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RECONSTRUCTION[1] AND AMALGAMA TION[2]

Table of Contents

QUESTION BANK

How any amalgamation of a company with another company be carried out?
Define reconstruction and amalgamation.

SHORT NOTES

Regulation and amalgamation of a Company.
Amalgamation and reconstruction.

I] MEANING:-

There can be a compromise where there is an existing dispute. For example, disputes can take place between a company and its creditors or between a company and its members. A scheme of compromise may be worked out to resolve such disputes.

In ‘arrangement’, there is no dispute. ‘Arrangement’ may be made when there is a need to re-adjust the rights and liabilities of a member, a class of members, a creditor, or a class of creditors. “Arrangement” includes a reconstruction of the share capital of a company by consolidating shares of different classes, by division of shares into different classes, or by both these methods.[3].

Thus, compromise and arrangement occur within the existing company, and there is no question of amalgamation or merger into any other company.

II] POWER TO COMPROMISE OR MAKE ARRANGEMENTS WITH

CREDITORS AND MEMBERS (S. 230):-

(i) Between whom does the compromise or arrangement take place?

Where a compromise or arrangement is proposed

(a) between a company and its creditors or any class of them or

(b) between the company and its members or any class of them.

(ii) Application to and calling meeting by the Tribunal:-

The tribunal may, on an application of the company or creditor or member of the company, or the liquidator in case of a company which is being wound up, order a meeting of creditors or class of creditors or the members to be called, held and conducted in such manner as the tribunal directs.

(iii) Information to be disclosed to the Tribunal:-

The company or any other person by whom an application is made shall disclose to the Tribunal by affidavit-

all material facts relating to the company, such as the latest financial position of the company, the latest auditor’s report on the company’s accounts, and the pendency of any investigation or proceedings against the company.
Reduction of the 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.
Where the company purports 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.

(iv) Notice of meeting:-

The Tribunal issues notice to all the creditors or class of creditors and to all the members or class of members and debenture holders of the company (as prescribed in the section).

(v) Sanctioning of the scheme of compromise and arrangement and its effect:-

Where, at a meeting held as above, the majority of persons representing three-fourths in value of the creditors, or class of creditors or members or class of members, as the case may be, voting in person or by proxy or by postal ballot, agree to any compromise or arrangement, and if the Tribunal sanctions such compromise or arrangement by an order, the same shall be binding on the company, all the creditors, or class of creditors or members or class of members, as the case may be, or in case of a company being wound up, on the liquidator and the contributors of the company.

The Tribunal may dispense with calling a meeting of the creditors or class of creditors where such creditors or class of creditors, having at least ninety per cent value, agree and confirm, by way of affidavit, to the scheme of compromise or arrangement.

The nature of orders passed by the Tribunal:-

For effective implementation of the terms of the compromise and arrangement arrived at in the meeting, the Tribunal shall pass all or any of the following orders, namely-

a) Option to accept arrears of dividend in cash or in equity shares:-

Where the compromise or arrangement provides for the conversion of preference shares into equity shares, preference shareholders shall be given the option to either obtain arrears of dividend in cash or accept equity shares equal to the value of the dividend payable.

b) The protection of any class of creditors.
c) If compromise or arrangement results in the variation of the shareholder’s rights, it shall be given effect under the provisions of 48[4].
d) Proceeding before the Board shall abate-

If the creditors agree to the compromise or arrangement, as mentioned above, any proceeding pending before the Board for Industrial and Financial Reconstructions shall abate.

e) Exist offer to dissenting shareholders:-

Such other matters, including exit offers to dissenting shareholders. Dissenting shareholders means dissenting for compromise or arrangement. They can be given an offer to exit the company.

f) Buyback must be according to the provisions of S. 68:-

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 by the provisions of S.68[5].

g) Certificate of company’s auditor:-

The Tribunal shall sanction no compromise or arrangement unless a certificate by the company’s auditor is filed with the Tribunal 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 S. 133.

h) Any compromise or arrangement may include a takeover offer made in the manner prescribed.

An aggrieved party may make an application to the Tribunal, in the event of any grievance, with respect to the takeover offer of companies other than listed companies, in such manner as may be prescribed, and the Tribunal may, on application, pass such order as it may deem fit.

The order of the Tribunal shall be filed with the Registrar by the company within a period of thirty days from receipt of the order.

III] POWER OF TRIBUNAL TO ENDOWER COMPROMISE AND

ARRANGEMENTS (S. 231):-

Where the Tribunal makes an order sanctioning the compromise or arrangement in respect of a company, it shall have the following powers-

(a) to supervise the carrying out of compromise or arrangement.

(b) to give such directions in regard to any matter or such modifications in compromise or arrangement as necessary.

In short, the Tribunal passes necessary orders required to effect compromise and arrangement.

Merger[6] and Amalgamation[7]:-

I] Meaning:-

1) Amalgamation:-

Amalgamation occurs when two or more companies are joined to form a third entity, or one company is blended or absorbed into another. It is well settled that in an amalgamation, a new company comes into existence by blending two existing companies; thereby, existing companies lose their existence.

2) Merger:-

The concept of Amalgamation is different from that of a merger. In a merger, one company is acquired by another, and a new company is not created. On the other hand, in an amalgamation, a new company is created.

The power of amalgamation should be vested in the memorandum of association. However, in case of amalgamation, the company’s financial position doesn’t need to be sound.

3) Reconstruction[8]:-

Reconstruction occurs when, under an agreement, the whole undertaking and property is transferred by one company to another company with which the old company members are entitled to obtain certain shares or interests. In other words, shareholders acquire certain shares or interests from another company.

II] Rules as to Merger and Amalgamation:-

1) Merger and Amalgamation (S. 232):-

i) Application to and called meeting by the Tribunal:-

Where an application is made to the Tribunal under S. 230, and it is shown to the Tribunal-

(a) that, the compromise or arrangement has been proposed for the purposes of or in connection with, a scheme for the reconstruction of the company or companies involving merger or amalgamation of any two or more companies; and

(b) that, under the scheme, the whole or any part of the undertaking, property or liabilities of any company is required to be transferred to another company or is proposed to be divided among and transferred to two or more companies-

-the Tribunal may, on such application, order a meeting of the creditors or class of creditors or the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal may direct.

The provisions of S. 230 also apply mutatis mutandis to this section.

ii) Information to be circulated in the meeting:-

The following is required to be circulated in the meeting-

the draft of the proposed terms of the scheme drawn up and adopted by the directors of the merging company.
confirmation that the copy of the draft scheme has been filed with the Registrar.
a report adopted by the directors of the merging companies explaining the effect of compromise on each class of shareholders, key managerial personnel, promoters and non-promoter shareholders, laying out, in particular, the share exchange ratio, specifying any special valuation difficulties.
the report of the expert with regard to valuation, if any.
a supplementary accounting statement if the last annual accounts of any of the merging companies relate to a financial year ending more than six months before the first meeting of the company summoned to approve the scheme.

iii) Sanctioning of the scheme of merger and amalgamation and its effect:-

The Tribunal, after satisfying itself of the procedural compliance, may, by order, sanction the compromise or arrangement or, by a subsequent order, make provision for the following matters, namely-

Transfer of undertaking etc.:-

The transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of the transferor company from a date to be determined by the parties unless the Tribunal, for reasons to be recorded in writing, decides otherwise.

Allotment of shares:-

The allotment or appropriation by the transferee company of any shares, debentures, policies or other like instruments in the company, which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person.

The continuation by or against the transferee company of any legal proceedings pending by or against any transferor company on the date of transfer.
Dissolution, without winding-up, of any transferor company;
The provision is to be made for any person or persons who dissent from the compromise or arrangement within such time and in such manner as the Tribunal directs.
Allotment to non-resident shareholders:-

Where share capital is held by any non-resident shareholder under the foreign direct investment norms or guidelines specified by the Central Government or in accordance with any law for the time being in force, the allotment of shares of the transferee company to such shareholder shall be in the manner specified in the order.

The transfer of the employees of the transferor company to the transferee company.
Where the transferor company is a listed company, and the transferee company is an unlisted company-

The transferee company shall remain an unlisted company until it becomes a listed company.
If shareholders of the transferor company decide to opt to go out of the transferee company, the provision shall be made for payment of the value of shares held by them and other benefits in accordance with a pre-determined price formula or after the valuation is made. The arrangements under this provision may be made by the Tribunal.

As to fees paid:-

Where the transferor company is dissolved, the fee, if any, paid by the transferor company on its authorised capital shall be set off against any fees payable by the transferee company on its authorised capital subsequent to the amalgamation.

Residuary matters:-

Such incidental, consequential and supplemental matters are deemed necessary to ensure that the merger or amalgamation is fully and effectively carried out.

(iv) Punishment for contravention:-

If a company fails to submit a certified copy of the order of compromise or arrangement within 30 days from its receipt (as mentioned in Sub-sec. 5), the company and every officer of the company who is in default shall be liable to a penalty of twenty thousand rupees and when the failure is a continuous one, with a further penalty of one thousand rupees for each day after the first during which such failure continues, subject to a maximum of three lac rupees[9].

2) Merger and amalgamation of certain companies (S. 233):-

A scheme of merger or amalgamation may be entered into between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be prescribed. The scheme is to be effected subject to the terms and conditions mentioned under S. 233.

3) Merger or amalgamation of company with a foreign company (S. 234):-

Subject to the provisions of any other law for the time being in force, a foreign company may, with the prior approval of the Reserve Bank of India, merge into a company registered under this Act or vice versa, and the terms and conditions of the scheme of merger may provide among other things, for the payment of consideration to the shareholders of the merging company in cash or Depository Receipts, or partly in cash and partly in Depository Receipts.

4) Power of Central Government to provide for amalgamation of companies in the public interest (S. 237):-

Where the Central Government is satisfied that it is essential in the public interest that two or more companies should amalgamate, the Central Government may, by order, notified in the Official Gazette, provide for the amalgamation of those companies into a single company, with such constitution, with such property, powers, rights, interests, authorities and privileges, and with such liabilities, duties and obligations, as may be specified in the order.

5) Preservation of books and papers of amalgamated companies (S. 239):-

The books and papers of a company which has been amalgamated with or whose shares have been acquired by another company under this Chapter shall not be disposed of without the prior permission of the Central Government.

6) Liability of officers in respect of offences committed prior to the merger, amalgamation, etc. (S. 240):-

The liability in respect of offences committed by the officers in default of the transferor company prior to its merger, amalgamation or acquisition shall continue after such merger, amalgamation or acquisition.

III] ACQUIRING SHARES OF SHAREHOLDERS:-

(i) Power to acquire shares of shareholders dissenting from a scheme or contract approved by a majority (S. 235):-

Where a scheme or contract involving the transfer of shares or any class of shares in a company to another company has, within four months after making an offer on that behalf by the transferee company, been approved by the holders or not less than nine-tenths in value of the shares whose transfer is involved, other than shares already held at the date of the offer, by or by a nominee of the transferee company, or its subsidiary company, the transferee company may, at the time within two months after the expiry of the said four months, give notice in the prescribed manner to any dissenting shareholder that it desires to acquire his shares, and-+

the shares may be acquired as per the rules.

2) Purchase of minority shareholding (S. 236):-

The acquirer person or company or group of persons (of 90 per cent or more issued share capital) shall offer to the minority shareholders of the company to buy the equity shares held by such shareholders at a price determined on the basis of valuation by a registered valuer in accordance with such rules as may be prescribed.

* * * * *

[1] पुनर्निर्माण

[2] एकत्रीकरण [एकीकरण / मिलाव]

[3]Explanation to S. 230 clause (i).

[4]Variation of shareholders’ rights- (1) Where a share capital of the company is divided into diriment classes of shares, the rights attached to the shares of any class may be varied with the consent in writing of the holders of not less than three-fourths of the issued shares of that class or by means of special resolution pass at a separate meeting of the holders of the issued shares of that class-……

[5]Power of company to purchase its own securities (Buy back) S. 68-

A company may purchase its own shares or other specified securities out of –

Free reserves;
The securities premium account; or
The proceeds of the issue of any shares or other specified securities ….

[6] सामाऊनघेने [विलय के मामले में एक कंपनी द्वारा दूसरी कंपनी का अधिग्रहण होता है| नई कंपनी का निर्माण नहीं होता है|]

[7] एक समामेलन में दो मौजूदा कंपनियों के सम्मिश्रण से नई कंपनी अस्तित्व में आती हैA जिस से मौजूदा कंपनियां अपना अस्तित्व खो देती हैंA [दोन कंपनीचे एकत्र करू.न तीसरी कंपनी तयास करने]

[8] पुनर्रचना- [एका कपनीस दुसरीने समाउन घेने [पुनर्निर्माण तब होती है जब एक समझौते के तहत पूरे उपक्रम और संपत्ति को एक कंपनी द्वारा दूसरी कंपनी में स्थानांतरित कर दिया जाता है,जिस के साथ पुरानी कंपनी के सदस्य कुछ शेयर या हित प्राप्त करने के हकदार होते हैं।]

[9] The section is substituted by the 2020 amendment.