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Provisions of The Companies Act On Restructuring and Merger |
The Companies Act, 1956 is a voluminous piece of legislation on the statute book with 658 sections and 14 schedules. However, there are only seven sections here on corporate restructuring including mergers, de mergers etc. Although corporate re-engineering physically occupies a small portion of the Companies Act comprising barely seven sections from 390 to 396A therein, yet its impact on industry and commerce has been far reaching. These provisions have been borrowed from the English Companies Act and have withstood the test of times.
Compromise, arrangement, reconstruction and amalgamation
Chapter V of the Companies Act deals with schemes of compromises, arrangements and reconstructions covering Sections 390 to 396A.
‘Arrangement’ has a very wide meaning and is wider than ‘compromise’. ‘Compromise’ hints at some element of accommodation on each side. ‘Arrangement’ or ‘reconstruction’ describes any form of restructuring of the company for its betterment and includes merger of two or more companies and the division of one company into two or more companies.
Generally in such schemes the rights of the concerned creditors and members have to be curtailed. The value of the provisions of the said Chapter V of the Companies Act is clearly evident where dissenting stakeholders are concerned. For reduction of rights individual agreement with or consent of each affected member or creditor would have been required. In such eventuality, dissenting or untraced members or creditors, though in a minority, could frustrate any arrangement. The provisions of statutory scheme ensure that such minority become bound by the restructuring exercise supported by the affected majority for betterment of the company and cannot scuttle it.
Powers of Court to sanction compromise or arrangement
According to Section 391 (1) where a compromise or arrangement is proposed between a company on one hand and its creditors or a class of them or with its members or a class of them, the Court may on an application of concerned member or creditor order a meeting of the creditors or members or concerned class of them, as the case may be for consideration of such proposals. Such proposals for compromise or arrangement under Section 391 of the Companies Act can also involve a scheme of reconstruction or amalgamation of companies by virtue of Section 394 of the said Act.
Reconstruction here is a generic term, which also includes within its ambit division, takeover, spin offs, divestitures etc. of corporate enterprises.
Under Section 391 (2) if a majority in number of, however, at least 3/4th in value of such creditors or members, as the case may be, present and voting either in person or by proxy agree, such compromise or arrangement shall be binding and enforceable, if sanctioned by the Court.
However, no order sanctioning any arrangement or compromise shall be made by the Court unless it is satisfied that the company or any person by whom the application is made has disclosed to the Court by affidavit or otherwise that all material facts relating to the company, such as its latest financial position, the latest auditor’s report on the accounts of the company, particulars of any pending investigation or proceedings in relation to the company under Sections 235 to 251 of the said Act and the like.
Under Section 391 (3) the order of the Court shall not have any effect unless a certified copy of the same has been filed with the Registrar of Companies of the State in which the registered office of the company is situated.
Under Section 391 (6) the Court may at any time after the application has been made stay the commencement or continuation of any suit or proceedings against the company on such terms the Court thinks fit, until the application is finally disposed of.
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