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Corporate Restructuring

Business Restructuring

Financial Restructuring

Business Restructuring

(No dispute)

of Capital


Consolidation / Subdivision
Reduction of Capital





Compromise, Arrangement and Reconstruction

S 391-Power to compromise or make arrangements with
Creditors and Members
S 392-Power of Tribunal to enforce Compromise and
S 393-Information as to Compromise and Arrangement
with Creditors and Members
S 394-Provisions for facilitating Reconstruction and
Amalgamation of companies

Section 391 to Section 393

pertain to Compromise or Arrangement
Section 394
pertains to Reconstruction or Amalgamation
Section 396
pertains to Power of the Central Govt for
Amalgamation of Companies in National Interest

Compromise means a settlement of differences

by mutual concessions; an agreement by
adjustment of conflicting or opposing claims by
reciprocal modification of demands.

Arrangement includes reorganisation of share

capital by consolidation of shares of different
classes or by the division of shares into shares of
different classes or by both these methods.

1. Debenture holders extending time for repayment, accepting less
than the face value
2. Debenture holders giving up their security, partly or fully,
exchanging their Debentures for Shares in the Company or in a
New Company
3. Creditors taking payments of their claims and balance in Shares
or Debentures of the Company
4. Preference Shareholders giving up their rights to arrears of
5. Preference Shareholders agreeing to accept reduced rate of
6. Shareholders transferring their Shares to another Company
7. Modifying the rights of Shareholders
8. Buy-back of Shares held in small lots
9. Severance of Holding-Subsidiary connection by transferring by
Holding Company its shareholding in the Subsidiary to another
Company and allotment of Shares by it to the Shareholders of the
Holding Company

Objectives of any Compromise, Arrangement or Amalgamation

1. Synergy
2. Economies of Scale
3. Cost Reduction
4. Benefits of Integration
5. Optimum use of Capacities
6. Tax Advantage
7. Financial Strength
8. Diversification
9. Advantage of Brand Equity
10. Survival in the Business
11. Revival of a sick or weak company

Merger or Amalgamation may take place

in any of the following ways: 1. Co A (Transferee) absorbs Co B (Transferor)
Co B goes into liquidation
2. Co A (Transferor) and Co B (Transferor) amalgamate into
Co C (Transferee). Co A and CO B go into liquidation
In either case, assets and liabilities of the transferor
company are transferred to transferee co; and the
transferee co issues shares to the shareholders of the
transferor company.
Transferor Company ceases to exist

Reorganisation of Share Capital

1. Consolidation of shares of different classes
2. Division of shares into different classes
3. Conversion of one type of shares into another
4. Conversion of shares into debentures
5. Reduction of paid-up share capital
a) Reducing liability for uncalled capital
b) Paying off capital
c) Paying off capital keeping the face value in tact
d) Writing off capital not represented by assets
Articles, special resolution and court order

Section 391
(complete Code for Single window clearance

Refer Slide 12

1. Application for Compromise or Arrangement can be made

either by the Company or by any Creditor or any Member
or any Class of them or by the Liquidator of a Company
which is being wound up.
Refer Slide 14

2. Application has to be made to the Company Law Tribunal

3. CLT may call a meeting of the Creditors or Members to be
called, held and conducted in a manner as the CLT may
Refer Slide 26

4. Majority in number representing three-fourth in value of the

Creditors or Members or any Class of them, present and
voting, either in person or by proxy, must agree to such
Compromise or Arrangement.
(Subsequent approval by individual affidavit allowed as was held in SM Holdings

Finance Ltd Vs Mysore Machinery manufactureres Ltd.)

Section 391 (continued)

4. If CLT sanctions the scheme, it is binding on all creditors,
members, company, liquidator and the contributories
5. Before the CLT issues any order, it has to satisfy that the
applicants have submitted to it all material facts relating to
the Company such as latest Financial Position, latest
Auditors Report and the pendency of any Investigation of
the company under Sections 235 to 251 of the Act.

Court rejected the petition

since authenticated financial statements were not placed before the meeting Bharat Synthetics Ltd Vs bank of India (1995)

6. Order of the CLT is effective only after a certified copy of

the order is filed with the Registrar.
7. Copy of every such order has to be affixed to every copy of
Memorandum of the company.
8. CLT may stay the continuation or commencement of any
suit or proceedings against the company, if it thinks fit.

Companies eligible to enter into

a scheme of Compromise and Arrangement
As per Section 390, any company liable to wound up under the
act can enter into a scheme of Compromise and Arrangement.
Therefore it does not debar amalgamation of financially sound
There is no bar to a company amalgamating with a fifteen-day
old company having no assets and business
It is not necessary that the companies must be carrying on
similar businesses in order to be eligible for amalgamation.

Section 392 Tribunal to enforce

Compromise and Arrangement
Powers of the Tribunal
1. Stay
2. Supervise
3. Directions
4. Modifications
5. Winding up

Section 393
Company must ensure that it sends Explanatory Statement
along with the Notice for calling the meetings of creditors or
Such statement must show all material facts relating to any
such Compromise or arrangement.

Section 394
Where application under Section 394 covers amalgamation of two
or more companies i.e. transfer of assets and liabilities from the
Transferor Company to the Transferee Company, the CLT order
may cover the following: 1. Transfer of the Undertaking, Assets and Liabilities from the
Transferor Company to the Transferee company
2. Allotment of shares, debentures etc by the Transferee Company to
those who are entitle to as per the scheme
3. Continuation of any legal proceedings by or against the
Transferor Company or vice versa
4. Dissolution, without Winding Up, of the Transferor Company
5. Protect the interests of those who dissent from such scheme.
6. CLT to obtain from Registrar and Liquidator a report that the
affairs of the company are not being conducted in a manner
prejudicial to the interests of members or public interest.
7. Certified copy of the CLT order must be filed with the Registrar
within 30 days

Section 394 A
CLT must give Notice to the Central Govt of every
application made under S. 391 and S. 394.
CLT shall take into account any representation made by the
Central Govt before passing any order

Applicability of Section 77 of the Companies Act

Section 77 provides that a company limited by shares cannot
buy its own shares
Exception is provided in Section 77 A for Buy back of its
own shares
But take the following examples ------------1. A Ltd (Holding Company) and B Ltd (Subsidiary Company)
A merges with B or vice versa
2. A Ltd holds the shares in B Ltd or vice versa
(No holding subsidiary relationship)
A merges with B or vice versa

In either case, the transferee company would end up holding its

own shares.
This would mean contravention of Section 77 of the Companies
Solution would be ------Transfer the shares so held to a third party before the scheme
of amalgamation is put into process.
In the case of Himachal Telematics Ltd Vs Himachal Futuristic
Communication Ltd.(1996), Delhi High Court has held that
non-compliance with the provisions of Section 42 and 77 of the
Act would not be bar to sanctioning a scheme of amalgamation.
Similar judgment was followed by Karnataka High Court in
the case of Consolidated Coffee Ltd. (1999)

Should the Objects Clause of the Amalgamating Companies

include the the power to amalgamate ?
In the case of Sir Mathuradas Vissanji Foundation (1996) case,
the Bombay High Court has held that it is not necessary to have
such a power in the objects clause. Section 391 to Section 394 of
the Companies Act confer wide powers to the High Court to
sanction amalgamation.
Similar views have been expressed by the High Court in
Rangakala Investments Ltd.(1995), Aimco Pesticides Ltd. (1999)
and Feedback Reach Consultancy Ltd. (2003)
It has also been held that there need not be union or identity
between the objects of the Transferor company and the
Transferee Company.
It has been held in the case of PMP Auto Indus Ltd. (1994) that
Companies carrying entirely dissimilar businesses can

Valuation of Shares and Share Exchange ratio

Amalgamation involves allotment of shares by the Transferee Company
to the shareholders of the Transferor Company.
Valuation Experts usually work out the valuation and exchange ratio
based on number of factors such as ---1.

Stock Exchange prices and past history

Dividends paid in the past
Relative growth prospects of the companies
Pay out Ratio of the Companies
Relative Gearing of the Companies
Value of the Net Assets of the companies
Supreme Court has held in the case of Hindustan Lever Employees
Union Vs HLL (1995), that the share exchange ratio worked out by the
valuation experts would be accepted unless fraud or mala fides is proved.

Book Value method has been described as more of a talking

point than a matter of substance

Supreme Court has held in the case of Hindustan Lever Employees Union Vs
HLL (1995), that the share exchange ratio worked out by the valuation
experts would be accepted unless

fraud or mala fides is proved.

Valuer considered the Yield Value, the Asset Value and the Market
Value with appropriate weightage for working out exchange ratio.
Valuation of shares is a technical matter which requires considerable skill and
expertise. There are bound to be differences of opinion as to the correct value
of shares. The courts approach would be that of non-interference as long as
the shareholders of both the companies accept the valuation.
Similar view has been taken by the High Court in the case of Coimbatore
Cotton Mills.
In the case of Piramal Spinning and Weaving Mills Ltd (1980), the High Court
held that unless the person who challenged the valuation satisfied the court
that the valuation arrived at is grossly unfair, the court would not disturb the
scheme of amalgamation approved by the shareholders of the two companies.