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Formalities in respect of Compromise and Arrangement - Section 230,The Companies Act,2013

Sections 230 to 240 of the Companies Act, 2013 deals with the subject of amalgamation, arrangements and compromises. While sections 230 and 231 deals with compromise and arrangement, sections 233 to 240 speak about merger and amalgamation.

Compromise and arrangement

The term compromise itself denotes the presence of a dispute. Dispute may be between a company and its creditors or any class of them or may be between a company and its members or any class of them. Such a dispute may be resolved by drawing up a scheme of compromise, provided it must be a reasonable one. It must be beneficial to both the sides. Surrendering everything without gaining anything is not a reasonable compromise.

The term arrangement has a wider meaning. It includes arranging or changing the share capital or capital structure. It may also denote the modification of rights and liabilities. This is possible even without the existence of any dispute. Hence where there is no dispute but there is a need for modification or re-arrangement of rights and of liabilities of creditors or a class of them or of members or class of them, the company may resort to ‘arrangement’.

Section 230: Power to compromise or make arrangements with creditors and members

On the application filed to the tribunal by the company, or any creditor, or any of its member, or its liquidator ( in case if it is in winding up ), the tribunal may order a meeting of the creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the tribunal directs.[i] Such an application can be filed by a member or creditor of the class which is affected by the compromise or arrangement.

The applicant shall disclose all the material facts that are relating to the company, reduction of share capital of the company that are included in the scheme of compromise or arrangement, and any scheme of corporate debt restructuring consented to by not less than 75% of the secured creditors in value, including:
  1. a creditors responsibility statement
  2. safeguards for protection of other secured and unsecured creditors,
  3. report by the auditor that the fund requirements of the company after the corporate debt restructuring as approved shall conform to the liquidity test,
  4. where the company proposes to adopt the corporate debt restructuring guidelines issued by RBI then a statement to that effect,
  5. a valuation report in respect of the shares and the property and all assets of the company by a registered valuer, to the Tribunal by affidavit.[ii]
Notice of meeting shall be sent to all creditors, members and debenture-holders of the company individually at the address registered with the company. It shall be accompanied by a statement disclosing the details of the compromise or arrangement, a copy of valuation report explaining its effect on creditors, key managerial personnel, promoters and non promoter members etc.
Such notice and documents shall be advertised on the website of the company, if any. In case of a listed company, it shall be sent to the SEBI and stock exchange where the securities of the companies are listed.[iii]

The notice also shall inform that the persons to whom the notice is sent can vote in the meeting to the adoption of compromise or arrangement either by themselves or by proxies or by postal ballot, within one month from the date of receipt of notice. Any objection to the scheme of compromise or arrangement can be made by persons who are 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.[iv]

Notice along with the other documents has also be sent to Central Government, the income tax authorities, RBI, SEBI, the Registrar, the respective stock exchanges, the Official Liquidator, the Competition Commission of India and such other sectoral regulators or authorities that are likely to be affected by the scheme of compromise or arrangement and require that any representation by them shall be made within 30 days from the date of receipt of notice.[v]

If majority of persons representing three-fourths in value of the creditors or members, as the case may be, agree to any compromise or arrangement and if it is sanctioned by the tribunal, then the same shall be binding on the company, all the creditors, or members, as the case may be. And in case of company being wound up, on the liquidator and the contributories of the company.[vi]

The following are the particulars to be stated in the order of the Tribunal:

  1. where the scheme of compromise or arrangement provides for conversion of preference shares into equity shares, such preference shareholders shall be given an option to either obtain arrears of dividend in cash or accept equity shares equal to the value of the dividend payable
  2. the protection of any class of creditors;
  3. in case of variation of the rights of the shareholders due to compromise or arrangement, it shall be given effect to under section 48;
  4. if the compromise or arrangement is agreed to buy the creditors, all the applications under the Sick Industrial Companies (Special Provisions ) Act shall abate;
  5. such other matters which are in the opinion of the Tribunal necessary to implement the scheme of compromise or arrangement.

No compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the company’s auditor, to the effect that the accounting treatment proposed in the compromise or arrangement is in conformity with the accounting standards prescribed, has been filed with the Tribunal. [vii]

The order of the Tribunal has to be filed with the Registrar within a period of 30 days of the receipt of the order by the company.[viii] The Tribunal may dispense with calling of a meeting of creditors if such creditors or class of creditors, having at least 90% value, agree and confirm to the proposed compromise or arrangement by way of affidavit.[ix]

No scheme of compromise or arrangement relating to buy-back of securities shall be sanctioned by the Tribunal unless such buy-back is in conformity with provisions of section 68.[x] Any scheme of compromise or arrangement may include takeover offer which is made in the prescribed manner. Provided, in case of listed companies, takeover offer shall be as per the SEBI regulations.[xi]

An application can be filed by the aggrieved party to the Tribunal in case of any grievances related to the takeover offer of companies other than the listed companies in the manner prescribed and on application, the Tribunal may pass such order as it may deem fit.[xii]

Section 231: Power of Tribunal to enforce the order

The Tribunal which makes an order sanctioning a compromise or an arrangement in respect of a company has some powers entrusted on it. It has the power to supervise the implementation of the scheme of compromise or arrangement. It can also give such directions in respect to any matter in the compromise or arrangement. The Tribunal may also make such modifications, at the time of making such order or at any time thereafter, in the compromise or arrangement as it may consider necessary for the effective and proper implementation of the scheme.[xiii]

If the Tribunal finds that the compromise or arrangement cannot be implemented properly with modifications or without modifications and the company is unable to pay its debt as per the scheme, it may order for winding up the company. Such an order will be an order under section 273.[xiv]

Conclusion
The sanction of Tribunal cannot be called upon a scheme of compromise or arrangement if it is unreasonable and unworkable prima facie. A compromise or an arrangement sanctioned must be reasonable and must be beneficial to both the parties making it.

End-Notes:
  1. Section 230(1), Companies Act, 2013
  2. Section 230(2), Companies Act, 2013
  3. Section 230(3), Companies Act, 2013
  4. Section 230(4), Companies Act, 2013
  5. Section 230(5), Companies Act, 2013
  6. Section 230(6), Companies Act, 2013
  7. Section 230(7), Companies Act, 2013
  8. Section 230(8), Companies Act, 2013
  9. Section 230(9), Companies Act, 2013
  10. Section 230(10), Companies Act, 2013
  11. Section 230(11), Companies Act, 2013
  12. Section 230(12), Companies Act, 2013
  13. Section 231(1), Companies Act, 2013
  14. Section 231(2), Companies Act, 2013

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