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Amalgamation and Merger under Companies Act 1956

Amalgamations and Mergers under Companies Act 1956

 

In general, amalgamation is the process of combining or uniting multiple entities into one form.

Whereas Merger means the combining of two or more entities into one, through a purchase acquisition or a pooling of interests. Differs from a consolidation in that no new entity is created from a merger

 

The terms merger and amalgamation have not been defined in the Companies Act, 1956 (hereinafter referred to as the Act) though this voluminous piece of legislation contains 69 definitions in Section 2. The concept paper recently issued by the Ministry of Company Affairs, the fate of which is still unknown, contained 100 such definitions but still stopped short of defining merger or amalgamation. The terms merger and amalgamation are synonyms and the term ‘amalgamation’, as per Concise Oxford Dictionary, Tenth Edition, means, ‘to combine or unite to form one organization or structure’.

The provisions relating to merger and amalgamation are contained in sections 391 to 396A in Chapter V of Part VI of the Act. Any proposal of amalgamation or merger begins with the process of due diligence, as the proposal for merger without due diligence is like entering a tunnel with darkness growing with each step. The due diligence process makes the journey see the light at the end of the tunnel – the light of wisdom to amalgamate or not.

 

The Act and the relevant rules pertaining to amalgamation are to be followed scrupulously. The provisions of the Act also deal with compromise or arrangement within or without amalgamation or merger. Presently, the High Court enjoys powers of sanctioning amalgamation matters under section 394 of the Act though it is a matter of time when this power will be exercised by National Company Law Tribunal, a forum where Chartered Accountants shall be authorized to appear. Not losing sight of this opportunity coming way of the Chartered Accountants, the seminar on this very topic, assumes greater significance and it is imperative that professionals like Chartered Accountants should keep themselves informed of the provisions relating to merger and amalgamations. The role of Chartered Accountants, in any amalgamation case, cannot be undermined as without their uncanny insight within the financial maze, no due diligence, valuation, share exchange ratio etc. can be accomplished.

 

SECTION 390: Interpretation of Section

 

Meaning of Company

The expression ‘company’ includes an unregistered company. The court having jurisdiction is the court at the place where the unregistered company reside and has its principal place of business. A Foreign company which is an unregistered company is a ‘company’ under this section .The court can order an amalgamation of the Indian undertaking of a foreign company with an Indian Company.

 

COMPROMISE AND ARRANGEMENT

‘Compromise’ is an expression which implies the existence of a dispute such as relating to rights, which it seeks to settle.

‘Arrangement’ is a term of very wide import, and its meaning is not to be limited to something analogous to a compromise to a compromise. All modes of reorganizing the share capital, takeover of shares of one company by another including interference with preferential and other special rights attached to shares can properly form part of an arrangement with members.

 

SECTION 391: POWER TO COMPROMISE OR TO MAKE ARRANGEMENTS WITH THE CREDITORS AND MEMBERS.

Where application section 391(1) is considered, The Calcutta High Court has held that no notice to Central Government is necessary. However, Allahabad High Court has held that in such a matter both the Central Government and the Shareholders of the company is entitled to be heard before any decision is made under this section.

 

CHAIRMAN’S REPORT

After approval of scheme by creditors or members, the Chairman is required to file his report within seven days of conclusion of meeting. Thereafter, within seven days of filing the report, the applicant shall present a petition to the court for confirmation of compromise or arrangement. Where Company fails to make the application, a creditor or contributor may make the application.  

 

CHAIRMAN’S REPORT

While, sectioning the scheme of arrangement or compromise, the court may issue directions or make modification in the scheme as may be thought appropriate for proper working of scheme. The court must be satisfied that statutory majority are acting in bona fide manner and that any intelligent and honest man belonged to the class would approve the scheme.    

 

CREDITOR’S RESOLUTIION – NECESSARY

The creditors have to pass requisite resolution for a scheme on arrangement or compromise with them. If the creditor wrongfully refuses to agree on the scheme, the Court cannot sanction the scheme or probe into the mala fide refusal of creditors to refuse the approval of the scheme.

 

MRTP Companies- Amalgamation

Where two companies are carrying on the same business, there was no need to file application under section 23 of MRTP Act for amalgamation thereof, although both companies are registered under MRTP Act and requirements under section 23(3) of MRTP Act is fulfilled.  

PROCEEDINGS

It includes both civil and criminal proceedings. Where directors are sought to be proceeded against criminally for their act as director by the creditor pending the consideration of a scheme of arrangement, the criminal proceeding can be stayed for the limited purpose so that the directors are not pressurized by the creditors and the scheme can be considered effectively.

WHEN COURT CAN PROCEED TO GIVE EFFECT TO SCHEME

The court held that the amalgamation scheme has been approved by the majority of the shareholders of both the companies, the exchange ratio has been fixed by a reputed firm of Chartered Accountants and accepted by the share holders, the statutory formalities have been complied with, the scheme is fair and reasonable and there is no fraud involved, then the court would proceed to give effect to the decision of the majority of the share holders of the company.

 

PROCEDURE FOR AMALGAMATION

A.   The MoA of the company contains power to amalgamate. If not, alter the object clause of memorandum by following the procedure laid down under section 17.

B.   The Draft scheme of amalgamation (based on fair exchange ratio) prepared and approved by the Board of Directors. It is always preferred to have the valuation of shares by an outside expert to determine the fair exchange value of shares.

C.   Apply to High Court for directions to convene the general meeting by way if Judge’s summon y an affidavit. The summons shall be in Form no. 33 and affidavit in Form no. 34 of Companies Court Rules. The affidavit is signed and sworn in prescribed manner by the deponent under Code of Civil Procedure, 1908.

D.   Send a copy of application made to the court to the concerned Regional Director, Department of Company Affairs (section 394A).

E.     The High Court should give the directions in respect of the matter set out in Rule 69 of Companies Court Rules, with respect to meeting including fixation of time, place and quorum of such meeting, appointment of chairman, etc.

F.    Notice of general meeting should be sent to members setting forth the terms of compromise or arrangement and their effect, interest of directors, managing director or manager of the company and effect of those interested on the amalgamation. Notice [in form no. 36 of Companies Court Rule] shall be sent to the members at least 21 clear days before meeting [ Rule 74 of Companies Court Rules ].

G.   Where notice is sent by an advertisement , he same should be in the form no. 38 of Companies Court Rules and include the aforesaid statement or a notification of the place at which and the manner in which the members who are entitled to attained the meeting may obtain copies thereof [ Rule 74 of Companies Court Rules ].

H.   If the amalgamation affects the rights of debenture holders, the said statement shall give the like information and explanation as respects the trustees of any deed for securing the debenture as it is required to give as respects the company’s Directors  [section393(2)].

I.       Provide a copy of statement free of charge to every creditor or member applying for the same within 24 hours of the requisition made so.

J.      Ensuring the chairman appointed by the Court for the meeting of company or any other person files an affidavit at least 7 days before the meeting showing the directions regarding the issue of notice and advertisement have been compiled with [Rules 75 and 76 of Companies Court Rules].

K.   Hold the general meeting and pass the resolution as mentioned below:

1.     Resolution approving the scheme of amalgamation to be passed by three/fourth majority in value of members, and authorizing the directors to implement the scheme.

2.     Resolution for increasing the authorized capital of the company, where necessary by ordinary/special resolution.

L.    Send 6 copies of notice and copy of proceedings of the meeting to the concerned stock exchanges as per listing agreements.

M. File form no. 23 along with copy of resolution and explanatory statement with filing fee with the Registrar of Companies within 30 days of passing.

N.   The Chairman should report the result of the meeting to the court on form no 39 within time fixed by the court or within 7 days of conclusion of meeting.

O.   Move the High Court for approval by submitting a petition in Form no. 40 within 7 days of the filing of the report by the Chairman and ensure compliances under section 394 and 395 in this regard. The petition is accompanied by an affidavit in Form no. 03 of Companies Court Rules. The High Court should be moved jointly by transferor and transferee companies where registered offices of both the companies are in the same state. Where both companies have their registered office in different states, each company shall move to the respective High Court for directions.

P.    The certified copy of the order of the High Court shall be filed in form no. 21 with filing fee with the Registrar of the Companies.

Q.   A copy of every order must be annexed to every copy of the memorandum of association issued after the certified copy of the said order has been filed with the Registrar of Companies.

R.   The scheme amalgamation, etc. as approved by High Court is implemented a s per direction of the High Court by issue of suitable notice to the shareholders.

S.    Convene a Board meeting and pass Board resolution for allotment of shares to the shareholders of the transferor company in exchange of shares held in the transferor company and fixing of record date for the purpose.

 

 

 

CASEW LAWS

1.     PUNJAB NATIONNAL BANK LTD. V.  SHRI VIKRAM COTTON MILLS  LTD AIR 1970 SC 1973

It was held that any compromise with creditors under the scheme does not reduce the liability of surety unless the contract of surety provides otherwise. A suit by Bank against surety can be stayed till the time the amount recoverable and due from the company is determined.

 

2.     RIVER STEAM NAVIGATIO CO. LTD  71 CWN 845

The court has jurisdiction to entertain application under section 391 of the Act in respect of foreign company and a Government Company.  

 

 

SECTIO 392: POWER OF HIGH COURT TO ENFORCR COMPROMISE AND ARRANGMENTS.

Provisions of this section confer wide powers and authorities in the Courts to enforce and make effective a compromise or an arrangement. Supervisory powers are given to the court to ensure the carrying out of the compromise or arrangement. The powers may be exercised by the courts for the purpose of proper working of the scheme. Not only this, including any modification in the scheme, with only objective to ensure proper working of compromise or arrangement. Having supervisory jurisdiction over the working of the scheme sanctioned, court although cannot adjudicate the matters concerning the rights or interest claimed by the company against the persons who are not parties to the scheme, yet has power to issue interim directions to maintain status quo to enable the company to take appropriate proceedings.

 

CASE LAWS

1.     DIVYA VASUNDHARA FINANCER LTD. V. K.N. SAMANT (1990) 69 COMP CAS646.

It was held that the court can make the eviction orders against a person who have prima facie no right, title or interest in the company’s properties by issuing suitable directions. The provisions of section 6 of Specific Relief Act 1963 cannot override the provisions of section 391and 392 of the Act.

 

2.     MEHTAB CHANDNA GOLCHA V. OFFICAIL LIQUIDATOR, GOLCHA PROPERTIES (P) LTD. (1981)  51COMP (RAJ)

It was held by the court that However, the power can be exercised where such modification is considered necessary for proper working of the scheme. But where the modification makes the compromise or arrangement suitably in variance of original one or where it prejudicially affects any section of the creditors or contributories, the sanction of a fresh meeting will have to be sought.

 

 

SECTION 393: INFORMATION AS TO COMPROMISES OR ARRANGMENTS WITH CREDITORS AND MAMBERS.

 

Notice given for the meetings of members of members, creditors or any class of them should contain explanatory statements giving the particulars of compromise and arrangement and their effects, Further it should indicate material interest of Directors, Managing Directors, or Manager as such or as shareholders or Creditors. The effect of those interested should be indicated stating if and how far the same are different from the like interest of other persons. Such explanation must be mentioned in the notice being advertised indicating therein that the explanations are available at the Company’s office. Where debenture holders are also affected by such scheme, the interest of trustees should also be indicated.

 

CASE LAWS

 

1.     DORMAN LONG & CO. LTD.  ALL ER  

It was held in this case that Where that matters involved are of considerable difficulty and doubt, it becomes the duty of the court to examine and scrutinize the content of notice or circular sent to the members and creditors who are parties to the scheme to make sure that the notice is sent contained appropriate disclosures under section 393(1) (a).

 

2.     CLOTNESS IRON COMPANY  1951 SC 476

It was held in this case that a statement made in general “Directors have no interest in the scheme other than as members along with other members” is not a sufficient compliance under the provisions.

 

 

SECTION 394: PROVISIONS FOR FACILITATING RECONSTRUCTION AND AMALGAMATION OF COMPANIES.

 

The Duties of the Court under this section are onerous and have to carefully performed .The court cannot come to a proper conclusion under the section unless it is satisfied that the matter has been considered at an extraordinary general meeting of the members specially convened for the purpose under the directions of the court under section 391. Point to be noted in this section is the definition ‘Transferor Company’ which unlike the ‘Transferee Company’ includes any body corporate. The object is to facilitate compromise or arrangement between foreign companies as transferors and Indian companies as transferees.

 

CASE LAWS

 

1.      POINEER DYING HOUSE LTD. V. Dr. SHANKAR VISHNU MARETHE (1967) AIR BOM.

It was held in this case that the object of reconstruction of amalgamation is to enable companies to come out of difficulty and to reestablish their business. In this case court rejected the scheme filed by the creditors without understanding its implications.

 

 

2.     BIHARI MILLS LTD. (1985) COMP CAS GUJ.

It appeared to the court that the scheme was by way of, what is known as commercial world as a reverse takeover which means that a profit making company merges itself into a loss making company for the purpose of having advantage for tax purpose of examining that the scheme is not that reason against public interest and for evasion of taxes. On the facts court found that the scheme was bona fide commercial nature, reasonable and fair.

       

   

 

SECTION 394A: NOTICE TO BE GIVEN TO CENTRAL GOVERNMENT FOR APPLICATION UNDER SECTION 391 AND 394.

 

The court is duty bound to give notice of every application under section 391 and 394 to the Central Government and also to consider the representation made to it before passing any order. However, the Calcutta and Madras high courts have held that at the first stage while considering the application under section 391(1) no notice to central government is necessary.   Powers and functions of the Central Government under section 394A have been delegated to the Regional Directors at Mumbai, Kolkata, Chennai and Kanpur. [Notification No. G.S.R., dated 31-5-1991].

 

 

SECTION 395: POWERS AND DUTIES TO ACQUIRE SHARES OF SHAREHOLDERS DISSENTING FROM CSHEME OR CONTRACT APPROVED BY MAJORITY.

 

The provisions of this section apply to scheme or contract involving transfer of shares in a company to another company. The transferee company may acquire the shares of the dissenting share holders. It was held by the Privy Council in Blue Metal Industries Ltd. V. Dilley (1969) 3 ALL ER 437 in similar enactment of New South Wales that this provision applies to a case where transfer of shares is involved to a single company and not to two or  more companies . The important factors emerged from this section is to be borne in mind are as follows:

 

Ø A right is given to a transferee company to acquire other people’s properties on certain conditions which are strictly defined in the scheme or contract.

Ø As a matter of policy in the Act, the dissenting shares holders should not be penalized due to their dissent and that they should get no less favorable treatment the approving shareholders.

Ø The transferee company has its own discretion to exercise its power of compulsory acquisition under section 395.Where it exercises the powers, it should give the same terms.

      

As dissenting share holder shall include a share holder who has not assented to the scheme or contract.

 

 

 

CASE LAWS

 

1.     SIMO SECURITIES TRUST LTD. (1971) 3 ALL ER 999

It was held that the date on which the offer is made. In order to ascertain all the terms in the offer, on should look to the query from the angle of dissenting share holders. All the conditions offered to other shareholders must to be continued to dissenting share holders even if the date of exercising offer expired.

 

2.     GETHING V. KILNER (1972) 1 ALL ER 166.

It was held by the court that every circular and notice containing recommendations to the member of transferor company by its Directors should be accompanied by such information as prescribed. Further it shall contain a statement on behalf of the transferee company that steps have been taken to ensure that necessary cash would be available as provided in the scheme.

  

 

SECTION 396: POWERS OF CENTRAL GOVERNMENT TO PROVIDE FOR AMALGAMATION OF COMPANIES IN NATIONAL INTEREST.

 

If the Central Government is satisfied that two or more companies be amalgamated the same being essential in public interest. Then the Central Government shall provide for the amalgamation of two companies into a single company. The validity of such order shall depend upon the grounds showing that the Central Government is satisfied in issuing an order being essential in public interest. The order of Central Government made so is to be notified in the Official Gazette and shall state company’s constitution, property, rights, interests, authorities and privileges together with its liabilities, duties and obligations.

A member or creditor having interest in the company involved in amalgamation shall have same rights and interest in the newly constituted company and to that extent he receives less than his rights and interests from the new company, he shall be entitled to compensation. The compensation is to be assessed by the prescribed authority.

Any member or creditor, being aggrieved by the award of compensation by the prescribed authority under subsection (3) may file an application to Company Law Board within 30 days of the date of publication of assessment on the Official Gazette.

 

In exercise of the powers conferred by section (1) & (2) of section 396 of Companies Act 1956 read with notification of Government of India in the department of company affairs. No.GSR 443(E), dated 18th October, 1972, the Company Law Board made Chandpur Sugar Co. Ltd. and U.P. State Sugar Corporation Ltd. (Amalgamation) Order, 1989 to provide for the amalgamation of two companies into a single company.

 

 

    

SECTION 396A: PRESERVATION OF BOOKS AND PAPERS OF AMALGAMATED COMPANY.

 

Comments
 sundar July 1, 2010
One high court gave order in say year 1 whereas another high court in another state passed the order after 3 years. then when should form 21 be filed to ROC and by which company transferor or transferee.
 Anil Kumar Joshi July 4, 2010
Please clarify whether a governent company can be amalgamamted with private company
 DEBABRATA ADHIKARI July 12, 2010
please clarify how retainment of human capital component is justified while preparing proposal of conglomerate merger of CPSE companies.
 bharkad r.m. July 30, 2010
pl tell me when one company merge in other company then what will happen to criminal liabilities of formerone.
 Kanwar I S Sahni January 18, 2011
What exactly is the status of the earst while Shareholders if they are not issued the new shares of the merged entity even after the High Court approval of the merger ..Kindly comment with respect to a listed Company ...
 vasu January 24, 2011
is it statutory that the new firm formed after amalgamation should continue the earlier business.
 Mr pandya August 1, 2011
in case of amalgamation for change of the name in co op society , society can take transfer charges or premium for change of the name
kirit pandya September 4, 2012
whether demerger is an amalgamation or not?
Kishor August 15, 2013
What is the definition of Creditors for the purpose of Amalgamation. Does it includes Provision made in respect of them in the books. Please provide reference for the base.
Kishor August 15, 2013
What is the definition of Creditors for the purpose of Amalgamation. Does it includes Provision made in respect of them in the books. Please provide reference for the base.
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