Law and Procedure for Fast Track Mergers and Amalgamations

The Companies Act, 2013 (CA 2013), dispenses with the cumbersome and time consuming process for mergers provided for under the Companies Act, 1956 and lays down a simple, fast track merger procedure for the merger of certain companies like holding and subsidiary companies, and small companies. This new move seems like a simplified procedure, and a move in the right direction with regards to the class of companies covered under these provisions. This would result into faster decisions on approvals for mergers and amalgamations resulting effective restructuring in companies and growth in the economy.

This is a new provision (Section - 233 of CA 2013) and seeks to provide for merger or amalgamation between two small companies or between a holding company and its wholly owned subsidiary company by giving a notice of the proposed scheme inviting comments or objections or suggestions by both the transferor and the transferee company and Registrar, Official Liquidator or persons affected by the scheme.

The scheme is to be approved by the respective members at a general meeting holding ninety per cent of total number of shares and by nine-tenth in value of the creditors of respective companies. Both the transferor and transferee company must file declaration of solvency. "Transferee company shall file a copy of the approved scheme with the Central Government". If the Central Government is of the opinion that such a scheme is not in public interest or in interest of the creditors, it may file an application before the Tribunal stating its objections and requesting it to consider the scheme under section 232. On registration of the scheme, the transferor company shall be deemed to be dissolved. This provision also provides for effects of registration of the scheme with the Registrar.

Procedure for merger of small companies:

This sub-section provides for an option to both small companies and holding and its subsidiary companies to 'use the provision of section 232 for the approval of any scheme for merger or amalgamation' Looking to the need to get Government's consent, which quite often may result in unnecessary bureaucratic delays and hurdles. Section 233 of CA 2013, which reads as follows:

Notwithstanding the provisions of section 230 and section 232, 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 notice of the proposed scheme inviting objections or suggestions, if any, from the Registrar and Official Liquidators where registered office of the respective companies is situated, or persons affected by the scheme within thirty days is issued by the transferor company or companies and the transferee company;
• 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;
• 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
• 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.

2. The transferee company shall file a copy of the scheme so approved in the manner as may be prescribed, with the Central Government, Registrar and the Official Liquidator where the registered office of the company is situated.
3. On the receipt of the scheme, if the Registrar or the Official Liquidator has no objections or suggestions to the scheme, the Central Government shall register the same and issue a confirmation thereof to the companies.
4. If the Registrar or Official Liquidator has any objections or suggestions, he may communicate the same in writing to the Central Government within a period of thirty days:

Provided that if no such communication is made, it shall be presumed that he has no objection to the scheme.

5. If the Central Government after receiving the objections or suggestions or for any reason is of the opinion that such a scheme is not in public interest or in the interest of the creditors, it may file an application before the Tribunal within a period of sixty days of the receipt of the scheme under sub-section (2) stating its objections and requesting that the Tribunal may consider the scheme under section 232.
6. On receipt of an application from the Central Government or from any person, if the Tribunal, for reasons to be recorded in writing, is of the opinion that the scheme should be considered as per the procedure laid down in section 232, the Tribunal may direct accordingly or it may confirm the scheme by passing such order as it deems fit:

Provided that if the Central Government does not have any objection to the scheme or it does not file any application under this section before the Tribunal, it shall be deemed that it has no objection to the scheme.

7. A copy of the order under sub-section (6) confirming the scheme shall be communicated to the Registrar having jurisdiction over the transferee company and the persons concerned and the Registrar shall register the scheme and issue a confirmation thereof to the companies and such confirmation shall be communicated to the Registrars where transferor company or companies were situated.
8. The registration of the scheme under sub-section (3) or sub­section (7) shall be deemed to have the effect of dissolution of the transferor company without process of winding-up.
9. The registration of the scheme shall have the following effects, namely: -

• transfer of property or liabilities of the transferor company to the transferee company so that the property becomes the property of the transferee company and the liabilities become the liabilities of the transferee company;
• the charges, if any, on the property of the transferor company shall be applicable and enforceable as if the charges were on the property of the transferee company;
• legal proceedings by or against the transferor company pending before any court of law shall be continued by or against the transferee company; and
• where the scheme provides for purchase of shares held by the dissenting shareholders or settlement of debt due to dissenting creditors, such amount, to the extent it is unpaid, shall become the liability of the transferee company.

10. A transferee company shall not on merger or amalgamation, hold any shares in its own name or in the name of any trust either on its behalf or on behalf of any of its subsidiary or associate company and all such shares shall be cancelled or extinguished on the merger or amalgamation.
11. The transferee company shall file an application with the Registrar along with the scheme registered, indicating the revised authorised capital and pay the prescribed fees due on revised capital:

Provided that the fee, if any, paid by the transferor company on its authorised capital prior to its merger or amalgamation with the transferee company shall be set-off against the fees payable by the transferee company on its authorised capital enhanced by the merger or amalgamation.

12. The provisions of this section shall mutatis mutandis apply to a company or companies specified in sub-section (1) in respect of a scheme of compromise or arrangement referred to in section 230 or division or transfer of a company referred to in clause (b) of sub-section (1) of section 232.
13. The Central Government may provide for the merger or amalgamation of companies in such manner as may be prescribed.
14. A company covered under this section may use the provisions of section 232 for the approval of any scheme for merger or amalgamation.

"The benefit of the simplified procedure is available, inter alia, to two or more small companies or to a holding company and its wholly owned subsidiary companies."

Merger of a holding company with its wholly owned subsidiary or subsidiaries:

In the case of merger of a holding company with its wholly owned subsidiaries, to avail the simple procedure prescribed in section 233 of CA 2013, it is necessary that the subsidiary company or companies must be wholly owned.

Transferor and Transferee:

The expression 'transferor' or 'transferee' is not defined in the CA 2013. However, in section 232(l)(b) of CA 2013 dealing with merger or amalgamation of companies, there is a mention "…. 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".

Persons Affected:

The CA does not provide a definition of 'persons affected'. However, in general view, 'person affected' should refer apart from the members, creditors and the employees of the companies, various concerned governmental authorities and sectoral regulators authorities.

Members:

The term "member" is defined in section 2(55) of CA 2013. It reads as follows:

"member", in relation to a company, means-

1. the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members;
2. every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;
3. every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository.

"A subsidiary cannot be a member of its holding company. Trust is not recognised in law and hence the beneficiaries of a trust cannot consider as members where the shares are held by the trustees on behalf a trust."

Creditors:

There is no definition of the term "creditor" in the CA 2013. A Creditor of a company is a person to whom the company owes a debt.

Declaration of solvency:

The expression 'solvency' is not defined in the CA 2013. The dictionary meaning of this term as "the ability to pay debts as they become due". In business the term means the ability of a company to meet its financial obligations. To be a 'solvent' company it should have the ability to meet its current liabilities from out of its current assets.

Scheme for merger:

Neither Section 233 of CA 2013 nor the Companies (Compromises, Arrangements and Amalgamations) Rules 2016, indicate what is meant by 'scheme' for merger in relation to small companies. However, in the context of an application for compromise or arrangement under section 230 of CA 2013, Rule 25(3) of the Companies (Compromises, Arrangements and Amalgamations) Rules 2016 provides that any objections and/or suggestions to the proposed scheme of merger of small companies shall be accompanied by a statement, as far as applicable, referred to in sub-section (3) of section 230 of the Act read with sub-rule (3) of rule 6.)

Procedure for Fast Track Merger Under Section 233 of The Companies Act, 2013 ("Act") Read with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 ("Rules"), Laid out below is a step by step procedure setting out the procedure and timelines for the transferor and transferee company:

Reference & Sources:

1. Companies Act, 2013
2. Law and Procedure on Corporate Restructure, By- Shri, K. R. Sampath.

Disclaimer: The information is provided purely for informational and educational purpose only and based on my understanding/knowledge. This does not constitute any legal advice or legal opinions. Therefore, I cannot take any responsibility for the result or consequences of any attempt to use or adopt any of the information presented in this article/Compilation.