Chapter-12 Corporate Reorganization CS Executive Company Law

Corporate Reorganization

Power to Compromise or Make Arrangements with Creditors and Members (Section 230)
Power of Tribunal to call and conduct meeting (Subsection 1)
Where 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,

the Tribunal 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 appointed under this Act or under the Insolvency and Bankruptcy Code, 2016, as the case may be,

order a meeting

  • of the creditors or class of 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.

Explanation.—For the purposes of this sub-section, arrangement includes a reorganization of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of those methods.

Disclosures to Tribunal by affidavit (Subsection 2)
The company or any other person, by whom an application is made under subsection (1), shall disclose to the Tribunal by affidavit—

  1. all material facts relating to the company, such as
    • the latest financial position of the company,
    • the latest auditor’s report on the accounts of the company and
    • the pendency of any investigation or proceedings against the company;
  2. reduction of share capital of the company, if any, included in the compromise or arrangement;
  3. any scheme of corporate debt restructuring consented to by not less than 75% of the secured creditors in value, including—
    • a creditor’s responsibility statement;
    • safeguards for the protection of other secured and unsecured creditors;
    • report by the auditor that the fund requirements of the company after the corporate debt restructuring as approved shall conform to the liquidity test based upon the estimates provided to them by the Board;
    • where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India, a statement to that effect; and
    • a valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and immovable, of the company by a registered

Notice of Meeting (Subsection 3)
Where a meeting is proposed to be called in pursuance of an order of the Tribunal under sub-section (1), a notice of such meeting shall be sent

  • to all the creditors or class of creditors and
  • to all the members or class of members and
  • the debenture-holders of the company,

individually at the address registered with the company which shall be accompanied by

  • a statement disclosing the details of the compromise or arrangement,
  • a copy of the valuation report, if any,

and explaining their effect on

  • creditors,
  • key managerial personnel,
  • promoters and non-promoter members, and
  • the debenture-holders and
  • any material interests of the directors of the company or the debenture trustees, and
  • such other matters as may be prescribed

Notice and related documents on website of company and to SEBI/SE
Such notice of meeting and other documents

  • shall also be placed on the website of the company, if any, and
  • in case of a listed company,
    • shall be sent to the SEBI and stock exchange where the securities of the companies are listed, for placing on their website and
  • shall also be published in newspapers in such manner as may be prescribed

Directions as to Voting (Subsection 4)
A notice under sub-section (3) shall provide that the persons to whom the notice is sent may vote in the meeting

  • either themselves
  • or through proxies
  • or by postal ballot to the adoption of the compromise or arrangement within 1 month from the date of receipt of such notice.

Objection to the compromise or arrangement
Any objection to the compromise or arrangement shall be made only by persons

  • 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.

Notice to other Authorities (Subsection 5)
A notice under sub-section (3) along with all the documents shall also be sent to

  • the Central Government,
  • the income-tax authorities,
  • the Reserve Bank of India,
  • the Securities and Exchange Board,
  • the Registrar,
  • the respective stock exchanges,
  • the Official Liquidator,
  • the Competition Commission of India established under sub-section (1) of section 7 of the Competition Act, 2002, if necessary, and
  • such other sectoral regulators or authorities which are likely to be affected by the compromise or arrangement

and shall require that representations, if any, to be made by them shall be made within a period of 30 days from the date of receipt of such notice, failing which, it shall be presumed that they have no representations to make on the proposals.

Majority with 3/4th in Value + approval of Tribunal required to sanction compromise or arrangement (Subsection 6)
Where, at a meeting held in pursuance of sub-section (1),

  • majority of persons representing three-fourths in value of the creditors, or class of creditors or members or class of members, as the case may be, voting in person or by proxy or by postal ballot, agree to any compromise or arrangement

and if such compromise or arrangement is sanctioned by the Tribunal by an order, the same shall be binding on the company, all the creditors, or class of creditors or members or class of members, as the case may be, or, in case of a company being wound up, on the liquidator and the contributories of the company.

Content of order made by the Tribunal (Subsection 7)
An order made by the Tribunal under sub-section (6) shall provide for all or any of the following matters, namely:—

  • where the 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;
  • the protection of any class of creditors;
  • if the compromise or arrangement results in the variation of the shareholders’ rights, it shall be given effect to under the provisions of section 48;
  • if the compromise or arrangement is agreed to by the creditors under sub-section (6), any proceedings pending before the Board for Industrial and Financial Reconstruction (BIFR) established under section 4 of the Sick Industrial Companies (Special Provisions) Act, 1985 shall abate;
  • such other matters including exit offer to dissenting shareholders, if any, as are in the opinion of the Tribunal necessary to effectively implement the terms of the compromise or arrangement:

No compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the company’s auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under section 133.

Order of Tribunal to be filed with ROC within 30 days (Subsection 8)
The order of the Tribunal shall be filed with the Registrar by the company within a period of 30 days of the receipt of the order.

Power of Tribunal to dispense with calling of a meeting creditors (Subsection 9)
The Tribunal may dispense with calling of a meeting of creditor or class of creditors where such creditors or class of creditors, having at least 90% value, agree and confirm, by way of affidavit, to the scheme of compromise or arrangement.

Compromise or arrangement in respect of any buy-back of securities (Subsection 10)
No compromise or arrangement in respect of any buy-back of securities under this section shall be sanctioned by the Tribunal unless such buy-back is in accordance with the provisions of section 68.

Takeover Offer (Subsection 11)
Any compromise or arrangement may include takeover offer made in such manner as may be prescribed:
Provided that in case of listed companies, takeover offer shall be as per the regulations framed by the Securities and Exchange Board.

Aggrieved party may make an application to the Tribunal (Subsection 12)
An aggrieved party may make an application to the Tribunal in the event of any grievances with respect to the takeover offer of companies other than listed companies in such manner as may be prescribed and the Tribunal may, on application, pass such order as it may deem fit.
Explanation.—For the removal of doubts, it is hereby declared that the provisions of section 66 shall not apply to the reduction of share capital effected in pursuance of the order of the Tribunal under this section.

Sub-sections (11) and (12) have been notified on 03.02.2020

Power of Tribunal to Enforce Compromise or Arrangement [Section 231]

  1. Power of Tribunal to make order w.r.t a compromise or an arrangement
    Where the Tribunal makes an order under section 230 sanctioning a compromise or an arrangement in respect of a company, it—
    • shall have power to supervise the implementation of the compromise or arrangement; and
    • 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 implementation of the compromise or arrangement.
  2. Power of Tribunal to make order for winding up the company
    If the Tribunal is satisfied that the compromise or arrangement sanctioned under section 230 cannot be implemented satisfactorily with or without modifications, and the company is unable to pay its debts as per the scheme, it may make an order for winding up the company and such an order shall be deemed to be an order made under section 273.

In case of Government Company – In Section 231 for the word “Tribunal” the words “Central Government” shall be substituted.

Rule 3 of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016
Application for order of meeting. –

  1. An application under Section 230(1) of the Act may be submitted in form no. NCLT-1 (appended in the National Company Law Tribunal Rules; 2016) along with:-
    • a notice of admission in Form No. NCLT-2
    • an affidavit in Form No. NCLT -6
    • a copy of scheme of compromise or arrangement, which should include disclosures as per section 230(2) of the Act; and
    • fee as prescribed in the Schedule of Fees.
  2. Where more than one company is involved in a scheme in relation to which an application under sub-rule (1) is being filed, such application may, at the discretion of such companies, be filed as joint-application.
  3. Where the company is not the applicant, a copy of the notice of admission and of the affidavit shall be served on the company, or, where the company is being wound up, on its liquidator, not less than 14 days before the date fixed for the hearing of the notice of admission.
  4.   The applicant shall also disclose to the Tribunal in the application under sub-rule (1), the basis on which each class of members or creditors has been identified for the purposes of approval of the scheme.
  5. A member of the company shall make an application for arrangement, for the purpose of takeover offer in terms of sub-section (11) of section 230, when such member along with any other member holds not less than 3/4th of the shares in the company, and such application has been filed for acquiring any part of the remaining shares of the company.
    Explanation I. – “shares” means the equity shares of the company carrying voting rights, and includes any securities, such as depository receipts, which entitles the holder thereof to exercise voting rights.
    Explanation II.-Nothing in this sub-rule shall apply to any transfer or transmission of shares through a contract, arrangement or succession, as the case may be, or any transfer made in pursuance of any statutory or regulatory requirement.
  6. An application of arrangement for takeover offer shall contain:-
    1. the report of a registered value disclosing the details of the valuation of the shares proposed to be acquired by the member after taking into account the following factors:
      • the highest price paid by any person or group of persons for acquisition of shares during last 12 months;
      • the fair price of shares of the company to be determined by the registered valuer after taking into account valuation parameters including return on net worth, book value of shares, earning per share etc.
    2. details of a bank account, to be opened separately, by the member wherein a sum of amount not Iess than one-half of total consideration of the takeover offer is deposited.

Mergers & Amalgamations

Merger and Amalgamation of Companies (Section 232)
Meeting for the purpose of Merger/Amalgamation (Subsection 1)
Where an application is made to the Tribunal under section 230 for the sanctioning of a compromise or an arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Tribunal—

  • that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of the company or companies involving merger or the amalgamation of any two or more companies; and
  • that under the scheme, the whole or any part of the undertaking, property or liabilities of any company (hereinafter referred to as the transferor company) is required to be transferred to another company (hereinafter referred to as the transferee company), or is proposed to be divided among and transferred to two or more companies,

the Tribunal may on such application, order a meeting of the creditors or class of creditors or the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal may direct and the provisions of sub-sections (3) to (6) of section 230 shall apply mutatis mutandis.

Additional Matters to be circulated for the meeting (Subsection 2)
Where an order has been made by the Tribunal under sub-section (1), merging companies or the companies in respect of which a division is proposed, shall also be required to circulate the following for the meeting so ordered by the Tribunal, namely:—

  • the draft of the proposed terms of the scheme drawn up and adopted by the directors of the merging company;
  • confirmation that a copy of the draft scheme has been filed with the Registrar;
  • a report adopted by the directors of the merging companies explaining effect of compromise on each class of shareholders, key managerial personnel, promoters and non-promoter shareholders laying out in particular the share exchange ratio, specifying any special valuation difficulties;
  • the report of the expert with regard to valuation, if any;
  • a supplementary accounting statement if the last annual accounts of any of the merging company relate to a financial year ending more than 6 months before the first meeting of the company summoned for the purposes of approving the scheme.

Order of Tribunal sanctioning the Scheme (Subsection 3)
The Tribunal, after satisfying itself that the procedure specified in sub-sections (1) and (2) has been complied with, may, by order, sanction the compromise or arrangement or by a subsequent order, make provision for the following matters, namely:—

  1. the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of the transferor company from a date to be determined by the parties unless the Tribunal, for reasons to be recorded by it in writing, decides otherwise;
  2. the allotment or appropriation by the transferee company of any shares, debentures, policies or other like instruments in the company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person.
    Provided that a transferee company shall not, as a result of the compromise or arrangement, hold any shares in its own name or in the name of any trust whether on its behalf or on behalf of any of its subsidiary or associate companies and any such shares shall be cancelled or extinguished;
  3. the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company on the date of transfer;
  4. dissolution, without winding-up, of any transferor company;
  5. the provision to be made for any persons who dissent from the compromise or arrangement;
  6. where share capital is held by any non-resident shareholder, the allotment of shares of the transferee company to such shareholder shall be in the manner specified in the order;
  7. the transfer of the employees of the transferor company to the transferee company;
  8. where the transferor company is a listed company and the transferee company is an unlisted company,
    • the transferee company shall remain an unlisted company until it becomes a listed company;
    • if shareholders of the transferor company decide to opt out of the transferee company, provision shall be made for payment of the value of shares held by them and other benefits in accordance with a pre-determined price formula or after a valuation is made, and the arrangements under this provision may be made by the Tribunal:
      Provided that the amount of payment or valuation under this clause for any share shall not be less than what has been specified by the SEBI under any regulations framed by it;
  9. where the transferor company is dissolved, the fee, if any, paid by the transferor company on its authorised capital shall be set-off against any fees payable by the transferee company on its authorized capital subsequent to the amalgamation; and
  10. such incidental, consequential and supplemental matters as are deemed necessary to secure that the merger or amalgamation is fully and effectively carried out:

Provided that no compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the company’s auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under section 133.

Certified copy of order of Tribunal to be filed with ROC within 30 days (Subsection 5)
Every company in relation to which the order is made shall cause a certified copy of the order to be filed with the Registrar for registration within 30 days of the receipt of certified copy of the order.
Certificate from professional to be filed with ROC every year until the completion of the scheme (Subsection 7)
Every company in relation to which the order is made shall, until the completion of the scheme, file a statement in Form CAA 8 and within 210 from the end of each financial year with the Registrar every year duly certified by a chartered accountant or a cost accountant or a company secretary in practice indicating whether the scheme is being complied with in accordance with the orders of the Tribunal or not.
Punishment for Contravention (Subsection 8)
If a company fails to comply with sub-section (5), the company and every officer of the company who is in default shall be liable to

  • a penalty of Rs. 20,000, and
  • where the failure is a continuing one, with a further penalty of Rs. 1000 for each day after the first during which such failure continues, subject to a maximum of 3 lakh rupees.(Amended by Companies (Amendment) Act, 2020

Explanation.—For the purposes of this section,—

  • in a scheme involving a merger,
    • where under the scheme the undertaking, property and liabilities of one or more companies, including the company in respect of which the compromise or arrangement is proposed, are to be transferred to another existing company, it is a merger by absorption, or
    • where the undertaking, property and liabilities of two or more companies, including the company in respect of which the compromise or arrangement is proposed, are to be transferred to a new company, whether or not a public company, it is a merger by formation of a new company;

In case of Government Company – In Section 232 for the word “Tribunal” the words “Central Government” shall be substituted.

Merger or Amalgamation of Certain Companies (Section 233)

Formalities w.r.t merger or amalgamation entered into between two or more small companies or between a holding company and its wholly-owned subsidiary company (Subsection 1)
Notwithstanding the provisions of section 230 and section 232, a scheme of merger or amalgamation may be entered into between

  • two or more small companies or
  • between a holding company and its wholly-owned subsidiary company or
  • two or more start-up companies; or
  • one or more start-up company with one or more small company,

subject to the following, namely:—

  1. Notice of the proposed scheme to ROC/OL/Persons affected by the scheme
    A notice (in Form No. CAA 9) of the proposed scheme inviting objections or suggestions, if any, from the Registrar and Official Liquidators where registered office of the respective companies are situated or persons affected by the scheme within 30 days is issued by the transferor company or companies and the transferee company;
  2. Approval of Members in General Meeting
    The objections and suggestions received are considered by the companies in their respective general meetings and the scheme is approved by the respective members or class of members at a general meeting holding at least 90% of the total number of shares;
  3. Declaration of solvency to ROC
    Each of the companies involved in the merger files a declaration of solvency (in Form No. CAA 10), with the Registrar of the place where the registered office of the company is situated; and
  4. Approval of Scheme by Creditors
    The scheme is approved by majority representing 9/10th in value of the creditors or class of creditors of respective companies indicated in a meeting convened by the company by giving a notice of 21 days along with the scheme to its creditors for the purpose or otherwise approved in writing.

Copy of the scheme approved under Subsection 1 to different authorities (Subsection 2)
The transferee company shall file a copy of the scheme so approved (within 7 days after the conclusion of the meetings), with the

  • Central Government (power delegated to RD),
  • Registrar and
  • the Official Liquidator

where the registered office of the company is situated.

Confirmation by Central Government (Subsection 3)
On the receipt of the scheme,

  • if the Registrar or the Official Liquidator has no objections or suggestions to the scheme,

the Central Government shall register the same and issue a confirmation thereof to the companies.

In case of any objection or suggestion by ROC or OL (Subsection 4)
If the Registrar or Official Liquidator has any objections or suggestions, he may communicate the same in writing to the Central Government within a period of 30 days. If no such communication is made, it shall be presumed that he has no objection to the scheme.

Application to NCLT by Central Government (Subsection 5)
If the Central Government

  • after receiving the objections or suggestions or for any reason

is of the opinion that such a scheme is not in public interest or in the interest of the creditors, it may

  • file an application before the Tribunal within a period of 60 days of the receipt of the scheme under sub-section (2) stating its objections and requesting that the Tribunal may consider the scheme under section 232.

Power of Tribunal to order merger or amalgamation as per Section 232 (Subsection 6)
On receipt of an application from the Central Government or from any person, if the Tribunal, for reasons to be recorded in writing, is of the opinion that the scheme should be considered as per the procedure laid down in section 232, the Tribunal may direct accordingly or it may confirm the scheme by passing such order as it deems fit.

Filing of order confirming the scheme to ROC and the persons concerned (Subsection 7)
A copy of the order under sub-section (6) confirming the scheme shall be communicated to the Registrar having jurisdiction over the transferee company and the persons concerned and the Registrar shall register the scheme and issue a confirmation thereof to the companies and such confirmation shall be communicated to the Registrars where transferor company or companies were situated.

Dissolution of the transferor company (Subsection 8)
The registration of the scheme under sub-section (3) or sub-section (7) shall be deemed to have the effect of dissolution of the transferor company without process of winding-up.

Effect of Merger/Amalgamation (Subsection 9)
The registration of the scheme shall have the following effects, namely:—

  • 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;
  • 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;
  • legal proceedings by or against the transferor company pending before any court of law shall be continued by or against the transferee company; and
  • 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.

No shares in the name of Transferee Company (Subsection 10)
A transferee company shall not on merger or amalgamation, hold any shares in its own name or in the name of any trust either on its behalf or on behalf of any of its subsidiary or associate company and all such shares shall be cancelled or extinguished on the merger or amalgamation.

Application to ROC by Transferee Company to revised authorised capital (Subsection 11)
The transferee company shall file an application with the Registrar along with the scheme registered, indicating the revised authorized capital and pay the prescribed fees due on revised capital:

Provided that the fee, if any, paid by the transferor company on its authorized capital prior to its merger or amalgamation with the transferee company shall be set-off against the fees payable by the transferee company on its authorized capital enhanced by the merger or amalgamation.

A company covered under this section may use the provisions of section 232 for the approval of any scheme for merger or amalgamation.

Merger or Amalgamation of Company with Foreign Company (Section 234)

  1. The provisions of this Chapter (unless otherwise provided under any other law for the time being in force) shall apply mutatis mutandis to schemes of mergers and amalgamations between companies registered under this Act and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government.
    But Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and amalgamations provided under this section.
  2. Subject to the provisions of any other law for the time being in force, a foreign company, may with the prior approval of the RBI, merge into a company registered under this Act or vice versa and the terms and conditions of the scheme of merger may provide, among other things, for the payment of consideration to the shareholders of the merging company in cash, or in Depository Receipts, or partly in cash and partly in Depository Receipts, as the case may be, as per the scheme to be drawn up for the purpose.

Explanation.—For the purposes of sub-section (2), the expression “foreign company” means any company or body corporate incorporated outside India whether having a place of business in India or not.

 

Power to Acquire Shares of Shareholders Dissenting from Scheme or Contract Approved by Majority (Section 235) – Friendly Takeover

Notice to dissenting shareholders from Transferee Company about its desire to acquire their shares (Subsection 1)
Where a scheme or contract involving the transfer of shares or any class of shares in a company (the transferor company) to another company (the transferee company) has,

  • within 4 months after making of an offer in that behalf by the transferee company,

been approved by the holders of not less than 9/10th in value of the shares whose transfer is involved (other than shares already held at the date of the offer by, or by a nominee of the transferee company or its subsidiary companies), the transferee company may,

  • at any time within 2 months after the expiry of the said 4 months,

give notice in the prescribed manner to any dissenting shareholder that it desires to acquire his shares.

Right and Duty of Transferee Company to acquire the shares of dissenting shareholders (Subsection 2)
Where a notice under sub-section (1) is given, the transferee company shall,

  • unless on an application made by the dissenting shareholder to the Tribunal, within 1 month from the date on which the notice was given and the Tribunal thinks fit to order otherwise,

be entitled to and bound to acquire those shares on the terms on which, under the scheme or contract, the shares of the approving shareholders are to be transferred to the transferee company.

Transfer of consideration by Transferee Company to Transferor Company (Subsection 3)
Where a notice has been given by the transferee company under sub-section (1) and

  • the Tribunal has not, on an application made by the dissenting shareholder, made an order to the contrary,

the transferee company shall,

  • on the expiry of 1 month from the date on which the notice has been given, or,
  • if an application to the Tribunal by the dissenting shareholder is then pending, after that application has been disposed of,

send a copy of the notice to the transferor company together with an instrument of transfer, to be executed on behalf of the shareholder by any person appointed by the transferor 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 acquire, and the transferor company shall—

  • thereupon register the transferee company as the holder of those shares; and
  • within 1 month of the date of such registration, inform the dissenting shareholders of the fact of such registration and of the receipt of the amount or other consideration representing the price payable to them by the transferee company.

Sum received by the transferor company shall be kept in the separate bank account [Subsection 4]
Any sum received by the transferor company under this section shall be paid into a separate bank account, and any such sum 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 sum or other consideration were respectively received and shall be disbursed to the entitled shareholders within sixty days.

Explanation.—For the purposes of this section, “dissenting shareholder” includes

  • a shareholder who has not assented to the scheme or contract and
  • any shareholder who has failed or refused to transfer his shares to the transferee company in accordance with the scheme or contract.

Purchase of Minority Shareholding [Section 236] – Minority Squeeze Out

Notification to the company by acquirers of their intention to buy equity shares of minority [Subsection 1]
In the event of

  • an acquirer, or a person acting in concert with such acquirer, becoming registered holder of 90% or more of the issued equity share capital of a company, or

in the event of

  • any person or group of persons becoming 90% majority or holding 90% of the issued equity share capital of a company, by virtue of an amalgamation, share exchange, conversion of securities or for any other reason,

such acquirer, person or group of persons, as the case may be,

  • shall notify the company of their intention to buy the remaining equity shares.

Offer to Minority shareholders by acquirer, person or group of persons [Subsection 2]
The acquirer, person or group of persons under sub-section (1) shall offer to the minority shareholders of the company for buying the equity shares held by such shareholders at a price determined on the basis of valuation by a registered valuer.

Offer by Minority shareholders to acquirer, person or group of persons [Subsection 3]
Without prejudice to the provisions of sub-sections (1) and (2), the minority shareholders of the company may offer to the majority shareholders to purchase the minority equity shareholding of the company at the price determined in accordance with such rules as may be prescribed under sub-section (2).

The majority shareholders shall deposit the purchase amount in a separate bank account [Subsection 4]
The majority shareholders shall deposit an amount equal to the value of shares to be acquired by them under sub-section (2) or sub-section (3), as the case may be, in a separate bank account to be operated by company whose shares are being transferred for at least 1 year for payment to the minority shareholders and such amount shall be disbursed to the entitled shareholders within 60 days.
Provided that such disbursement shall continue to be made to the entitled shareholders for a period of 1 year, who for any reason had not been made disbursement within the said period of 60 days or if the disbursement have been made within the aforesaid period of 60 days, fail to receive or claim payment arising out of such disbursement.

Company itself shall act as transferring agent [Subsection 5]
In the event of a purchase under this section, company whose shares are being transferred shall act as a transfer agent for receiving and paying the price to the minority shareholders and for taking delivery of the shares and delivering such shares to the majority, as the case may be.

In the absence of a physical delivery of shares by the shareholders [Subsection 6]
In the absence of a physical delivery of shares by the shareholders within the time specified by the company, the share certificates shall be deemed to be cancelled, and company whose shares are being transferred shall be authorized to issue shares in lieu of the cancelled shares and complete the transfer in accordance with law and make payment of the price out of deposit made under sub-section (4) by the majority in advance to the minority by dispatch of such payment.

 

Where minority shareholder have died or ceased to exist [Subsection 7]
In the event of a majority shareholder or shareholders requiring a full purchase and making payment of price by deposit with the company for any shareholder or shareholders

  • who have died or ceased to exist, or
  • whose heirs, successors, administrators or assignees have not been brought on record by transmission,

the right of such shareholders to make an offer for sale of minority equity shareholding shall continue and be available for a period of 3 years from the date of majority acquisition or majority shareholding.

Where majority shareholders negotiated the shares of minority shareholders with someone else at a higher price [Subsection 8]
Where

  • the shares of minority shareholders have been acquired in pursuance of this section and
  • as on or prior to the date of transfer following such acquisition,
    • the shareholders holding 75% or more minority equity shareholding negotiate or reach an understanding on a higher price for any transfer, proposed or agreed upon, of the shares held by them
      • without disclosing the fact or likelihood of transfer taking place on the basis of such negotiation, understanding or agreement,

the majority shareholders shall share the additional compensation so received by them with such minority shareholders on a pro rata basis.

Power of Central Government to provide for Amalgamation of Companies in Public Interest [Section 237]

Power of Central Government to Provide for Amalgamation [Subsection 1]
Where the Central Government is satisfied that

  • it is essential in the public interest that two or more companies should amalgamate,

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, interests, authorities and privileges, and with such liabilities, duties and obligations, as may be specified in the order.

Provisions w.r.t legal proceedings pending by or against any transferor company [Subsection 2]
The order under sub-section (1) may also provide for the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company and such consequential, incidental and supplemental provisions as may, in the opinion of the Central Government, be necessary to give effect to the amalgamation.

Interest of Stakeholders after amalgamation [Subsection 3]
Every member or creditor, including a debenture holder, of each of the transferor companies before the amalgamation shall have, as nearly as may be, the same interest in or rights against the transferee company as he had in the company of which he was originally a member or creditor, and in case the interest or rights of such member or creditor in or against the transferee company are less than his interest in or rights against the original company, he shall be entitled to compensation, and such compensation shall be paid to the member or creditor concerned by the transferee company.

 

Appeal to NCLT against assessment of compensation [Subsection 4]
Any person aggrieved by any assessment of compensation under sub-section (3) may,

  • within a period of 30 days

prefer an appeal to the Tribunal and thereupon the assessment of the compensation shall be made by the Tribunal.

Conditions to be fulfilled before making the order of Amalgamation [Subsection 5]
No order shall be made under this section unless—

  • a copy of the proposed order has been sent in draft to each of the companies concerned;
  • the time for preferring an appeal under sub-section (4) has expired, or where any such appeal has been preferred, the appeal has been finally disposed off; and
  • the Central Government has considered, and made such modifications, if any, in the draft order as it may deem fit in the light of 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 2 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.

Registration of Offer of Schemes Involving Transfer of Shares [Section 238]

In relation to every offer of a scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company under section 235,—

  • every circular containing the offer of scheme or contract involving transfer of shares or any class of shares and recommendation to the members of the transferor company by its directors to accept such offer, shall be accompanied by such information as set out in Form No. CAA.15. The circular shall be presented to the Registrar for registration.
  • every such offer shall contain a statement by or on behalf of the transferee company, disclosing the steps it has taken to ensure that necessary cash will be available; and
  • every such circular shall be presented to the Registrar for registration and no such circular shall be issued until it is so registered:

Registrar may refuse, for reasons to be recorded in writing, to register any such circular which does not contain the information required to be given under clause (a) or which sets out such information in a manner likely to give a false impression, and communicate such refusal to the parties within 30 days of the application.

An appeal shall lie to the Tribunal against an order of the Registrar refusing to register any circular under sub-section (1). Said appeal shall be in the Form No. NCLT.9 (appended in the National Company Law Tribunal Rules, 2016) supported with an affidavit in the Form No. NCLT.6 (appended in the National Company Law Tribunal Rules, 2016)

The director who issues a circular which has not been presented for registration and registered under clause (c) of sub-section (1), shall be liable to a penalty of one lakh rupees.

Preservation of Books and Papers of Amalgamated Companies [Section 239]

The books and papers of a company which has been amalgamated with, or whose shares have been acquired by, another company under this Chapter shall not be disposed of without the prior permission of the Central Government and before granting such permission, that Government may appoint a person to examine the books and papers or any of them for the purpose of ascertaining

  • whether they contain any evidence of the commission of an offence in connection with the promotion or formation, or the management of the affairs, of the transferor company or its amalgamation or the acquisition of its shares.

Liability of Officers in Respect of Offences Committed Prior to Merger, Amalgamation, etc. [Section 240]

Notwithstanding anything in any other law for the time being in force, the liability in respect of offences committed under this Act by the officers in default, of the transferor company prior to its merger, amalgamation or acquisition shall continue after such merger, amalgamation or acquisition.

Oppression & Mismanagement

Same class of shareholders shall have same rights. In company form of business, matters shall be decided by the voting among the members, and will of the majority always prevails. Thus, at times, minority shareholders may feel oppressed by majority shareholders.

But in general, minority shareholders or any individual shareholder cannot take action against the wish of majority because on becoming a member of a company a shareholder agrees to submit to the will of the majority. If any wrong is done to the company by directors, it is only the company itself (acting through its majority) that can seek to redress and not an individual shareholder.

This rule was established in a case Foss v. Harbottle. In the said case it was held that the company (i.e. the majority) is the proper plaintiff for wrong done to the company, so the majority of members are competent to decide whether to commence proceedings against the directors.

Justification of the Rule in Foss v. Harbottle

  1. Company is a separate legal personality. It can file suit in its own name. Thus if someone (including directors) has done some wrong to the company, it is the company itself that should seek to redress.
  2. In company form of business there may be many members. Thus, matters shall be decided by the voting among the members, and will of the majority shall always prevails.
  3. If every individual member were permitted to sue anyone who had injured the company through a breach of duty, there could be as many suits as there are shareholders. Legal proceedings would never cease, and there would be enormous wastage of time and money.

Advantages of Rule in Foss v. Harbottle

  1. Recognition of the separate legal personality of company
  2. Need to preserve right of majority to decide
  3. Multiplicity of futile suits avoided
  4. Litigation at suit of a minority futile if majority does not wish it

Application of Foss v. Harbottle Rule in Indian context
In India, companies get majority of funds by Institutional Investors which may be very less in number as compare to retail investors. Application of Foss v. Harbottle Rule in strict sense may make these institutional investors voiceless and they may lose their interest/trust in making investments in the companies.

Thus, in India, the interest of minority shareholders have been properly addressed by making provisions under Companies Act, 2013.

The rule in Foss v. Harbottle is not absolute. The interest of minority shareholders is protected by:

  • the common law; and
  • the provisions of the Companies Act, 2013.

Oppression and Mismanagement

Oppression
In general, oppression means ‘unjust treatment’ or ‘exercise of authority in a wrong way’. Companies Act, 2013 has not specially defined the term oppression but according to Companies Act, 1956, oppression is a situation ‘when affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members’.

Mismanagement
In general mismanagement means ‘the process of managing something badly or wrongly’. Companies Act, 2013 has not specially defined the term mismanagement but according to Companies Act, 1956, mismanagement means ‘conducting the affairs of the company in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company or there has been a material change in the management and control of the company, and by reason of such change it is likely that affairs of the company will be conducted in a manner prejudicial to public interest or interest of the company’.

Who and When an Application to Tribunal can be made for Relief in Cases of Oppression, etc [Section 241]

1Any member of a company who has a right to apply under section 244 may apply to the Tribunal if he feels/complains that—
 a.the affairs of the company have been or are being conducted
 

o   in a manner prejudicial to public interest or

o   in a manner prejudicial or oppressive to him or any other member or members or

o   in a manner prejudicial to the interests of the company; or

b.the material change (not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company), has taken place in the management or control of the company, whether
 

o   by an alteration in the Board of Directors, or manager, or

o   in the ownership of the company’s shares, or

o   if it has no share capital, in its membership, or

o   in any other manner whatsoever,

 and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members.
2.

The Central Government may apply to the Tribunal, if it is of the opinion that

the affairs of the company are being conducted in a manner prejudicial to public interest.

3.Where in the opinion of the Central Government there exist circumstances suggesting that––
 (a) any person concerned in the conduct and management of the affairs of a company is or has been in connection therewith guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions under the law or of breach of trust;
(b) the business of a company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices;
(c) a company is or has been conducted and managed by such person in a manner which is likely to cause, or has caused, serious injury or damage to the interest of the trade, industry or business to which such company pertains; or

(d) the business of a company is or has been conducted and managed by such person with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to public interest,

the Central Government may initiate a case against such person and refer the same to the Tribunal with a request that the Tribunal may inquire into the case and record a decision as to whether or not such person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.

  Inserted by Companies (Amendment),Act 2019

Who has Right to Apply under Section 241 [Section 244]

The following members of a company shall have the right to apply under section 241, namely:—

  • in the case of a company having a share capital,
    • not less than 100 members of the company or
    • not less than 1/10th of the total number of its members,
      whichever is less, or
  • any member or members holding not less than 1/10th of the issued share capital of the company,
    subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares;
  • in the case of a company not having a share capital,
    not less than one-fifth of the total number of its members

Discretionary power of Tribunal
Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specified above in clause (a) or clause (b) so as to enable the members to apply under section 241.

For the purposes of this section, where any share or shares are held by two or more persons jointly, they shall be counted only as one member.

Where any members of a company are entitled to make an application, any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them. 

Powers of Tribunal [Section 242]

  • made or done by or against the company within 3 months before the date of the application under this section,
    which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference;

  •  

Consequence of Termination or Modification of Certain Agreements [Section 243]

Where an order made under section 242 terminates, sets aside or modifies an agreement such as is referred to in sub-section (2) of that section,—

  • such order shall not give rise to any claims whatever against the company by any person for damages or for compensation for loss of office or in any other respect either in pursuance of the agreement or otherwise;
  • no managing director or other director or manager whose agreement is so terminated or set aside shall, for a period of 5 years from the date of the order terminating or setting aside the agreement, without the leave of the Tribunal, be appointed, or act, as the managing director or other director or manager of the company:
    It should be noted that the Tribunal shall not grant leave under this clause unless notice of the intention to apply for leave has been served on the Central Government and that Government has been given a reasonable opportunity of being heard in the matter.

The person who is not a fit and proper person pursuant to Section 242(4A) shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company for a period of 5 years from the date of the said decision; and such person shall not be entitled to, or be paid, any compensation for the loss or termination of office.

Provided that the Central Government may, with the leave of the Tribunal, permit such person to hold any such office before the expiry of the said period of 5 years.

Notwithstanding anything contained in any other provision of this Act, or any other law for the time being in force, or any contract, memorandum or articles, on the removal of a person from the office of a director or any other office connected with the conduct and management of the affairs of the company, that person shall not be entitled to, or be paid, any compensation for the loss or termination of office.

Inserted by Companies (Amendment), Act 2019

Punishment for contravention
Any person who knowingly acts as a managing director or other director or manager of a company in contravention of clause (b), and every other director of the company who is knowingly a party to such contravention, shall be punishable

  • with imprisonment for a term which may extend to 6 months or
  • with fine which may extend to 5 lakh rupees, or
  • with both. [deleted by Companies (Amendment) Act, 2020]

Class Action (Section 245)

Class means a group of persons representing common interest. Class Action Suit means suit that allows a large number of people with a common interest in a matter to sue or be sued as a group. Other names for lawsuits brought by a number of people who suffered similar harm or losses are “mass tort litigation” and “multi-district litigation” (“MDL”).

In India, prior to the enactment of Companies Act 2013, class actions suits have been filed as

  • representative suit under Civil Procedure Code 1908 or
  • under the pretext of public interest litigations.

The Companies Act, 2013 introduces the concept of class action under Section 245, detailed in Chapter XVI – Prevention of Oppression and Mismanagement. However, this is not to be misunderstood with provisions governing oppression and mismanagement as set out under sections 241-244. Class actions under 245 are evidently distinctive and separate and were brought in as additional tool for investor protection.

Class Action [Section 245]
Application of Class Action and Reliefs (Subsection 1)
Such number of member or members, depositor or depositors or any class of them, as may be prescribed may,

  • if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors,

file an application before the Tribunal on behalf of the members or depositors for seeking all or any of the following orders, namely:—

  1. to restrain the company from committing an act which is ultra vires the AOA/MOA of the company;
  2. to restrain the company from committing breach of any provision of the company’s MOA/AOA;
  3. to declare a resolution altering the MOA/AOA of the company as void if the resolution was passed by suppression of material facts or obtained by misstatement to the members or depositors;
  4. to restrain the company and its directors from acting on such resolution;
  5. to restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force;
  6. to restrain the company from taking action contrary to any resolution passed by the members;
  7. to claim damages or compensation or demand any other suitable action from or against—
  • the company or its directors for any fraudulent, unlawful or wrongful act or omission or conduct or any likely act or omission or conduct on its or their part;
  • the auditor including audit firm of the company for any improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct; or
  • any expert or advisor or consultant or any other person for any incorrect or misleading statement made to the company or for any fraudulent, unlawful or wrongful act or conduct or any likely act or conduct on his part;

       8.to seek any other remedy as the Tribunal may deem fit.

Liability of the audit firm as well as of each partner (Subsection 2)
Where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.

Requisite number of members/depositors to file Class Action Suit – In case of unlisted companies(Subsection 3)
a. in the case of a company having a share capital,
    ·         not less than 100 members/depositors of the company or
  ·         not less than 5% of the total number of its members/depositors,
  whichever is less, or
  ·         any member/depositor or members/depositors holding not less than 5% of the issued share capital/total deposits of the company,
  subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares;
b. in the case of a company not having a share capital, o   not less than one-fifth of the total number of its members.

Matters to be considered by Tribunal while admitting the application (Subsection 4)

In considering an application under sub-section (1), the Tribunal shall take into account, in particular—

  1. whether the member or depositor is acting in good faith in making the application for seeking an order;
  2. any evidence before it as to the involvement of any person other than directors or officers of the company on any of the matters provided in clauses (a) to (f) of subsection (1);
  3. whether the cause of action is one which the member or depositor could pursue in his own right rather than through an order under this section;
  4. any evidence before it as to the views of the members or depositors of the company who have no personal interest, direct or indirect, in the matter being proceeded under this section;
  5. where the cause of action is an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be—
    1. authorised by the company before it occurs; or
    2. ratified by the company after it occurs;
  6. where the cause of action is an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company.

Matters to be considered by Tribunal after admitting the application (Subsection 5)

If an application filed under sub-section (1) is admitted, then the Tribunal shall have regard to the following, namely:—

  • public notice shall be served on admission of the application to all the members or depositors of the class in such manner as may be prescribed;
  • all similar applications prevalent in any jurisdiction should be consolidated into a single application and the class members or depositors should be allowed to choose the lead applicant and in the event the members or depositors of the class are unable to come to a consensus, the Tribunal shall have the power to appoint a lead applicant, who shall be in charge of the proceedings from the applicant’s side;
  • two class action applications for the same cause of action shall not be allowed;
  • the cost or expenses connected with the application for class action shall be defrayed by the company or any other person responsible for any oppressive act.

Order passed by the Tribunal shall be binding (Subsection 6)

Any order passed by the Tribunal shall be binding on the company and all its members, depositors and auditor including audit firm or expert or consultant or advisor or any other person associated with the company.

Punishment for failure (Subsection 7)

Any company which fails to comply with an order passed by the Tribunal under this section shall be punishable

  • with fine which shall not be less than 5 lakh rupees but which may extend to 25 lakh rupees and

every officer of the company who is in default shall be punishable

  • with imprisonment for a term which may extend to 3 years and

with fine which shall not be less than 25,000 rupees but which may extend to 1 lakh rupees.

Fine in case of Frivolous or Vexatious Application (Subsection 8)

Where any application filed before the Tribunal is found to be frivolous or vexatious (silly), it shall, for reasons to be recorded in writing, reject the application and make an order that the applicant shall pay to the opposite party such cost, not exceeding 1 lakh rupees, as may be specified in the order.

This section shall not apply to a banking company. (Subsection 9)

Application by non-members (Subsection 10)

Subject to the compliance of this section, an application may be filed or any other action may be taken under this section by any person, group of persons or any association of persons representing the persons affected by any act or omission, specified in sub-section (1).

OVERVIEW OF REGISTERED VALUERS

Who shall conduct the valuation?

Section 247(1) of the Companies Act, 2013 states that where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liabilities under the provision of the Companies Act, 2013, it shall be valued by a person having such qualifications and experience and registered as a valuer in such manner, on such terms and conditions as may be prescribed and appointed by the audit committee or in its absence by the Board of Directors of that company.

The valuer appointed under sub-section (1) shall,—

  • make an impartial, true and fair valuation of any assets which may be required to be valued;
  • exercise due diligence while performing the functions as valuer;
  • make the valuation in accordance with such rules as may be prescribed; and
  • not undertake valuation of any assets in which he has a direct or indirect interest or becomes so interested at any time during a period of three years prior to his appointment as valuer or three years after the valuation of assets was conducted by him.

In case of contravention made by the Valuer

Section 247(3) states that if a valuer contravenes the provisions of the section 247 or the rules made thereunder,

  • the valuer shall be liable to a penalty of Rs. 50,000:
    Provided that if the valuer has contravened such provisions with the intention to defraud the company or its members, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Liability of Valuer

Section 247(4) states that where a valuer has been convicted under sub-section (3), he shall be liable to –

  • refund the remuneration received by him to the company; and
  • pay for damages to the company or to any other person for loss arising out of incorrect or misleading statements of particulars made in his report.

Regulatory authority for Registered Valuer

The Central Government delegated its powers and functions under section 247 of the Companies Act, 2013 to the Insolvency and Bankruptcy Board of India (IBBI) and specified the IBBI as the Authority under the Companies (Registered Valuers and Valuation) Rules, 2017.

INSTITUTE OF COMPANY SECRETARIES OF INDIA – REGISTERED VALUER ORGANISATION (ICSI-RVO)

What is ICSI – RVO?

Section 247 of the Companies Act, 2013 provides that where a valuation is required to be made in respect of any assets it shall be valued by a person who, having the necessary qualifications and experience, and being a valuer member of a recognized valuer organisation, is registered as a valuer with the Authority.

Accordingly, to enable the members of the Institute/others to practice as Registered Valuers, the Institute incorporated ICSI-RVO. ICSI- RVO is a Section 8 company which has been formed with the intent to enroll, register, educate, train, promote, develop and regulate Registered Valuers Rules while establishing and promoting high standards of practice and professional conduct and furthermore, to promote good professionalism, ethical conduct and competency of Registered Valuers for ensuring quality of valuation work.

The IBBI vide Registered Valuers Organisation Recognition No. IBBI/RVO/2018/003 recognized ICSI RVO as a Registered Valuers Organisation for the Asset Class(es):-

  •  Land and Building
  • Plant and Machinery
  • Securities or Financial Assets

Who can offer Valuation services?

For conducting valuations required under the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016, a person is to be registered with the IBBI as a registered valuer. For registering with IBBI, a person must have necessary qualification and experience, has to be enrolled as a valuer member with a Registered Valuer Organisation (RVO), has to complete a recognised educational course conducted by the RVO, and pass valuation examination conducted by IBBI.

IBBI, being the Authority, in pursuance of the first proviso to rule 5 (1) of the Companies (Registered Valuers and Valuation) Rules, 2017 specified the details of educational course for the Asset Class of ‘Securities or Financial Assets’. These courses shall be delivered by the RVOs in not less than 50 hours.

With effect from 1st April, 2018, for conducting valuations required under the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016, a person is to be registered with the IBBI as a registered valuer. In pursuance of the Rule 5 (3) of the Companies (Registered Valuers and Valuation) Rules, 2017, IBBI, being the Authority, has also published the syllabus, format and frequency of the valuation examination for the Asset Class of ‘Securities or Financial Assets’. A person wishing to be a valuer needs to pass this valuation examination.

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