Companies (Compromises, Arrangement & Amalgamation) Rules, 2016-Comments

Authority before which application has to be made

As per the Companies Act 1956, The authority before whom an application has to be made is the “High Court” having jurisdiction in the State in which the registered office of the company is situated As per the new Act and draft the authority is the National Company Law Tribunal (Hereinafter referred to as Tribunal) to sanction all schemes of compromises or arrangements.

Notice of meeting

For the purpose of sub-section (4) of section 230 voting through postal ballot shall be made within thirty days from the date of the issue of the notice. As per the previous acts, persons to whom notice is sent may vote in the meeting either themselves or through proxies or by postal Ballot within one month from the date of receipt of the notice. The draft does not mention about voting through proxies which according to me will expedite the process of voting and remove discrepancies, if any.  At the same time as per the new draft, voting can be done within 30 days from the date of issue of notice instead of receipt of notice which as per my opinion should be receipt of notice because the duration could be calculated appropriately once the notice is received, there might be chances that the notice is not received by the concerned person and could cause delay in voting.

For the purposes of sub-section (5) of section 230, the notice of the meeting under sub-section (3) of section 230, a copy of the scheme of compromise or arrangement, the explanatory statement and the disclosures mentioned under sub-rule (1) shall be sent to

The Central Government,

The Registrar of Companies,

Income-Tax Authorities,

The Official Liquidator in all cases as per the 2016 draft, earlier it was sent to OL, if necessary.

The Reserve Bank of India,

The Securities and Exchange Board of India,

The Competition Commission of India,

The stock exchanges and other sectoral regulators or authorities only if necessary, in Form No. AMG.5.

Copy of compromise or arrangement to be furnished by the company

According to the new draft 20016, Every creditor or member entitled to attend the meeting shall be furnished by the company, free of charge and within one day of a requisition being made for the same, with a copy of the proposed compromise or arrangement together with a copy of the statement required to be furnished under section 230 of Act; whereas as per the previous Acts, it is only mentioned that notice shall indicate the time within which copies of Compromise or Arrangement shall be made available to the concerned person free of charge from the registered office of the Company. In my opinion, it becomes more precise regarding the time within which the copy of Comp/Arr shall be furnished and made available.

No compromise or Arrangement shall be sanctioned by the Tribunal as per the Companies Act 2013, 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 is in conformity with the accounting Standards under Section 133.The new draft 2016, is silent about the Auditors Certificate which is important in my opinion to bring about authenticity and transperancy. Section 391 of the Companies Act 1956 states that no order made by the Court shall be effective unless a certified copy of it is filed with the Registrar and it also requires that a copy of the order has to be annexed to every copy of the MOA issued after filing order copy with Registrar. Companies Act 2013 and the new draft 2016 does not contain any express provision to this effect, except that Clause 230 contains that copy of order has to be filed with Registrar within 30 days of receipt of order.

Offer of takeover of a company, other than a company whose equity shares are listed on any stock exchange, pursuant to a scheme of compromise or arrangement

An acquirer may, with the consent of the board of directors of the company being acquired, make a takeover offer pursuant to sub-section (11) of section 230 at a price determined by registered valuer. Provided that where the company, being acquired is regulated under a special Act, approval of the regulatory body constituted or established under that Act if required under such act, shall also be obtained. The person making the takeover offer shall enter into memorandum of understanding or an agreement with the company so being acquired. Such memorandum or agreement for takeover shall be annexed to the notice of the general meeting. The Companies Act 2013, simply mentions that the takeover offer shall be made in such a manner as may be prescribed and in case of listed Company as per the guidelines of SEBI.

Application under sub-section (12) of section 230

An application under sub-section (12) of section 230 shall be filed by an aggrieved party to the Tribunal in Form No. AMG.7 specifying any grievance with respect to the takeover offer of companies under sub-section (11) of section 230 shall be accompanied by a copy of the takeover agreement or memorandum of understanding and a detailed statement explaining the specific adverse effect of such agreement or memorandum of understanding on the applicant whereas the Companies Act 2013,simply mentions about the application to the Tribunal in the event of any grevience with respect to takeover of Company other than listed Company. It is a cumbersome procedure according to me.

Date and notice of hearing

The Tribunal shall fix a date for the hearing of the petition, and notice of the hearing shall be advertised in the same papers in which the notice of the meeting was advertised, or in such other papers as the Tribunal may direct, not less than ten days before the date fixed for the hearing. The notice of the hearing of the petition shall also be served by the Tribunal to the representative of the objectors under sub-section (4) of section 230 and to the Central Government and other authorities who have made representation under sub-section (5) of section 230.Nothing is mentioned in this regard in the Companies Act 2013.Therefore, according to me, this clause brings about more transparency in the system and should be specifically mentioned.

Application for directions under section 232

Clause 232 of the Act contains provision regarding Merger (including demerger) and Amalgamation of companies. The difference between Section 394 and Clause 232 is that, in Clause 232, an attempt has been made to codify separately, the complete procedure for amalgamation and demerger of companies. Clause 232 opens with the provision that where an application is made to the Tribunal under Clause 230 and if it pertains to –

- A scheme of reconstruction or amalgamation,

- Transfer of whole or part of an undertaking of a company (transferor company) to another company (transferee company) - demerger,

then a meeting of the creditors or members, or any class of each of them may be ordered by the Tribunal, to be called, held and conducted as per the directions of the Tribunal. It further states that in case of amalgamations and demergers, all provisions of Clause 230 pertaining to notice requirements, majority required for approval of scheme etc. shall apply in the same manner with necessary changes only.

Clause 232 additionally mandates circulation of following details/documents before a meeting, as aforesaid, is held –

- Copy of draft scheme approved by the Board of the merging companies

- Confirmation that a copy of the scheme has been filed with ROC

- Report by directors of the merging companies, explaining the effect of the scheme on Shareholders, Key Management Personnel .etc., laying out in particular the share exchange ratio and specifying any special valuation difficulties

- Copy of valuation report, if any

- Copy of Accounts drawn up to a date not preceding the board meeting date (held for consideration of scheme) by more than 6 months.

As regards matters to be included in the Tribunal's order sanctioning a scheme of amalgamation or demerger, Clause 232 incorporates all of the points mentioned under section 394 with the following additions – .

Allotment of shares to Non-resident shareholders in the manner to be 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 and ) if shareholders of the transferor company decide to opt out of the transferee company, provision shall be made for payment of the value of shares held by them in accordance with a pre-determined price formula or after a valuation is made, and the arrangements under this provision may be made by the Tribunal

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

Section 394 mandates that a report of the ROC and OL, confirming that the affairs of the company have not been conducted in a manner prejudicial to its members or public interest, has to be submitted to the Court before an order, sanctioning the scheme or confirming dissolution, is made. Clause 232 does not expressly mandate this requirement.

Section 394/Clause 232 also require that a certified copy of the order has to be filed with ROC within 30 days, with the difference that Section 394 states that order has to be filed within 30 days of making of the order whereas Clause 232 stipulates that order has to be filed within 30 days of receipt of the certified copy of the order.

Section 394 clarifies that “transferee company” does not include any company other than a company within the meaning of this Act, but “transferor company” includes anybody corporate, whether a company within the meaning of this Act or not. Clause 232 is silent on this aspect.

Statement of compliance in mergers and amalgamations

For the purposes of sub-section (7) of section 232, every company in relation to which an order is made under sub-section (3) of section 232 shall until the completion of the scheme, file with the Registrar of Companies the statement in Form No. AMG. 11 along with such fee as prescribed by the Central Government within thirty days from the end of each financial year. As per the new draft 2016, it is not mentioned that it has to be duly certified with CA/CS in practice or Cost Accountant.

Compromise or arrangement including merger of certain companies

(1) For the purposes of sub-section (1) of section 233, in addition to the schemes stated therein, a scheme of merger or amalgamation between a holding company and its wholly owned subsidiary may also be approved pursuant to the process laid down under section 233. It is further clarified that a company shall be deemed to be a "wholly owned subsidiary" if hundred per cent of its share capital is held by the holding company, except the shares held by the nominee or nominees to ensure that the number of members of subsidiary company is not reduced below the statutory limit as provided in section 187.

(2) The notice under clause (a) of sub-section (1) of section 233 shall be in Form No. AMG. 12.

(3) For the purposes of clause (c) of sub-section (1) of section 233, the declaration of solvency shall be filed by the each of the companies involved in a scheme of compromise or arrangement involving merger in Form No. AMG.13 along with such fee as provided in Schedule of Fees before convening the meeting of members and creditors for approval of the scheme.

(4) For the purposes of clause (b) and (d) of sub-section (1) of section 233, the notice of the meeting to the members and creditors shall be accompanied by -

(a)  a statement, as far as applicable, referred to in sub-section (3) of section 230;

(b)  the declaration of solvency made in pursuance of clause (c) of sub-section (1) of section 233;

(c)   a copy of the scheme.

(5)(a) For the purposes of sub-section (2) of section 233, the transferee company shall, within seven days after the conclusion of the meeting(s) of members or class of members or creditors or class of creditors, file in Form No. AMG.14 a copy of the scheme as approved by the members and creditors, along with report of the result of each of the meetings with the Central Government, Registrar of Companies and the Official Liquidator, of the place where the registered office of the company is situated.

(b)  Copy of the scheme in Form No. AMG.14 shall be filed with the Registrar of Companies along with the fee as provided by the Central Government through the MCA e-filing system.      

(c) Copy of the scheme in Form No. AMG.14 shall be filed with the Central Government and Official Liquidator, by sending them through hand delivery or registered or speed post or through electronic filing system as may be approved by the Central Government.

(6) Where no objection or comment is received to the scheme from the Registrar of Companies and Official Liquidator or where even after the receipt of objections or comments of Registrar and Official Liquidator, the Central Government is of the opinion that the scheme is in the public interest or in the interest of creditors the Central Government shall issue in Form No. AMG. 15, a confirmation order of such scheme of compromise or arrangement.

(7) Where objections are received from the Registrar of Companies or Official Liquidator and the Central Government is of the opinion, whether on the basis of such objections or otherwise, that the scheme is not in the public interest, it may file an application before the Tribunal within sixty days of the receipt of the scheme stating its objections or opinion and requesting that Tribunal may consider the scheme under section 232.

(8) For the purposes of sub-section (7) of section 233, the confirmation order of the scheme issued by the Central Government or Tribunal, shall be filed in Form No. AMG.16 along with the fee as provided by the Central Government with the Registrar of Companies having jurisdiction over the transferee and transferor companies respectively.

It is clarified that with respect to schemes of arrangement or compromise falling within the purview of section 233, the concerned companies may, at their discretion, opt to undertake such schemes under sections 230 to 232, including where the condition prescribed in section 233 (1) (d) has not been met.   

Fees to be paid on revised capital

For the purposes of sub-section (11) of section 233, to the extent that the transferee company and transferor company are not eligible for the benefit of the proviso therein, the transferee company shall pay such fees as may be specified by the Central Government on the revised capital.

Merger or amalgamation of a company with a foreign company

The merger or amalgamation of a company into a foreign company, or vice versa, shall comply in all respects with the Foreign Exchange Management Act, 1999 and any applicable regulations there under, including any amendments or clarifications thereto, and any other applicable laws (including the applicable law in the relevant jurisdiction), including with respect to the obtaining of any approvals required for the purposes of giving effect to the merger or amalgamation as per the new draft 2016 whereas according to the Act 2013, prior approval of RBI is required and central Government shall make rules regarding such schemes in consultation with RBI which according to me is a complicated procedure but will bring more authenticity and should be included in the new draft.

Notice to dissenting shareholders for acquiring the shares

For the purposes of sub-section (1) of section 235, the transferee company shall send a notice in Form No. AMG. 17 to the dissenting shareholder(s) of the transferor company, at the last intimated address of such shareholder, for acquiring the shares of such dissenting shareholders. Time limit for sending the notice to the dissenting shareholders is not mentioned in this draft; whereas as per the Companies Act 2013 it is mentioned that the transferee company shall within 2 months after the expiry of the said 4 months give notice. It should be more exact in the draft.

Determination of price for purchase of minority shareholding

For the purposes of sub-section (2) of section 236, the registered valuer shall determine the price (hereinafter called as offer price) to be paid by the acquirer, person or group of persons referred to in sub-section (1) of section 236 for purchase of equity shares of the minority shareholders of the company,  in accordance with the following rules:- 

(1) In the case of a listed company,

(i)  the offer price shall be determined in the manner as may be specified by the Securities and Exchange Board of India under the relevant regulations framed by it, as may be applicable; and

(ii) the registered valuer shall also provide a valuation report/basis of valuation addressed to the Board of directors of the company giving  justification for such valuation.

(2) In the case of an unlisted company and a private company,

(i)  the offer price shall be determined after taking into account the following factors:-

(a)  the highest price paid by the acquirer, person or group of persons for acquisition during last twelve months;

(b) the fair price of shares of the company to be determined by the registered valuer after taking into account valuation parameters including return on net worth, book value of shares, earning per share,  price earning multiple vis-à-vis the industry average, and such other parameters as are customary for valuation of shares of such companies; and

(ii)  the registered valuer shall also provide a valuation report/basis of valuation addressed to the Board of directors of the company giving justification for such valuation.

Nothing is mentioned in the draft 2016 regarding the mode of payment (opening a separate bank Account to be operated by the transferor Company for at least 1 yr for payment to Minority Shareholders and such amount shall be disbursed to the entitled shareholders within 60 days.     

Circular containing scheme of amalgamation or merger

For the purposes of clause (a) of sub-section (1) of section 238, every circular containing the offer of scheme or contract involving transfer of shares or any class of shares and recommendation to the members of the transferor company by its directors to accept such offer, shall be accompanied by such information as set out in Form No. AMG.18.

Appeal under sub-section (1) of section 238

Any aggrieved party may file an appeal against the order of the Registrar of Companies refusing to register any circular under sub-section (1) of section 238.  The said appeal shall be in the form as prescribed under National Company Law Tribunal Rules, 2016 supported with an affidavit. 

Miscellaneous Provisions

Any objection to the compromise or arrangement shall be made only by persons holding not less than ten per cent. of the shareholding or having outstanding debt amounting to not less than five per cent. of the total outstanding debt as per the latest audited financial statement.

Section 393 of the Companies Act 1956, requires every director, MD, Manager and Debenture Trustee to provide to the Company all details as may be necessary, It also stipulates a penalty provision if the requirements of the section are not complied with. There is no corresponding express provision in the latest draft or 2013 Act. This clause should be added in my opinion as it could bring about accountability on the part of the KMP also and more transparency will be there which is an important ethic of running a business.

The draft is silent about Section 233 of the Act which according to me should be added for small Companies and Holding-WOS Company. With respect to Merger and Amalgamation of two or more small Companies or Holding Company and its WOS; the authority to sanction the scheme lies in the Regional Director (Central Government) and not Tribunal.

The draft is also silent about:

Objection to Compromise or Arrangement ( Any objection to Compromise or Arrangement shall be made only by persons holding not less than 10% of the shareholding or having outstanding debt amounting to not less than 5% of the total outstanding debt as per the latest audited Financial Statement.

Section 237-Power of the Central Government to provide amalgamation of Companies in Public Interest.

Section 239- Preservation of Books & Papers of Amalgamated Companies; which is an important clause as it could help the Companies to keep a record of the previous working and proceeding of the Amalgamated Company.