Learning No. 15Month: June 2021
(This article was prepared for ICSI Palakkad Chapter magazine "Synergy" and published on June 24, 2021)
INSIGHT INTO THE SCHEME OF COMPROMISE OR ARRANGEMENT
Introduction
Many
big corporates are facing financial crisis as well as operational problems in
their day today business life. In order to eliminate such problems and enhance
company’s efficiency and performance, Corporate Restructuring is the only
solution which plays significant role in re-organization of business
operations. It means reorganizing the operational, financial and other
structure of the Company in order to achieve its pre-determined objectives like
increase profit, cost effectiveness etc.
NEED FOR CORPORATE RESTRUCTURING
Ø Change in the ownership structure of the Company as a
result of mergers, takeovers etc..
Ø Adverse economic conditions and changes in business such as
bankruptcy, over employed personnel etc.;
Ø To achieve vision of the Company by eliminating asset/
undertaking/ subsidiaries which are not required;
Ø Does not have enough profit to meet the cost and may incur
huge losses;
Ø To refinance the debt in order to minimize the finance
cost;
Ø Reorganizing the functions such as marketing, sales, and
distribution;
Ø To improve the Balance Sheet of the company by disposing
of unprofitable division from its core business and underutilized assets;
change in the management and reduction in manpower etc...
INTERNAL/ ORGANIC RESTRUCTURING
1.
Organizational
Restructuring: Such restructuring is done to reduce cost and payoff the
liabilities which are not required, as the result of which organizational
structure of a company will be changed such as reducing its level of the
hierarchy, redesigning the job positions and reducing workforce.
2.
Financial
Restructuring: This type of restructuring normally
done due to a huge loss in the business as a result of unavoidable reasons like
CoVID-19 pandemic which has affective almost all sectors. Such restructuring alters
its shareholding pattern, debt-servicing schedule mainly to sustain in the
market and make relatively good turnover and profitability.
EXTERNAL/ IN-ORGANIC RESTRUCTURING
1. Merger: This is the concept where two or more business entities
are merged with existing entities or newly formed company.
2. De-merger: Such restructuring happens with the transfer of a company’s business
undertakings/ segments into another company. This is done mainly to concentrate
in core business activities. The company whose undertaking is being transferred
is called the de-merged company. The other company is often known as the
resulting company. The de-merger can happen in the form of Spin off, Split off and
Split up.
v Spin off:
In this case, the parent company incorporates a separate entity and
issues shares of the new entity to its existing shareholders. Such shares are
distributed as special dividends by the parent company on a pro-rata basis and
as such the parent company doesn’t receive any cash consideration for
undertaking the spin-off. As a result, subsidiary no longer controlled by its
parent company and there are 2 separate publicly traded companies. Its main
purpose is to have a distinct identity from the parent company’s management.
For eg: ABC Ltd engages in business of media and chemical segments and it has incorporated
a new company in the name of XYZ Ltd. ABC Ltd transferred chemical business
into XYZ Ltd and allotted shares of XYZ Ltd to the shareholders of ABC Ltd.
v Split-Off:
Under Split off, parent company incorporates new
entity and shareholders of parent company exchange their shares for newly
created entity. The difference between a spin-off and a split-off is that in case
of split-off, shareholders shall exchange their existing shares for the new entity
whereas in a spin-off, the existing shareholders are given shares of the new entity. For eg: Take
same example as illustrated above. ABC Ltd transferred chemical business into
XYZ Ltd and allotted shares of XYZ Ltd to the shareholders of ABC Ltd in
exchange of their shares held.
v Split up:
Here
parent company is divided into two or more business undertaking. But once split
up is happen, the parent company will be liquidated. For eg: ABC Ltd engages in
business of media and chemical and incorporated new companies in the name of PQR
Ltd and XYZ Ltd. ABC Ltd transferred chemical business into XYZ Ltd & media
business to the PQR Ltd and allotted shares of XYZ Ltd & PQR Ltd to the
shareholders of ABC Ltd. Thereafter ABC Ltd ceases to exist.
3. Reverse Merger: Many private companies are looking for growth by doing public issue and use those funds for the expansion purpose. But on the other hand, few private companies with huge networth and profits, don’t want to raise capital, but intended to remain listed and traded in the stock exchanges. Hence we can say that the reverse merger being a speedy corporate transaction method whereby public listed company is acquired by a private company and thereafter merged with it, which allows the acquirer to go to the public through the procedure which is simpler, less risky and comparatively less time-consuming than IPO. With this merger, new operating entity shall come into picture and if change in name is required, it can do so in line with new business.
4. Disinvestment: When a corporate entity sells out its stake in a company or other investments or liquidates its asset, it is known as “Disinvestment/ Divestment”. Business Organisation normally tends to divest mainly to set off losses or exit from particular segment that incurs the loss to the Company.
5. Takeover/ Acquisition: It means acquirer who acquires shares, voting rights or control over Target Company. Takeovers can be done by purchasing a majority stake in the investee company. There are various reasons for acquisition:
·
To increase the
productivity and profitability & reduce cost of productions/ operations
through synergies;
·
Diversify the area
of operation;
·
Increase market
share and presence in more areas;
·
Eliminate
competition.
Normally, Takeover consists of Friendly Takeover and Hostile Takeover. Friendly takeover normally happens through mutual discussion between Board of Directors of both the companies. They do the process of Due Diligence to understand pros and cons of such restructuring. Whereas Hostile takeover is quite aggressive whereby one party involves in creeping acquisition of shares and as a result of which acquirer gets major control over target firm before its promoter realizes the same.
6. Joint Venture (JV): Under this strategy, an entity in which two or more organizations join together to share their resources like investment, expenses, manpower, technology, Intellectual Property Rights etc. to gain the benefit out of it. Normally, companies enter into such venture to pursue specific projects. Companies initiate a venture through an agreement and the profit or loss out of such business will be shared among the participants.
With this venture, entry into a new
market can be made easily possible with the help of parties to JV and helps to
increase market visibility & credibility to the larger extent.
7. Strategic Alliance: It is an arrangement whereby two or more entities enter into an agreement to join together in order to achieve certain objectives while these entities continue to act as independent organizations.
8. Slump Sale: It means an undertaking which sold for a consideration at a value irrespective of the individual values of the assets or liabilities of the undertaking.
COMPROMISE OR ARRANGEMENT
Merger
& Amalgamation being corporate restructuring can be undertaken through a Scheme
of Compromise or Arrangement “the Scheme”.
The term “Compromise” is no where defined under the
Companies Act, 2013. Let’s now understand the concept “Compromise or
Arrangement”.
· COMPROMISE: The term
Compromise normally occurs when there is a dispute. Such dispute may be between
members (including class of them) and company or creditors (including class of
them) and company that occurred due to organizational restructuring like
Merger, Amalgamation, De-mergers etc. Scheme of Compromise is the only solution
to resolve the dispute provided that there must be consensus and beneficial to both
the above parties.
· ARRANGEMENT
As per explanation to Sec 230 (1), the term “Arrangement”
includes a re-organisation 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. It has wider meaning.
REGULATORY FRAMEWORK GOVERNING THE SCHEME COMPROMISE OR
ARRANGEMENT
In
India, the provisions for schemes of compromises or arrangements were first
mentioned under Sec 153 of the Indian Companies Act, 1913 which was followed by
the successors like the Companies Act, 1956 & the Companies Act, 2013.
Currently, Sections 230 to 240 of the Companies Act, 2013 deals with the concept “Compromises, Arrangements and Amalgamation which came into effect December 15, 2016 wherein Section 230 and 231 relating to “Compromise and Arrangement” and sections 233 to 240 deals “Merger and Amalgamation”. These sections have to be read along with a rule viz., The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“CAAR, 2016”).
Consequent to the enactment of Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’), it was not possible to enforce the schemes of compromise/ arrangement for companies coming under the purview of BIFR. However, the Insolvency and Bankruptcy Code, 2016 (‘Code’) made it possible by way of amendments in section 230 of the Companies Act, 2013 (“the Act”) so as to include a liquidator appointed under the Code as eligible to propose a scheme under that section. With this, sick companies are getting chance of revival through resolution plan containing the scheme under the Code before such company is proceeded to the liquidation.
Lets now discuss in detail the process involved in implementing the Scheme.
STEP 1: APPLICATION FOR ORDER OF TRIBUNAL FOR THE CONVENING MEETING:
As
per Rule 3 of CAAR, 2016, if there is any Scheme under Sec 230(1) of the Act
which is proposed between:
·
A Company and its creditors or any
class of them or
·
A Company and its members or class of
them,
an
application under Section 230(1) of the Act may be submitted in Form NCLT-1 (as per National Company Law Tribunal Rules, 2016
“NCLT Rules”) to the Tribunal along with:-
Ø a
notice of admission in Form NCLT-2 of NCLT Rules;
Ø an
affidavit in Form NCLT -6 of NCLT Rules;
Ø a
copy of the Scheme which should include disclosures as mentioned below:
i. all
material facts relating to the company such as the latest financial results,
auditor’s report and the pendency of any investigation or proceedings against
the company;
ii. reduction
of share capital of the company, if any, included in the Scheme;
iii. any
scheme of corporate debt restructuring consented to by not less than 75% of the
secured creditors in value, including—
a. a
creditor’s responsibility statement in form CAA-1;
b. safeguards
for the protection of other secured and unsecured creditors;
c. Auditors
report that mentions about 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;
d. where
the company proposes to adopt the corporate debt restructuring guidelines
specified by the Reserve Bank of India, a statement to that effect; and
e. 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
valuer.
iv. fee as prescribed in the Schedule
of Fees.
STEP -2: DIRECTIONS OF TRIBUNAL AT HEARING OF THE APPLICATION
As
per Rule 5 of CAAR, 2016, upon hearing the application, the Tribunal shall (unless
it thinks fit for any reason to dismiss the application) give such directions
in respect of the following matters:-
v
determining the class(s) of creditors
or of members whose meeting(s) have to be held for considering the proposed Scheme;
v
dispensing with the meeting(s) of
class(s) of creditors or of members as mentioned under Sec 230 (9);
v
fixing the time and place of the
meeting(s);
v
appointing a Chairperson and
scrutinizer for the meeting(s) to be held and fixing the terms of his
appointment including remuneration;
v
fixing the quorum and the procedure to
be followed at the meeting(s), including voting in person or by proxy or by
postal ballot or by voting through electronics means;
v
determining the values of the
creditors or the members including any of its class, whose meetings have to be
held;
v
notice to be given of the meeting(s)
and the advertisement of such notice;
v
notice to be given to sectoral
regulators or authorities under Section 230(5);
v
the time limit for submitting the
report of meeting results by chairperson of the meeting to the tribunal; and
v
such other matters as the Tribunal may
deem necessary.
STEP -3: NOTICE OF MEETING
As
per Sec 230(3) provides that such notice and other documents shall also be
placed on the website of the Company if any, for not less than 30 days before
date fixed for the meeting. In case of listed companies, these details have to
be sent to stock exchanges and BSE where securities of the company are listed.
The statutory authorities desire to make any representation, the same shall be sent to the Tribunal within a period of 30 days from the date of receipt of such notice and copy of such representation shall simultaneously be sent to the concerned companies.
Such notice shall be accompanied by a copy of the scheme, if such details are not already included in the said scheme:-
i. Details of the order of the Tribunal directing the
calling, convening and conducting of the meeting;
(a) Date of the
Order
(b) Date, Time and Venue of the Meeting
ii. details of the company including name of the company; Corporate
Identification Number (CIN) or Global Location Number (GLN) of the company; date
of incorporation; PAN, type of the company (whether public or private or
one-person company); registered office address and e-mail address etc..
iii. if
the Scheme relates to more than one company, the fact and details of any
relationship subsisting between such companies who are parties to such Scheme,
including holding, subsidiary or of associate companies.
iv. the
date of the Board meeting at which the scheme was approved by the Board of
directors including the name of the directors who voted in favour, who voted
against and who did not vote/ participate on such resolution;
v. Explanatory
statement disclosing details of the Scheme including:
o parties involved in such Scheme;
o in case of amalgamation or merger,
appointed date, effective date, share exchange ratio (if applicable) and other
considerations, if any;
o summary of valuation report (if
applicable) including basis of valuation and fairness opinion of the registered
valuer, if any; and the declaration that the valuation reports is available for
inspection at the registered office of the company;
o details of capital/debt
restructuring, if any;
o rationale for the Scheme;
o benefits of the Scheme as perceived
by the Board of directors to the company, members, creditors and others (as
applicable);
o Amount due to unsecured creditors.
vi. Disclosure
about the effect of the Scheme on Key Managerial Personnel (KMP), directors, promoters,
non-promoter members etc.
vii. Disclosure
about effect of the Scheme on material interests or directors, KMP and
debenture trustee.
viii. Investigation
or proceedings, if any, pending against the company under the Act.
ix. Details
of the availability of the certain documents like latest audited financial
statements, the scheme, contracts/ agreements/ documents relating to the scheme
etc. for obtaining extract from or for making/ obtaining copies of or for
inspection by the members and creditors.
x. details of approvals/ sanctions/ no-objection(s),
if any, from regulatory or any other government authorities w.r.t the scheme.
xi. a statement to the effect that the
persons to whom the notice is sent may vote in the meeting either in person or
by proxies, or where applicable, by voting through electronics means.
As per Sec 230(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.
STEP 4: VOTING
The person who
receives the notice may within 1 month from date of receipt of the notice, vote
in the meeting either in person of through electronic means to the adoption of
the scheme of compromise and arrangement.
STEP 5: PROXIES
As per Rule 10 of
CAAR, 2016, voting by proxy shall be permitted, provided a proxy in the
prescribed form duly signed by the person entitled to attend and vote at the
meeting is filed with the company at its registered office not later than 48
hours before the meeting.
Where a body corporate which is a member or creditor (including debenture holders) of a company authorizes any person to act as its representative at the meeting, of the members or creditors of the company, or of any class of them, as the case may be, a copy of the resolution of the board of directors or other governing body of such corporate authorizing such person to act as its representative at the meeting, and certified to be a true copy by a director, the manager, the secretary, or other authorized officer of such body corporate shall be lodged with the company at its registered office not later than 48 hours before the meeting.
Such rule also says about person shall not be appointed as a proxy who is a minor.
STEP 6: AFFIDAVIT OF SERVICE OF NOTICE & ADVERTISEMENT
As per Rule 12 of
CAAR, 2016, the chairperson appointed for the meeting of the company or other
person directed to issue the advertisement and the notices of the meeting,
shall file an affidavit before the Tribunal not less than 7 days before the
date fixed for meeting or date of the first of the meetings, as the case may be,
stating that the directions regarding the issue of notices and the
advertisement have been duly complied with.
STEP 7: RESULT OF THE MEETING TO BE DECIDED BY VOTING
The voting at the
meeting held in pursuance of the directions of the Tribunal, on all resolutions
shall take place by poll or by voting through electronics means.
As per Sec 230 (6) of the Act, where, at a meeting held in pursuance of sub-section (1), the Scheme shall be agreed by 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.
The report of the result of the meeting shall be in form no CAA. 4 and shall state accurately the number of creditors or class of creditors, as the case maybe who were present and who voted at the meeting either in person or by proxy, and where applicable, who voted through electronics means, their individual values and the way they voted. The chairperson of the meeting shall within the time fixed by the tribunal, or where no time has been fixed, within 3 days after the conclusion of the meeting submit a report to the Tribunal on the result of the meeting.
STEP 8: PETITION FOR CONFIRMING COMPROMISE OR ARRANGEMENT
Rule 15 of CAAR,
2016, where the proposed Scheme is agreed to by the members or creditors
or both as the case maybe with or without modification as above, the company or
its liquidator, shall, within 7 days of the filing of the report by the
chairperson, present a petition to the tribunal in Form No. CAA. 5 for
sanction of the scheme. Where the company fails to present the petition for
confirmation of the Scheme as aforesaid, it shall be open to any creditor or
member as the case may be, with the leave of the tribunal, to present the
petition and the company shall be liable for the cost thereof.
The tribunal thereafter shall fix a date for the hearing of petition, and notice of the hearing shall be advertised in the same newspaper in which the notice of the meeting was advertised or in such other newspaper as the Tribunal may direct, not less than 10 days before the date fixed for the hearing.
The notice of the hearing of the petition shall also be served by the Tribunal to the objectors or to their representatives under Section 230 (4) of the Act and to the central government and other authorities who have made representation under rule 8 and have desired to be heard in their representation.
STEP 9: ORDER ON PETITION
Where the Tribunal
sanctions the compromise or arrangement, the order shall be in Form no. CAA.6
which shall include such directions in regard to any matters as per Sec 230(7)
of the Act:
a. where
the Scheme 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;
b. the
protection of any class of creditors;
c. if
the Scheme results in the variation of the shareholders’ rights, it shall be
given effect to under the provisions of section 48;
d. if
the Scheme is agreed to by the creditors under Section 230(6), any proceedings
pending before the BIFR shall abate;
e. 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 Scheme:
An order made under section 232 (Mergers and Amalgamations of Companies) read with section 230 of the Act, shall be in Form No CAA.7 with such variation as the circumstances may require.
Such order shall direct that a certified copy of the same shall be filed with the registrar of companies within 30 days from the date of the receipt of copy of the order, or such other time as maybe fixed by the tribunal.
RELEVANCE OF APPOINTED DATE AND EFFECTIVE DATE IN THE LIGHT OF MERGERS AND AMALGAMATIONS
Every Mergers and
Amalgamations of companies has to have Appointed date and Effective date. Both
dates are important for Income Tax Act, 1961. “Appointed date” means date on
which amalgamation takes place ie., assets and liabilities of merging company
(transferor company) transferred to merged company (transferee company) whereas
“Effective date” means date (ie NCLT
order date sanctioning the merger) on which process of merger is completed in
all respects and merging company is dissolved by Registrar of Companies.
CONCLUSION
Corporate
restructuring is done mainly to re-arrange the various levels of business
operations in the corporate to achieve certain predetermined objectives.
Various Corporate tycoons like Mr. Ram Prasad Goenka, Mr. Sudarshan Birla, Mr.
Srichand Hinduja, Mr. Dhirubhai Ambani etc… who were instrumental in
undertaking the corporate restructuring exercises. The scheme of Compromise or
Arrangement plays a big role in the restructuring process. We as a Company
Secretaries should be expert in these areas by acquainting the knowledge with
latest changes including case laws.
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