(12.17.6) Information as to Compromise or Arrangement

Section 393 lays down the following rules regarding providing of information to the affected persons under a scheme of compromise or arrangement:

  1. Where a meeting of the creditors (or any class of creditors), or of members (or any class of members) is called under s.391, the notice calling the meeting must be accompanied by a statement setting forth the terms of compromise or arrangement and explaining its effect. The statement must in particular state any material interest of the directors, managing director or manager and every trustee of debenture holders of the company, whether in their capacity as such or as member or creditors of the company or otherwise.

  2. In case notice calling the meeting is given by advertisement there must be included either such a statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid. Such copies must be furnished by the company free of charge.

  3. If default is made in complying with any of the above requirements, the company and every officer of the company who is in default, shall be punishable with fine, which may extend upto Rs 5,000. The company and its officers can avoid liability if it can be proved that the default in sending the notice and the statement was caused by the refusal of a person responsible to supply the necessary particulars as to his material interests.

12.17.7 Legal Provisions regarding Reconstruction and Amalgamation. A reconstruction or amalgamation may take any of the following forms: 1.By sale of undertaking;2. By sale of shares; and 3. By a scheme of arrangement.

By sale of undertaking. According to s.394, where an application is made to the Court under s.391 and it is shown to the Court that the compromise or arrangement has been proposed for the purpose of a scheme of reconstruction of any company or amalgamation of two or more companies and that under the scheme the whole or any part of the undertaking, property or liabilities of any company is to be transferred to another company, the court many make provisions for all or any of the following matters:

  (a) the transfer to the transferee company of the whole or any part of the undertaking, property or liability of any transferor company;

  (b) the allotment or appropriation by the transferee company of any shares, debentures, policies or other like interests in that company which under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person;

  (c) the continuation by or against the transferee company of any legal proceeding pending by or against any transferor company;

  (d) the dissolution, without winding up of any transferor company;

  (e) the provision to be made for any person who within such time and in such manner as the Court directs, dissents from the compromise or arrangement; and

  (f) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.

However, the Court shall not sanction any compromise or arrangement for the amalgamation of a company, which is being wound up, with any other company unless the Court has received a report from the CLB or the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interests.

Thus, where the only purpose for which the transferor company was created was to facilitate the transfer of a building to the transferee company without attracting the capital gains tax and the dissolution of the transferor company was sought without winding up, the Court refused to sanction to the scheme [wood polymer Ltd. , In re (1977) 47 Comp . Cas. 597].

A certified copy of the Court’s order should be filed by the company with the Registrar within 30 days of the passing of the order.

By sale of shares (s.395). sale of shares is the simplest process of amalgamation or takeover. shares are sold and registered in the name of the purchasing company. The selling shareholders receive either compensation or shares in the acquiring company. In case certain shareholders dissent, s.395 contains provisions for the compulsory acquisition by the transferee company of shares of the dissenting minority. The shares may be acquired on the same terms on which the shares of the approving shareholders are to be transferred to it. This will prevent the minority shareholders from demanding too high a price for their shares. section 395 lays down as follows:

1. Where the transferee company has offered to acquire the shares or any class of shares of the transferor company, the scheme or contract embodying such offer has to be approved by the shareholders concerned within 4 months. The approval must be given by the holders of not less than 9/ 10ths in value of the shares whose transfer is involved. In computing 9/10ths value of shares, the shares already Held by the transferee company or its nominee or subsidiary are excluded.

  2. If the offer is approved, the transferee company may, at any time within 2 months of the expiry of the said 4 months, give a notice to the dissenting shareholders that it desires to acquire their shares. The transferee company is entitled and bound to acquire the shares of dissenting shareholders on the same terms on which the shares of approving shareholders are to be purchased unless on the application of the dissenting shareholders within 1 months of such notice, the Court orders otherwise.

If the transferee company already holds in the transferor company shares of the class whose transfer is involved, to a value more than 1 /10^th of the total value of all shares in that company, then the above provisions will not apply and the transferee company cannot acquire the shares of the dissenting members. However. it may still acquire the shares if: (a) it offers the same terms to all the shareholders of the same class; and  (b) the shareholders who approve of the scheme, besides  holding not less than 9/10^ths in value of the shares, are also not less than 3/4 ^ths in number of the holders of those shares.

  3. where the transferor company or its nominee or subsidiary already holds in the transferor company more than 9/10ths in value of shares of the class transferred in pursuance of the scheme, then the transferee company must give notice of the fact to the remaining dissenting shareholders of the transferor company within 1 month of the date of transfer. On receipt of such notice, the dissenting shareholders may, within 3 months, require the transferee company to acquire their shares. Then the transferee company will be entitled and bound to acquire such shares on the same terms as that of the approving shareholders or on such other terms as may be agreed or as ordered by the Court, on the application of the transferee company or the shareholder.

  4. where notice has been given by the transferee company to the dissenting shareholders expressing its desire to acquire their shares and the Court has not made an order on the application of the dissenting shareholders modifying the scheme of transfer, then the transferee company must send a copy of the notice to the transferor company on the expiry of one month of the notice, together with and instrument of transfer executed on behalf of the shares agreed to be purchased by it. The transferee company must also pay or transfer to the transferor company amount or consideration representing the price of shares which it is entitled to acquire under the section (i.e., s.395). Thereupon, the transferor company shall register the transferee company as the holder of those shares and inform the dissenting shareholders of the fact within one month of registration. The transferor company will also deposit the amount so received in a separate bank account to be held in trust for the holders of shares in respect to which such amount has been received.

Further, the following provisions are to apply in relation to every offer of a scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company:

  (a) Every such offer or every circular containing such offer, or every recommendation by the directors of the transferor company to its shareholders to accept such offer, must be accompanied by such information as may be prescribed by the Central Government.

  (b) Every such offer must contain a statement by or on behalf of the transferee company, disclosing the steps it has taken to ensure that necessary cash will be available.

  (c) Every circular containing or recommending acceptance of such offer must be presented to the registrar for registration and no such circular can be issued until it is so registered.

  (d) The registrar may refuse to register any such circular which does not contain the prescribed information as per clause (a) above, or which sets out such information in a manner likely to give a false impression.

  (e) An appeal may be made to the Court against an order of the registrar refusing to register such circular.

Any person responsible for issue of a circular containing an offer involving transfer of shares under a scheme or contract without getting the same registered shall be punishable with fine upto Rs 500.