Reconstruction and Amalgamation

With the increasing magnitude of the companies business and the commercial activities, there
had also been an increase in the diversities of the people who deal with them. Occasions of
clashes and conflicts frequently arise which needs to be resolved amicably. And to resolve
such conflicts the companies generally have to resort to arbitration or compromises to settle
such clashes.

Further, value creation, diversification, and for increasing the financial capacity of the
companies or for survival, one company may have to join hands with another company either
by way of amalgamation or by the takeover. So the companies act provides for the provisions
relating to various methods for the reorganization of a company. Thus is becoming vital to
discern the provisions of the Companies Act in relation to Mergers and Acquisition, and the
procedure thereof.

Mergers and Acquisition

Before 2013, Section 391 to 394 of The Companies Act, 1956 dealt with the Mergers and
acquisitions of a company. But after 2013, due to some backdrops in the old legislation, these
provisions were amended by virtue of sections 230-240 of The Companies Act 2013. So now
these sections govern any type of arrangement or mergers and acquisitions. All of these
sections were notified on 15th December 2016 except Section 234 which was notified on
13th April 2017. These provisions were amended to bring more transparency to the laws
relating to M&A. The amendment empowered the Tribunal (NCLT) to sanction the entire
process. The provisions under the Companies Act, 2013 deal with the substantive part only,
while the procedural aspects relating to M&A are given under the Companies (Compromise,
Arrangements, and Amalgamation) Rules, 2016.

Arbitration

Prior to 1960, Section 389 of the Companies Act empowered them to enter into arbitration as
per the provisions of the Arbitration Act, 1940. But the Arbitration act did not provide for
foreign arbitrations as a result of which the Indian Companies could not enter into an
arbitration agreement with foreign companies. In order to remove this lacuna, the Companies
Amendment Act, 1960 dropped section 389 from the companies act as a result of which the
Indian companies were free to enter into arbitration agreements with foreign companies,
provided that such agreements are allowed by the Memorandum.

Compromise and arrangement distinguished

The word compromise has nowhere been defined in the Companies Act. It basically connotes
the settlement of a conflict by mutual consent and agreement or through a scheme of
compromise. Thus, for a compromise, there has to be some dispute or conflict. On the other
hand, the word arrangement has been defined under section 230(1) of the companies act. The
arrangement has a wider connotation than compromise. The arrangement means re-
organizing the right and liabilities of the shareholders of the company without the existence
of some dispute. A company may enter into a compromise or arrangement to take itself out
from the winding-up proceedings.

Situations under which a company may call for a scheme of compromise:

1. If in the normal course of business, it becomes impossible to pay all the creditors
in full.
2. Subsidiaries/Units cannot work without incurring losses.
3. Where liquidation of the company may prove harsh for the creditors or members.
Situation under which a company may enter into arrangements:

1. For the issue of new shares.

2. For any variation in property.
3. Conversion of one class of share to another.
4. For reorganizing the share capital of the company.

Reconstruction
Reconstruction is a situation where a new company is formed and the assets of the old one
are transferred to the newly formed company. Reconstruction is the key technique used for
changing the capital structure of a firm. There are a number of reasons due to which a
company may go for reconstruction. A few of them are:

1. By reconstruction, the company can simplify the capital structure.

2. It can eliminate all the past losses.
3. Helps in raising working capital, adjusting cumulated dividends.
4. May result in a reduction of fix charges.
A reconstruction of a company may be done internally or externally. In external
reconstruction, the old company is dissolved and a new one is incorporated and the assets of
the older one are transferred to the new one. Whereas in internal restructuring, the old
company continues, only its capital structure is changed.

Procedure for compromise and arrangement under the company law

After the enactment of the Companies Act, 2013, the procedure for mergers, acquisitions,
amalgamations and restructuring has been simplified by the new provisions. The Act of 2013
has removed all the backdrops of the older legislation and is aimed to bring more
transparency. It allowed cross border mergers as well, increasing the horizons for the
industries and making it easier for them to expand. In order to speed up the process and to
bring more transparency the assistance of tribunal was invoked under the 2013 Act. So below
is the stepwise procedure for the scheme of compromise and arrangement:
 1. Preliminary Stage (Preparation of Scheme): This is the first stage, in which a
detailed scheme is prepared by the members of the creditors. This scheme must
contain all the matters that are of substantial interest, it must also explain or show
how the scheme is going to affect the members, creditors and all the other
companies. The scheme must also disclose the material interest of the director.
2. Application to Tribunal: Any member or a creditor of the company (in case the
company is winding up, its liquidator) can make an application to the Tribunal i.e.
to NCLT proposing the scheme of merger or acquisition between two or more
companies. The tribunal can also make the application on a suo moto basis.
3. Tribunal looks into the application: Once an application proposing the scheme is
made, the tribunal will take a look as to whether the application is within the ambit
of Section 230-240. It is pertinent to note here that in this stage the tribunal is not
concerned with the merits of the application, it will only look as to whether the
application is within the ambit of the act or not. It will also see that the application
is accompanied by an explanatory statement.
4. Conveyance of Meeting: Once the tribunal sees the application, it issues a notice
for the conveyance of the meeting of the creditors and the members of the
company within 21 days. It must be noted that, if the scheme is not going to have
any adverse effect on any party, then the tribunal can also avoid the call for the
meeting. If the meeting is conveyed then the scheme must be approved by a
majority of three fourth members present and voting.
5. Presentation of the outcome of the Meeting before the Tribunal: Once the scheme
is approved by the members or creditors or the liquidator (in case of a winding
company) in the meeting, the report of the meeting must be presented before the
tribunal within seven days of the meeting. The report must show the confirmation
of the scheme of compromise or arrangement.
6. Commencement of Hearings: After the submission of the report the tribunal shall
fix a date for hearing. Such data must be notified in the newspaper through
advertisement. Such advertisement must be notified before 10 days of the hearing.
7. Sanction of Cases: The tribunal shall after hearing all the objections and concerns
of all the parties, if it is deemed fair and reasonable to the tribunal then the tribunal
may sanction the compromise or arrangement.
8. Registration of the Scheme with Registrar: Once the scheme is sanctioned by the
Tribunal, a certified copy of the order shall be filed with the ROC (Registrar of
Company) within 14 days from such sanction order.

Powers and duties of the tribunal

Before understanding the powers and duties of the tribunal (National Company Law
Tribunal), it must be understood as to why be the sanction of tribunal important. There are
several reasons which necessitate the sanction of the Tribunal; a few of them are listed below:

1. Once the scheme is approved by the Tribunal, the company is bound to abide by it,
any avoidance or deviance from the same may bring legal consequences.
 2. If the tribunal won’t have interfered, the majority might have suppressed the
minority’s right; so Tribunal ensures adequate representation of the minority.
3. Tribunal also has supervisory power, so at any time if NCLT is of the view that the
scheme is not in the interest of the member, it may order to modify the scheme or
may order winding-up.
The tribunal is empowered with a wide range of powers by the virtue of Section 231. The
tribunal has the sole authority either to approve or to reject the scheme of compromise or
arrangement. If the tribunal approves the compromise or arrangement, in such a case it
further has the following powers:

1. To supervise/monitor the carrying out of the proposed scheme.

2. To modify/amend the scheme to achieve the best result.
3. To order winding up of Company, if it is deemed to the tribunal that the scheme is
not workable in the interest of the Company or its member.
Apart from the above powers, the tribunal is also bound by certain duties: So, whenever the
tribunal sanctions a scheme, it must make sure that the following factors had been complied
with.

1. That the scheme is within the provisions of the Companies Act.

2. The tribunal must make sure that the class of people, who were to be adversely
affected by the scheme, are fairly being represented in the meeting.
3. The proposed scheme must be reasonable; it should not have any adverse effect on
society.

Mergers and acquisitions of certain companies – the fast track

merger
Under the 1956 act, every company has to follow the same lengthy and time-consuming
procedure for compromise and arrangement. The process under the 1956’s act was long and
time-consuming because of the intervention of the High Court. So, it may not be
economically feasible for ‘certain’ companies to go through such a long procedure. In order
to remove this lacuna,

the 2013 act introduced the process of Fast Track Mergers. So, Section 233 of the
Companies Act covers the substantive part and Rule 25 of the Companies (Compromise,
Arrangements, and Amalgamation) Rules, 2016, covers the procedural aspect for the Fast
Tack Mergers. This rule 25 of the CAA Rules, 2016 was notified by the Ministry of
Corporate Affairs on 15th December 2016.

As per section 233 of the Companies Act, 2013, there are three classes of companies who are
not required to go through the regular merger process, but can prefer the fast track method,
those companies are:
 1. Holding and Subsidiary Companies: The Holding companies are defined
under Section 2(46) of the Companies Act, and Section 2(87) of the Companies
Act, defines a subsidiary company.
2. Small Company: Small company has been defined under Section 2(85) as a
company other than a public company, having a paid-up capital not exceeding 50
Lakh Rupees or any such amount as prescribed by the government, but shall not, at
any time exceed 10 crores.
3. Other Classes: As prescribed by the Government in the CAA Rules, 2016.
This fast track merger eliminates the sanction of the NCLT and brings a more speedy process.
The steps involved in Fast track merger are mentioned below:

1. The proposed scheme is served to the Registrar of Company.

2. Holding of the meeting of Creditors or members.
3. Declaration of solvency must be filed by both the companies to their respective
Registrar.
4. Filing of the report of the meeting with the Registrar of the Companies, and if the
Registrar has no objection then he shall register the company and must issue a
confirmation notice.
5. If, in case there are any objections, then those objections must be presented before
the NCLT, and the tribunal shall decide on it.
There are a lot of advantages that this fast track merger process has brought with it, a few of
which are: It has simplified the process, no compulsory requirement of NCLT’s approval,
short time, Less expensive, it has removed all the secondary opportunities to raise objection
which makes the process more expedient, further there are no need to issue public
advertisements, it helps in avoidance of serried of hearings, etc. So now if a person/company
goes through this fast track merger, the entire process would last for 90-100 days only.

Amalgamation of companies by central government in public interest

Section 237 of the Companies Act, 2013 deals with the M&A in Public Interest. The change
brought through the amendment enlarges the scope of government power for amalgamation
in the public interest.

Since Mergers and Acquisitions affect the revenue of the Companies and ultimately the
economy of the nation, so these mergers can have both positive and negative impacts on the
economy. So at any time, if the central government feels that it is important and expedient in
the public interest to amalgamate certain companies, the government may order mergers of
such companies.

A few of the provisions relating to M&A in the public interest are as follows:

1. The central government may at any time order for the merger of a company, by
notification in the official gazette.
 2. Generally there are some background checks in mergers, but when M&A is in the
public interest, then the central government may avoid such checks.
3. The government will make sure that the protection of rights of minority
shareholder.
4. If any person is aggrieved by compensation, then they can within 30 days from the
publication in the gazette appeal to the tribunal.
5. The section further inserts few more provisos that curtail the above rights under
237(5). Copy of such M&A must be laid before the parliament.

Protection of the dissenting shareholder’s rights

As a general presumption, the majority members enjoy supreme authority in controlling the
affairs of the company. And the minority is forced to concede the decision of the majority.
Thus, there might be a possibility that the majority oppresses the minority. In order to protect
the interest, the 2013’s act introduced Section 235 and 236. Both of these sections were
notified in 2016. As per the Majority’s Rule and Minority’s Right rule as laid in the case of
Foss vs. Harbottle (1843) the will of the majority shall prevail and even the court should not
interfere in such case, but such rules must be within a reasonable limit.

So, Section 236 introduces the concept of Squeezing out Minority Shareholder. So, this
means squeezing out the minority shareholder to free the dissenting shareholders. So how
these minority shares are purchased is provided under Section 236.

Minority Shareholders are the ones whose issued capital doesn’t exceed 10%. The majority
will offer a price to the minority that is reasonable; such an amount needs to be deposited in a
separate bank account. The amount from that separate bank account is to be transferred to
minority shareholders within 60 days.

Now, after the Ministry of Corporate Affair’s Notification of 2020, as notified on

3rd February, the scope of minority shareholders is now increased from 10% to 25%. And
now if the majority (75%) wants to purchase minority shareholders then they need to go to
SEBI (in case of listed Company) or to NCLT (if unlisted).