Compromise, Arrangement and Amalgamation in Company Law

Companies are constantly seeking ways to enhance their market presence, achieve economies of scale and leverage growth synergies. One of the most effective strategies employed by businesses globally is through compromise, arrangement and amalgamation along with various other forms of corporate restructuring. In the Indian context, the Companies Act, 2013, along with various other regulatory frameworks, governs these intricate processes.

What is Compromise?

The term ‘compromise’ has not been explicitly defined under the Companies Act, 2013. However, in a general sense, it refers to the settlement of conflicts by mutual consent or agreement. In the context of corporate restructuring, a compromise often involves a scheme of arrangement between a company and its creditors or shareholders to restructure its liabilities or equity.

Sections 230 to 232 of the Companies Act, 2013, provide the statutory framework for compromises and arrangements. These sections outline the procedures for proposing, approving and implementing such schemes. A compromise typically involves an agreement where the company proposes to modify the rights of its creditors or shareholders, which must be approved by the National Company Law Tribunal (NCLT).

The primary purpose of a compromise is to facilitate the settlement of disputes or financial reorganisation in a manner that is acceptable to all parties involved. This can include restructuring debt, converting debt into equity or altering the terms of existing obligations. By reaching a compromise, a company can avoid insolvency proceedings, continue its operations and safeguard the interests of its stakeholders.

What is Arrangement?

An arrangement, as defined under Section 230 of the Companies Act, 2013, includes the reorganisation of a company’s share capital. This can be achieved through the consolidation of shares of different classes, the division of shares into various classes or a combination of both methods. An arrangement may also encompass other forms of restructuring, such as mergers, demergers or the transfer of assets and liabilities between companies.

Similar to compromises, arrangements are governed by Sections 230 to 232 of the Companies Act, 2013. These sections outline the procedural requirements for proposing and implementing an arrangement, including obtaining approvals from the NCLT and conducting meetings with creditors and shareholders to secure their consent.

The primary objective of an arrangement is to facilitate corporate restructuring in a manner that enhances the operational efficiency and financial stability of the company. By reorganising its share capital or undertaking other forms of restructuring, a company can optimise its capital structure, improve its market position and enhance shareholder value.

What is Amalgamation?

Amalgamation is the combination of two or more companies into a single new entity. This process involves the transfer of assets and liabilities from the merging companies to the newly formed entity. Unlike mergers, where one company absorbs another, amalgamation results in the creation of a completely new company that inherits the assets and liabilities of the amalgamating companies.

The legal framework for amalgamations is provided under Section 2(1B) of the Income Tax Act, 1961, which defines amalgamation as the merger of one or more companies with another company or the merger of two or more companies to form one company. Additionally, Sections 230 to 232 of the Companies Act, 2013, govern the procedural aspects of amalgamations, including the requirement for NCLT approval and the conduct of meetings with creditors and shareholders.

The primary purpose of amalgamation is to achieve corporate growth and efficiency by combining the resources, operations and management of the amalgamating companies. This can result in economies of scale, enhanced market presence, reduced competition and increased shareholder value. Amalgamations are often used to enter new markets, diversify product lines and leverage synergies between the merging companies.

Key Differences Between Compromise, Arrangement and Amalgamation

While compromise, arrangement and amalgamation are all forms of corporate restructuring, there are key differences between them:

1. Compromise involves an agreement between a company and its creditors or shareholders to settle disputes or restructure liabilities.
2. Arrangement refers to the reorganisation of a company’s share capital or other forms of restructuring, including mergers and demergers.
3. Amalgamation involves the combination of two or more companies into a single new entity, resulting in the transfer of assets and liabilities to the new company.

Below is a table summarising the key differences between compromise, arrangement and amalgamation:

Governing Laws for Mergers and Amalgamations

Several laws govern the processes of compromise, arrangement and amalgamation in India. These include:

1. Companies Act, 2013: Sections 230 to 232 of the Act provide the statutory framework for compromises, arrangements and amalgamations, outlining the procedural requirements and the role of the NCLT in approving such schemes.
2. Companies (Compromise, Arrangement and Amalgamations) Rules, 2020: These rules provide additional procedural guidelines for implementing schemes of compromise, arrangement and amalgamation.
3. Foreign Exchange Management Act, 1999: This Act regulates foreign investment and cross-border mergers and amalgamations involving Indian companies.
4. The Competition Act, 2002: This Act ensures that mergers and amalgamations do not result in anti-competitive practices and require approval from the Competition Commission of India (CCI) in certain cases.
5. Income Tax Act, 1961: This Act provides tax implications and benefits associated with mergers and amalgamations, including the definition of amalgamation under Section 2(1B).
6. Insolvency and Bankruptcy Code, 2016: This Code provides a framework for resolving insolvency and bankruptcy cases, including the restructuring of distressed companies through compromise, arrangement or amalgamation.
7. Indian Stamp Duty Act, 1899: This Act imposes stamp duty on various instruments, including those related to mergers and amalgamations.
8. SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011: These regulations govern the acquisition of shares and control of listed companies, including mergers and amalgamations involving listed entities.

Process of Implementing a Scheme of Compromise, Arrangement or Amalgamation

The implementation of a scheme of compromise, arrangement or amalgamation involves several key steps:

1. Proposal of the Scheme: The company proposing the scheme prepares a detailed plan outlining the terms and conditions of the compromise, arrangement or amalgamation.
2. Approval by the Board of Directors: The board of directors of the company approves the proposed scheme and authorises the management to proceed with the necessary steps.
3. Application to the NCLT: The company files an application with the NCLT seeking approval for the proposed scheme. The NCLT reviews the application and may order the convening of meetings with creditors and shareholders.
4. Meetings with Creditors and Shareholders: The company conducts meetings with its creditors and shareholders to seek their approval for the proposed scheme. The scheme must be approved by a majority in number and three-fourths in value of the creditors or shareholders present and voting at the meeting.
5. Sanction by the NCLT: Upon receiving the requisite approvals from creditors and shareholders, the company files a petition with the NCLT seeking its sanction for the scheme. The NCLT reviews the petition and, if satisfied, sanctions the scheme, making it legally binding on all parties.
6. Filing with the Registrar of Companies: The company files the sanctioned scheme with the Registrar of Companies, completing the legal formalities for implementing the scheme.

Conclusion

Compromise, arrangement and amalgamation are essential tools in the corporate restructuring, enabling companies to achieve growth, efficiency and financial stability. Governed by a robust legal framework, these processes facilitate the seamless reorganisation of corporate entities, ensuring the protection of stakeholders’ interests and promoting economic development. As businesses continue to navigate the complexities of the modern economic landscape, the strategic use of compromise, arrangement and amalgamation will remain pivotal in driving corporate success.