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The Companies Act, 2013 (2013 Act) has seen the light of day and replaced the 1956 Act with some sweeping changes including those in relation to mergers and acquisitions (M&A).
On 7th November, 2016 Central Government issued a notification for enforcement of section 230-233, 235-240, 270-288 etc pertaining to proceedings relating to arbitration, compromise, arrangements and reconstruction of companies which will get enforced w.e.f. 15th December, 2016. MCA vide notification dated 14th Dec, 2016 has issued rules i.e. The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. These rules will be effective from 15th December, 2016.
1Consequent to such enforcement, cases which were dealt by the High Court, will get transferred to the Tribunal and the proceedings there under will be constituted pursuant to the NCLT Rules, 2016, which has already been notified by the MCA vide The Companies 2(Transfer of Pending Proceedings) Rules, 2016 vide notification dated 7th December, 2016
Effect of transfer of existing cases
All the pending Proceedings relating to Arbitration, Compromise, Arrangements and Reconstruction shall stand transferred to the Benches of the Tribunal. At present it will be little difficult that everyone have to wait for transfer of records from High Court to NCLT. All the matter on which date of hearing was fixed will also not manage by the High Court.
The idiom 3'mergers and acquisitions' (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. An 'acquisition' (also known as a takeover), is the buying of one company (the 'target') by another.
Involvement of provisions:
4Where a compromise or arrangement is proposed for the purposes of or in connection with scheme for the reconstruction of any company or companies, or for the amalgamation of any two or more companies, the petition shall pray for appropriate orders and directions under section 230 read with section 232 of the Act.
Section relating to Merger & Amalgamation Section 230 & 232.
5Rule 3-24 of The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.
NCLT-1 - Application (replacement of Judge summon)
NCLT-2 - A notice of admission
NCLT-6 - An affidavit (Affidavit supporting to application)
CAA-2 - Notice and Advertisement of notice of the meeting of creditors or members
CAA-3 - Notice to Central Government, Regulatory Authorities
CAA-4 - Report of result of meeting by Chairperson
CAA-5 - Petition to sanction compromise or arrangement
CAA-6 - Order on petition
CAA-7 - Order under section 232
CAA-8 - Statement to be filed with Registrar of Companies
6Constitution of NCLT
7Enforcement of section 230-233, 235-240, 270-288-
8The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016
9Transfer of Pending Proceedings
10Delegation of Power of CG to Regional Director
Major Changes from Old Act to New act:
Single window clearance
the Bombay High Court in its decision in PMP Auto Industries Ltd. In Re,  80 Comp. Case 289; considered it desirable that approval of various kinds of scheme under sections 391-395 should be granted in the manner of a "single window clearance". The court said that, excepting reduction of capital where the special procedure of reduction may have to be followed, all other formal requirements of the Companies Act, such as approval of change of objects or any other alteration of memorandum of association and all other consequential or incidental changes required for implementing the scheme, should be formalized in a single petition.
Hipolin Products Ltd., In Re,  2 Comp LJ 61 (Guj).
Novopan India Ltd., In Re,  14 SCL 233 (AP),
By-pass of Statutes: An amalgamation is single window clearance for the many matters as mentioned above. But an amalgamation cannot be used to by-pass other statutes. Example: 13The transferor company in an amalgamation was the tenant of premises under an agreement which specifically prohibited subletting without the consent in writing of the landlord. Under the scheme of amalgamation, all the assets of the transferor company including the tenancy passed to the transferee company. The written consent of the landlord was not taken. The transaction was held to be a transfer of the tenancy without the sanction of the landlord and the transferee company was held to be liable to be evicted from the premises.
In this article compromise & arrangment (C&A) will be read in relation to merger & amalgamation only.
In Case of application filing u/s 230 for Compromise & Arrangement in relation to reconstruction of the Company or companies involving merger or the amalgamation of any two or more companies should specify the purpose of the scheme.
PROCESS OF COMPROMISE & ARRANGEMENT (M&A):
As there are two steps of process of M&A filing of 1st Motion application (Take permission/instruction for holding of Meetings) with NCLT and filing of 2nd motion petition (Scheme of M&A) with NCLT. Each step includes many works and sub steps.
Who can file the application for Merger & Amalgamation Purpose?
14An application for Merger & Amalgamation can be file with Tribunal (NCLT). Both the transferor and the transferee company shall make an application in the form of petition to the Tribunal in whose jurisdiction registered office of the Company is situated under section 230-232 of the Companies Act, 2013 for the purpose of sanctioning the scheme of amalgamation.
Joint Application: Rule 3(2)
Where more than one company is involved in a scheme, such application may, at the discretion of such companies, be filed as a joint-application.
However, where the registered office of the Companies are in different states, there would be more than one Tribunals having the jurisdiction over those, companies, hence separate petition will have to be filed.
Step-1-Preparation of Draft Scheme
Check whether the memorandum of association of the company contains the powers to amalgamate. Even if the object clause of the Company not specifically empowers Company to amalgamate the Company can amalgamate, because there is statutory power of amalgamation under the Act. (AIMCO Pesticides Limited).
General process of application with NCLT
Power of High Court regarding C&A has been transferred to NCLT. As per general process of filing of application with NCLT, Every petition or application or reference shall be filed in form as provided in Form NCLT-1 with attachment thereto accompanied by the Form NCLT-2. Every application shall be verified by an affidavit in Form No. NCLT-6.
1st Motion Application
I. Application to the NCLT for direction to convene Meetings (Members & Creditors):
Company shall prepare an application in form NCLT-1 mentioning the details about applicant, jurisdiction, limitation, relief sought, the basis on which each class of members or creditors has been identified for the purposes of approval of the scheme etc. Company will submit the application along with following documents: Rule 3
II. Submission of copy application with NCLT:
Company would file the application in NCLT-1 to the tribunal in whose jurisdiction registered office of the Company is situated along with above mentioned 7 documents along with the fee of Rs. 5.000/-.
III. Direction by NCLT for to convene Meetings (Members & Creditors):
Upon hearing of the application Tribunal shall, unless it thinks fit for any reason to dismiss the application, give such directions/order as it may think necessary in respect 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 prescribed. rule 5 of CAA Rules, 2016 as follow.
After considering the application in NCLT-1 tribunal can give the following instructions regarding holding and concluding of Meeting. Fixing the time and place of the meeting or meetings, Appointing a Chairperson the procedure to be followed at the meeting, including voting in person or by proxy or by postal ballot or by voting through electronic means, The time within which the chairperson of the meeting is required to report the result of the meeting to the Tribunal; and Such other matters as the Tribunal may deem necessary.
Class of Creditors or Shareholders:
It is always a moot question what constitutes a class. It has observed that it is a formidable difficulty to say what constitutes a "class" of creditors. The creditors composing the different classes must have different interest. When one finds a different state of fact existing among different creditors which may differently, affect their minds and their judgment, they must be divided into different classes. "class" must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest (vide Sovereign Life Assurance Co. v. Dodd), Speaking very generally, in order to constitute a class, members belonging to the class must form a homogenous group with communality of interest. If people with heterogenous interests are combined in a class, naturally, the majority having common interest may ride rough shod over the minority representing a distinct interest. Below given are some examples of class:
There may be many questions relating to the class i.e. whether debenture holders are unsecured creditors or not? Whether all class will get the same shares. Creditor with different periods etc. There can be many questions relating to class of creditors or shareholders and their treatment.
III.I Dispense of Meeting of Creditors:
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 ninety per cent. value, agree and confirm, by way of affidavit, to the scheme of compromise or arrangement.
List of Creditor should not be older than 6 month from the date of application. Rule 9 explanation
Clarity: It has been cleared in the Act, 2013 that for despension of meeting of creditors there is need to take consent of 90% of value of creditors in the form of duly notarized affidavit. By reading of the provisions of Act, 2013 it seems that dispense of meeting of members are not allowed in this Act. As specific provisions are given for the dispense of creditors but no provisions are prescribed for dispense of meeting of share holders.17
IV. Convene of Meeting/Issue of Notice:
A. Notice of Meeting: The Notice of the meeting pursuant to the order of tribunal to be give in Form No. CAA-2. Rule 6
Person entitled to receive the notice The notice shall be sent individually to each of the Creditors or Members and the debenture-holders at the address registered with the company. Section 230(3)
Person authorized to send the notice:
Modes of Sending of notice:
Documents to be send along with notice: The notice of meeting send with
B. 19Advertisement of Notice of Meeting: The Notice of the meeting shall be advertised in Form No. CAA-2 at lease in one English Newspaper and in at least one vernacular language newspaper. it shall indicate the time within which copies of the compromise or arrangement shall be made available to the concerned persons free of charge from the registered office of the company
u Such Newspaper shall be published on the website of the company at least 30 days before the date fixed for meeting, as directed by tribunal. Section 230(3)
u In case of Listed Company, such notice and other documents shall also be published on the website of SEBI and stock exchange, where securities of the Company are listed.
C. Notice to Statutory Authorities: Section 230(5) and Rule 8
This is the major change in process of M&A from the Companies Act, 2013. Earlier the requirement of filing of notice with statutory authorities was with the 2nd Motion application. But under Act, 2013 this requirement is clubbed with 1st motion application. Second as per MCA notification dated 15th January 2013 this was the obligation of Regional Director to send the notice to RBI, Income Tax authorities, CCI etc.
A notice in Form No CAA-3along with Copy of Scheme of C&A, the explanatory statement and Disclosures mentioned in Annexure A, shall also be sent to followings:
Notice shall be sent to the office of the authority after sending of notice to members or creditors of the Company by Registered post, or by Speed post, or by courier, or by hand delivery.
Representation by authority:
The persons to whom the notice is sent may vote in the meeting either themselves or through 20proxies or by postal ballot to the adoption of the compromise or arrangement within one month from the date of receipt of such notice. Section 230(4) Rule 9
Right of Objections: Section 230(4)
Any objection to the compromise or arrangement shall be made only by
E. Holding of Meeting:
The Company on the requisition of the creditors or members entitled to attend meeting shall furnish a copy of scheme of C&A and copy of statement required to furnish in section 230(2)(c) with in one day of requisition.
F. Filing of Affidavit with Tribunal:
Liability to Service: The Chairperson appointed for the meeting of the company or other person directed to issue the advertisement and the notices of the meeting.
21Above mentioned shall file an affidavit before the Tribunal at least seven days before the date fixed for the meeting or the 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.
G. Result of Meeting:
Method of Voting: The voting at the meeting or meetings held in pursuance of the directions of the Tribunal on all resolutions shall take place by poll or by voting through electronic means.
The report of the result of the meeting shall be in Form No. CAA.4 and shall state accurately
H. Report of the result of the meeting by Chairperson: - 22The Chairperson of the meeting shall, within the time fixed by the Tribunal, or where no time has been fixed, within 3 (Three) days after the conclusion of the meeting, submit a report to the Tribunal on the result of the meeting in Form No. CAA.4.
2nd Motion Application
V. Petition for confirming Merger & Amalgamation Rule 15
23The Company shall, within 7 (seven) 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 of compromise or arrangement. The petitioner will pray for the appropriate orders and directions from the Tribunal.
Where a compromise or arrangement is proposed for the purposes of or in connection with scheme for the reconstruction of any company or companies, or for the amalgamation of any two or more companies, the petition shall pray for appropriate orders and directions under section 230 read with section 232 of the Act.
VI. Notice of Hearing by Tribunal Rule 16; The Tribunal shall fix a date for the hearing of the petition.
Legal Responsibility of the Tribunal: The notice of the hearing of the petition shall also be served by the Tribunal ;
Publication of the Notice:
The 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, at least 10 (ten) days before the date fixed for the hearing.
Elements of satisfactory scheme.-It is the duty of the tribunal to go through the matter carefully and find out whether all provisions of law and directions of the tribunal as the conduct of the meetings have been complied with and whether the scheme is in the interest of the company as well as in that of its creditors and should be given effect to. The tribunal has to satisfy itself that:
"Keeping in mind the above principles, the role which the tribunal have to play in this country is more vital and potent; it is not only an inquisitorial and supervisory role but also a pragmatic role which requires the forming of an independent and informal judgment as regards the feasibility or proper working of the scheme and making suitable modifications in the scheme and issuing appropriate directions with that end in view." Tata Oil Mills Co. Ltd., Re,  3 Comp LJ 46 at 55; Hindustan Lever Ltd., Re,  81 Com Cases 754 (Bom.). On appeal before the Supreme Court Hindustan Lever Employees' Union v. Hindustan Lever Ltd.,  83 Com Cases 30.
In considering any scheme proposed, the Court will also consider its effects on the workers or employees and see that, as far as possible, it works as little hardship as it can to them. River Steam Navigation Co. Ltd., in re  2 Comp LJ 106 (Cal.) and affirmed on appeal (1968) 38 Com Cases 99 (Cal-DB).
VII. Order by Tribunal Rule 12;
Where the Tribunal sanctions the Merger & Amalgamation, An order made under section 232 read with section 230 of the Act shall be in Form No.CAA.6 & CAA 7 with such variation as the circumstances may require.
Effect of order of court:
An order of the court sanctioning the scheme becomes binding on all the creditors, including Government creditors and the liquidator and the contributories and the dissenting creditors or members so that whether it is valid or not, a shareholder cannot afterwards question it. Gupta (SX) v. K.P. Jain,  49 Com Cases 342 (SC). See also Craigs Claim, Re,  1 Ch-267; S.B. Mathur v. India Porcelain Ltd.,  26 Com Cases 161 (Punj.).
Modification of scheme
Once a scheme has been sanctioned by the court, it has no power to modify it subsequently without the consent of those who agreed to the original scheme. Mymensingh Loan Office Ltd., In re, AIR 1937 Cal 667.
Compliance after approval/order of Merger & Amalgamation
VIII. Filing of Order of Tribunal with ROC: Section 232(5)
The order of the Tribunal shall be filed with the Registrar by the company within a period of thirty days of the receipt of the copy of order, or such other time as may be fixed by the Tribunal.
IX. Compliance until completion of scheme: Every company in relation to which the order is made shall, until the completion of the scheme, file a statement in Form No. CAA.8and within two hundred and ten days 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.
Annexure - A
Information required to circulate along with notice
Explanation- For the purposes of above disclosure required to be made by a company shall be made in respect of all the companies, which are part of the compromise or arrangement.
1. List of Matter transferred to NCLT given in the following link: http://www.csdiveshgoyal.info/2016/12/list-of-matters-transfer-to-nclt-wef.html
2. notification no. gsr 1119 (e) dated 7th December, 2016
3. Amalgamation was defined by the Supreme Court of India in the case of Saraswati Industrial Syndicate Ltd. v. CIT  53 Taxman 92/3 The Honorable Court opined that in an amalgamation two or more companies are fused into one by merger or one taking over the other.
4. Comparative Section of Companies Act, 1956 is Section 391- 394A
5. Earlier Company Court Rules, 1956 (Rule 68-84)
11. 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
12. 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
General Radio & Appliances Co. Ltd. v. M.A. Khader,  60 Com Cases 1013 (SC):
14. In the case of Kirloskar Electricals Co. Ltd., the Court held that various clauses of Section 394(1) of the Companies Act suggest that both the transferor and the transfer company shall make an application to the Court and under section 391-394 of the Companies Act, 1956 for sanction of the scheme of Compromise or arrangement involving amalgamation of the Companies.
15. In Mohan Exports (India) Ltd. In re  95 Com Cas 53 (Delhi) BAHRI J followed the decision in W.A. Beardsell & Co. (P.) Ltd. and Mettur Industries Ltd., Re, (1968) 38 Com Cases 197 (Mad) and concluded as follows: "A joint petition by transferor and transferee companies for seeking court's approval to a scheme of compromise or arrangement under section 394 of the Companies Act, 1956, is competent. if both the Companies are under the jurisdiction of the same High Court, Joint petition may be made.
16. Scheme of Corporate Debt restructuring as referred in section 230(2)(c) means "a scheme that restructures or varies the debt obligation of a company toward its creditors".
17. Re; Feedback Reach Consultancy Services (p) Limited in this care it instruct that "where the written consent to the proposed scheme is granted by all the members and secured and unsecured creditors, separate meeting of members and secured and unsecured creditors can be dispensed with".
18. It is hereby clarified that the service of notice of meeting shall be deemed to have been effected in case of delivery by post, at the expiration of forty eight hours after the letter containing the same is posted.
19. Where separate meeting of classes of creditors or members are to be held, a joint advertisement for such meetings may be given.
20. Guidelines for proxy given in rule no 10.
21. In case of default under this provision, the application along with copy of the last order issued shall be posted before the Tribunal for such orders as it may think fit to make
22. Where there are separate meetings, the Chairperson of each meeting.
23. Rejection of Petition: After the meetings have, been held, a petition is presented to the court to sanction the scheme. The petition should be moved within 7 days of the filing of the report by the chairman of the meeting (Rule 79). A delayed petition is liable to be rejected. Bhagwan Singh & Sons Pvt. Ltd. v. Kalawati,  60 Com Cases 94 (Delhi). The petition need not state that the company is carrying on business. Great Universal Stores Ltd. In Re,  1 WLR 78.
24. The court is not justified in going into the reasons which led the creditors in their meeting to give up a part of their debts. Lakshmi Commercial Bank Ltd. In Re,  18 Com Cases 265.
25. Explanation – For the purposes of these rules it is clarified that-
26. the valuation report shall be made by a registered valuer, and till the registration of persons as valuers is prescribed under section 247 of the Act, the valuation report shall be made by an independent merchant banker who is registered with the Securities and Exchange Board or an independent chartered accountant in practice having a minimum experience of ten years