http://accountlearning.blogspot.com/2011/04/concept-and-types-of-reconstruction.

html

And Types Of Reconstruction /Kinds

When a company is suffering loss for several past years and suffering from financial difficulties,
it may go for reconstruction. In other words, when a company's balance sheet shows huge
accumulated losses, heavy fictitious and intangible assets or is in financial difficulties or is to
over capitalized, and then the process of reconstruction is restored.
Reconstruction may be internal and external.

1.Externalreconstruction
When a company is suffering losses for the past several years and facing financial crisis, the
company can sell its business to another newly formed company. Actually, the new company is
formed to take over the assets and liabilities of the old company. This process is called external
reconstruction. In other words, external reconstruction refers to the sale of the business of
existing company to another company formed for the purposed. In external reconstruction, one
company is liquidated and another new company is formed. The liquidated company is called
"Vendor Company" and the new company is called "Purchasing Company". Shareholders of
vendor company become the shareholders of purchasing company.

2.InternalReconstruction
Internal reconstruction refers to the internal re-organization of the financial structure of a
company. It is also termed as re-organization which permits the existing company to be
continued. Generally, share capital is reduced to write off the past accumulated losses of the
company. The accounting procedure of internal reconstruction is distinct from that of
amalgamation, absorption and external reconstruction.

Meaning of Absorption

Absorption means an existing company taking over one or more companies. At that time, one or
more companies must close their business and existing company will operate one or more
company who are being absorbed by it.

For example : There are three companies in the market A,B and C. C company wants to become
powerful in the market. So, C company offers A and B companies to sell their business to it. A
and B companies accepts and close their business after getting purchase price from C company.
This is the simple case of absorption.
Meaning of Reconstruction

If any company is suffering loss and it close its business and join with or without other company,
it create new company. That is called reconstruction. There are two types of reconstruction.

http://www.svtuition.org/2010/06/absorption-and-reconstruction.html
Amalgamation Vs Absorption Vs External Reconstruction - Comparison through Chart

Ist - External Reconstruction

When a company has no power to operate his own business due to heavy loss and it sells his all
business to a new company. It will be external reconstruction.

2nd - Internal Reconstruction

Internal Reconstruction means to do every action for bringing the company out of losses. If a
company is suffering heavy losses, company can use the provision 94 of Indian Company law
1956 and reduce its capital.

{*} Simplified the meaning of Capital Reduction

You know Capital will increase with profits and decrease with losses.

Suppose, company has $ 100,000 share capital and Debt is $ 50,000. Company has losses in
business
$ 60000. Now, if company will use debt for losses, it means the end of company but if company
reduce $ 60000 from share capital. It can relive after this.

Capital reduction can be done with simple journal entry

1. Sacrifice which has been given by shareholders

Suppose, company has the share capital with $ 10 each share. Company wants to reduce by $ 2.
It can do with following way

Old Share capital Account Debit $ 10

New Share Capital Account Credit $ 8

Capital Reduction or Reconstruction Account Credit $ 2

2. Sacrifice which has been given by Creditors and debentureholders

Creditors Account Dr. XXX

Debentureholders Account Dr. XXX

Capital reduction or reconstruction account Cr. XXX

3. Now this reconstruction account or capital reduction account can be used for written off
any losses of business

Capital Reduction or Reconstruction Account Dr. XXX

Profit and loss account ( Losses ) Cr XXX

Any other losses Cr. XXX

One Important Question : Why are we passing above journal entries in the Process of internal
reconstruction?

Answer is very simple. If you make the balance sheet of loss making company. You will see
losses in the debit side. These shows zero assets, it is clear indication to all creditors that
company has no resources and all past resources are utilized in bad project. So, either
shareholders and creditor can do above or take the action to liquidate the company.

http://accountlearning.blogspot.com/2011/04/difference-between-amalgamation-and.html

Difference Between Amalgamation And Absorption

Following are the main differences between amalgamation and absorption:

1. Liquidation
Two or more companies are liquidated in the process of amalgamation. One or more companies are liquidated in
absorption.
2.Formation
In amalgamation, a new company is formed to take over the business of vendor companies. In absorption, no new
company is formed, only purchasing or absorbing company take over the business of liquidated company.

3.Size
There is no such matter of size of amalgamating companies. Generally, size of purchasing company is greater than
that of vendor company in absorption.

http://accountlearning.blogspot.com/2011/04/meaning-and-features-of-absorption.html

Meaning And Features Of Absorption

MeaningOfAbsorption

Absorption is the process under which an existing large company purchases the business of
another small company or companies doing similar business. In other words, when an existing
company takes over the business of one or more existing companies carrying similar business, it
is called absorption. The company whose business is acquired is liquidated. But, no new
company is formed. The company which takes over the business is called absorbing or
purchasing company and the company, the business of which is taken over is called absorbed or
vendor company. The accounting record of absorption is similar to that of amalgamation.

FeaturesOfAbsorption

 One or more companies are liquidated.

 No new company is formed
 The nature of business of both companies is similar.
 Generally, larger company purchase the business of smaller company.
http://www.lawyersnjurists.com/articles-reports-journals/law-and-ethics/circumstances-under-
which-a-surety-may-be-discharged-from-the-liability-by-the-conduct-of-the-creditor/

ircumstances under which a surety may be discharged from the liability

by the conduct of the creditor.

12. Apr, 2011

1. Introduction

Amalgamation is a combination of two companies into one larger company.[1] It may be in the
form of one or more companies being merged into an existing company or a new company may
be formed to merge two or more existing companies. Such actions are commonly voluntary and
involve stock swap or cash payment to the target. Stock swap is often used as it allows the
shareholders of the two companies to share the risk involved in the deal. A merger can resemble
a takeover but result in a new company name (often combining the names of the original
companies) and in new branding; in some cases, terming the combination a “merger”[2] rather
than an acquisition is done purely for political or marketing reasons.

According to companies act, 1956[3], the term amalgamation includes ‘absorption’.[4] The
learned judge refers to amalgamation as “a state of things under which either two companies are
joined so as to form a third entity or one is absorbed into or blend with another”.

 Merger or amalgamation through absorption.

 Merger or amalgamation through consolidation.

1.1 Absorption:

A combination of two or more companies into an existing company is known as ‘absorption’. In

absorption all companies expect one go into liquidation and lose their separate identities. E.g.
Absorption of Reliance Polyproplene Ltd. (RPPL) by Reliance Industries Ltd. As a result of the
absorption, the RPPL was liquidated and its shareholders were offered 20 shares of RIL for every
100 shares of RPPL held by them.

1.2 Consolidation:

That is a combination of two or more companies into a new company. In this form of merge, all
the existing companies, which combine, go into a new company. In this form of merger, all the
existing companies, which combine, go into liquidation and form a new company with a
different entity. The entity of the existing company is lost and their assets and liabilities are
taking over by the new corporation or company.
2. Types of Mergers/ amalgamation

From the perspective of business structures, there is a whole host of different mergers. Here are a
few types, distinguished by the relationship between the two companies that are merging:

 Horizontal merger – Two companies that are in direct competition and share similar product
lines and markets, join together it is known as a horizontal merger. The idea behind this type of
merger is to avoid competition between the units.[5]
 Vertical merger – A customer and company or a supplier and company.[6]
 Market-extension merger – Two companies that sell the same products in different markets
(e.g.: an ice cream maker in the United States merges with an ice cream maker in Canada)
 Product-extension merger – Two companies selling different but related products in the same
market (e.g a cone supplier merging with an ice cream maker).
 Conglomeration – Two companies that have no common business areas where two merging
firms are in the same general industry, but they have no mutual buyer/customer or supplier
relationship, such as a merger between a bank and a leasing company. Example: Prudential’s
acquisition of Bache & Company.

Acquisitions or Take-Over

An acquisition, also known as a takeover[7] or a buyout, is the buying of one company by

another. It is an act of acquiring control over management of other companies. An acquisition
may be friendly or hostile.

3. Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were synonymous,
the terms merger and acquisition mean slightly different things. When one company takes over
another and clearly established itself as the new owner, the purchase is called an acquisition.
From a legal point of view, the target company ceases to exist, the buyer “swallows” the business
and the buyer’s stock continues to be traded. In the pure sense of the term, a merger happens
when two firms, often of about the same size, agree to go forward as a single new company
rather than remain separately owned and operated. This kind of action is more precisely referred
to as a “merger of equals.” Both companies’ stocks are surrendered and new company stock is
issued in its place.

4. Amalgamation / Mergers & their sections

Section 391 – 394 of the Companies Act, 1956 deals with Compromises, Arrangements and
Reconstructions and other related issues through schemes of arrangement approved by the High
Courts. A resolution to approve the scheme of arrangement has to be passed by the shareholders
in the general meetings. The shareholders have to vote on the resolutions on the schemes of
arrangement on the basis of the disclosures in the notice/explanatory statement. Section 393 of
the Companies Act, 1956 specifies the broad parameters of the disclosures which should be
given to the shareholders / creditors, for approving a scheme of arrangement.
4.1 Section 391

Amendment in the Companies Act, 1956 in year 2002 gave powers to National Company Law
Tribunal to review and to allow any compromise or arrangement, which is proposed between a
company and its creditors or any class of them or between a company and its members or any
class of them. However, because of non formation of National Company Law Tribunal, these
powers still lie with High Courts and the parties concerned can make applications to high courts.

The order made by Tribunal will come in to effect only after the filing of certified copy with the
Registrar of Companies. Court’s power under the section is very wide and has discretion to allow
any sort of arrangement between the company and members. Scope and ambit of the Jurisdiction
of the Court:

Ø The sanctioning court has to see to it that all the requisite statutory procedure for
supporting any scheme has been complied with along with requisite meetings.

Ø That the scheme put up for sanction of the court is backed up by the requisite majority vote.

Ø That the concerned meetings of the creditors or members or any class of them had the
relevant material to enable the voters to arrive at an informed decision for approving the scheme.

Ø That the proposed scheme is not found to be violative of any provision of law and is not
contrary to public policy.

4.2 Section 392

Under this section, the court has power to supervise the carrying out of the compromise or an
arrangement; and may, at the time of making such order or at any time thereafter, give such
directions in regard to any matter or make such modifications in the compromise or arrangement
as it may consider necessary for the proper working of the arrangement.

4.3 Section 393

This section prescribes the procedure required for convening the meeting of the members or
creditors called under section 391.The notice for the meeting should be sent along with a
statement setting forth the terms of the compromise and or arrangement and explaining its effect
and in particular, the statement must state all material interest of the directors, managing
directors of the company, whether in their capacity as such or as members or creditors of the
company.

4.4 Section 394

Where the court is of the view that the proposed arrangement/scheme is of such nature that the
scheme is for the reconstruction of any company or for amalgamation of any two or more
companies; and that under the scheme the whole or any part of the undertaking property or
liabilities of any concerned company is to be transferred to another company; the court may
make provision for all or any of the following matters.

Ø The allotment or appropriation by the transferee company of any shares, debentures or

other like interest in that company which, under the arrangement, are to be allotted or
appropriated by that company to.

Ø The continuation of any legal proceeding against the transferee company by the transferor
company.

Ø The dissolution, without winding up, of any transferor company.

Ø The provisions for any dissenting persons. Who are opposing such scheme or any other
matter, which the court deems fit.

5. Guidelines for Merger/Amalgamation of Banks/Financial Institutions

(i) Banking Companies and Financial Institutions are primarily companies registered under the
Companies Act and as such are subject to the provision of the Companies Act, 1994[8] (“CA-
94″) for all matters including merger or amalgamation except those covered in the Banking
Companies Act, 1991 (“BCA-91″) or the Financial Institutions Act, 1993 (“FIA-93″).

(ii) However, an important factor that distinguishes Banking Companies and Financial
Institutions from other companies is that the Banks and Financial Institutions carry on their
business largely with the money accepted as deposits from members of public and for this reason
the Bangladesh Bank has been vested with power to ensure that Banks and Financial Institutions
do not undertake any activity or enter into any transaction which the Bangladesh Bank considers
as detrimental to the interest of the depositors and/or financial discipline of the country.

(iii) Banking Companies Act: – Section 49 (1) (c) of the BCA-91 requires Bangladesh Bank to
assist as intermediary or otherwise in relation to a proposal for amalgamation of banking
companies.

(iv) Financial Institutions Act- Reference is also made to Section 28 of the FIA-93 which lays
down that amalgamation of a Financial Institution with any other Financial Institution shall not
take place without prior approval of the Bangladesh Bank. Sub-section (2) further lay down that
with a view to considering the proposal of amalgamation, the Bangladesh Bank may call for such
information from the applicant, as it may deem necessary. Thus, the Financial Institutions are
also required to approach Bangladesh Bank before they approach the High Court division under
Section 228/229 of the CA-94.

(v) The net effect of the above provisions is that no merger / amalgamation of a Banking
Company with another Banking Company or of a Financial Institution with another Financial
Institution or of a Financial Institution with a Banking Company, is possible without the
Bangladesh Bank being satisfied that such amalgamation is not detrimental to the interest of the
depositors or the company or the financial system of the country.
(vi) In view of what is stated above, it is desirable to lay down a guideline to be followed by
Banking Companies and Financial Institutions for their merger/amalgamation, including
compromise, arrangement, reconstruction etc.

5.1 Proposal of Merger/Amalgamation including reconstruction etc.: – Banking Companies

carrying on business within the meaning of BCA-91 or Financial Institutions carrying on
financing business within the meaning of FIA-93 and proposing to reconstruct themselves
through a compromise/arrangement or carry out merger/amalgamation shall get suitable
resolutions passed by their respective Board of Directors agreeing in principle, to proceed in
accordance with such resolution.

5.2 Commencement of the Due-Diligence: – In order to enable Bangladesh Bank to consider

the amalgamation of banking companies/financial institutions, the transferee company should
seek prior approval in relation to commencement of the financial and legal due-diligence of itself
and also of that part of the business of the transferor banking company or financial institution
which is sought to be taken-over or of the whole transferor company, if merger is intended.

5.3 Parties to Maintain Confidentiality: -

(i) After obtaining approval from Bangladesh Bank for carrying out due-diligence of itself and
of the transferor company, the transferee company shall submit an undertaking as per Annexure
A to Bangladesh Bank confirming that all information, particularly all non-public domain
information and documents etc. shall be kept strictly confidential and shall not, unless advised by
Bangladesh Bank or legally required or required to comply with the regulatory requirements to
do so, be divulged to any person, organization, not included in the due-diligence team. Provided
that, where specific permission of Bangladesh Bank, under this clause, has not been obtained, the
Bank shall be duly informed of such disclosure. In case of any breach of the undertaking, the
approval given by the Bangladesh Bank shall be withdrawn.

(ii) The members of the due-diligence team, referred to the above, shall also be bound under the
aforesaid undertaking to keep the information, document etc. confidential and shall not divulge
any information that they come across during the course of due-diligence. The team conducting
the due-diligence shall not demand from the transferee/transferor companies, any
information/observations made by Bangladesh Bank in relation to the affairs and the business of
concerned companies or the Bangladesh Bank inspection report, either in part or full.

5.4 Submission of Due-Diligence Report: -

The team conducting the due-diligence on completion of its task shall submit a copy of the report
to Bangladesh Bank giving details of-

(i) The secured and unsecured debts and in the case of secured debts particulars of the securities,
their value.

(ii) The value of the property and the assets of the transferor and the transferee company
calculated on the basis of Annexure B.
(iii) The liabilities of the transferor and the transferee companies.

(iv) In view of clauses (i) to (iii) above, the financial impact of the compromise/merger proposal
on the two companies and their creditors, shareholders and depositors.

5.5 Consent of the shareholders/creditors in terms of the Companies Act: -

Based on the findings of the due diligence, the transferor and transferee companies shall prepare
a scheme of amalgamation as the case may be. The Board of Directors of the respective
companies, while passing a resolution in this regard, shall consider the scheme so drawn and
then, in terms of the provisions of CA-94, hold meetings of their respective members or class of
members to consider and approved.

5.6 Submission of Scheme to Bangladesh Bank: – With the requisite consent in terms of
paragraph 5 above, the transferee company shall submit an application to Bangladesh Bank with
a copy of the Scheme of reconstruction/merger/amalgamation.

5.7 Examination of Draft Scheme: – On receipt of the draft Scheme, Bangladesh Bank shall
satisfy itself that the Scheme as proposed by the transferee company can be successfully
implemented.

5.8 Valuation of Assets and Liabilities: -

It is for the transferor and the transferee companies to mutually agree to valuation of the assets.
Bangladesh Bank shall generally not interfere in this regard except where there are reasons to
believe that the valuation is not fair and reasonable. In a case where mutual agreement has not
been possible in relation to certain items for example (a) valuation of a particular asset (b)
classification of any advance (c) determination of any liability or any like issue, the bank /
financial institution, shall highlight those areas and seek advice of Bangladesh Bank.

5.9 The transaction price:-

The transaction cost/price shall be mutually agreed between the transferor and the transferee on
the basis of fair valuation of assets and liabilities proposed to be transferred. It would be open to
the parties to fix the price at a premium or discount to valuation. Bangladesh Bank shall,
however, have a right to be satisfied that the price as mutually agreed is fair and reasonable and
for this purpose may ask for pricing rationale to examine the same and accept or suggest
modification.

5.10 Approval by Bangladesh Bank: -

On being satisfied that the Scheme as proposed can be implemented (i) to the benefit of the
company or companies and/or the financial system of the country and (ii) that the scheme is not
detrimental to the interest of the depositors, Bangladesh Bank may give its approval to the said
Scheme with or without such modifications as deemed necessary.
5.11 Petition to High Court: -

(i) Once the scheme of merger/amalgamation has been approved by Bangladesh Bank, the
transferor and the transferee shall proceed to comply with other formalities as required under the
CA-94 and shall file an application in terms of Section 228/229 of the said Act before the High
Court and submit the scheme for the reconstruction, merger/amalgamation, as the case may be.
The transferee bank/financial institution shall mark a copy of the application was filed before the
Court together with annexure, if any, to Bangladesh Bank and shall keep the Bank informed of
the developments in the matter, from time to time or at such intervals as directed. If for any
reason, the company, after obtaining approval of the Scheme from the Bangladesh Bank, does
not take any further steps as required under the CA-94, to implement the same, in the next three
months from the date of the approval granted by Bangladesh Bank, the approval so granted shall,
unless otherwise extended on justifiable consideration, lapse.

(ii) The High Court may either by the order sanctioning the Scheme or by any subsequent order
make provisions for all or any of the following matters: -

a) The transfer to the transferee bank/financial institution of the whole or any part of the
undertaking and of the properties and liabilities.

b) Appropriation by the transferee company of any shares, debentures policies or other like
interest in the bank/financial institution.

c) The reconstruction or amalgamation of the share capital by consolidation of shares of different

classes or by division of shares into shares of different classes or both.

d) The continuation by or against the transferee bank/financial institution, of any legal

proceedings pending by or against the transferor bank/financial institution.

e) The dissolution of the transferor bank/financial institution.

f) Provision made by the transferor/transferee bank/financial institution, for the dissenting

stakeholder.

g) Such other matters as may become necessary in view of the proposal made in the scheme.

6. In conclusion

Ordinarily amalgamation and merger are same. Halsbury’s Laws of England describe
amalgamation as a blending of two or more existing undertaking into one undertaking, the
shareholders of each blending company becoming substantially the shareholders in the company
which is to carry on the blended undertaking. For a dead type of company amalgamation is
useful process. In that sense that is so good & sometimes essential too.
7. Bibliography:

 Search engine

1. Google

2. Ask

3. Yahoo

 Website

1. www.caipo.gov.bb/corp/corp.html

2. www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=1017&discuss

3. www.mbaknol.com/category/management-concepts

4. www.projectguru.in/publications/?p=346

5. www.maplecreeknews.com/commentary/letters-to-editor/168-amalgamation-essential-to-
survival

The end

[1] AMALGAMATION “blending together of two or more undertakings into one undertaking,
the shareholders of each blending company, becoming, substantially, the shareholders of the
blended undertakings. There may be amalgamations, either by transfer of two or more
undertakings to a new company, or to the transfer of one or more companies to an existing
company”.

[2] Merger is a financial tool that is used for enhancing long-term profitability by expanding
their operations. Mergers occur when the merging companies have their mutual consent. The
income tax Act, 1961 of India uses the term ‘amalgamation’ for merger.

[3] That’s actually the company act of India. Bangladeshi company act also depend on that too.

[4] In SS Somayajula v. Hop Prudhommee and co. ltd.

[5] e.g.: two manufacturers’ of same type of cloth, two transport companies operating on the
same route-the merger in all these cases will be horizontal merger.

[6] e.g.: an ice cream maker merges with the dairy farm that they previously purchased milk
from; now, the milk is ‘free’

[7] Reverse take-over: When a smaller firm will acquire management control of a larger or
longer established company and keep its name for the combined entity. This is known as a
reverse takeover.

[8] Company act of Bangladesh, which is based on Indian company act-1956.

Incoming search terms:

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from his liabilities? answer
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find about those link

http://law.nus.edu.sg/cle/partA_bar/Comp_Law_RL.pdf

http:/ http://www.caclubindia.com/forum/petition-under-sec-391-to-394-of-the-companies-act--
206670.asp#.UqgNBVKVHQ8/link.springer.com/chapter/10.1007%2F978-94-007-4670-1_9#page-1

http://www.academia.edu/5351353/A_REVIEW_AND_COMPARISON_OF_LAW_OF_RECONSTRUCTION_OF
_VARIOUS_COUNTRIES

Procedure of India 391-396

http://www.caclubindia.com/forum/various-law-relating-to-merger--108549.asp#.UqgLrFKVHQ8

VARIOUS LAW RELATING TO MERGER. Various Laws governing merger in India are as
follows: 1. Indian Companies Act, 1956 This has provisions specifically dealing with the
amalgamation of a company or certain other entities with similar status. The most common form
of merger involves as elaborate but time-bound procedure under sections 391 to 396 of the Act.
Powers in respect of these matters were with High Court (usually called Company Court). These
powers are being transferred to National Company Law Tribunal (NCLT) by companies (second
Amendment) Act, 2002. The Compromise, arrangement and Amalgamation/reconstruction
require approval of NCLT while the sale of shares to Transferee Company does not require
approval of NCLT. Sec 390 This section provides that “The expression ‘arrangement’ includes a
reorganization of the share capital of the company by the consolidation of shares of different
classes, or by the division of shares into shares of different classes, or by both these methods”
Sec 390(a) As per this section , for the purpose of sections 391 to 393,’Company’ means any
company liable to be wound up under the Act. Sec 390(b) As per this section, Arrangement can
include reorganization of share capital of company by consolidation of shares of different classes
or by division of shares of different classes. Sec 390(c) As per this section, unsecured creditors
who have filed suits or obtained decrees shall be deemed to be of the same class as other
unsecured creditors. Thus, their separate meeting is not necessary. Sec 391 This section deals
with the meeting of creditors/members and NCLT’s sanction to Scheme. If majority in number
representing at least three-fourths in value of creditors or members of that class present and
voting agree to compromise or arrangement, the NCLT may sanction the scheme. NCLT will
make order of sanctioning the scheme only if it is satisfied that company or any other person
who has made application has disclosed all material facts relating to the company, e.g. latest
financial position, auditor’s report on accounts of the company, pendency of investigation of
company etc. NCLT should also be satisfied that the meting was fairly represented by
members/creditors. Sec 391(1) As per this sub-section, the company or any creditor or member
of a company can make application to NCLT. If the company is already under liquidation,
application will be made by liquidator. On such application, NCLT may order that a meeting of
creditors or members or a class of them be called and held as per directions of NCLT. Sec 391
(2) As per this sub-section, if NCLT sanction, it will be binding on all creditors or members of
that class and also on the company, its liquidator and contributories. Sec 391(3) As per this sub-
section, Copy of NCLT order will have to be filled with Registrar of Companies. Sec 391(4) As
per this sub-section, A copy of every order of NCLT will be annexed to every copy of
memorandum and articles of the company issued after receiving certified copy of the NCLT
order. Sec 391(5) In case of default in compliance with provisions of section 391(4), company as
well as every officer who is in default is punishable with fine upto Rs 100 for every copy in
respect of which default is made. Sec 391(6) After an application for compromise or
arrangement has been made under the section, NCLT can stay commencement of any suit or
proceedings against the company till application for sanction of scheme is finally disposed of.
Sec 391(7) As per this sub-section, Appeal against NCLT order can be made to National
Company Law Appellate Tribunal (NCLAT) where appeals against original order the NCLT lies.
Sec. 392 This section contains the powers of NCLT to enforce compromise and arrangement Sec
392 (1) As per this section, where NCLT sanctions a compromise or arrangement, it will have
powers to supervise the carrying out of the scheme. It can give suitable directions or make
modifications in the scheme of compromise or arrangement for its proper working. Sec 392 (2)
As per this section, if NCLT finds that the scheme cannot work, it can order winding up. Sec 393
This section contains the rules regarding notice and conduct of meeting. Sec.393 (1) Where a
meeting of creditors or any class of creditors, or of numbers or any class of members, is called
under section 391:- a) With every notice calling the meeting which is sent to a creditor or
member, there shall be sent also a statement setting forth the terms of the compromise or
arrangement and explaining its effect, and in particular stating any material interests of the
directors, managing directors, or manager of the company, whether in their capacity as such or as
members or creditors of the company or otherwise and the effect on those interests of the
compromise or arrangement if, and in so far as, it is different from the effect on the like interests
of other person, and b) In every notice calling the meeting which is given by advertisement, there
shall be included either such a statement as aforesaid or a notification of the place at which
creditors or members entitled to attend the meeting may obtain copies of such a statement as
aforesaid. Sec 393 (2) As per this sub-section, if the scheme affects rights of debenture holders,
statement should give details of interests of trustees of any deed for securing the issue of
debentures as it is required to give as respects the companies directors. Sec 393 (3) As per this
sub-section, the copy of scheme of compromise or arrangement should be furnished to
creditor/member free of cost. Sec 393 (4) Where default is made in complying with any of the
requirements of this section, the company and every officer of the company who is in default,
shall be punishable with fine which may extend to Rs. 50,000 and for the purpose of this sub-
section any liquidator of the company and any trustee of a deed for securing the issue of
debentures of the company shall be deemed to be an officer of the company. Provided that a
person shall not be punishable under this sub-section, if he shows that the default was due to the
refusal of any other person, being a director, managing director, manager or trustee for debenture
holders, to supply the necessary particulars as to his material interests. Sec 393 (5) As per this
section, any director, managing director, manager or trustee of debenture holders shall give
notice to the company of matters relating to himself which the company has to disclose in the
statement, if he unable to do so, he is punishable with fine upto Rs.5,000. Sec 394 This section
contains the powers while sanctioning scheme of reconstruction or amalgamation. Sec 394(1)
NCLT can sanction amalgamation of a company which is being wound up with other company,
only if Registrar of Companies (ROC) has made a report that affairs of the company have not
been conducted in a manner prejudicial to the interests of its members or to public interest. Sec
394 (2) As per this sub-section, if NCLT issues such an order, NCLT can direct that the property
will be vest in the transferee company and that the transfer of property will be freed from any
charge. Sec 394 (3) As per this sub-section, Copy of NCLT order shall be filed with Registrar
within 30 days. In case of default, company as well as every officer who is in default is
punishable with fine upto Rs.500. Sec 394A As per this section, if any application is made to
NCLT for sanction of arrangement, compromise, reconstruction or amalgamation, notice of such
application must be made to Central Government. NCLT shall take into consideration any
representation made by Central Government before passing any order. Sec 395 This section
provides that reconstruction or amalgamation without following NCLT procedure is possible by
takeover by sale of shares. Selling shareholders get either compensation or shares of the
acquiring company. This procedure is rarely followed, as sanction of shareholders of at least
90% of value of shares is required, and not only of those attending the meeting. This procedure
can be followed only when creditors are not involved in reconstruction and their interests are not
affected. Sec 395(1) As per this sub-section, the transferee company has to be give notice in
prescribed manner to dissenting shareholder that it desires to acquire his shares. The transferee
company is entitled and bound to acquire those shares on the same terms on which shares of
approving share holders are to be transferred to the transferee company. The dissenting
shareholder can make application within one month of the notice to NCLT. The NCLT can order
compulsory acquisition or other order may be issued. Sec 395(2) As per this sub-section, if the
transferee company or its nominee holds 90% or more shares in the transferor company, it is
entitled to and is also under obligation to acquire remaining shares. The transferee company
should give notice within one month to dissenting shareholders. Their shares must be acquired
within three months of such notice. Sec395 (3) As per this section, if shareholders do not submit
the transfer deeds, the transferee company will pay the amount payable to transferor company
along with the transfer deed duly signed. The transferor company will then record name of the
transferee company as holder of shares, even if transfer deed is not signed by dissenting
shareholders. Sec395 (4) As per this section, The sum received by transferor company shall be
kept in a separate account in trust for the dissenting shareholders. Sec395 (4A) When the
transferee company makes offer to shareholders of transferor company, the circular of offer shall
be accomplished by prescribed information in form 35A. Offer should contain statement by
Transferee Company for registration before it is sent to shareholders of Transferor Company. Sec
396 This section contains the power to Central Government to order amalgamation. Sec.396 (1)
As per this sub-section, if central government is satisfied that two or more companies should
amalgamate in public interest, it can order their amalgamation, by issuing notification in Official
Gazette. Government can provide the constitution of the single company, with such property,
powers, rights, interest, authorities and privileges and such liabilities, duties and obligations as
may be specified in the order. Sec 396(2) The order may provide for continuation by or against
the transferee company of any legal proceedings pending by or against Transferor Company. The
order can also contain consequential, incidental and supplemental provisions necessary to give
effect to amalgamation. Sec396 (3) As per this sub-section, every member, creditor and
debenture holder of all the companies will have same interest or rights after amalgamation, to the
extent possible. If the rights and interests are reduced after amalgamation, he will get
compensation assessed by prescribed authority. The compensation so assessed shall be paid to
the member or creditor by the company resulting from amalgamation. Sec 396A This section
deals with the preservation of books and papers of amalgamated company. Books and papers of
the company which has amalgamated or whose shares are acquired by another company shall be
preserved. These will not be disposed of without prior permission of Central Government.
Before granting such permission, Government may appoint a person to examine the books and
papers to ascertain whether they contain any evidence of commission of an offence in connection
with formation or management of affairs of the company, or its amalgamation or acquisition of
its shares. 2. Monopolies and Restrictive Trade practices Act, 1969 (MRTP 1969) Certain
Amendments in the MRTP Act were brought about in 1991. The Government has removed
restrictions on the size of assets; market shares and on the requirement of prior government
approvals for mergers that created entities that would violate prescribed limits. The Supreme
Court, in a recent judgment, decided that “prior approval of the central government for
sanctioning a scheme of amalgamation is not required in view of the deletion of the relevant
provision of the MRTP Act and the MRTP Commission was justified in not passing an order
restraining implementation of the scheme of amalgamation of two firms in the same field of
consumer articles”. 3. Foreign Exchange Regulation Act 1973 (FERA 1973) FERA is the
primary Indian Law which regulates dealings in foreign exchange. Although there are no
provisions in the Act which deal directly with transactions relating to amalgamations, certain
provisions of the Act become relevant when shares in Indian companies are allotted to non-
residents, where the undertaking sought to be acquired is a company which is not incorporated
under any law in India. Section 29 of FERA provides that no foreign company or foreign
national can acquire any share of an Indian company except with prior approval of the reserve
Bank of India. The Act has been amended to facilitate transfer of shares two non residents and to
allow Indian companies to set up subsidiaries and joint ventures abroad without the prior
approval of the Reserve Bank of India. 4. Income Tax Act, 1961 Income Tax Act, 1961 is vital
among all tax laws which affect the merger of firms from the point view of tax savings/liabilities.
However, the benefits under this act are available only if the following conditions mentioned in
Section 2 (1B) of the Act are fulfilled: a) All the amalgamating companies should be companies
within the meaning of the section 2 (17) of the Income Tax Act, 1961. b) All the properties of the
amalgamating company (i.e., the target firm) should be transferred to the amalgamated company
(i.e., the acquiring firm). c) All the liabilities of the amalgamating company should become the
liabilities of the amalgamated company, and d) The shareholders of not less than 90% of the
share of the amalgamating company should become the shareholders of amalgamated company.
In case of mergers and amalgamations, a number of issues may arise with respect to tax
implications. Some of the relevant provisions may be summarized as follows: Depreciation: The
amalgamated company continues to claim depreciation on the basis of written down value of
fixed assets transferred to it by the amalgamating company. The depreciation charge may be
based on the consideration paid and without any re-valuation. However, unabsorbed
depreciation, if any, cannot be assigned to the amalgamated company and hence no tax benefit is
available in this respect. Capital Expenditures: If the amalgamating company transfers to the
amalgamated company any asset representing capital expenditure on scientific research, then it is
deductible in the hands of the amalgamated company under section 35 of Income Tax Act, 1961.
Exemption from Capital Gains Tax: The transfer of assets by amalgamating company to the
amalgamated company, under the scheme of amalgamation is exempted for capital gains tax
subject to conditions namely (i) that the amalgamated company should be an Indian Company,
and (ii) that the shares are issued in consideration of the shares, to any shareholder, in the
amalgamated company. The exchange of old share in the amalgamated company by the new
shares in the amalgamating company is not considered as sale by the shareholders and hence no
profit or loss on such exchange is taxable in the hands of the shareholders of the amalgamated
company. Carry Forward Losses of Sick Companies: Section 72A(1) of the Income Tax Act,
1961 deals with the mergers of the sick companies with healthy companies and to take advantage
of the carry forward losses of the amalgamating company. But the benefits under this section
with respect to unabsorbed depreciation and carry forward losses are available only if the
followings conditions are fulfilled: The amalgamating company is an Indian company. The
amalgamating company should not be financially viable. The amalgamation should be in public
interest. The amalgamation should facilitate the revival of the business of the amalgamating
company. The scheme of amalgamation is approved by a specified authority, and The
amalgamated company should continue to carry on the business of the amalgamating company
without any modification Amalgamation Expenses: In case an expenditure is incurred towards
professional charges of Solicitors for the services rendered in connection with the scheme of
amalgamation, then such expenses are deductible in the hands of the amalgamated firm.

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