Compromises, Arrangements and Amalgamations

COMPROMISES, ARRANGMENTS, AMALGAMATIONS

Introduction:

Section- 230: contains the power of central government, on filing of application for compromise and arrangements. A compromise necessitates the existence of a dispute. The dispute may be resolved by drawing up a scheme of compromise. Even when there is a dispute, but the scheme is such that the members will have to give up their rights, it will not amount to compromise.

It should be agreed by everyone that a compromise or arrangement which has been sanctioned by the court must be reasonable, and no arrangement or compromise can be said as reasonable in which there is no motive of profit and just end up by giving everything. A reasonable compromise is regarded as the reasonable people with subject matter in regard to it, in which both the sides are getting benefitted. The arrangement would be improper if the court allows it to certain creditors, it wouldn’t be termed as reasonable. The purpose of this section is not confiscation. It is not that only one person gets targeted and the others should feast upon their rights. Its purpose is to enable compromises, to be made which are for the common benefit of creditors or a class of creditors as such.

There is a difference between arrangement which is assumption in nature and the arrangement which contemplates a gift.

Between whom the Compromise & Arrangement can be proposed: According to section 230(1),

1) Between a company and its creditors or any class of them or
2) Between a company and its members or any class of them.

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But the term arrangement is of a wider meaning. Without the existence of a dispute then the re-arrangement of rights & liabilities is possible. Hence, under the scheme where in every shareholder of the company has to transfer some amount and some to its shareholders, then the court refused to uphold because there was no dispute under the scheme.

A company can enter into schemes even where no power has been specifically mentioned, by the Memorandum of Association because Chapter 5 of Companies Act, 2013 gives power to companies to apply for sanction of arrangement, compromise, and amalgamation.

Who can file the application for Compromise & Arrangement: An application for compromise & arrangement can be files with Tribunal by the following:

1) The Company, or
2) Creditor, or
3) Member of the company, or
4) In the case of a company which is being wound up of the Liquidator.

An application can be made only by a person or creditor of the class which is affected by compromise or arrangement. The company has to place different interests in separate classes. If the members are affected differently under the scheme then the classification should be done on basis of it.

Thus, where dissimilar interests were put in a single class the tribunal refused to sanction the scheme, and held that: The meaning of the word class will prevent the section being worked so hard and it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to go together.

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Meetings:

If an application is properly made, the Tribunal may order a meeting of class of creditors or members to be called, which shall be conducted in the manner directed by tribunal. A single joint application by all companies involved a scheme for holding a meeting has been held permissible. It is also stated that to give such direction/ order as it may think necessary to respect meeting of the creditors or class of creditors, or as may be the case be.

Notice of meeting and disclosures:

A statement of the terms of the compromise or arrangements and its effects has to be sent with every notice calling the meeting. As the Tribunal, having the judicial nature, it is very important to proper exercise that the notice should be given to all the interested parties as well the shareholders. The statement should explain in particular any material interest and effect of compromise and the interests are different from them. The notice of the meeting has to be given to creditors and members of all classes accompanied by the statement of disclosure. When a member or creditor entitled to receive a copy applies for it, the company shall be bound to supply him one free of charge.

Every officer of the company is required to give notice to the company of such matters relating to him as may be necessary for the purposes of the scheme.

Approval by three- fourth:

If the scheme is approved by a majority representing three- fourths in value of the creditors or members, as however the case may be then it can be sanctioned by Tribunal. It should be operated directory and not in terms of mandatory. Tribunal’s sanction imparts a binding touch to the scheme. It has to be assured that the scheme is fair and reasonable and is not contrary to law.

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Amalgamation:

Amalgamation happens when two or more companies are joined to form a third organization. The effect is to delete the merging companies and to combine all into the new one. The new company comes into existence having all the property, rights and powers and subjected to all the duties and obligations of both the constituent companies. The word amalgamation has not been defined in the act; but the ordinary dictionary meaning is combination. Chapter V relating to compromises, arrangements and amalgamations, the primary object of amalgamation of one company with another to facilitate reconstruction of the amalgamating companies and this decision is leftover to the shareholders.

Power of amalgamation:

There should be power in the company’s memorandum to amalgamate. If it is not provided then it should be acquired by altering the memorandum. It is not necessary that the company adopting a scheme should be in financial difficulties or that it should be an affluent company. The expression any company liable to wound up under this act does not mean that the company is insolvent, but every company registered under the act is subject to the winding up.

Author: Saba banu,
Pendekanti law college, 3rd year BA LLB student

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