Compromise, Arrangement and Amalgamations - Concepts

Section 230(2) of the Companies Act, 2013, states that the company or any other person, by whom an application is made under sub-section (1), shall disclose to the Tribunal by affidavit–

(a)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;

(b)reduction of share capital of the company, if any, included in the compromise or arrangement;

(c)any scheme of corporate debt restructuring consented to by not less than seventy-five per cent of the secured creditors in value, including—

(i)a creditors’ responsibility statement in the prescribed form;

The Creditors’ Responsibility Statement shall be in Form CAA-1 and be included in the scheme of corporate debt restructuring. A scheme of corporate debt restructuring as referred to in clause (c) of sub-section (2) of section 230 of the Act shall mean a scheme that restructures or varies the debt obligations of a company towards its creditors.

(ii)safeguards for the protection of other secured and unsecured creditors;

(iii)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;

(iv)where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India, a statement to that effect; and

(v)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.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 4A(i) (Syllabus 2022).

Section 232(1) of the Companies Act 2013, states that when an application is made to the Tribunal under section 230 of the Companies Act, 2013 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 –

(a)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

(b)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.

Case Law: In the matter of Mohit Agro Commodities & Ors. NCLAT, dated June 28, 2021 When the “Transferor and Transferee Company” involve a Parent Company and a Wholly Owned Subsidiary the meeting of Equity Shareholders, Secured and Unsecured Creditors can be dispensed with as the rights of the Equity Shareholders of the “Transferee Company” are not being affected.

Analysis and Answer:

Based on the statutory provisions and the judicial interpretation in Mohit Agro Commodities & Ors., it is evident that the Tribunal has the jurisdiction to dispense with the meeting of equity shareholders, secured creditors, and unsecured creditors under Section 232 of the Companies Act, 2013. The Tribunal will evaluate:

(a)whether the proposed scheme alters stakeholders’ rights,

(b)whether there is any internal impact on the creditors/members, and

(c)whether dispensing with meetings would violate any provisions of the Act.

If satisfied that the rights and liabilities of stakeholders are unaffected and the scheme is fair and reasonable, the Tribunal may exercise its discretion to sanction the merger without requiring these meetings.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 4(b) (Syllabus 2022).

Section 230(6) of the Companies Act, 2013 states that the scheme shall be approved when at a meeting held in pursuance of section 230(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 scheme.

In this case out of 1200 members, 900 members attended the meeting, but only 780 members voted at the meeting. As 420 members voted in favor of the scheme, the requirement relating to majority in number (i.e. 390) is satisfied. 780 members who participated in the meeting held 56,00,000 shares, three-fourth of which works out to 42,00,000 shares while 420 members (more than 390 i.e. 50% of 780) who voted for the scheme held 44,00,000 shares (more than 42,00,000 shares).

As both the requirements are fulfilled, the scheme is approved by the requisite majority.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 1(a) (Syllabus 2022).

Section 230(3) of the Companies Act, 2013 read with Rule 6 of the Companies(Compromises, Arrangements and Amalgamations) Rules, 2016 provides that when a meeting of creditors for compromise or arrangement is proposed to be called in pursuance of an order of the Tribunal under Section 230 (1), a notice of such meeting in Form CAA-2 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;

–The notice of the meeting to the creditors and members shall be accompanied by a copy of the scheme of compromise or arrangement, if such details are not already included in the said scheme :

–Details of the order of the Tribunal directing the calling, convening and conducting of the meeting; date of the order; Date, Time and Venue of the Meeting;

–Details of the company;

–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 of the resolution, who voted against the resolution and who did not vote/ participate on such resolution;

–Explanatory statement disclosing details of the scheme of compromise or arrangement;

–Disclosure about the effect of the compromise or arrangement on key managerial personnel; directors; promoters; non-promoter members; depositors; creditors; debenture holders; deposit trustee and debenture trustee; employee of the company;

–Disclosure about effect of compromise or arrangement on material interests or directors, Key Managerial Personnel (KMP) and debenture trustee;

–Investigation or proceedings, if any, pending against the company under the Act;

–Details of approvals, sanctions or no-objection(s), if any, form regulatory or any other government authorities required, received or pending for the purpose scheme of compromise or arrangement;

–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.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 6(b) (Old syllabus).

Section 230 to 240 covered under Chapter XV of the Companies Act, 2013 provides for the Compromise, Arrangements and Amalgamation of Companies. The said provisions are uniformly applicable to all companies except Section 233 which prescribes simplified procedure for merger or amalgamation of -

•two or more small companies, or

•between a holding company and its wholly-owned subsidiary company, or

•such other class or classes of companies as may be prescribed.

Accordingly, sub-section (1) of Section 233 of Companies Act, 2013 states that notwithstanding the provisions of section 230 and section 232 of Companies Act, 2013, 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 such other class or classes of companies as may be prescribed, subject to the following, namely:-

(a)a notice 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 thirty days is issued by the transferor company or companies and the transferee company;

(b)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 ninety per cent of the total number of shares;

(c)each of the companies involved in the merger files a declaration of solvency, in the prescribed form, with the Registrar of the place where the registered office of the company is situated; and

(d)the scheme is approved by majority representing nine-tenths 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 twenty-one days along with the scheme to its creditors for the purpose or otherwise approved in writing.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 1(b) (Syllabus 2017).

In the matter of Mohit Agro Commodities & Ors, the NCLAT has observed that section 232(1) of the Companies Act, 2013 uses the word ‘may’ which introduces an element of discretion to the Tribunal to be exercised in the interest of justice in appropriate situations. Section 232 is a specific provision carved out by the Legislature when both conditions maintained in clauses (a) and (b) of the sub section (l) of section 232 are met.

In the given case the merger sought for is between a wholly owned subsidiary and the holding company. The points which need to be noted is:

•Whether such amalgamation/merger alters the rights of the stakeholders of the company?

•Whether such an amalgamation/merger has any bearing internally on Creditors/ Members of both the companies?

•Whether not holding the subject meeting would amount to violation of any of the provisions of the Companies Act, 2013

•Whether the Tribunal can exercise their discretion when the “Transferor Company” is wholly owned subsidiary of the “Transferee Company” and financial position of the Transferee Company is positive and the merger is not affecting the rights of the Shareholders or Creditors?

Therefore, it is held that the rights and liabilities of Secured and Unsecured Creditors were not getting affected in any manner by way of the proposed scheme as no new shares are being issued by the ‘Transferor Company’ and no compromise is offered to any Secured and Unsecured Creditors of the ‘Transferee Company’. Hence, when the ‘Transferor and Transferee Company’ involve a Parent Company and a Wholly Owned Subsidiary the meeting of Equity Shareholders, Secured Creditors and Unsecured Creditors can be dispensed with as the rights of the Equity Shareholders of the ‘Transferee Company’ are not being affected.

With reference to above case law and provisions, the Tribunal may in the interest of justice direct dispensing with the meeting of Equity shareholders, Secured and Unsecured Creditors as the rights of the Equity Shareholders of the company are not being affected, Hence, it is clear that the objection of the Company Secretary is not correct.

BOD of PQR Ltd., may dispense with the meeting of Equity shareholders, Secured and Unsecured Creditors as the rights of the Equity Shareholders of the “Transferee Company” are not being affected.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 3(c) (Syllabus 2017).

In the light of Section 232, when the 'Transferor and Transferee Company' involve a Parent Company and a Wholly Owned Subsidiary, the meeting of Equity Shareholders, Secured and Unsecured Creditors can be dispensed with if the rights of the Equity Shareholders of the 'Transferee Company' are not being affected.

In the matter of Mohit Agro Commodities & Ors. NCLAT, dated June 28, 2021, the NCLAT has observed that Section 232(1) of the Companies Act, 2013 uses the word 'may' which introduces an element of discretion to the Tribunal to be exercised in the interest of justice in appropriate situations. Section 232 is a specific provision carved out by the legislature when both conditions maintained in clauses (a) and (b) of section 232(1) are met.

In the instant case the amalgamation sought for is between a Wholly Owned Subsidiary and the Holding Company. The points which were considered in the above-mentioned judgment were:

1)Whether such an arrangement alters the rights of the Stakeholders of the Company?

2)Whether such an amalgamation has any bearing internally on Creditors/Members of both the Companies?

3)Whether not holding the subject meeting would amount to violation of any of the provisions of the Companies Act, 2013?

4)Whether the Tribunal can exercise their discretion when the 'Transferor Company' is a Wholly Owned Subsidiary of the Transferee Company and financial position of the 'Transferee Company' is positive and the merger is not affecting the rights of the Shareholders or the Creditors?

Therefore, it was held that the rights and liabilities of Secured and Unsecured Creditors were not getting affected in any manner by way of the proposed scheme as no new shares are being issued by the 'Transferor Company and no compromise is offered to any Secured and Unsecured Creditors of the 'Transferee Company. Hence, when the ‘Transferor and Transferee Company’ involve a Parent Company and a Wholly Owned Subsidiary, the meeting of Equity Shareholders, Secured Creditors and Unsecured Creditors can be dispensed with as the rights of the Equity Shareholders of the ‘Transferee Company’ are not being affected.

Therefore, the opinion given by Mr. Niraj, Practicing Company Secretary to the board of the company is correct.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 1(b) (Syllabus 2017).

Appointed date and Effective date are two significant dates in any scheme of Merger and Amalgamation.

Mention of an appointed date is mandatory for the schemes falling under Section 232 of the Companies Act, 2013. Schemes involving Merger or Amalgamation or division of undertaking are required to fix an appointed date.

In Marshall Sons & Co. India Ltd. vs. ITO, it was held by the Hon'ble Supreme Court that every scheme of amalgamation has to necessarily provide a date with effect from which the amalgamation/transfer shall take place, and that such date may precede the date of sanctioning of the scheme by the Court, the date of filing of certified copies of the orders of the Court before the Registrar of Companies, and the date of allotment of shares, etc. It was observed therein that, the scheme, however, would be given effect from the transfer date (appointed date) itself.

Section 232(6) of the Companies Act, 2013 states that the scheme shall be deemed to be effective from the 'appointed date' and not a date subsequent to the 'appointed date'. This is an enabling provision to allow the companies to decide and agree upon an 'appointed date' from which the scheme shall come into force.

The “Effective date” is the date when the amalgamation/merger is completed in all respects after having gone through the formalities involved, and the transferor company is dissolved by the Registrar of Companies and certified copy of the order for the scheme of compromise and arrangement is filed with ROC and all other required statutory authorities, if any.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 2A(ii) (Syllabus 2017).

As per section 233(1) of the Companies Act 2013, notwithstanding the provisions of section 230 and section 232, a scheme of merger or amalgamation may be entered between:

•2 or more small companies or

•a holding company and its wholly owned subsidiary company or

•Such other class or classes of companies as prescribed.

(i)two or more start-up companies; or

(ii)one or more start-up company with one or more small company.

The provisions given for fast track merger in section 233 of the Act are optional in nature and not a compulsion on the company. Section 233(14) states that a company covered under Section 233 may use the provisions of section 232 for the approval of any scheme for merger or amalgamation.

Therefore, with respect to schemes of arrangement or compromise falling within the purview of section 233 of the Companies Act, 2013, the concerned companies may, at their discretion, opt to undertake such schemes under sections 230 to 232 of the Act.

Hence, here the opinion of Company Secretary of Q Limited can be said to be not correct and his contention is not valid as per the law. The company shall have an option to choose between normal process of merger under Section 232 read with Section 230 and fast track merger under Section 233.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 2(a) (Syllabus 2022).

Yes, Mercury Limited a foreign company can merge with Mars Limited, an Indian Company as per Section 234 of Companies Act, 2013.

Section 234(2) of Companies Act, 2013 states that subject to the provisions of any other law for the time being in force, a foreign company may with the prior approval of the Reserve Bank of India, 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 or partly in Depository Receipts, as the case may be, as per the scheme to be drawn up for the purpose.

For the purpose of sub section (2), the expression “foreign company’ means a company or body corporate incorporated outside India whether having a place of business in India or not.

Section 234(1) states that the provisions of this Chapter unless otherwise provided under any other law or the time being in force, shall apply mutatis mutandis to schemes of merger 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. The Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and amalgamations provided under this section.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2023, Q. 5(d) (Syllabus 2017).

American Amalgamation is a company incorporated in USA and does not have a place of business in India. It would like to merge with an Indian company. The auditors and secretary of the Indian company are of the opinion that an Indian company cannot merge with a foreign company unless they have a place of business in India.

Merger or Amalgamation of a Company with a Foreign Company

Section 234(2) of the Companies Act, 2013 states that subject to the provisions of any other law for the time being in force, a foreign company, may with the prior approval of the Reserve Bank of India, 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.

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.

Section 234(1) states that 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.

The Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and amalgamations provided under this section.

Hence a foreign company not having a business in India can merge with an Indian company as approved by RBI.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 2A(iii) (Old syllabus).

Rules 25A of the Companies (Compromise, Arrangement and Amalgamation) Rule, 2014 provides for Merger or amalgamation of a foreign company with a Company and vice versa.

Rule 25A (2) provides that a company may merge with a foreign company incorporated in any of the jurisdictions specified in Annexure B of the aforesaid Rule after obtaining prior approval of the Reserve Bank of India and after complying with provisions of sections 230 to 232 of the Companies Act, 2013 and Companies (Compromise, Arrangement and Amalgamation) Rule, 2014.

The British Virgin Island is one of the Jurisdiction covered under the Annexure B of the Companies (Compromise, Arrangement and Amalgamation) Rule, 2014 and hence, an Indian company ABC Ltd. is allowed to amalgamate into a foreign company MNP Ltd. which is registered in British Virgin Islands.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 3A(i) (Old syllabus).

Section 236 of Companies Act, 2013, provides following provisions for the purchase of minority shareholding-

(1)In the event of an acquirer, or a person acting in concert with such acquirer, becoming registered holder of ninety per cent or more of the issued equity share capital of a company, or in the event of any person or group of persons becoming ninety per cent majority or holding ninety per cent 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.

(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 in accordance with such rules as may be prescribed.

(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 subsection (2).

(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 Accordingly, by following the aforesaid steps the percon can acquire the balance 10% shares from the existing shareholders subject to fulfilment of requirement of the minimum number of members in the company.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 6(b) (Old syllabus).

(a)As per section 239 of the Companies Act, 2013,the books and papers of a company which has been amalgamated with, or whose shares have been acquired by, another company under Companies Act 2013 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. Thus, there is no fixed minimum period for preservation of books and papers of amalgamated companies. The compliance requirement for their disposal is to obtain the prior permission of the Central Government.

(b)As per section 240 of the Companies Act, 2013, notwithstanding anything in any other law for the time being in force, the liability in respect of offence committed under the Companies Act, 2013 by the officers in default, of the transferor company prior to its merger, amalgamation or acquisition shall continue after such merger, amalgamation or acquisition. Hence, the liability of the officers in default of amalgamated companies shall not cease after amalgamation.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 4A(i) (Syllabus 2022).

As per Section 239 of the Companies Act, 2013, the books and papers of a company which has been amalgamated with, or whose shares have been acquired by, another company under this Chapter (Chapter XV Compromises, Arrangements and Amalgamations) 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.

Hence, the decision of the Board of directors of Y Ltd. is not valid. For disposal of record of the transferor company the transferee company should obtain the prior permission of the Central Government to be granted after following the procedure laid down under section 239 explained above.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 3(a) (Syllabus 2022).