COMPANY LAW - UNIT V RECONSTRUCTION, AMALGAMATION AND WINDING UP Synopsis Reconstruction, Rehabilitation and Amalgamation © Concept ‘© Jurisdietion and powers of courts and NCLT ‘© Vesting of rights and transfer of obligations © Takeover and acquisition of minority interest Winding up Concept Modes of winding up Who can apply Procedure under different modes. RECONSTRUCTION, REHABILITATION AND AMALGAMATION The change of business dynamics demands the business organizations not only to keep up their internal strategies but also require them to devise inorganic business strategies that helps in growth, utilization of resources and meeting expectations of shareholders Reconstruction and amalgamation are one of these techniques which aims at changing the structure of the company to inerease the value of the company business, Meaning of Reconstruction Reconstruction, in law, is the transfer of a company’s (or several companies’) business to a new company. The old company will get into liquidation, and shareholders will agree to take shares of equivalent value in the new company The term reconstruction has not been defined anywhere in the act of 2013. However, the institution of judiciary has interpreted the term through various ruling hence in Hooper v. western countries co. ( (1892) W.N. 148), In this case reconstruction was defined as incorporation of a new company which intends to take over the assets of the old company with the intention that the new company shall carry out the same business run and managed by the same person in the similar manner, Reconstruction connotes reconstituting the financial structure of the company with or without resorting to the dissolution of the business. Reconstruction is done to achieve following objective: + Simplification of capital structure + Decreasing the fixed charge‘Company Law - Unit V Al- Ameen College of Law, Bat + Adjusting the arrears in forms of dividend + Increasing the working capital of the company + Elimination of past losses. Usually, reconstruction becomes a necessary recourse in the situation when financial position of a company degrades. Reconstruction can be both internal as well as external. Internal reconstruction implies alteration of share capital without effecting the transfer of the business whereas external reconstruetion occurs when existing company is dissolved and new company is formed which take-over the business of existing company Meaning of Amalgamati Amalgamation is a legal process by which two or more companies are joined together to form a new entity or ‘one or more companies are to be absorbed or blended with another as a consequence the amalgamating company loses its existence and its shareholders become the shareholders of new company or amalgamated company. In other words, property, assets, liabilities of one or more companies are taken over by another or are absorbed by and transferred to an existing company or a new company. It means merger of one company with another in ‘order to facilitate the reconstruction of the company which is amalgamating In the case of Somayujula v. Hope Prudhome & Co. Ltd.{(1963) 2 Comp LJ. 61] observed amalgamation takes, place when two or more companies are joined to form a third entity or one is absorbed in another. In Re. South African Supply Co [(1904)2 Ch 268] the court interpreted amalgamation to connote “blending of ‘two or more undertakings into one undertaking, shareholders of each blending company becoming substantially the shareholders in the company which holds the blended undertaking”. In Marshall Sons & co. v. Income Tax Officer | AIR 1997 SC 1763] the supreme court in this case held that every amalgamation scheme has to provide a date from which it takes effect. Although tribunal under scheme can provide direction as well as dates from which it takes effect but when tribunal only provides sanction to scheme & not the date from which amalgamation takes effect in such case date of effect will become date specified in scheme and not from the date the scheme was approved by the tribunal Objective of Amalgamation & Reconstruction Provisions for facilitating amalgamation & reconstruction has been given under Sec. 232 of the Act of 2013 Usually, a company take recourse to such tools during following scenarios + Torestructure the capital as per the Act + To diversify the activities which business can undertake‘Company Law - Unit V Al- Ameen Col + Reorganization of the share capital Comparison Between Reconstruction And Amalgamation Amalgamation is the process where two different business entities join together for the purpose of making a totally new business entity to sustain in the market by absorbing the other company. This process can also be referred as reconstruction as there is a new formation of completely new entity The procedure of Reconstruction generates when a particular company transfers the undertaking as well as the property to an absolutely new company and its shareholders. The objective of reconstruction is to re-organize the total amount of the eapital ‘Therefore, the word amalgamation and reconstruction are two sides of the same coin. In practice as well both are guided by the same provisions of companies act as given under section 232 Provisions: ‘The Companies Act for the first time explains the term and the procedure for merger and amalgamation. Section 232 of the Companies Act 2013 is a facilitating provision similar to section 394 of the previous Companies Act, 1956 Section 232 facilitates and discusses clearly the procedure when two or more than two companies merge or amalgamate, It states that where an application is made to the Tribunal for the sanctioning of a compromise or an arrangement and itis shown to the Tribunal a) that the compromise or arrangement has been proposed for the purposes of reconstruction of the company or companies involving merger or the amalgamation; and b) that under the scheme, the whole or any part of the undertaking, property or liabilities of the transferor company is required to be transferred to the transferee company. On receiving such application, the Tribunal may order a meeting of the creditors or members or their classes separately, as the case may be, to be called, held and conducted in such manner as the Tribunal may direct. The Tribunal, after being satisfied that all the statutory requirements have been complied with, may, by order, sanction the compromise or arrangement or by a subsequent order, make provision for the following matters, namely: (a) 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 by it in writing, decides otherwise;‘Company Law - Unit V Al- Ameen College of Law, Bat (b) 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, As a result of compromise or arrangement, a transferee company shall not hold any shares in its own name or in the name of any trust whether on its behalf or on behalf of any of its subsidiary or associate companies and any such shares shall be cancelled or extinguished; (©) 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 to be made for any persons who, within such time and in such manner as the Tribunal directs, dissent from the compromise or arrangement; (0) 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; (g) the transfer of the employees of the transferor company to the transferee company; (h) 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, (i) where the transferor company is dissolved, the fee, if any, paid by the transferor company on its authorized capital shall be set-off against any fees payable by the transferee company on its authorized capital subsequent to the amalgamation, and (j) such incidental, consequential and supplemental matters as are deemed necessary to secure that the merger or amalgamation is fully and effectively carried out.” Thus, from the appointed date which the Tribunal sanetions, the assets, liabilities and shareholders of the transferor company stands to be transferred to the transferee company Transfer of Undertaking (Section 232) [As per Section 232 of the Act the tribunal has the power to sanction the scheme of amalgamation and along with-it tribunal can pass any subsequent order for following matters ‘© The transfer to the transferee company of the whole or any part thereof such as that of property liabilities or undertakings of transferor company.‘Company Law - Unit V Al- Ameen College of Law, Bat Allotment of share by transferee company under the terms of contract Dissolution without the winding up of the amalgamating company Provision for the people who dissent from the scheme of amalgamation Continuation by or against the transferee company of any legal proceedings pending by or against the amalgamating company. Or any other matter which it deems necessary for effectuating the scheme of amalgamation. Sec. 230 makes it obligatory for the tribunal to send in a representation to Central Govt. for every application which is being made under Sec. 230 & 232 of the Companies Act 2013 before sanctioning any scheme of amalgamation, In Cotton Agents v. Vijay Laxmi Trading co, it was held that Centre Government will not interfere with the valuation in amalgamation unless the govt. suspects fraud or undue influence which undermines the actual valuation of companies Notice to Dissenting Shareholders Once the transferee company obtains nine- tenth majority of shareholders approval for amalgamation it gives the company the right to acquire the shares of the dissenting shareholders. Within two months rhe transfer company should send out the notice to the dissenting shareholders that company intends to acquire their shares. The transferee company is entitled to acquire the shares or bound to follow the same terms of acquisition of share which approving majority of shareholders have agreed upon It should be duly noted that Sec 235 confers wide variety of power upon the tribunal to disallow the attempt to acquire the shares, The exercise of this power is based on two paramount principles ‘© The scheme should be fair & conscionable, ‘© The onus to prove unfairness lies upon the dissenting shareholders Adequate Information to Shareholders With an intention to prevent fraud and malpractices in relation to takeover offers and acquisition of share of dissenting shareholders under the scheme approved by majority, Sec 235 (3) of act 2013 requires that complete amount of information has to be disclosed in terms of offers being made to the majority and it is up to dissenting shareholders to decide whether they want to take it or not because inadequacy of information can become another ground for the tribunal to withheld the sanction of scheme of amalgamation and reconstruction,‘Company Law - Unit V Al- Ameen College of Law, Bat Rehabilitation of a Company In the case of companies that are determined sick, the rehabilitation scheme would involve a change in ‘management, financial mandates, employee rehabilitation, and the preparation of an elaborate scheme for the same. It’s about the rehabilitation of the company into a better profitable structure ‘Where on a demand by the secured creditors of a company representing fifty percent or more of its outstanding amount of debt, the company has failed to pay the debt within a period of thirty days of the service of the notice of demand or to secure or compound it to the reasonable satisfaction of the creditors, any secured creditor may file an application to the Tribunal in the prescribed manner along with the relevant evidence for such default, non-repayment or failure to offer security or compound it, for a determination that the company be declared as, a sick company. A company which fails to pay or secure a debt, which is fifty percent or more of its total outstanding debt, within thirty days of demand notice it may be declared as sick company Once a company is determined as a sick company by the Tribunal, any secured creditor of the company or the company itself’ may make an application to the Tribunal for determination of measures for revival and rehabilitation of the company ‘The company administrator shall prepare or cause to be prepared a scheme of revival and rehabilitation of the sick company afier considering the draft scheme filed along with the application, The scheme prepared by the company administrator shall be place before the creditors of the company in a meeting for their approval within the period sixty days from his appointment. This period of sixty days may be extended up to one hundred twenty days, The scheme prepared by the company administrator shall be examined by the Tribunal. The Tribunal may publish or cause to be published the draft scheme in brief in daily newspapers for suggestions and objections. ‘The complete draft scheme shall be kept at the place where registered office of the company is situated or at a place mentioned in the advertisement. In light of suggestions and objections received, the Tribunal may make such modifications as it may consider necessary. The sick company, company administrator, amalgamating company, and any shareholder or creditor or employee of these companies may submit suggestions and objection After satisfying that the scheme had been validly approved, the Tribunal shall within sixty days from the receipt of the scheme, pass an order sanctioning such scheme.‘Company Law - Unit V Al- Ameen College of Law, Bat Revival of a Company (Sec 254) In case a company fails to commence a business with a year of its incorporation or has not been carrying any business or is not operating for two financial years or fails to submit some yearly returns then it so happens that the Registrar may insert the company into a strike off. And this forbids the company from doing any operation. So in order to make it operational or active again, the process is called the revival of a company A company that is struck off from the ROC may be revived by filing an application to the National Company Law Tribunal (NCLT) in FORM STK 7 wherein the order of striking off may be challenged. Grounds for revival in general The NCLT usually looks into the following grounds while considering an application for the revival ofa struck- off company. They are as follows: Whether the company holds any immovable property Whether the company had complied with GST, income tax, and other authorities apart from the ROC. Whether there are any ongoing transactions that evidence the company is still active Whether the company has renewed any license on an ongoing basis, Any other documents evidencing the company is active Objectives The objectives of the Revival and Rehabilitation of Sick Companies are listed below: © To enable sick companies to seek relief and concessions to revive over difficult financial times. ‘© To assess the economic viability of sick companies and rehabilitate them Section 254 of the Companies Act, 2013 See 254 of the Companies Act, 2013 provides for the application for revival and rehabilitation., Any sick company may make an application to the tribunal in order to take necessary steps for its revival and rehabilitation and the said application needs to be accompanied by, > Audited financial results of the company relating to immediately preceding financial year, > Documents authenticated in a reasonable manner and also the relevant fees paid, > Draft scheme for revival‘Company Law - Unit V Al- Ameen College of Law, Bat It is important to note here that the said application has to be made within a period of 60 days from the date of determination of the company as a sick company Section 256 of the Companies Act, 2013 Afler the presentation of the application under Section 254 for the revival and rehabilitation of the company. the tribunal shall appoint an interim administrator. The interim administrator has the following responsibilities carved out for him: Within 45 days call for a meeting of the creditors of the company. Prepare a draft scheme for revival and present it before the tribunal within 60 days from the meeting In case there is no such draft scheme prepared then the interim administrator shall take over the entire management and the administration of the company And it shall be the responsibility of the management to provide full assistance and cooperation to the interim administrator. ‘The procedure for the revival of the company The application to the NCLT shall be made in Format NCLT 9 accompanied by a demand draft of Rs. 1,000 payable to the Ministry of Corporate Affairs (MCA). The following documents are to be accompanied by the said application: + Anaffidavit verifying FORM NCLT-9 striking off order passed by the ROC. Certificate of incorporation. Memorandum of association. Copy of the latest audited financial statements since the financial year in which the said audited financial statements have not been filed with the ROC. Bank statements, + Copy of the board resolution authorizing the filing of the application, A copy of the petition is to be sent to the ROC within 14 days before the date of hearing in the NCL. If the NCLT orders for the revival of the name of the company in the ROC, the company shall: + File a certified copy of the order in FORM INC 28 within 30 days, and + File pending annual financial statements and annual reports to the ROC.‘Company Law - Unit V Al- Ameen College of Law, Bat WINDING UP OF A COMPANY Winding up is the legal process of closing down a firm and ceasing all operations. Winding up of a company is the process through which the life of'@ company comes to an end and its property is administered for the benefit of its members & creditors. An Administrator, called a liquidator is appointed and he takes control of the company, collects its assets, pays its debts, and finally distributes any surplus among the members in accordance with their rights, According to Halsburry's Laws of England: “Winding up is a means by which the dissolution of a company is brought about and its assets realized and applied in payment of its debts, and after satisfaction of the debts. the balance, if any, remaining is paid back to the members in proportion to the contribution made by them to the capital of the company As per section 2 (94A) of the Companies Act, 2013, “winding up” means winding up under this Act or liquidation under the Insolvency and Bankruptey Code, 2016. Chapter XX Sections 270 - 378 of the Companies Act, 2013 deals with winding up and other aspects of it. ‘Winding up is a process in which the company is dissolved by clearing all the debts or liabilities, dissolution of its assets is collected, and other important items are returned to the creditors and if any contributions are made by the members, they are also returned. ‘Thus, winding up ultimately leads to the dissolution of the company. In between winding up and dissolution the legal entity of the company remains, and it can be sued in a Tribunal of law. Meaning of Dissolution A company is said to be dissolved when it ceases to exist as a corporate entity. On dissolution, the company’s name shall be struck off'by the Registrar from the Register of Companies and he shall also get this fact published in the Official Gazette. The dissolution thus puts an end to the existence of the company Difference between dissolution and winding up ing up Winding up is one of the methods by which dissolution of a company is brought about. Dissolution is the end result of winding up. > Legal entity of the company continues at the commencement of the winding up. Dissolution brings about an end to the legal entity of the company. A company may be allowed to continue its business so far necessary for the beneficial winding up of the company.‘Company Law - Unit V Al- Ameen College of Law, Bangalore + Company ceases to exist on its dissolution. Procedure of Modes of Winding up of a compa According to Section 270 of the Companies Act, 2013, a company can be wind up in two ways. They are’ 1, Compulsory Winding up of Company by Tribunal 2. Voluntary Winding up of Company: Creditors + Members voluntary winding up ‘Compulsory Winding Up (Sec 272) Compulsory winding up takes place when a company becomes insolvent or bankrupt. When the company ordered to be wound up by the Court or Tribunal, itis referred to as compulsory winding up of a company. If the company goes into liquidation, the court of law appoints a liquidator to complete the process of liquidation, Section 270 of the Companies Act, 2013 deals with winding up by the Tribunal According to Section 271 of the Companies Act, a Tribunal may issue an order to wind up a company in the following circumstances, as detailed in Section 271(1) of the Companies Act, 2013 Sick Company Special Proposal Acts against the State Fraudulent Conduct of Business Failure to file financial statements with the Registrar It is just and equitable to wind up. Sick Company: If the firm is in a position where creditors have a dominating position, with debt dues, the Committee of Creditors shall appoint an administrator to hold up the winding up of the Company, in accordance with the Tribunal’s ruling. This occurs when the company is in a sick state, ie. the firm is unable to pay its obligations and it is not feasible to resuscitate and rehabilitate such opinion and order that the Company may be wind up. Special Resolution: If the Company has agreed, by a special resolution that it will wind up by the Tribunal then the said winding up is at the discretion of the Tribunal. This exempts the Tribunal’s ability to wind up a corporation if it is contrary to the public interest or the company’s interest‘Company Law - Unit V Al- Ameen College of Law, Bangalore Acts against the State: If the Company commits an act that is detrimental to India’s sovereignty and integrity, the security of the State, cordial relations with other states, public order, decency, or morals, the Tribunal may ask company to wind up the company Fraudulent Conduct of Business: If the Tribunal believes that the Company’s affairs have taken place by way Of fraud or that the reason for forming the company is for fraudulent or unlawful purpose, the Tribunal has the ultimate discretion to wind up the company only after receiving an application from the Registrar of Companies or any other person authorized by the Central Government. Failure to file financial statements with the Registrar: If the Company has failed to file its financial statements or annual reports with the Registrar for the last five consecutive fiscal years, as required by Section 271(1) (f) of the Act. It is just and equitable to wind up: Section 271(1) (g) of the Act states that if the Tribunal believes that it is just and equitable that the company be wind up, it must consider the interests of the company, its employees, creditors, shareholders, and the general public interest, as well as all other remedies to resolve the circumstance that led to the Tribunal’s decision to wind up. Under this premise, winding up the firm necessitates a strong ground to liquidate that company Just & Equitable Grounds: Deadlock of the company: Members are not in speaking terms (Deadlock in the management) Loss of Substratum: Main object of the company has failed to materialize. Loss: Business running at a loss Oppression of minority: Majority adopt aggressive methods to oppress minority’s view. Fraudulent purpose: Illegal purpose Mere bubble without business or property Procedure of Modes of Winding up - Compulsory Winding up of Company by Tribunal A petition is used to make an application to the Tribunal in the winding up of a company under Section 272 of the statute ‘The following individuals are entitled to file this petition’ > The Company > Any creditor or creditors, including any contingent or potential ereditors > Any Contributors to that company‘Company Law - Unit V 2 Al- Ameen College of Law, Bangalore > The Registrar > Any person authorized by the Central Government to do so. PROCEDURE The following is the procedure for compulsory winding up of company by tribunal Appointment of a Liquidator to the Company under Section 275 to examine the Company’s debts and credits to verify the Company's eligibility for forced winding up by the Tribunal Following the appointment, Liquidators as per section 281 of the Act to make a report to the Tribunal. The Tribunal issues orders to the liquidators in dissolving the Company under Section 282 of the Act. And according to which, the company’s property undergo shift into custody in order to satisfy the ereditors and contributors first. Finally, the Court issues the order for dissolution under Section 302 of the Act, after carefully reviewing the audits and reports provided by the liquidator to the Court in the interest of resolving the obligations owed to creditors and other contributors. Powers of the Tribunal (Section 273) On receiving a petition for winding up the Company Law Tribunal can pass the following orders It can dismiss the petition with or without cost. It can make interim orders. It can appoint a provisional liquidator of the Company till giving an order for Winding up Make an order for winding up Can pass any other order as it thinks fit Before appointing a provisional liquidator, the tribunal has to give notice to the company in order to provide them an opportunity to make its representation VOLUNTARY WINDING UP Section 304 of the Companies Act, 2013, specifies two statutory conditions in which a company may be voluntarily wind up. They are Resolution in general meeting: If the company’s general meeting approves a resolution requiring the company to be wind up voluntarily asa consequence of the expiration of the time for its duration,