Study Notes

Companies Act, 2013

Chapter XV – Part 1
Compromises,
Arrangements &
Amalgamations
Companies Act, Chapter XV Part 1 Compromises, Arrangements & Amalgamations

Section Heading of the section

Section 230 Power to compromise or make arrangements with creditors
Covered
and members in this
Section 231 Power of Tribunal to enforce compromise or arrangement note
Section 232 Merger and amalgamation of companies
Section 233 Merger or amalgamation of certain companies
Section 234 Merger or amalgamation of company with foreign company
Section 235 Power to acquire shares of shareholders dissenting from
scheme or contract approved by majority
Section 236 Purchase of minority shareholding
Section 237 Power of Central Government to provide for amalgamation of
companies in public interest.
Section 238 Registration of offer of schemes involving transfer of shares
Section 239 Preservation of books and papers of amalgamated companies
Section 240 Liability of officers in respect of offences committed prior to
merger, amalgamation, etc.

INTRODUCTION

 This chapter provides the mechanism where in a scheme of arrangement may be

entered into between a company, its creditors and/or its members.
 The mechanism envisages a mandatory approval of the Tribunal (NCLT).

IMPORTANT TERMS

 Compromise
 settlement or adjustment of claims in dispute by mutual concessions
 compromise is between a company and its creditors or class of creditors

 Arrangement
 Re-organization 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 methods
 Arrangement is between a company and its members or class of members

 Merger

 Combination of two or more companies into a single company where one

survives and the others lose their corporate existence
 Generally, the company which survives is the buyer (survivor) which retains its
identity and the seller company is extinguished.
 The company whose assets & liabilities are transferred is known as the transferor

2
Companies Act, Chapter XV Part 1 Compromises, Arrangements & Amalgamations

company (usually the seller companies) whereas the company to whom those
assets, liabilities are transferred is known as the transferee company (the buyer
company).

 Amalgamation

 Generally, merger and amalgamation are considered to be synonymous

 Amalgamation is a blending of two or more existing undertakings into one
undertaking, the shareholders of each blending company becoming substantially
the shareholders in the company which is to carry on the blended undertaking.
 There may be amalgamation either by:
o transfer of two or more undertakings to a new company or
o by the transfer of one of more undertakings to an existing company

SECTION 230 POWER TO COMPROMISE OR MAKE ARRANGEMENTS WITH CREDITORS

AND MEMBERS

 Power to order a meeting:

 Where compromise or arrangement is proposed between:
o Company and its creditors or
o Company and its members,
Tribunal may, on application in Form NCLT-1, order meeting of creditors, or of
members, to be called, held and conducted in manner as Tribunal directs
 Application may be sent by:
 Company; or
 Creditor; or
 Member; or
 in case of Company being wound up – liquidator (appointed under Companies
Act, 2013 or IBC, 2016).

 Disclosure to Tribunal by affidavit on making an application:

 Company or other person, by whom application is made, shall disclose to Tribunal
by affidavit in Form NCLT-6:
o all material facts, such as latest financial position of Company, Auditor’s
report & pendency of any investigation or proceedings against Company
o reduction of share capital of Company if any, included in the compromise
or arrangement
o any scheme of corporate debt restructuring (CDR) consented to by not
less than 75% of secured creditors in value, including:
 Creditor’s responsibility statement in Form CAA-1;
 safeguards for protection of other secured & unsecured creditors;
3
Companies Act, Chapter XV Part 1 Compromises, Arrangements & Amalgamations

 report by auditor that fund requirements after CDR shall

 conform to liquidity test based upon estimates provided to them by
Board;
 where company proposes to adopt CDR guidelines specified by
RBI, statement to that effect; &
 valuation report in respect of shares & property & all assets by
registered valuer.

 Notice of meeting to be sent:

 Notice of meeting pursuant to order of Tribunal in Form CAA-2 be sent to all
creditors & all members & debenture-holders, individually at registered
address.
 Notice accompanied by:
o scheme of compromise or arrangement,
o valuation report &
o statement disclosing following details

(Rule 6 of Companies (Compromises, Arrangements and Amalgamations) Rules,

2016):

 details of order of Tribunal

 details of company
 relationship subsisting between companies who are parties to
scheme (holding/ subsidiary/ associate)
 date of board meeting at which scheme was approved by BOD
 explanatory statement disclosing details of scheme
 disclosure about effect of compromise or arrangement on KMP,
Directors, prompters, non-promoters, creditors, employees, deposit
trustee, debenture trustee, etc.
 Disclosure about effect of compromise or arrangement on material
interests of directors, KMP & debenture trustee
 investigation or proceedings, if any, pending against Company
 details of availability of documents for obtaining extract/copies for
inspection
 details of approvals, sanctions or no-objection from regulatory or
other governmental authorities
 statement that persons to whom notice is sent may vote in meeting.

 Notice and other documents shall also be:

o placed on website of Company and

o in case of Listed Co, sent to SEBI & stock exchange where securities
of are listed, for placing on their website and
4
Companies Act, Chapter XV Part 1 Compromises, Arrangements & Amalgamations

o to be published in newspapers at least 1 English newspaper & in at

least 1 vernacular newspaper (Rule 7).

 Notice by Advertisement shall indicate time within which copies of

compromise or arrangement shall be made available free of charge from
registered office.
 Chairperson or other person directed to issue advertisement & notice shall file
affidavit before Tribunal not less than 7 days before date fixed for meeting or
date of first meeting, stating that directions regarding issue of notice &
advertisement duly complied (Rule 12).

 Right to vote and object:

 Notice shall provide that person to whom it is sent may vote in meeting either
themselves or through proxies or by postal ballot or through electronic means
to adoption of compromise or arrangement within 1 month from date of receipt
of such notice (Rule 9).
 Objection to compromise or arrangement be made only by:
o persons holding not less than 10% of shareholding or
o having outstanding debt amounting to not less than 5% of total
outstanding debt as per latest audited FS.
 Report of result of meeting shall be in Form CAA-4 and shall state number of
creditors or number of members present and who voted either in person or by
proxy, or through electronic means (Rule 13).

 Report shall be submitted to Tribunal by Chairperson, within

o time fixed by Tribunal, or
o where no time has been fixed, within 3 days after conclusion of
meeting (Rule 14).
 Notice to others and representation window:
 Notice in Form CAA-3, along with all documents shall also be sent to Central
government, income-tax authorities, RBI, SEBI, Registrar, respective stock
exchanges, Official Liquidator, CCI & other sectoral regulators or authorities
likely to be affected.
 Representations, if any, to be made by them shall be made within period of 30
days from date of receipt of such notice, failing which, it shall be presumed
that they have no representations to make on proposals (Rule 8).

 Conditions of proposal binding on company:

 Any compromise or arrangement shall be binding on Company, all creditors,
or members, or in case of Company being wound up, on liquidator &
contributories where:
o at meeting, majority of persons representing three-fourths in value of
creditors or members, voting in person or by proxy or by postal ballot,
agree to any compromise or arrangement and
o sanctioned by Tribunal by order.

 Rule 15: Company (or its liquidator), shall, within 7 days of filing
of report by Chairperson, present petition to Tribunal in Form

5
Companies Act, Chapter XV Part 1 Compromises, Arrangements & Amalgamations

CAA- 5 for sanction of scheme.

 Rule 16: Tribunal - fix date for hearing of petition, & notice of
hearing shall be advertised in same newspaper in which notice
of meeting was advertised, or other newspaper as Tribunal
may direct, not less than ten days before date fixed for hearing.
 Notice of hearing also be served by Tribunal to objectors and to
Central government and other authorities who made
representation under Rule 8.

 Order in Form CAA-6 made by Tribunal shall provide for following matters:
 where compromise or arrangement provides for conversion of preference
shares into equity shares, such preference shareholders shall be given option
to either obtain arrears of dividend in cash or accept equity shares equal to
value of dividend payable;
 protection of any class of creditors;
 if compromise or arrangement results in variation of shareholders’ rights, it
shall be given effect to under provisions of section 48;
 if compromise or arrangement is agreed to by creditors, proceedings pending
before BIFR shall abate;
 other matters necessary to effectively implement terms of compromise or
arrangement
No compromise or arrangement be sanctioned by Tribunal unless certificate by
auditor filed with Tribunal that accounting treatment, proposed in scheme is in
conformity with Accounting Standards prescribed u/s 133.

 Order to be filed with Registrar:

 Order of Tribunal shall be filed with Registrar by the company within period of
30 days of receipt of order.

 Exemption from calling of meeting:

 Tribunal may dispense with calling of meeting of creditor where creditors,
having at least 90% value, agree & confirm, by way of affidavit, to scheme of
compromise or arrangement.

 In case of Buyback:
 No compromise or arrangement in respect of any buyback of securities shall
be sanctioned by Tribunal unless such buy-back is in accordance with section
68.

 Takeover offer (Securities and Exchange Board of India (Substantial Acquisition of

Shares and Takeovers) Regulations, 2011:
 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 SEBI.

 Aggrieved party in case takeover offer:

 An aggrieved party may make an application to the Tribunal in the event of
any grievances with respect to the takeover offer of companies other than
6
Companies Act, Chapter XV Part 1 Compromises, Arrangements & Amalgamations

listed companies in such manner as may be prescribed and the Tribunal may,
on application, pass such order as it may deem fit.
Note: Provisions of section 66 shall not apply to the reduction of share capital
effected in pursuance of the order of the Tribunal under this section.

SECTION 231 POWER OF THE TRIBUNAL TO ENFORCE COMPROMISE OR

ARRANGEMENT

 Where Tribunal makes order u/s 230 sanctioning compromise/ arrangement, it:
 shall have power to supervise implementation of compromise/ arrangement;
 give directions in regard to any matter or make modifications in compromise or
arrangement
 If Tribunal is satisfied that compromise or arrangement cannot be implemented
satisfactorily with or without modifications, and Company is unable to pay its
debts as per scheme, it may make order for winding up of Company u/s 273.
 Section also applies to Company of which, order has been made before
commencement of this Act.

SECTION 232 MERGER & AMALGAMATION OF COMPANIES

 Power of the Tribunal to order meeting:

 Where application is made to Tribunal under Section 230 for sanctioning of
compromise/ arrangement proposed between Company and any persons and
it is shown to Tribunal:
o that compromise/ arrangement has been proposed for purposes of, or
in connection with, scheme for reconstruction of Company or
companies involving merger or amalgamation of two or more
companies; and
o that under the scheme, whole or any part of undertaking, property or
liabilities of transferor Company required to be transferred to
transferee Company or is proposed to be divided among & transferred
to 2 or more companies,
Tribunal may, order meeting of creditors or members, as case may be, to be called,
held & conducted in manner as Tribunal may direct & Section 230(3) to (6) shall apply
mutatis mutandis.

 Items to be circulated for meeting:

 Where order has been made by Tribunal, merging Company or Company in
respect of which division is proposed, also be required to circulate following
for meeting so ordered by Tribunal:
o draft of proposed terms of scheme drawn up & adopted by directors of
merging Company;
o confirmation that copies of draft scheme has been filed with Registrar;
o report adopted by directors of merging companies explaining effect of
compromise on shareholders, KMP, promoters and non-promoter
shareholders laying out in particular the share exchange ratio,
o report of expert with regard to valuation,
o supplementary accounting statement if last annual accounts of any of
merging Company relate to F.Y ending more than 6 months before first
7
Companies Act, Chapter XV Part 1 Compromises, Arrangements & Amalgamations

meeting of Company summoned for approving scheme.

 Tribunal, after satisfying that procedure has been complied with, by order, sanction
compromise/arrangement and make provision for following matters:
 transfer to transferee Company of whole or any part of undertaking, property
or liabilities of transferor Company from date determined by parties unless
Tribunal decides otherwise;
 allotment or appropriation by transferee Company of any shares, debentures,
policies or other like instruments in Company which, are to be allotted or
appropriated by that Company to or for any person. Transferee Company
shall not, hold shares in its own name or in name of any trust on its behalf
or on behalf of any of its subsidiary or associate companies and such shares
shall be cancelled or extinguished;
 continuation by or against transferee Company of legal proceedings pending
by or against transferor Company on date of transfer;
 dissolution, without winding-up, of transferor Company;
 provision to be made for persons who dissent from compromise or
arrangement;
 where share capital is held by non-resident shareholder under FDI norms or
guidelines specified by Central Government, allotment of shares of transferee
Company as specified in order;
 transfer of employees of transferor to transferee,
 where transferor is listed Company and transferee is unlisted Company-
o transferee Company shall remain unlisted until it becomes listed
Company;
o if shareholders of transferor decide to opt out of transferee, provision
be made for payment of value of shares held by them and other
benefits asper predetermined price formula or after valuation is made
Amount of payment or valuation not be less than that
specified by SEBI under regulations framed by it;

 where transferor Company is dissolved, fee, paid by transferor Company on

its authorized capital shall be set-off against fees payable by transferee
Company on its authorized capital subsequent to amalgamation;
 such incidental, consequential and supplemental matters necessary to secure
that M & A is fully and effectively carried out.
No compromise/ arrangement be sanctioned by Tribunal unless certificate by
Company’s auditor filed with Tribunal that accounting treatment, proposed in scheme is
in conformity with AS prescribed u/s 133.

 Transfer of assets and liabilities:

 Where order provides for transfer of any property or liabilities, then property
be transferred to transferee Company and liabilities shall be transferred to
transferee Company and any property, if order so directs, be freed from
charge which by virtue of compromise/ arrangement, cease to have effect.

 File copy of order with Registrar:

 Company shall file certified copy of order with Registrar for
registration within 30 days of receipt of certified copy of order.

 Appointed date of scheme:

8
Companies Act, Chapter XV Part 1 Compromises, Arrangements & Amalgamations

 Scheme indicate appointed date from which it shall be effective and scheme
be deemed to be effective from such date.

 Until completion of scheme:

 Every Company until completion of scheme, file statement in Form CAA-8 and
within 210 days from end of each F.Y. (as per Rule 21) with Registrar every
year duly certified by CA/ cost accountant/ CS in practice indicating that
scheme is being complied with orders of Tribunal or not.

 Punishment for contravention:

 If company fails to file a certified copy of the order made under this section
with the Registrar than the company and every officer of the company who is
in default shall be liable to a penalty of 20,000 rupees.
 If failure is a continuing one, with a further penalty of 1000 rupees for each
day after the first during which such failure continues, to a maximum of 3 lakh
rupees.