Legal Service India - Arbitration, Compromises, Arrangements and Reconstruction
Company Law

Arbitration, Compromises, Arrangements and Reconstruction

If 3/4 in value of the creditors, or class of creditors, or members or class of members, present and voting either in person or, where proxies are allowed, under rules made by the Court
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Power to compromise or make arrangements with creditors and members

Where a compromise or arrangements is proposed-
  1. between a company and its creditors or any class or them; or
  2. between a company and its members or any class or them;
the Court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of class or members, as the case may be to be called, held and conducted in such manner in the court directs.

If 3/4 in value of the creditors, or class of creditors, or members or class of members, present and voting either in person or, where proxies are allowed, under rules made by the Court, by proxy, at the meeting, agree, to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also, on the company, or, in the case of a company which is being would up, on the liquidator and contributories of the company.

The Court shall not approve of such a scheme unless it is satisfied that the Company or the applicant has disclosed to the Court all material facts relating to the company such as the latest financial position of the company, the latest auditor's report, details of any investigation pending against the company, etc.

An order made by the Court shall have no effect until a certified copy of the order has been filed with the registrar.

A copy of every such order shall be annexed to every copy of the memorandum of the company issued after the certified copy of the order has been filed, as aforesaid.

If default is made in complying with the above provisions, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to ten rupees for each copy in respect of which default is made.

The Court may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceeding against the company on such terms as the Court thinks fit, until the application is finally disposed of.

An appeal shall lie from any order made by a Court exercising original jurisdiction under this section to the Court empowered to hear appeals from the decisions of that Court, or if more than one Court is so empowered to the Court of inferior jurisdiction.

Power of High Court to enforce compromises and arrangements

Where a High Court makes an order as above sanctioning a compromise or an arrangements in respect of a company, it-
  1. shall have power to supervise the carrying out of the compromise or arrangement; and
  2. may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement.
If the Court aforesaid is satisfied that a compromise or arrangement sanctioned under the above provisions cannot be worked satisfactorily with or without modifications, it may, either on its own motion or on the application of any person interested in the affairs of the company, make an order winding up the company.

Information as to compromises or arrangements with creditors and members
Where a meeting of creditors, or any class of creditors, or of members or any class of members, is called: -
  1. with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting for the terms of the compromise or arrangement and explaining its effect; and in particulars, stating any material interests of the directors, managing director or manager of the company, whether in their capacity as such or as members or creditors of the company or otherwise, and the effect on those interest, of the compromise or arrangement, if, and in so far as, it is different from the effect on the like interests of other persons; and
  2. in every notice calling the meeting which is given by advertisement there shall be included either such a statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid.
Where the compromise or arrangement affects the rights of debenture holders of the company, the said statement shall give the like information and explanation as respects the trustees of any deed for securing the issued of the debentures as it is required to give as respects the company's directors.

Where a notice given by advertisement includes a notification that copies of a statement setting forth the terms of the compromise or arrangement proposed and explaining its effect can be obtained by creditors or members entitled to attend the meeting, every creditor or member so entitled shall, on making an application in the manner indicated by the notice, by furnished by the company, free of charge, with a copy of the statement.

Provisions for facilitating reconstruction and amalgamation of companies
Where an application is made to the Court as above for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Court-
  1. that the compromise or arrangement has been proposed for the purposes of , or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies; and
  2. that under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme is to be transferred to another company : -
the Court may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the following matters:-
  1. the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company;
  2. the allotment or appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person;
  3. the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company;
  4. the dissolution, without winding up, of any transferor company;
  5. the provision to be made for any persons who, within such time and in such manner as the court directs, dissent from the compromise or arrangement; and
  6. such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.
Where an order provides the transfer or any property or liabilities then, by virtue of the order, that property shall be transferred to and vest, and those liabilities shall be transferred to and become the liabilities of, the transferee company; and in the case of any property, it the order so directs, freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect.

Within fourteen days after the making of an order under this section, every company in relation to which the order is made shall cause a certified copy thereof to be filed with the Registrar for registration.

Power and duty to acquire shares of shareholders dissecting from scheme or contract approved by majority
Where a scheme or contract involving the transfer of shares or any class of shares in a company to another company has, within four months after the making of the offer in that behalf by the transferee company, been approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved (other than shares already held at the date of the officer by, or by a nominee for, the transferee company or its subsidiary), the transferee company may, at any time within two months after the expiry of the said four months, give notice in the prescribed manner to any dissenting shareholder, that it desires to acquire his shares; and when such a notice is given, the transferee company, shall, unless, on an application made by the dissenting shareholder within one month from the date on which the notice was given, the Court thinks fit to order otherwise, be entitled and bound to acquire those shares on the terms on which, under the scheme or contract, the shares of the approving share holders are to be transferred to the transferee company.

However, where shares in the transferor company of the same class as the shares whose transfer is involved are already held as aforesaid to a value greater than one-tenth of the aggregate of the values of all the shares in the company of such class, the foregoing provisions shall not apply, unless :-
  1. the transferee company offers the same terms to all holders of the shares of that class (other than those already held as aforesaid) whose transfer is involved; and
  2. the holders who approve the scheme or contract, besides holding not less than nine-tenths in value of the shares (other than those already held as aforesaid) whose transfer is involved are not less than three-fourths in number of the holders of those shares.
Where, in pursuance of any such scheme or contract, as aforesaid, shares or shares of any class, in a company are transferred to another company or its nominee, and those shares together with any other shares or any other shares of the same class, as the case may be, in the first- mentioned company held at the date of the transfer by, or by a nominee for, the transferee company or its subsidiary comprise nine-tenths in value of the shares, or the shares of that class, as the case may be, in the first-mentioned company, then :-
  1. the transferee company shall, within one month from the date of the transfer (unless on a previous transfer in pursuance of the scheme or contract it has already complied with this requirement) give notice of that fact in the prescribed manner to the holder so the remaining shares or of t remaining shares of that class, as the cast may be, who have not assented to the scheme or contract; and
  2. any such holder may, within three months from the giving of the notice to him, require the transferee company to acquire the shares in question; and where a shareholder gives notice under clause (b) with respect to any shares, the transferee company shall be entitled and bound to acquire those shares on the terms on which, under the scheme or contract, the shares, of the approving shareholders were transferred to it, or on such other terms as may be agreed, or as the Court on the application of either the transferee company or the shareholder thinks fit to order.
Where a notice has been given by the transferee company and the Court has not, on an application made by the dissenting shareholder, made an order to the contrary, the transferee company shall, on the expiry of one month from the date on which the notice has been given, or, if an application to the Court by the dissenting shareholder is then pending, after that application has been disposed of, transmit a copy of the notice to the transferor company together with an instrument of transfer executed of behalf of the shareholder by any person appointed by the transferee company and on its own behalf by the transferee company, and pay or transfer to the transferor company the amount or other consideration representing the price payable by the transferee company for the shares which, by virtue of this section, that company is entitled to acquires; and the transferor company shall thereupon register the transferee company as the holder of those shares.

Any sums received by the transferor company shall be paid into a separate bank account, and any such sums and any other consideration so received shall be held by that company in trust for the several persons entitled to the shares in respect of which the said sums or other consideration were respectively received.

Power of Central Government to provide for amalgamation of companies in national interest

Where the Central Government is satisfied that it is essential in the national interest that two or more companies should amalgamate, then the Central Government may, by order notified in the Official Gazette, provide for the amalgamation of those companies into a single company with such constitution; with such property, powers, rights, interest, authorities, and privileges; and with such liabilities duties, and obligations ; as may be specified in the order.

The order aforesaid may contain such consequential, incidental and supplemental provisions as may, in the opinion of the Central Government, be necessary to give effect to the amalgamation.

Every number or creditor (including a debenture holder) of each of the companies before the amalgamation shall have, as nearly as may be, the same interest in or rights against the company resulting from the amalgamation as he had in the company of which he was originally a member or creditor; and to the extent to which the interest or rights of such member or creditor in or against the company resulting from the amalgamation are less than his interest in or rights against the original company, he shall be entitled to compensation which shall be assessed by such authority as may be prescribed.

The compensation so assessed shall be paid to the member or creditor concerned by the company resulting from the amalgamation.

No such order shall be made, unless-
  1. a copy of the proposed order has been sent in draft to each of the companies concerned; and
  2. the Central Government has considered, and made such modifications if any, in the draft order as may seem to it desirable in the light of any suggestions and objections which may be received by it from any such company within such period as the Central Government may fix in that behalf, not being less than two months from the date on which the copy aforesaid is received by that company, or from any class of shareholders, therein, or from any creditors or any class of creditors thereof.
Copies of every order made under this section shall, as soon as may be after it has been made, be laid before both Houses of Parliament.
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