Role played by “public interest” in compromise/arrangement schemes

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compromises and arrangements

When the mergers and acquisition takes place, then, the major problem comes when the laws are governed under these modes of Corporate Reconstructing.[1] The provision which was related to the compromises and arrangements was not in force due to the non establishment of NCLT[2] and NCLAT[3]. The central government issued a notification on 7th November, 2016 for the enforcement of section 230 to 233, Section 235 to 240 and Section 272 to 288. The rules were issued on 14 December 2016 and were effective from 15 December 2016.[4]

Under the Companies Act, the compromise and arrangement takes place between a company and its creditors or a company and its members. This has been stated under Section 230(1)[5] of Companies Act, 2013.[6] An application for the compromise and arrangement can be filed by the company or the member of a company or if a company is being wound up then, by a liquidator. When there is more than one company which is involved in a scheme then such an application should be filed as a joint application.[7] “The person who receives the notice may within one month from the date of receipt of the notice vote in the meeting either in person or through proxy or through postal ballot or through electronic means to the adoption of the scheme of compromise and arrangement”.[8]

Defination of compromise and arrangement

Compromise means which is done between the parties to settle their differences by making on mutual concession.[9] Under the compromise, the parties tried to settle down there disputes by themselves. In the case of Dani Chand and Co. v. Narendra Singh Co.,[10] the court stated that for making the compromise it is essential that a party should be empowered to make the necessary concessions. Compromise only comes when there is a dispute where as arrangement comes when there is a while import and the meaning is not limited. An arrangement can also involve debenture that gives an extension from the time for the payment.[11]

Reconstruction

Reconstruction or arrangement can only take place when one company is involved. Amalgamation takes place when there are two or more companies involved. The term reconstruction includes re-organisation, arrangement etc.[12] The reconstruction takes place when the company winds up its business and is going to form other new company under which there are old shareholders. The Assets of the old companies will be transferred to the new companies. When there is reconstruction of all the assets then it does not pass to the company and all the shareholders of the transferor company might not be the shareholder of the transferee company.[13]

 Why reconstruction

Reconstruction helps in the extending of the operations of the company. When the shares are fully paid up and the capital which is desired is to be released then the shareholders of the old company can issue the partly paid shares to the new companies.[14] Reconstruction helps in the altering of the memorandum of association.[15] Reconstruction helps in the arrangement to alter and modify the rights of shareholders and creditors. The act requires that the capital of a company must consist of only of the equity and preference shares.[16] The companies which have different or other forms of capital are organised to confirm the legal requirement as their capital structure by scheme of reconstruction.[17] Reconstruction can be carried out:

1 “By the scale of a company under the power contain in its memorandum of association

2. By scheme of arrangement

3. By acquiring all or majority of shares in another company

4. By a compulsory amalgamation companies in the public interest or by and order of the central government

5. By a scheme of arrangement with creditors only”.[18]

Public interest in arrangement & compromise schemes

The company can retain from accepting a compromise which is related to the scheme that is in a connection to the scheme of an amalgamation before receiving a report from the company law board. This must be conducted in a manner which is pre-judicial to the interest of its member and to the public interest. Moreover the order of dissolution cannot be made until the official liquidator has reported to the court that the affairs of the company had been conducted to the interest of the members of to the public interest. Amalgamation is very important for the public interest. Under amalgamation two or more companies form a single company with such a Constitution that the property, power interest, equalities, rights and the privileges such as assets, liabilities, duties and obligation must be specified in the notification.[19] Every member of the old companies when converted into the new companies has the same interest or the right against amalgamated one. A person who is associated with the previous company will receive the compensation if his interest of the rights against the amalgamated company is less than his original interests.[20]

In the case of Shri Krishan v. State of Rajasthan,[21] the court stated that the public interest has very wide expression and comprehends and there should be economic welfare of the community whereas in the case of Basti Sugar v. Ram Ujagar,[22] it was held that the company must work for the welfare of labour

In the transferor company the court needs a satisfactory report from the company law board and which the phase of the company has not been conducted in such a manner that is pre judicial to the interest of its member or to the public interest because it is a scheme of amalgamation. Under Section 237,[23] the central government has the right to provide the amalgamation all the companies which act for the Public Interest.

Illustration

1. A Ltd. and B Ltd. decide to enter into the scheme of amalgamation by which B Ltd. will take the entire undertaking of A Ltd. However, the same can be done only when the amalgamation is authorized by the Memorandum of Association of the company.

Frequently asked questions:

What is public interest under Company Law?

Under Companies Act, 2013 the term ‘in public interest’ or ‘in the interest of public’ has been used repetitively which means having a pecuniary interest or any interest through which legal rights and liabilities of the community are affected. In case of a company public interest takes place outside the sphere of concern of shareholders alone and emphasis on the functioning for public good or welfare.

What is reconstruction under company law?

Reconstruction is when a company transfers its entire undertaking and assets to another company under an arrangement. Under this scheme the old shareholders are entitled to receive certain shares or other interest in another company. Reconstruction brings material alteration in the rights and obligation of class of shareholders or creditors.

Edited by Parul Soni
Quality check – Ankita Jha
Approved & Published – Sakshi Raje

Reference:

[1] Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 – See more at: http://taxguru.in/company-law/companies-compromises-arrangements-amalgamations-rules-2016.html#sthash.bv78DKrS.dpuf, Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 – See more at: http://taxguru.in/company-law/companies-compromises-arrangements-amalgamations-rules-2016.html#sthash.bv78DKrS.dpuf (2016)

[2] National Company Law Tribunal.

[3] National Company Law Appellate Tribunal.

[4] COMPROMISE AND ARRANGEMENT, COMPROMISE AND ARRANGEMENT (2013), https://aishmghrana.me/2013/12/20/compromise-and-arrangement/.

[5] 1) Where a compromise or arrangement is proposed–

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them, the Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, order a 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 the Tribunal directs.

[6] Companies Act, 2013, Section 230 – Bare Act, Companies Act, 2013, Section 230 – Bare Act, https://www.legalcrystal.com/act/62620/companies-act-2013-section-230.

[7] PSA Legal Counsellors, India: Merger Regime Under The Companies Act, 2013 (2014), http://www.mondaq.com/india/x/289180/Corporate Commercial Law/Merger Regime Under The Companies Act 2013.

[8] MCA Notifies ‘Companies (Compromises, Arrangements & Amalgamations) Rules, 2016’,  (2016), https://caclub.in/companies-compromises-arrangements-amalgamations-rules-2016-notified-by-mca/ (last visited Mar 30, 2017).

[9] Notification of various sections under the Companies Act, 2013, , https://www.pwc.in/assets/pdfs/news-alert tax/2016/pwc_news_alert_15_december_2016_notification_of_various_sections_under_the_companies_act_2013.pdf.

[10] Dani Chand and Co. v. Narendra Singh Co, (1947) 7 Comp. Case 195 F.B.

[11] COMPROMISE , ARRANGEMENT & AMALGAMATION, COMPROMISE , ARRANGEMENT & AMALGAMATION, http://www.icaiknowledgegateway.org/littledms/folder1/chapter-7-8.pdf.

[12] Id.

[13] COMPANIES ACT, 2013 BACKGROUNDER CORPORATE RESTRUCTURING RESTRUCTURING & INSOL & INSOLVENCY, https://www.icsi.edu/portals/0/CORPORATE%20RESTRUCTURING.pdf.

[14] Merger Regime Under The Companies Act, 2013, http://psalegal.com/upload/publication/assocFile/ENewslineJanuary2014.pdf.

[15] Mergers, Amalgamation and Reconstruction, Mergers, Amalgamation and Reconstruction, http://www.ey.com/in/en/issues/governance-and-reporting/ey-compass-on-companies-act-2013/ey-cfo-companies-act-2013-mergers-amalgamation-and-reconstruction.

[16] Id.

[17] Merger and amalgamation of companies., Merger and amalgamation of companies., http://www.advocatekhoj.com/library/bareacts/companies2013/232.php?Title=Companies%20Act,%202013&STitle=Merger%20and%20amalgamation%20of%20companies.

[18] Supra note 17.

[19] Supra note 17.

[20] Anup Koushik Karavadi, changing-contours of mergers and acquisitions under companies act 2013changing-contours of mergers and acquisitions under companies act 2013, http://www.lakshmisri.com/News-and-Publications/Publications/Articles/Corporate/changing-contours-of-mergers-and-acquisitions-under-companies-act-2013.

[21] Shri Krishan v. State of Rajasthan, 1955 2 SCR 53.

[22] Basti Sugar Vs Ram Ujagar (1964) S.C. 355.

[23] 1) Where the Central Government is satisfied that it is essential in the public interest that two or more companies should amalgamate, the Central Government may, by order notified in the Official Gazette, provide for the amalgamation of those companies into a single company with such constitution, with such property, powers, rights, interests, authorities and privileges, and with such liabilities, duties and obligations, as may be specified in the order.

(2) The order under sub-section (1) may also provide for the continuation by or against the transferee company(……..)