CORPORATE RESTRUCTURING - RECONSTRUCTION & REVERSE MERGER

RECONSTRUCTION

Provisions for facilitating reconstruction and amalgamation of companies – Section 394 (1) of Companies Act.

Where an application is made to the Tribunal under Section 391 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Tribunal that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies the Tribunal may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.

“Reconstruction” involves the winding up of an existing company and the transfer of its assets and liabilities to a new company formed for the purpose of taking over the business and undertaking of the existing company. Shareholders in the existing company become shareholders in the new company. The business undertaking and shareholders of the new company are substantially the same as those of the old company.

The company should ensure that its Memorandum of Associated contains a clause authorizing reconstruction.

REVERSE MERGER

In a reverse merger, a healthy company merges with a financially weak company. The main reason for this type of reverse merger is the tax savings under the Income- Tax, 1961. Section 72A of the Income Tax Act ensures the tax relief, which becomes attractive for such reverse mergers, since the healthy and profitable company can take advantage of the carry forward losses/of other company. The healthy units lose its name and surviving sick company retains its name.

Salient features of Reverse mergers under Section 72A of the Income Tax Act

1. Amalgamation should be between the companies and none of them should be a firm of partners or sole- proprietor.
2. The tax relief under Section 72A would not be made available to companies engaged in trading activities or services.
3. The company should make an application to the “specified authority” for requisite recommendation of the case to the Central Government for granting or allowing the relief.
4. Specified Authority has to be satisfied of the eligibility of the company for the relief under Section 72 of the Income Tax Act.
5. Carry forward of unabsorbed depreciation the conditions of Section 32 should not have been violated.
6. Accumulated loss should arise from “Profits and Gains from business or Profession” and not be loss under the head” Capital Gains” or “ Speculation’
7. After amalgamation the “sick” company shall survive and the other income generating company shall extinct.
8. One of the merger partner should be financially unviable and have accumulated losses to qualify for the merger and the other merger partner should be profit earning so that tax relief to the maximum extent could be had.
9. Amalgamation should be in the public interest and should not defeat basic tenets of law and must safeguard the interest of employees, consumers, creditors, and shareholders apart from promoters of the company through revival of company.