DEC 20, 2016

Enforcement of Compromise and Arrangement Provisions Under Companies Act, 2013

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Ministry of Corporate Affairs (MCA) vide Notification dated December 7, 2016 has brought in force the much awaited Sections of Companies Act, 2013 dealing with Compromise & Arrangements, including mergers and demergers. The procedural aspects of these sections is also notified on December 14, 2016 in the form of Rules called Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (the “Rules”), both of which shall come into force on December 15, 2016.

  1. The major changes introduced which will impact the fresh cases of Merger & Demergers are as follows:
    • Merger, demergers and other Arrangements shall now be dealt with by National Company Law Tribunal (“NCLT”) in place of High Courts.
    • As per the notification, all pending cases at High Court would also be transferred to NCLT benches as per notified jurisdictions.

    • Valuation: Valuation report for the mergers or arrangements shall be obtained from a Registered Valuer. However, till the time the registration of valuers is not effected, the valuation report shall be obtained from independent Merchant Banker registered with SEBI or an independent chartered accountant having minimum experience of 10 years.
    • Approval of Scheme by Creditors & Members:
      • The scheme would require approval of all class of creditors and member through their respective meetings. However, no such meetings would be required in a case where written consent of 90% of more of creditors/shareholders is obtained.
      • Also, NCLT now has the power to determine the values of the creditors or the members, or creditors or the members of any class, as the case may be whose meetings are to be held.
    • Notice of meetings
      • Clear one month prior notice shall be sent to the respective creditors or members as directed by NCLT setting out the benefit of the scheme to the category of stakeholders. The Rules also set out the various mandatory contents/information to be provided in the notice of meetings.
      • Notice shall be sent to authorities like Central Government, Reserve Bank, Registrar of Companies, Competition Commission of India etc.
    • Advertisement of Notice: An advertisement shall be placed on the website of the company when the notice is issued and on the website of SEBI and stock exchange if the company is listed.
    • Voting in Shareholders/Creditors meetings can also be done electronically.
    • Objection to the Scheme: Member holding not less than 10 percent of the shareholding or not less than 5 percent of the total outstanding debt can object to the proposed scheme.
    • Post Sanction Reporting: Every company under compromise or arrangement shall file a statement of compliance in mergers and amalgamations within 210 days of each financial year with the concerned registrar of Companies;
  2. Fast Track Merger
    • The provisions of fast track merger in case of small companies (other than public company whose paid up capital and turnover does not exceed Rs. 50 lacs and Rs. 2 Crores respectively) and a holding company with its wholly owned subsidiary have been made effective. The adoption of these presents shall be an option available to the said companies.
    • Such companies need not to approach NCLT for approval of proposed amalgamation and the same can be approved by Central Government.
    • The proposed scheme shall be approved by creditors/members majority representing Ninety Percent in value in meeting in writing;

CP Comments:

  • There might be initial hiccups in the transfer of cases but NCLT being a specialized forum with having a detailed procedure would have uniformity and would be faster in execution.
  • It is expected that fresh matters for mergers and amalgamations would be dealt in a schemed manner as laid out in the Rules and disposed expeditiously.
  • Mergers for the small companies would take a lesser time and would be able to avoid the NCLT route.

Click here to download The Companies (Transfer of Pending Proceedings) Rules, 2016.
Click here to download The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.