Chapter XV: The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016

[YAGAY andSUN]

The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 were introduced under the Companies Act, 2013, to provide detailed procedural guidelines for the implementation of compromises, arrangements, and amalgamations within companies. These rules apply to the processes of mergers, demergers, amalgamations, and compromises in terms of the company’s debt and restructuring.

These rules are significant in ensuring that such transactions are executed legally and transparently and that the interests of creditors, shareholders, and other stakeholders are duly considered and protected.

Key Provisions of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016

1. Definition of Compromise, Arrangement, and Amalgamation

• Compromise: Refers to an agreement between a company and its creditors or members to settle claims, debts, or obligations that may be in dispute. A compromise often involves the restructuring of a company's liabilities.
• Arrangement: Refers to any reorganization or restructuring of a company's financial position. It may include the transfer of assets or liabilities, the amalgamation of different entities, or any other changes that affect the company's capital structure or operations.
• Amalgamation: Involves the merger of two or more companies into a single entity, with one company absorbing the others. The rules specifically cover the procedural requirements for such mergers, including the legal process for the approval and implementation of the merger.

2. Application for Compromise, Arrangement, or Amalgamation

2.1. Filing of Application

• Companies wishing to enter into a compromise, arrangement, or amalgamation must file an application with the National Company Law Tribunal (NCLT) under Section 230 of the Companies Act, 2013. This application can be filed by the company itself, creditors, members, or other interested parties, subject to the fulfillment of legal requirements.
• The application should be accompanied by the following documents:
  • Draft scheme of compromise, arrangement, or amalgamation.
  • Copies of Board resolutions or shareholder resolutions authorizing the scheme.
  • Financial statements of the company.
  • Report of the auditors or other professional experts, if necessary.

2.2. NCLT Approval

• After the application is filed, the NCLT will schedule a hearing to examine whether the scheme complies with legal requirements. The tribunal may ask for modifications to the scheme if it deems necessary.
• Once the scheme is approved by the NCLT, the company will then need to proceed with the further procedural steps laid out in the rules, including the involvement of creditors and shareholders.

3. Procedure for Compromise and Arrangement

3.1. Scheme of Arrangement

• A scheme of arrangement refers to a proposal where a company, with the approval of its members or creditors, restructures its capital structure or organizational framework. This can involve:
  • Reorganization of share capital.
  • Transfer of assets and liabilities.
  • Conversion of debt into equity.
• A company proposing a scheme of arrangement must send a notice to all creditors and shareholders. The notice must specify the details of the arrangement, including the terms of the scheme.

3.2. Creditors' and Shareholders' Meetings

• The company must convene meetings of its creditors and members to obtain their approval for the proposed arrangement. A special resolution must be passed in the meeting.
• In case a scheme involves more than one class of creditors or members, separate meetings should be conducted for each class to ensure that the arrangement is fair and equitable for all parties involved.

3.3. Filing of Affidavit

• After obtaining the necessary approvals, the company must file an affidavit with the NCLT to confirm that the scheme has been duly approved by creditors and members. The company must also provide evidence of compliance with the provisions of the Act and rules.

3.4. Order of NCLT

• Upon reviewing the application and necessary documentation, the NCLT will issue an order either approving or rejecting the scheme of arrangement. If approved, the scheme becomes binding on all the parties involved, including creditors, shareholders, and the company.

4. Procedure for Amalgamation

4.1. Filing of Petition for Amalgamation

• The process of amalgamation involves the merger of two or more companies into a single company. A company that wishes to merge with another must file a petition before the NCLT under Section 230 and Section 232 of the Companies Act, 2013.
• The petition should include:
  • The scheme of amalgamation.
  • Board resolution approving the scheme.
  • Valuation report or independent third-party analysis of the assets and liabilities of the companies involved in the merger.

4.2. Approval of Shareholders and Creditors

• The scheme of amalgamation must be approved by the shareholders and creditors of the companies involved. Similar to the process for compromises and arrangements, the approval is obtained through meetings and resolutions.

4.3. Filing with NCLT

• After the required approvals are obtained from shareholders and creditors, the company must file the scheme with the NCLT for final approval.
• If the NCLT finds that the scheme is fair and reasonable, it will issue an order approving the amalgamation. Once approved, the amalgamation is legally binding on all parties involved.

5. Effect of Scheme on Companies Involved

• Once the scheme of compromise, arrangement, or amalgamation is approved by the NCLT, the following consequences apply:
  • The scheme becomes binding on the company and all its stakeholders, including creditors and shareholders.
  • In the case of an amalgamation, the amalgamated company succeeds to the assets and liabilities of the merging companies.
  • In case of a compromise or arrangement, the debts and claims of creditors may be settled or restructured according to the terms of the scheme.

6. Role of the Registrar of Companies (RoC)

• After the approval of the scheme by the NCLT, the company must file a certified copy of the order with the Registrar of Companies (RoC).
• The RoC will then update the company’s records to reflect the changes resulting from the compromise, arrangement, or amalgamation.

7. Impact on Shareholders and Creditors

• The rules ensure that the interests of minority shareholders and creditors are protected during the implementation of any scheme of compromise, arrangement, or amalgamation.
• Shareholders and creditors who dissent from the approved scheme may have their rights protected by the NCLT, which ensures fair treatment during the proceedings.

8. Penalty for Non-Compliance

• If a company fails to comply with the provisions under the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, the company and its officers may face penalties.
• Non-compliance may lead to legal proceedings and penalties under the Companies Act, 2013, including fines and imprisonment for directors or officers involved in wrongful conduct.

9. Conclusion

The Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 provide a well-structured process for companies to engage in compromises, arrangements, and amalgamations, ensuring that these corporate changes are implemented in a legal, fair, and transparent manner. These rules protect the interests of shareholders, creditors, and other stakeholders and promote a clear and orderly process for corporate restructuring.

By following the prescribed procedures, companies can successfully navigate the complexities of mergers, acquisitions, and compromises, ultimately contributing to the stability and growth of the corporate sector.