involving the transfer of whole undertakings, blending of assets, and eventual dissolution without winding up. | National Company Law Tribunal (NCLT) | Section 230 thresholds applied across merging entities, plus detailed structural reporting. |
Section 233 (Fast Track Merger) | Simplified corporate restructuring tailored to reduce administrative burdens for smaller corporate structures. | Central Government (Regional Director) / ROC / Official Liquidator | Board approval + 90% in value of creditors + 90% of total shares or 3/4ths in value of members. |