CS Executive · Company Law and Practice

Compromise, Arrangement and Amalgamations - Concepts: formula sheet

Full chapter guide

Key formulas

Compromise: Compromise = agreement between company and creditors/members, with give and take, usually settling a dispute or doubt; Needs approval of the class and sanction of the Tribunal to bind all.
Arrangement: Arrangement = any reorganisation of the company's affairs or of rights of creditors/members (includes reorganisation of share capital); Wider than compromise. No dispute is needed.
Parties to the scheme: Company ↔ creditors (or class) OR members (or class); Application under section 230 can be made by the company, a creditor, a member, or the liquidator.
Approval needed at the meeting: Majority in number representing 3/4 in value of those present and voting; Then the Tribunal sanctions the scheme. Dissenters are bound after sanction.
Scope of section 232: Scheme of reconstruction involving merger or amalgamation of two or more companies, or division of a company's undertaking among two or more companies; Section 230(3) to (6) apply mutatis mutandis to the meetings ordered under section 232(1).
Merger types (Explanation to section 232): Merger by absorption: transfer to an existing company. Merger by formation of a new company: transfer of two or more companies to a new company; The new company may or may not be a public company.
Approval majority: Majority in number of persons representing 3/4 in value, voting in person, by proxy or by postal ballot; Section 230(6). Counted separately for each class of creditors or members.
Voting period: Within 1 month from receipt of notice; Section 230(4). Persons may vote themselves, by proxy or by postal ballot.
Right to object: Holders of ≥ 10% of shareholding, or creditors with outstanding debt ≥ 5% of total outstanding debt (latest audited financial statement); Proviso to section 230(4). Others cannot raise objections.
Representations by authorities: Within 30 days of receipt of notice; silence means no representation; Section 230(5). Applies to Central Government, income-tax authorities, RBI, SEBI, Registrar, stock exchanges, Official Liquidator, CCI if necessary, and sectoral regulators.
Dispensing with creditors' meeting: Creditors or class holding ≥ 90% in value confirm by affidavit; Section 230(9). The Tribunal may dispense with that meeting.
Filing of Tribunal order: With Registrar within 30 days of receipt of order; Section 230(8). The company files it.
Corporate debt restructuring consent: Consent of not less than 75% of secured creditors in value; Section 230(2)(c). Needs extra disclosures.
Conditions for section 232 to apply: (a) scheme for reconstruction involving merger or amalgamation of two or more companies AND (b) whole or part of undertaking, property or liabilities of the transferor is to be transferred to the transferee, or divided among two or more companies; Both conditions must be shown to the Tribunal. Only then may it order meetings of creditors or members.
Documents to circulate for the meeting (section 232(2)): Draft scheme adopted by directors; confirmation that a copy is filed with the Registrar; directors' report on effect on each class of shareholders, KMP, promoters and non-promoter shareholders, including the share exchange ratio and any valuation difficulties; expert's valuation report, if any; supplementary accounting statement if the last annual accounts are older than six months before the first meeting; Remember them as: draft scheme, Registrar filing, directors' report, expert valuation, supplementary accounts.
Auditor's certificate: No sanction unless the company's auditor certifies that the proposed accounting treatment conforms to the accounting standards prescribed under section 133; This is a proviso to section 232(3). It is a condition for sanction.
Appointed date: The scheme must clearly state an appointed date. It is effective from that date and not from a later date.; Section 232(6). This is different from the date of the Tribunal's order.
Filing the order with the Registrar: Certified copy of the order to be filed within 30 days of receiving it; Section 232(5). Default: penalty of ₹20,000 on the company and every officer in default. If the default continues, a further ₹1,000 for each day after the first, up to a maximum of ₹3,00,000 (section 232(8)).
Annual compliance statement: Until the scheme is complete, file every year a statement certified by a chartered accountant, cost accountant or company secretary in practice, stating whether the scheme is being complied with as per the Tribunal's orders; Section 232(7).
Treasury shares: The transferee company must not hold shares in its own name, or through a trust, on its own behalf or for a subsidiary or associate. Such shares are cancelled or extinguished.; Proviso to section 232(3)(b).
Listed transferor and unlisted transferee: Transferee stays unlisted until it becomes listed. Dissenting shareholders who opt out get a pre-determined price formula or a valuation. The price must not be less than what SEBI regulations specify.; Section 232(3)(h).
Supervision power: Section 231(1)(a): Tribunal shall have power to supervise implementation of the sanctioned scheme; Applies where the Tribunal has made an order under section 230 sanctioning the scheme.
Directions and modifications: Section 231(1)(b): directions on any matter or modifications, at the time of the order or at any time thereafter, as necessary for proper implementation; The test is necessity for proper implementation. The power is not unlimited in purpose.
Winding up on failure: Section 231(2): scheme cannot be implemented satisfactorily (with or without modifications) AND company unable to pay its debts as per the scheme → Tribunal may order winding up; Both conditions together. The word is 'may', so winding up is discretionary. The order is deemed made under section 273.
Earlier schemes: Section 231(3): section applies, so far as may be, to orders sanctioning a scheme made before commencement of the Act; Covers old sanctioned schemes too.
Section 235 approval threshold: Approval ≥ 9/10 in value of shares whose transfer is involved; Shares already held at the offer date by the transferee company, its nominee or its subsidiaries are excluded.
Section 235 time limits: Approval within 4 months of offer; notice within 2 months after those 4 months; The dissenter may apply to the Tribunal within 1 month from the date of notice.
Section 235 terms of acquisition: Price = terms offered to approving shareholders; Unless the Tribunal orders otherwise on the dissenter's application.
Section 235 handling of money: Separate bank account; disburse within 60 days; inform dissenters within 1 month of registration; The transferor company holds the sum in trust for the entitled shareholders.
Section 236 trigger: Acquirer (or persons acting in concert) holds ≥ 90% of issued equity share capital; Any cause counts: amalgamation, share exchange, conversion of securities or other reason.
Section 236 price and deposit: Price = registered valuer's valuation; deposit = value of shares to be acquired, kept at least 1 year; Payment to entitled shareholders within 60 days; account operated by the company whose shares are being transferred.
Section 236 follow-on rights: Heirs' right: 3 years; 75% minority higher-price sharing: pro rata; If 75% or more of the minority negotiate a higher price without disclosure, the majority shares the extra compensation pro rata.

Quick revision

Section 230 lets the Tribunal order meetings of creditors or members, or any class of them, on application.
Applicants can be the company, any creditor or member, or the liquidator if the company is being wound up.
Arrangement includes reorganising share capital by consolidation, division or both.
The applicant must disclose material facts by affidavit, including latest financial position, auditor's report and pending investigations.
Notice goes to creditors, members and debenture-holders, with a statement of effect and any valuation report.
Voters can vote themselves, by proxy or by postal ballot within one month of receiving notice.
Objections can be made only by holders of at least 10% of shareholding or debt of at least 5% of total outstanding debt.
Authorities get notice and have 30 days to make representations, otherwise they are presumed to have none.
Approval needs a majority of persons representing three-fourths in value of those voting.
The Tribunal can dispense with a creditors' meeting if creditors holding at least 90% in value confirm by affidavit.
Sanction needs the auditor's certificate that accounting treatment follows Section 133 standards.
File the Tribunal's order with the Registrar within 30 days of receiving it.

Common mistakes

Saying a compromise always needs a dispute in court. Fix: Say a compromise usually settles a dispute or doubt and involves give and take. It is not a court case. The Tribunal's role is to sanction it.
Treating compromise and arrangement as exact synonyms. Fix: Show the difference. A compromise is a give-and-take settlement. An arrangement is wider and needs no dispute. Give one example of each.
Writing that the majority is three-fourths in number. Fix: Write both: a majority of persons, representing three-fourths in value.
Mixing up the 10% and 5% objection thresholds. Fix: 10% is for shareholding, 5% is for outstanding debt.
Treating the date of the Tribunal's order as the effective date of the scheme. Fix: Remember that the scheme must state an appointed date and takes effect from it, not from a later date (section 232(6)). The order sanctions the scheme. The effective date is the appointed date.
Missing the auditor's certificate as a condition for sanction. Fix: State that the Tribunal will not sanction the scheme unless the auditor's certificate on accounting treatment, in line with section 133 standards, has been filed.
Applying section 231 before the scheme is sanctioned Fix: Remember: section 230 sanctions, section 231 enforces. Section 231 starts only after the sanction order.
Saying the Tribunal must wind up whenever a scheme fails Fix: Write that the Tribunal 'may' order winding up, and only if both conditions in sub-section (2) are met.
Mixing up Sections 235 and 236. Fix: Remember: 235 follows an offer under a scheme or contract and measures approval; 236 follows a holding of 90% or more of equity and uses a valuer's price.
Counting the nine-tenths on all shares of the company under Section 235. Fix: Exclude shares already held at the offer date by the transferee company, its nominee or its subsidiaries before applying the nine-tenths test.

Exam tips

Start definition questions with the two terms side by side: compromise as give and take, arrangement as wider reorganisation.
Cite section 230 for schemes in general and section 232 for merger, amalgamation and division. Do not mix them.
Name the parties correctly: creditors or a class of them, members or a class of them. Use the words 'transferor' and 'transferee' for section 232.
End every answer with the Tribunal's sanction, since the scheme binds only after it.
Use short examples with Indian company names to show you have applied the definition.
Learn the numbers in one list: 3/4 value, 1 month, 10%, 5%, 30 days, 90%.
Write the steps in sequence: application, affidavit, meeting, notice, vote, sanction, filing.
Quote the section number, such as section 230(6) for the majority, to earn marks.