Fast Track Mergers & Amalgamation - Corporate and Company Law

Preface

The Ministry of Corporate Affairs ("MCA") vide Notification¹ dated December 7, 2016 had notified various provisions of the Companies Act, 2013 (hereinafter referred as "CA 2013") which have come into force with effect from December 15, 2016. Vide this notification, the provisions pertaining to compromise, arrangements, reconstruction (comprising sections 230 to 240 of the CA 2013²) got enforced from December 15, 2016. The notified sections relating to compromises, arrangements and amalgamations correspond to sections 390 to 396A of the Companies Act, 1956.

Subsequently, MCA has also come out with a separate Notification³ on December 14, 2016 to notify the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, (hereinafter referred as "CAA Rules") to be effective from December 15, 2016.

Synopsis of provisions notified with respect to Compromises and Amalgamations

Before briefing on the diverse aspects of the Fast Track Mergers & Amalgamation process, a short synopsis of the various provisions relating to compromise and amalgamation is presented herein below in concise manner for better understanding of the subject matter. The provisions mentioned under these sections shall be read with the CAA Rules.

Power to compromise or make arrangements with creditors and members

The provisions of section 230 of the CA 2013 deals with the powers of the National Company Law Tribunal ("NCLT"/ "Tribunal") to make order on the application of the company or any creditor or member or in case of company being wound up, of the liquidator, for the proposed compromise or arrangements. The section provides that if a compromise or arrangement is proposed between a company and its creditors or any class of them, or between a company and its members or any class of them, then an application can be made to NCLT for sanctioning the same.

Power of Tribunal to enforce compromise or Arrangement

Section 231 of the CA 2013 provides that the powers of the Tribunal can be exercised either at the time of making the order or at anytime thereafter as specified therein. The Tribunal may also order for winding up of the company, which shall be deemed to be an order under section 273 of CA 2013, in case the sanctioned compromise or arrangement is not satisfactorily implemented and the company is unable to pay its debts as per the scheme.

Merger and amalgamation of companies

Section 232 deals with the powers of the Tribunal to order for holding meetings of the creditors or the members and also to make such orders on the proposed reconstruction, merger or amalgamation of companies. Additionally, the section also provides the manner and procedure for merger, amalgamation, compromise, arrangement, demerger of companies.

Merger or amalgamation of certain companies

Section 233 of the CA 2013 is a new section which deals with merger or amalgamation of the following companies without approval of any Court or Tribunal subject to fulfilment of prescribed conditions and following the procedure prescribed under the CAA Rules:

i Two or more small companies⁴

ii Between a holding company & its wholly owned subsidiary company

iii Other class of prescribed companies⁵.

Power to acquire shares of dissenting Shareholders

Section 235 deals with the manner in which the transferee company may acquire shares of such shareholders who are dissenting from the scheme or contract as approved by the holders of not less than nine‐tenths in value of the shares.

Purchase of Minority Shareholding

This section 236 provides the procedure and manner for acquiring shares held by minority shareholders.

Amalgamation of companies in public interest

In pursuance to this section 237 the Central Government is empowered to amalgamate two or more companies in public interest by passing an order to be notified in the Official Gazette.

Registration of offer of schemes involving transfer of shares

This section 238 provides the manner of registration of offer of schemes or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company in case of acquisition of shares of dissenting shareholders.

Preservation of books and papers of amalgamated companies

The section 239 provides that books of account and papers of a company which has been amalgamated or whose shares have been acquired by another company, shall not be to disposed of without prior permission of the Central Government.

Liability of officers to be continued post merger, amalgamation etc .

This section 240 provides the liability in respect of offences committed by the officers in default of transferor company prior to its merger or amalgamation or acquisition shall continue after such merger or amalgamation or acquisition.

Fast Track Mergers and Amalgamation

Section 233 of the Companies Act, 2013 (CA 2013) dealing with "Merger or Amalgamation of Certain Companies" has also come into force with effect from 15th December, 2016. In contrast to the Companies Act, 1956, this is a new provision under CA 2013 which deals with out of court/tribunal, fast tracked merger or amalgamation of certain companies subject to conditions prescribed.

The detailed framework and the procedure of the Fast Track mergers and amalgamation has been provided under Section 233 of CA 2013 read with Rule 25 of the CAA Rules.

Salient features of Fast Track Mergers/Amalgamations

Applicability

In terms of Section 233(1) of CA 2013, a scheme of merger or amalgamation under the said provisions may be entered into between:

i two or more small companies

ii a holding company & its wholly owned subsidiary company.

iii other class of prescribed companies⁶

The approval of the above scheme will not require mandatory approval of NCLT unless the companies concerned opts for.

Eligibility for compromise or arrangement

The above mentioned class of companies would also be eligible for out of Court/Tribunal process of compromise or arrangement in terms of Section 233(12) of CA 2013. Such compromise or arrangement could be:

i between a company and its creditors or any class of them; or

ii between a company and its members or any class of them.

Conditions

The eligible class of company or companies as mentioned herein above are required to fulfil the following conditions for Fast Track Mergers & Amalgamations under Section 233:

i To invite objections and suggestions from the ROC and Official Liquidator on the proposed scheme;

ii To consider the objections and suggestions, if any;

iii To file declaration of solvency before the ROC; and

iv To get the scheme approved by the shareholders and creditors

Necessary Approvals for Fast Track Mergers & Amalgamations

Approvals of the following concerns are required for fast Track Mergers & Amalgamations:

i Shareholders;

ii Creditors;

iii The Central Government (powers delegated to Regional Director vide MCA notification⁷ dated 19/12/2016);

iv ROC; and

v The Official Liquidator

It is pertinent to note that if the ROC and the Official Liquidator concerned does not have any objections or suggestions to the scheme, the Central Government (Regional Director) shall register the scheme and issue a confirmation thereof to the companies.

Procedure

The procedure under the Fast Track Mergers & Amalgamation may be summarized as below: i There must be power to amalgamate with other companies in the Memorandum of Association (MOA) of the companies seeking to merge. If not such power provided in the MOA then as a first step get the MOA to be amended to insert the provision empowering the company to get itself merged with one or more other companies.

ii Convene the Board of Directors meeting to get the scheme approved in both the Transferor Company and the Transferee Company.

Send Notices (in Form CAA.9) by both the Transferor Company and the Transferee Company inviting objections or suggestions on the scheme of amalgamation to the ROC, Official Liquidator and such other persons who are all affected by the scheme of merger/amalgamation. The Notice given to the shareholders or creditors or any class of them, shall be contain the followings:

Scheme of Amalgamation;
Statement disclosing the scheme of amalgamation and the effect of the scheme on its stake holders such as the shareholders, key managerial personnel, directors, employees, promoters, creditors, debenture holders etc.;
Copy of the valuation report;
Such other information or documents as the Board or Management believes necessary and relevant for making decision for or against the scheme.

iii File Declaration of Solvency by both the Transferor and the Transferee Company in Form CAA.10 with the ROC.

iv Convening the meeting of Shareholders for their Approval with 90% of the shareholders approving the resolution.

v Convening the meeting of Creditors for the approval of the scheme by the majority representing 9/10th in value of creditors or class of creditors of the respective companies.

vi The transferee company to file a copy of the scheme so approved in the Form CAA-11 with the ROC in Form GNL-1 and with the Office of Official Liquidator through hand delivery or by registered post or speed post.

vii If there is no objection or suggestion received from the ROC and Official Liquidator and the Central Government is of the opinion that the scheme is in the public interest or in the interest of creditors, a confirmation order of such scheme of merger or amalgamation in Form No. CAA.12 shall be issued by the Central Government.

viii Where objections or suggestions are received from the ROC or Official Liquidator and the Central Government is of the opinion that the scheme is not in the public interest or in the interest of creditors, it may file an application before the Tribunal in Form No. CAA.13 within sixty days of the receipt of the scheme requesting that Tribunal may consider the scheme under section 232 of the CA 2013.

ix On receipt of an application from Central Government as aforesaid or from any other person, if NCLT for reasons recorded in writing is of the opinion that the scheme should be considered as per the procedure laid down in section 232, the NCLT may direct accordingly or it may confirm the scheme by passing such order as it deems fit. x The confirmation order to be filed by the transferor and transferee companies in Form INC 28 with the ROC concerned within 30 days of the order of confirmation from the Central Government or NCLT as the case may be.

Effect of Registration of the Scheme

The registration of scheme shall have the following effect:

i Transfer of property or liabilities of the transferor company to the transferee company so that the property becomes the property of the transferee company and the liabilities become the liabilities of the transferee company;

ii The charges, if any, on the property of the transferor company shall be applicable and enforceable as if the charges were on the property of the transferee company;

iii Legal proceedings by or against the transferor company pending before any court of law shall be continued by or against the transferee company; and

iv Where the scheme provides for purchase of shares held by the dissenting shareholders or settlement of debt due to dissenting creditors, such amount, to the extent it is unpaid, shall become the liability of the transferee company.

Conclusion :

In a nutshell the provisions of Section 233 provide a simplified procedure for the merger & amalgamation including any scheme of compromise & arrangement for certain specified companies. The modus operandi of this section is no mandatory approval from NCLT and dissolution of transferor companies without process of winding up on registration of the scheme for the specified companies. It is a new provision which was introduced in the Companies Act, 2013 as no such provision was there in the previous Companies Act, 1956. This route of Fast Track Merger & Amalgamation provides extensive relief to such companies from following the meticulous and complex procedure of merger & amalgamation involving approval of NCLT. As there are significant interest of third parties and general public in mergers between holding and its wholly owned subsidiary company, the fast track mergers & Amalgamation scheme is relevant and a boon for the corporate sector. The small companies are also get benefitted by saving time and cost as well. The NCLT will also become less burdened. This is a much needed step taken by the Government in order to promote ease of doing business in India and for the overall benefit of the industries.

Footnotes

1. h t t p : / / w w w . m c a . g o v . i n / M i n i s t r y / p d f commencementnotif_08122016.pdf">

2. Sections 230(11), 230(12) and 234 have not been notified.

3. h t t p : / / w w w. mc a . g o v . i n /M i n i s t r y / p d f / compromisesrules2016_15122016.pdf

4. As per section 2(85) ''small company'' means a company, other than a public company,—

(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; AND

(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this clause shall apply to—

a holding company or a subsidiary company;

a company registered under section 8; or

(C) a company or body corporate governed by any special Act;

5. The other class of companies have not been yet prescribed till date of this article

6. The other class of companies have not been yet prescribed till date of this article

7. http://mca.gov i n /Mi n i s t r y/pdf /Not i f i cat i on_PowerRD_20122016.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

India: Fast Track Mergers & Amalgamation