Restructuring,

Compromise &
Arrangements  

Krishna Sharan Mishra

FCS | LLB | TMA
www.ksmassociates.net
Company Secretaries | Trade Marks Attorneys | Insolvency Professionals  

1
Relevant Provisions
 
RESTRUCTURING
 
• The term “Restructuring” is not defined under Companies Act.

• The Collins dictionary defines the terms “Restructuring” as

below:

“To restructure an organization or system means to change

the way it is organized, usually in order to make it work
more effectively.”

2
Relevant Provisions
 
…..RESTRUCTURING
can be divided in two broad
RESTRUCTURING
categories
Management Internal restructuring of the organisation without
Decisions involving outside parties
Impacting These essentially involve re-adjustment of rights
Balance Sheet & liabilities with the outside parties

•  Those which involve only a few parties - can be done merely

by mutual understanding and amending the contracts.
Example - in Covid scenario, vendors/consultants being
asked to reduce their claims by 10%.
•  Those which involve multiple factors to be an effective
restructuring - these will usually impact multiple parties

•  It is this sub-category which needs support of s230-232.

3
Relevant Provisions

IBC and Restructuring

IBC redirects Restructuring to s-230 of Companies Act  

•  In  Shivram Prasad v. Dhanapal, [order dt 27.02.2019] the

NCLAT held that during the liquidation process, step
required to be taken for CDs revival should be by way of
compromise or arrangement with members/creditors in
terms of section 230 of CA2013.  
   
•  This led to insertion of regulation 2B of Liquidation Process
Regulations to provide for the decision in the judgement
{w.e.f. 25.07.2019}.  
   
•  The arrangement of scheme so taken up under IBC should
be in consonance with the statement and object of the IBC.  
4
Relevant Provisions

Single Window Clearance

The Bombay High Court in PMP Auto Industries Ltd 1994
Vol 80 Company Cases page 289 observed the following
while rejecting the objections of the Regional Director:  
   
"....Not only is section 391 a complete code, but it is
intended to be in the nature of a "single window clearance"
system to ensure that the parties are not put to avoidable,
unnecessary and cumbersome procedure of making repeated
applications to the court for various other alterations or
changes which must be needed effectively to implement the
sanctioned scheme whose overall fairness and feasibility has
been judged by the court under section 394 of the Act."  

5
 PROCESS
(M & A)
 

6
Relevant Provisions
 
Relevant Provisions
 
•  Section 230 of CA,2013 regulating Scheme of Compromise and
Arrangements

•  Section 232 of CA, 2013 regulating Schemes of arrangement

which result in merger or demerger.

•  Section 233 of CA, 2013 regulating merger between two or more

small companies or between a holding and wholly owned
subsidiary company.

•  Companies (Compromises, Arrangements and Amalgamations)

Rules, 2016 {GSR 1134(E) dated 14.12.2016}

Schemes proposed under section 230 and 232 are considered by the
NCLT whereas schemes under section 233 are considered by the
Regional Director.
7
Stages in Merger  

Stages in Merger

Two broad stages:

 
– Company Application stage (First Motion) and
– Company Petition stage (Second Motion)
 
• 1st Motion is for obtaining NCLT Order for holding/waiving the
meetings of the shareholders/creditors
 
• 2nd Motion is for obtaining NCLT Order sanctioning the scheme.
 

8
 1st Motion Process
•  Scheme for compromise or arrangement, valuation, swap ratio,
list of creditors, list of shareholders, Certificate for accounting
treatment in the scheme etc.

•  Apply to Tribunal to hold shareholders’ meeting and/or

creditors’ meeting. It can be made either by the company or any
creditor or any member or the liquidator [if under liquidation
(IBC)/WU (CA 2013)].

•  Tribunal orders meeting of shareholders/creditors and appoint

a Chairman. Alternatively, the Tribunal may dispense with the
meeting of creditors if 90% in value sign consent affidavit {sec
230(9)}. There is no specific provision for dispensation of
shareholders meeting.
 
9
 …1st Motion Process  
Upon hearing, the Tribunal may give following directions:

•  Determining class of shareholders/creditors for holding

meetings thereof
•  Fixing the time and place of meetings
•  Appointing Chairperson and Scrutiniser for the meetings
•  Fixing quorum for the meetings
•  Notice of meetings to be given and advertisement of such notices
•  Notice to sectoral regulators
•  Time within which the Chairperson is required to submit his
report

10
 Between 1st and 2nd Motion  
•  Intimate the sectoral regulators
•  Advertise the notices of meetings and send notices individually
•  Affidavit of service by Chairman atleast 7 days before the
meeting date to be submitted to NCLT.
•  Conduct the meetings of shareholders/creditors; Scrutinizer
submits his report to Chairman.
•  Chairman submits his report to Tribunal within 3 days of the
meeting date.
•  Regional Director submits his report to Tribunal
•  Official Liquidator submits his report to Tribunal after the
auditor submits its report to him.
11
 Double Majority Voting
n  Each meeting of shareholders/creditors to approve the
scheme separately with:

–  majority of persons voting, whether in person by

proxy or postal ballot and

–  three-fourth in value

n  Known as Double Majority Rule

12
 2nd Motion Process

•  File Company Petition within 7 days of filing of Chairman’s

report {rule 15(1)}.

•  Hearing by the Tribunal and passing of order confirming the

scheme.

•  File the Order with Registrar within 30 days of the receipt of the
Order {230(8)}

13
 Joint Application is possible

•  where more than one company falling within same jurisdiction

of NCLT is involved in a scheme

•  such application may be filed as a joint-application as it is

permitted under rule 3(2).

14
If the Company fails to present the Petition

In case of failure of company to present the petition within 7

days, it is open for creditor/member to present the petition with
leave of the Tribunal {rule 15(3)}.

15
 Queries generally raised by Tribunal
at 1st Motion hearing
•  Whether Objects of the Scheme are mechanically copied or some
genuine thought has gone into it.
•  Which type of Scheme it is – whether Amalgamation in the
nature of Merger or Amalgamation in the nature of Purchase?
[As per AS 14, when an amalgamation is in the nature of merger,
it should be accounted for under Pooling of Interests Method;
when an Amalgamation is in the nature of purchase, it should be
accounted for under the Purchase Method].
•  Whether Certificate for Accounting Treatment is issued by the
Statutory Auditor à Valuation report can be by a professional
other than statutory auditor, but the accounting treatment
certificate shall only be by the statutory auditor.

16
 Queries generally raised by Tribunal
at 1st Motion hearing
•  What will be the effect on EPS post-merger?
•  The Tribunal looks forward for a Synopsis at the time of
hearing.
•  In case of corporate creditors/shareholders, whether their Board
resolutions are also enclosed authorising the signatory to give
consent

17
 General queries posed by Tribunal at
2nd Motion hearing

•  The Tribunal seeks explanations to the observations of the RD,

OL, Income Tax or any other authority.

18
 Select Query raised by RD
§  Name of a company cannot be changed as part of the
Scheme

§  Authorised Capital shall not be increased unless the

necessary fees and stamp duty are paid

Specific to demerger {Elitecore Gujarat HC on 19.06.2012}

§  there is no system and manner under Companies Act to

ascertain the unit-wise/undertaking-wise authorised
capital in case of demerger, thus business-wise bifurcation
of authorised capital is not lawful

19
 …….Select Query raised by RD
§  there is no mechanism in the Act to devise and/or reduce
the authorised capital of any Company and to give credit in
respect of fees and stamp duty already paid, to any other
Company

§  there is no provision in the Companies Act for decrease/

reduction in the authorised share capital of a Company;

§  the MCA21 system does not allow the Registrar of

Companies to effect such reduction in the authorised
share capital, in absence of specific provisions in the
Companies Act.

20
 Meaning of class of member /
creditors
•  There is no express rule to determine a ‘class of creditors’ or a
‘class of members’.
•  General rules are applied by the courts to determine such
classes like homogeneity, commonality of interest, compromise
terms offered to them, etc.
•  If it can be shown that their claims are capable of being
ascertained by any common system of valuation or interest, it
can be said that such group of persons would constitute one
class.
•  Similar views regarding determination of class of shareholders
have been expressed by the NCLAT on 21st September 2017 in
the case Cyrus Investments Pvt. Ltd & Anr. Vs. Tata Sons Ltd &
Ors.

21
 Can buy-back be part of scheme
•  In the erstwhile Act, buy-back was permitted in view of the
judgement in the case of Securities & Exchange Board of India v.
Sterlite Industries (India) Ltd 2003 113 CompCas273(Bom).
•  A clause proposing buy-back as a part of the Scheme, is still
permitted by virtue of 230(10). The said sub-section only
requires that such buy-back shall be in accordance with the
provisions of section 68.
•  However, s-230(10) does not require observance of section 70
which prohibits buy-back in case of, inter alia, default in
repayment of deposit, interest thereon, redemption of
debentures/preference shares, payment of dividend or
repayment of term loan/interest thereon.
•  Therefore, it appears that though existence of defaults specified
in section 70 would prohibit buy-back in normal cases, the
same prohibitions would not apply when a Scheme proposes a
buy-back.
22
 Reduction of capital can be part of
scheme
•  Explanation to section 230 expressly permits reduction of
capital as part of the Scheme

•  The conditions of reduction of capital enunciated in section 66

of the Act will not apply if the reduction is effected in pursuance
of the order of the Tribunal.

23
 Conditions of related party
transactions u/s 188 not applicable
•  General Circular No. 30/2014 dated 17th July 2014
clarified that transactions arising out of Compromises,
Arrangements and Amalgamations dealt with under
specific provisions of the Act will not attract the
requirements of Section 188 of the Act.

24
 Fast Track Merger (s233)
•  Application is to be made to the Regional Director having
jurisdiction (seven RDs as of date) – instead of NCLT

•  In case of merger:

- between two or more small companies or

- between HoldCo. and its WOS

•  Declaration of Solvency is required to be filed by Directors

•  Double Majority Rule for voting – stricter than s230

- majority of members/creditors at a meeting and

- 90% in total no. of shares (value in case of creditors)

25
 Preservation of Books & Papers of
Amalgamated companies (S-239)
•  This section is verbatim of section 396A of 1956 Act which
was inserted w.e.f. 15.10.1965.

•  The section provides that books of Transferor Company

shall not be disposed of without the prior permission of the
Central Government.

•  Before granting such permission, the CG 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 the promotion or formation, or
the management of the affairs, of the transferor company
or its amalgamation or the acquisition of its shares.
26
 ……Preservation of Books

•  Does this mean that books of the Transferor Company are

required to be maintained practically perpetually?

•  Is it that the criteria of disposal of records on expiry of

eight years is not applicable to Transferor Companies?

•  To answer these questions, we need to peep into the

history.

27
 ……Preservation of Books

History…
• Section 209(4A) of 1956 Act was inserted by Amendment Act
1960 based on the findings of the on-going investigations by
the Commission of Inquiry on administration of Dalmia Jain
companies. The section requires preservation of books and
papers of a running company for eight years.

• Section 550 of 1956 Act (right from commencement) provides

that books and papers of a company which has been
completely wound up shall be maintained for a period of 5
years from the dissolution of the company.

28
 ……Preservation of Books
History…
• A Commission of Inquiry on the Administration of Dalmia
Jain Companies was appointed by notification S.R.O. No. 2993
of the Ministry of Finance (Department of Economic Affairs) on
the 11th December 1956 under the Commission of Inquiry
Act, 1952 under Chairmanship of Justice S.R. Tendolkar (later
resigned due to ill health). This Commission is also referred to
as Bose Commission, since Shri Vivian Bose succeeded Shri
Tendolker. The Commission in its Report had given
recommendations for amendments in the Companies Act,
1956 in para 55 & 56 on page 812, as below:

29
 ……Preservation of Books

55. Destruction of Books of Account.

Section 209(4A) provides that the books of account of

every company relating to a period of not less than eight years
immediately preceding the current year shall be preserved in
good order, and section 550 provides for preservation of books
in winding up. The Commission noticed in many cases that
where liquidated companies were amalgamated with other
companies the amalgamating company took charge of the
properties, including the books of the liquidated company, and
within, a short time destroyed the books as being redundant for
its purposes. We have cited various instances of this practice in
the first part of our report.
30
 ……Preservation of Books

56. The amendment to the Companies Act as mentioned

above appears to have taken care of this practice, but there is
one circumstance which has not been provided for i.e., where
a company is amalgamated with another company without
being liquidated. The Act is silent on this point and it is,
therefore, recommended that
 

“Where a company has been amalgamated with another

without liquidation, the provisions of Section 550 shall,
notwithstanding there being no liquidation, apply to the
transferor company and it should be made incumbent
on the transferee company to retain the books in good
order for the period for which it has been directed so to
do.”   31
 ……Preservation of Books

•  Subsequently, referring to the Commission’s Report,

Daphtary & Sastri Committee further recommended that
notwithstanding the completion of the winding up
proceedings or of the amalgamation, the books of the
company so wound up or amalgamated should be
preserved in their entirety in its Report dated 25.04.1963
on the Report of the Commission. The observations appear
in pages number 15-16.

•  This led to genesis of section 396A in the 1956 Act inserted

w.e.f. 15.10.1965 providing that the Transferee company
shall not dispose off the books and papers of the
amalgamated company without prior permission of the CG.  

32
 ……Preservation of Books
Practice in other countries:

•  Singapore: There is no provision prescribing any period for

maintenance of books and papers after amalgamation of the
Transferor Company, though a period of 5 years after
Winding Up for maintenance of books and papers is
prescribed.

•  UK: Accounting records of a company which has been

Wound Up should be maintained for
a) 3 years in case of a private company three years
b) 6 years in case of a public company  

•  N o p r o v i s i o n f o r p r e s e r v a t i o n o f b o o k s u p o n
Amalgamation.
33
 Cross Border Merger (S-234)
•  Merger of foreign company with Indian company and vice-versa,
both are permitted subject to prior approval of RBI.

•  RBI has given general permission for both the kinds of merger,
by way of FEM (Cross Border Merger) Regulations, 2018 dated
20.3.2018.

•  The condition for general permission are:

- should fall in the sector eligible for automatic route

- should not exceed sectoral caps
- valuation should also confirm to norms of FDI/ODI.

•  Therefore, prior approval is not required in view of the general

permission and its conditions.

34
 Merger of Private Banks
•  Such mergers are regulated by RBI (Amalgamation of Private
Sector Banks) Directions, 2016 dated 21.04.2016.

•  Section 230-232 of the Companies Act, 2013 are not applicable

to such mergers à They need not be sanctioned by the NCLT,
instead they need RBI Approval.

•  The Double Majority rule for voting by shareholders is required

here also à same as section 230.

•  There is no requirement of approval from creditors.

•  Merger of NBFC with Private Bank will need approval of NCLT

also.
35
 LANDMARK
JUDGEMENTS
(M & A)

36
Relevant Provisions

JUDGEMENT WHICH SETS

THE TONE OF MERGER
•  Justice DHANANJAY Y CHANDRACHUD in the case of Ion
Exchange (India) Ltd. In re, (2001) 105 Comp Cases 115 (Bom)
has beautifully put forth the approach of the judiciary

•  “Corporate restructuring is one of the means that can be

employed to meet the challenges and problems which confront
business. The law should be slow to retard or impede the
discretion of corporate enterprise to adapt itself to the needs of
changing times and to meet the demands of increasing
competition. The law as evolved in the area of mergers, and
amalgamation has recognised the importance of the Court not
sitting as an appellate authority over the commercial wisdom of
those who seek to restructure business.”

37
Stages in Merger  

THE TORCHBEARER JUDGEMENT

Miheer H. Mafatlal vs. Mafatlal Industries Ltd. Supreme Court
on 11.09.1996 JT 1996 (8) 205
 
1) Bonafides of the majority voters was questioned

Bona fides of the majority acting as a group has to be examined vis-

a-vis the Scheme in question and not the bona fides of the person
whose personal interest might be different from the interests of
the voters as a class. Bona fide of person can only be relevant if it
can be established with reasonable certainty that he represents
majority or is controller of majority.

It is not possible to agree with the contention of learned senior

counsel for the appellant that the majority had acted unfairly to the
appellant and had not protected his interest of minority
shareholders falling in the same class along with the majority.
38
…THE TORCHBEARER JUDGEMENT
It is not possible to concur that the majority had acted with any
oblique motive to fructify any adverse commercial interest qua him
(the Appellant) and his group when it consisted of outsiders like
financial institutions or that there was any possibility of their
surrendering their economic interest in the Scheme at the
dictates of shareholder-director Arvind Mafatlal and his group.

In this connection, the Supreme Court referred to a decision of

English Court in the case of Hellenic and general Trust Limited
reported in 1976 (1) WLR 123. In that case the court was
concerned with a Scheme of Arrangement whereunder
- all the ordinary shares of the company were to be cancelled
and new shares were to be issued to Hambros which would
make the company as wholly owned subsidiary of Hambros.
- Holders of such cancelled shares were to be paid by Hambros
at 48 pennies.
39
 …THE TORCHBEARER JUDGEMENT  
In short it was an arrangement for taking over of the company by
Hambros.
- 53% shares of the Hellenic Company were held by another
company MIT.
- MIT itself was a wholly owned subsidiary company of
Hambros.

This situation led the court to conclude that the subsidiary company
of Hambros which was holding such large number of shares placed
itself vis-à-vis Hambros in the position of vendor and the lifted vail
of transaction showed it to be one of acquisition than of
amalgamation.

The aforesaid decision is a pointer to the fact that what was

required to be considered while sanctioning the scheme was
bona fides of the majority acting as a class and not of one
single person. 40
 …THE TORCHBEARER JUDGEMENT  
2) Whether the Court has jurisdiction to minutely scrutinise the
scheme when the majority of the creditors or members or their
respective classes have approved the scheme.
 

On this question, the Supreme Court observed the following:

– It
is the commercial wisdom of the parties to the scheme who have
taken an informed decision about the usefulness and propriety of
the scheme by supporting it by the requisite majority vote that has
to be kept in view by the Court.

– The Court has neither the expertise nor the jurisdiction to delve
deep into the commercial wisdom exercised by the creditors and
members of the company who have ratified the Scheme by the
requisite majority. Consequently, the Company Court's jurisdiction
to that extent is peripheral and supervisory and not appellate.

41
 …THE TORCHBEARER JUDGEMENT
‒  The Court acts like an umpire in a game of cricket who has to
see that both the teams play their according to the rules and do
not overstep the limits. But subject to that how best the game is
to be played is left to the players and not to the umpire.

‒  The supervisory jurisdiction of the Company Court can also be

called out from the provisions of Section 392 of the Act [this
section vests the Courts with power to supervise the carrying
out of the scheme]

‒  the said provision itself clearly earmarks the field in which the
sanction of the Court operates. It is obvious that the supervisor
cannot ever be treated as the author or a policy maker.

42
 …THE TORCHBEARER JUDGEMENT

−  The Court cannot, therefore, undertake the exercise of

scrutinising the scheme placed for its sanction with a view to
finding out whether a better scheme could have been adopted by
the parties. This exercise remains only for the parties and is in
the realm of commercial democracy permeating the activities of
the concerned creditors and members of the company who in
their best commercial economic interest by majority agree to
give green signal to such a compromise or arrangement.  

43
 …THE TORCHBEARER JUDGEMENT
3) Contours of the jurisdiction of the Court were laid down
The following broad contours of such jurisdiction have emerged:
1. The sanctioning court has to see to it that all the requisite
statutory procedure for supporting such a scheme has been
complied with and that the requisite meeting as contemplated by
Section 391(1) (a) have been held.
2. That the scheme put up for sanction of the Court is backed up by
the requisite majority vote as required by Section 391 sub-section
(2).
3. 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 in
question. That the majority decision of the concerned class of
voters is just fair to the class as whole so as to legitimately
blind even the dissenting members44
of that class.
…THE TORCHBEARER JUDGEMENT
4.  That all the necessary material indicated by Section 393(1)(a) is
placed before the voters at the concerned meetings as
contemplated by Section 391 sub-Section (1).

5.  That all the requisite material contemplated by the provision of

sub-Section (2) of Section 391 of the Act is placed before the
Court by the concerned applicant seeking sanction for such a
scheme and the Court gets satisfied about the same.

6.  That the proposed scheme of compromise and arrangement is

not found to be violative of any provision of law and is not
contrary to public policy. For ascertaining the real purpose
underlying the Scheme with a view to satisfy itself on this aspect,
the Court, if necessary, can pierce the veil of apparent corporate
purpose underlying the scheme and can judiciously X-ray
the same.
45
…THE TORCHBEARER JUDGEMENT
7.  That the Company Court has also to satisfy itself that members
or class of members or creditors or class of creditors as the case
may be, were acting bona fide and in good faith and were not
coercing the minority in order to promote any interest adverse to
that of the latter comprising of the same class whom they
purported to represent.
8.  That the scheme as a whole is also found to be just, fair and
reasonable from the point of view of prudent men of business
taking a commercial decision beneficial to the class represented
by them for whom the scheme is meant.

46
 …THE TORCHBEARER JUDGEMENT
7.  Once the aforesaid broad parameters about the requirements of
a scheme are found to have been met, the Court will have no
further jurisdiction to sit in appeal over the commercial wisdom
of the majority of the class of persons who with their open eyes
have given their approval to the scheme even if in the view of the
Court there would be a better scheme for the company and its
members or creditors for whom the scheme is framed.

8.  That the scheme as a whole is also found to be just, fair and
reasonable from the point of view of prudent men of business
taking a commercial decision beneficial to the class represented
by them for whom the scheme is meant.

47
…THE TORCHBEARER JUDGEMENT

9.  Once the aforesaid broad parameters about the requirements of

a scheme are found to have been met, the Court will have no
further jurisdiction to sit in appeal over the commercial wisdom
of the majority of the class of persons who with their open eyes
have given their approval to the scheme even if in the view of the
Court there would be a better scheme for the company and its
members or creditors for whom the scheme is framed.

The aforesaid parameters of the scope and ambit of the jurisdiction

of the Company Court which is called upon to sanction a Scheme of
Compromise and Arrangement are not exhaustive but only broadly
illustrative of the contours of the Court's jurisdiction.

48
…THE TORCHBEARER JUDGEMENT
4) Class of members/creditors – how to determine

The Supreme Court in the Mafatlal case gave the following

observations:

− As per Section 86 the share capital of a company shall be of two

kinds only, namely, equity share capital and preferences share
capital. So far as the Articles of Association of respondent-company
are concerned they also contemplate two classes of shareholders. No
separate class of equity shareholders is contemplated either by the
Act or by the Articles of Association of respondent-company.
Appellant is admittedly an equity shareholder. Therefore, he
would fall within the same class of equity shareholders whose
meeting was convened by the orders of the Company Court.

49
 …THE TORCHBEARER JUDGEMENT  
−  Even though the Companies Act or the Articles of Association do
not provide for such a class within the class of equity
shareholders, in a given contingency it may be contended by
a group of shareholders that because of their separate and
conflicting interests vis-a-vis other equity shareholders with
whom they formed a wider class, a separate meeting of such
separately interested shareholders should have been
convened. But such is not the case of the appellant.

50
 …THE TORCHBEARER JUDGEMENT  
Palmer in the Treatise on Company Law (24th Edition) says:
 
− "What constitutes a class: The Court does not itself consider at this
point what classes of creditors or members should be made parties
to the scheme. This is for the company to scheme purports to
achieve. The application for an order for meetings is a preliminary
step the applicant taking the risk that the classes which are fixed by
the judge, unusually on the applicant's request, are sufficient for the
ultimate purpose of the section, the risk being that if in the result,
and we emphasis the words 'in the result' they reveal inadequacies,
the scheme will not be approved'. If e.g. rights of ordinary
shareholders are to be altered, but those of preference shares
are not touched, a meeting of ordinary shareholders will be
necessary but not of preference shareholders.

51
…THE TORCHBEARER JUDGEMENT
If there are different groups within a class the interests of
which are different from the rest of the class, or which are to
be treated differently under the Scheme, such groups must be
treated as separate class for the purpose of the scheme.
Moreover, when the Company has decided what classes are
necessary parties to the scheme, it may happen that one
class will consist of a small number of persons who will all be
willing to bound by the scheme. In that case it is not the
practice to hold a meeting of that class, but to make the class
a party to the scheme and to obtain the consent of all its
members to be bound. It is however, necessary for at least
one class meeting to be held in order to give the Court
jurisdiction under the Section."

52
 …THE TORCHBEARER JUDGEMENT  

−  It is, therefore, obvious that unless a separate and different

type of Scheme of Compromise is offered to a sub- class of a
class of creditors or shareholders, no separate meeting of
such sub-class of the main class of members or creditors is
required to be convened.

53
…THE TORCHBEARER JUDGEMENT
Another judgement on “determination of Class”
Gujarat High Court
Maneck Chowk and Ahmedabad Mfg. Co. Ltd. In re.
(1970) 2 Comp LJ 300 (Guj)

It is always a moot question as to what constitutes a class. However,

speaking broadly, when it is shown that a group of persons would
constitute a “class” that they have conveyed all interests, and their
claims are capable of being ascertained by a common system of
valuation. The group who are styled as “class” must have
“commonality of interest” and ordinarily be homogeneous and
they have been offered identical compromise. This will provide a
rationale for determination of the peripheral boundaries of
classification.

54
 …THE TORCHBEARER JUDGEMENT
5) Whether scheme can be rejected on the ground that the
Exchange Ratio was ex-facie unfair and unreasonable to the
equity shareholders

−  valuation of shares is a technical and complex problem which

can be appropriately left to the consideration of experts in the
field of accountancy.

−  Reference was made to the decision of the Gujarat High Court

decision of the Gujarat High Court in Kamala Sugar Mills
Limited [55 Company Cases P.308] as below:

55
…THE TORCHBEARER JUDGEMENT

"Once the exchange ratio of the shares of the transferee-

company to be allotted to the shareholders of the transferor-
company has been worked out by a recognised firm of
chartered accountants who are experts in the field of
valuation and if no mistake can be pointed out in the said
valuation, it is not for the court to substitute its
exchange ratio, especially when the same has been
accepted without demur by the overwhelming majority
of the shareholders of the two companies or to say that
the shareholders in their collective wisdom should not have
accepted the said exchange ratio on the ground that it
will be determined to their interest."

56
 PETITIONS IN DIFFERENT
COURTS/STATES - CAN THEY PASS
DIFFERENT ORDERS?
In cases of schemes where the companies are situated in different
jurisdictions, there is always a chance of the different Courts
passing opposing judgements.

While holding that different courts can pass different orders, the
Courts have been vocal about this confusion and have even given
advisory to the Ministry.

57
…. PETITIONS IN DIFFERENT COURTS/
STATES - CAN THEY PASS DIFFERENT
ORDERS?
Bank of Baroda Ltd. v. Mahindra Ugine Steel Co. Ltd. (1976)
46 Com Cases 227 (Guj) wherein the learned Judge observed the
following:

“…..it is somewhat incongruous that provision be made for the

same thing of matter by two different judicial orders passed
by two different Courts presumably on two different dates.
Could the legislature have really envisaged a situation of
this nature?....................... Is it a situation which can be
remedied only by legislative intervention by way of an
amendment?”

58
 …. PETITIONS IN DIFFERENT COURTS/
STATES - CAN THEY PASS DIFFERENT
ORDERS?
•  Mafatlal Industries Limited (1995) 5 Comp LJ 38 (Guj) (Single
Judge] The anomaly of a scheme being sanctioned by one High
Court but not being sanctioned by another has to be avoided by
appropriate amendment to the Companies Act.

•  Consolidated Coffee Limited, In re, (1999) 97 Com Cases 1

(Kar) Merely because a petition for sanction is pending before
another High Court it is not a ground on which the Court
should be requested to defer the decision until that case was
heard.
 

59
 …. PETITIONS IN DIFFERENT COURTS/
STATES - CAN THEY PASS DIFFERENT
ORDERS?
•  Nokia Siemens Network India P Ltd., In re, (2009) 150 Com
Cases 728 (Kar) Where the scheme did not affect the rights of
the members or creditors of the transferee company, it was not
necessary that the scheme be examined by the court within
whose jurisdiction the transferee company was situated.

60
 MERITS OF THE SCHEME CANNOT BE
CONSIDERED AT THE APPLICATION
STAGE
•  NCLAT in Company Appeal (AT) No. 04 of 2019 vide Order dated
27.05.2019 arising out of the Order of Bengaluru Bench; MEL
Windmills Pvt. Ltd. vs. Mineral Enterprises Ltd & Anr.

Brief Facts:

1.  It was a scheme of demerger involving a company where in there

were certain pending investigations in respect of its mining
business.
2.  The mining business was not being demerged
3.  Company Application was made to the Bangalore Bench for
dispensation of the meetings of the members/creditors

61
…MERITS OF THE SCHEME CANNOT BE
CONSIDERED AT THE APPLICATION
STAGE
4.  The NCLT went into the merits of the scheme and also
considered the pending investigations and REJECTED the
Application.

5.  Appeal was made before the NCLAT against the Order.

62
…MERITS OF THE SCHEME CANNOT BE
CONSIDERED AT THE APPLICATION
STAGE
The Appellate Tribunal sat aside the Order observing that

•  “It is manifestly clear that at the stage of calling of

meeting of creditors/members for consideration of the
scheme of compromise or arrangement the Tribunal is
not required to examine the merits of the scheme qua
the proposed compromise/ arrangement. Any such
indulgence on the part of Tribunal would fall foul of the
provision engrafted in Section 230 (1) of the Act and would
be without jurisdiction”

63
 Whether Memorandum should contain
enabling clause for Amalgamation

•  Conflicting opinions have been expressed by various courts

 
•  However, there is greater unanimity that there is no necessity to
have special power in the objects clause for its amalgamation
with another company, as to amalgamate with another company
- it is a power of the company and not an object of the company.
The Karnataka High Court in Hindhivac (P) Ltd. In re (CP No.15
and 16 of 2005), (206) 62 CC 58, Marybong & Kyel Tea Estates
Ltd., Re (1977) 47 Com Cases 802, Hari Krishan Lohia v.
Hoolungoree Tea Company, (1970) 40 Com Cases 458: AIR 1969
Cal 312 (DB).

64
 Whether objects of Transferor /
Transferee should be similar / identical

•  There need not be unison or identity between objects of

transferor company and transferee company. Companies
carrying entirely dis-similar businesses can amalgamate. [Re:
PMP Auto Inds Ltd. (1994) 80 Comp Cas 291 (Bom); Re: EITA
India Ltd. (ibid); Re: Mcleod Russel (India) Ltd. (1997) 13 SCL
126(Cal)].

•  Scheme of amalgamation should provide that on amalgamation

the main objects of the transferor company shall be deemed to
be (additional) main objects of the transferee company. No need
for compliance under Section 17 of the Companies Act, 1956
[Vasant Investment Corporation Ltd. v. Official Liquidator (1981)
51 Comp Cas 20 (Bom)].
  65
 Scheme was rejected on unfair grounds

•  In the matter of Rama Investment Company P Ltd., Chennai

Bench had approved the Scheme by its Order dated 12.04.2018
stating that the minority shareholders do not have locus standi
to object since scheme is approved by special resolution

•  However, NCLAT by its Order dated 29.11.2019, rejected the

scheme on unfair grounds since valuation did not consider
investments made by the transferor company.

66
 MERGER OF LLP WITH COMPANY

•  The CA, 2013 provides for amalgamation of companies with

other companies. On the other hand, the LLP Act, 2008 provides
for amalgamation of LLPs with other LLPs.

•  The cross-merger between an LLP and a company is neither

specifically permitted nor is specifically prohibited, whereas
merger of foreign body corporate (hence, foreign LLP/LLC) with
Indian company is specifically permitted.

67
 …MERGER OF LLP WITH COMPANY

•  Two significant judgements in this regard where the NCLT

approved the merger of LLP into a company:

−  merger of Vertis Microsystems LLP with Forgeahead Solutions

Private Limited (filed under section 394 of Companies Act,
1956) by NCLT Mumbai.

−  Merger of Real Image LLP with Qube Cinema Technologies P Ltd

by NCLT Chennai

68
 …MERGER OF LLP WITH COMPANY

•  The rationale of the NCLT, Chennai was that under the

Companies Act, 1956, there was an express provision wherein
‘transferor company’ included any body-corporate. However,
there is no similar provision under the Companies Act, 2013.
Since, merger of a body corporate (including LLP) with an Indian
Company was categorically covered under the Companies Act,
1956 and there being no specific provision under the Companies
Act, 2013 to provide for the same, it was reckoned to be case of
‘casus omissus’ i.e. a case which was omitted to be included but
which would otherwise have been included given that the same
was specifically provided for in the erstwhile law.

69
 …MERGER OF LLP WITH COMPANY

• A similar scheme for amalgamation of a registered

Indian partnership firm, with an Indian company was
placed before the Ahmedabad Bench of the NCLT for its
approval. The Ahmedabad Bench of the NCLT held that
since a registered partnership firm did not fall within the
ambit of the term ‘company’ as per the 2013 Act, it should
not be permitted to be merged with a company.

• However, the NCLAT has reversed the order of NCLT,

Chennai for merger of LLP into a company.
 

70
 …MERGER OF LLP WITH COMPANY

•  Therefore, it is now settled that an LLP cannot be merged

with Company. The only way to do this, is to convert the LLP
into a company and then propose a scheme for merger.

My View: Merger of LLP with company may be allowed if

the LLP is a member of the company. The eligibility
criteria for making application u/s 230 permits any
member to make an application. Therefore, all is not lost
è only water needs to be tested !!

71
 APPOINTED DATE
•  Mandatory for Scheme to mention an Appointed Date - Section
232(6) provides that the scheme shall clearly indicate an
Appointed Date

•  In Marshall Sons & Co. India Ltd v. ITO [223 ITR 809], Supreme
Court held that the Appointed Date MAY PRECEDE the date
of sanctioning of Scheme, the date of filing of certified copy of
the Order, date of allotment of shares, etc.
 
•  In the matter of amalgamation of Equitas Housing Finance Ltd
and Equitas Micro Finance Ltd with Equitas Finance Ltd in CP
Nos. 119 to 121 of 2016, the Madras High Court held that “the
appointed date” need not necessarily be a specific calendar
date.

72
 …APPOINTED DATE
•  General Circular No. 9/2019 dated 21.08.2019 clarified
that

−  Section 232(6) enables to choose and state an appointed

date in the scheme.

−  This date may be a specific calendar date

−  Appointed date may be tied to an event such as grant of

licence by a competent authority or fulfilment of any
preconditions agreed upon by parties.

−  Where appointed date chosen is a specific calendar date,

it may precede the date of filing the Application, but not
beyond a year unless justification brought out in the
scheme.
73
 RECALL OF MERGER ORDER
There have been a few applications with prayers to rescind
the Order of merger. But, the Courts have been very cautious in
allowing such prayers. In one of the instances some relief has been
allowed by the Madras High Court in the Scheme of Amalgamation
involving Anand Electronics and Industries Ltd. (Transferee Co) and
Dharmapuri Paper Mills P Ltd. (Transferor Co) [CP 144 and 145/95
respectively; Unreported].

− After the Merger Order, two applications CA 282 and 283/96 were
filed in CP 144 and 145/95 to rescind the order sanctioning the
scheme
− Citing business reasons and that the same had also been approved
by the board of directors of the company (the company had not even
filed the Order with ROC).

74
 …RECALL OF MERGER ORDER

− The learned single Judge refused to rescind stating that (i) it is a

suo moto reconsideration by the Boards of the companies (ii) it is
not open to company to seek sanction and annulment of such
sanction at the whim and pleasure of the Boards of the companies.

It was Appealed to Division Bench in O.S.A. 152 and 153/96. In the

Appeal an alternative was also prayed that instead of recall of the
Order for merger, an Order may be passed for not implementing the
scheme.

• The Division Bench had certain reservations as to whether any

objection could arise if either the rescinding or non-implementation
prayers are allowed.

75
 …RECALL OF MERGER ORDER

•  Therefore, it directed advertisements in newspapers calling for

objections.

•  The Court allowed the alter native prayer i.e. non-

implementation of the scheme reading sections 391(3) and
394(3) together in regard to the order not having come into
effect.

•  Annoyed with the slackness on the part of the appellant in

seeking the merger order and not implementing it, the Court
levied cost of Rs. 5,000/- to the Madras High Courts Advocates
Association.

76
 STAMP DUTY
•  This is the most contentious part of any merger. Though
the overwhelming view of the Courts is in favour of levying
Stamp duty, there is no absolute unanimity amongst
various High Courts. This is also because, stamp duty is
State-subject and therefore the leviability depends on the
respective Stamp Acts of the States.

•  Four issues lead to confusion - (I) rate of stamp duty may

not have been prescribed in the respective State Stamp Act
or (II) whether an order for amalgamation is a
“conveyance” or “instrument” or not (III) when there are
two Orders for merger passed by two different High Courts
in respect of companies subject to merger reside in two
different States (IV) When the property lies in two different
States though there is only one Merger Order.
77
 …STAMP DUTY

• States of Maharashtra and Gujarat have specifically amended the

Stamp Act and included the order of amalgamation in the definition
of “conveyance”.

• Hence, clearly, there is no escape from Stamp Duty in these two

States.

• State of Tamilnadu has also amended its Stamp Act and levied a
stamp duty of 2% on the total value of consideration under the
Order.

78
 …STAMP DUTY
•  The Bombay Stamp Act was amended w.e.f. 10.12.1985 by
amending the term “conveyance” to include “a decree or final
order of any Civil Court”.

•  Further w.e.f. 1.5.1993, the definition of “conveyance” includes

“every order made by the High Court u/s 394 of CA 1956 in
respect of amalgamation of companies”.

•  The validity of this amendment was upheld by Bombay High

Court in the case of Li Taka Pharmaceutical Ltd. v. State of
Maharashtra [AIR 1997 Bom 7] by holding that an order
sanctioning an amalgamation is an instrument within the
meaning of the amended Stamp Act and is therefore liable to
pay stamp duty as prescribed by the Act on conveyance of
property.

79
 …STAMP DUTY

•  The Supreme Court also decided on the same lines in the

case of Hindustan Lever Limited v. State of Maharashtra
[(2003) 117 Com Cases 758].

•  Rate of Stamp duty in Maharashtra is currently 10% of

the market value of shares allotted and any other
amount paid subject to cap of

- 5% of market value of immovable property or

- 0.7% of market value of shares allotted together
with other any consideration paid,

whichever is higher.

80
 …STAMP DUTY

•  Regarding levy of stamp duty on the Order in case of two

different states, the judgement of the Bombay High Court
dated 31.03.2016 in the case of Chief Controlling Revenue
Authority v. Reliance Industries Limited, AIR 2016 Bom
108 sparked a controversy by holding that both the Orders
will be subject to levy of stamp duty depending on the
applicable rates in the two States.

•  This matter has been appealed in the Supreme Court.

Pending final judgement, the Supreme Court has stayed the
Bombay High Court Order vide its Order dated 21.11.2016.  
 
81
 …STAMP DUTY

n In
this case there were two orders – one from the Bombay
High Court (dated 7.6.2002) and another from the Gujarat
High Court (dated 13.9.2002).  

n Before the Supreme Court, it was argued that “…….on

amalgamation, without the order of the High Court of Gujarat
which is later in point of time, the document does not become an
instrument so as to attract the stamp duty”

n Stay
on the Bombay High Court Order granted, final
judgement still pending.  

82
 Thank you

 
HP: +91-9884041418
krishna@ksmassociates.net
www.ksmassociates.net

83