(12.17.l)COMPROMISE AND ARRANGEMENT

Meaning. Compromise means an amicable settlement of differences by mutual concessions by the parties to dispute or difference by agreeing not to try it out. Arrangement is of wider import than compromise and includes a reorganization of the share capital of the company by the consolidation of shares of different classes, or by both these methods. An arrangement may also involve (i) debentureholders being given an extension of time for payment, releasing their security in whole or in part or changing their debentures for equity shares in a new company; (ii) the creditors agreeing to receive cash in part payment of the claims and the balance in shares or debentures of the company; (iii) the preference shareholders giving up- their rights to arrears of dividends, further  agreeing to accept a reduced rate of dividend in the future and so on.

Arrangements and compromises may take place for the purposes of reconstruction and amalgamation of companies. The term reconstruction indicates the process which involves (i) the transfer of undertaking of an existing company to another company, usually a company incorporated for the purpose. The old company ceases to exist. However, all the assets might not pass the new company; (ii) the carrying on of substantially the same business by the same persons; (iii) the rights of the shareholders in the old company being satisfied by their being allotted shares in the new company. A reconstruction is made for any of the following purposes:

  (a) To extend the operations of the company. If the shares are fully paid-up and it is desired to raise further capital, the shareholders in the old company may be issued omly partly paid shares in the new company so that by calling up the uncalled amount, the company would have the necessary funds for carrying on its business. Also, if the company wants to do business which is totally unrelated to its objects, it may resort to reconstruction. The object clause of the new company may include the business which it wants to pursue.

  (b) For purpose of reorganisation which implies alteration or modification of the rights of shareholders or creditors or both.

Amalgamation is the blending of two or more undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders of the other company which holds blended undertakings.

The difference between amalgamation and reconstruction is that amalgamation involves the blending of two or more different concerns and not merely the continuance of one concern; reconstruction implies the carrying on of an existing business in some altered form, so that persons interested in the business may be substantially the same.