Analysis of Section 230 of Companies Act, 2013

Article analyses section 230 of Companies Act, 2013 which deals with Power to Compromise or Make Arrangements with Creditors and Members. 

POWER TO COMPROMISE OR MAKE ARRANGEMENTS WITH CREDITORS AND MEMBERS

This section empowers NCLT to make an order on the application of the company or creditor/member or in the case of company being wound up of the liquidator for the proposed compromise or arrangements including Corporate Debt Restructuring (CDR)

MEANING OF COMPROMISE OR ARRANGEMENT

– Compromise is a term which implies the existence of a dispute relating to rights. When a company has a dispute with a member or a class of members or with a creditor or a class of them, a scheme of compromise may be drawn.

– Where, however there is no dispute but there is need for adjudicating the rights or liabilities of member or a class of members, the company may resort to

– Thus, arrangement may be made in anticipation of a dispute whereas compromise is arrived at the conclusion of a dispute.

– Arrangement and compromise may take place for the purpose of reconstruction or amalgamation/merger/demerger of companies or may involve reduction of share capital.

APPLICATION TO TRIBUNAL

1. Under this section, where a compromise or arrangement is proposed between a company and its creditors/class of them or its members/class of them, following documents shall be submitted with NCLT for convening a meeting to give effect to the same.

• AN APPLICATION IN FORM NO. NCLT-1 shall be made to NCLT by the company/any creditor of the
  company/any member of the company/liquidator (in the case of a company which is being wound up)
• AN AFFIDAVIT in Form No. NCLT-6
• FEE AS PRESCRIBED in the Schedule of Fees.
• A NOTICE OF ADMISSION in Form No. NCLT-2 including the basis on which each class of members or creditors has been identified for the purposes of approval of the scheme
• A COPY OF SCHEME OF COMPROMISE OR ARRANGEMENT, which should include by way of an affidavit

(a) latest financial position of the company including consolidated financial statements, the latest auditor’s report on the accounts of the company and the pendency of any investigation or proceedings against the company;

(b) reduction of share capital of the company, if any,

(c) Any scheme of Corporate Debt Restructuring (CDR) consented to by at least 75% of the secured creditors in value, including—

(i) a creditor’s responsibility statement in Form NO.CAA.1

(ii) safeguards for the protection of other secured and unsecured creditors;

(iii) report by the auditor of the company to the effect that its fund requirements after the CDR will conform to the liquidity test based upon the estimates provided to them by the Board of Directors;

(iv) where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India, a statement to that effect;

(v) a valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and immovable, of the company by a registered valuer.

NOTE: A SCHEME OF CORPORATE DEBT RESTRUCTURING SHALL MEAN A SCHEME THAT RESTRUCTURES OR VARIES THE DEBT OBLIGATIONS OF A COMPANY TOWARDS ITS CREDITORS.

2. Where more than one company is involved in the scheme, they may file a joint-application to NCLT.

3. Where the company is not the applicant, a copy of the notice of admission and of the affidavit shall be served on the company/where the company is being wound up, on its liquidator at least 14 days before the date fixed for the hearing of the notice of admission.

4. Upon hearing the application, NCLT may order a meeting of the creditors/class of creditors or the members/class of members as the case may be after giving such directions as it may think necessary.

CALLING OF MEETING IN PURSUANCE OF AN ORDER OF NCLT

1. Where a meeting is directed to be convened, the Chairperson appointed for the meeting shall send the notice of such meeting in Form No. CAA.2 at least one month before the date fixed for meeting.

2. The notice shall specifically provide that the persons to whom the notice is sent may vote in the meeting either themselves/through proxies/by postal ballot to the adoption of the compromise or arrangement within one month from the date of receipt of such notice.

3. The notice shall be sent individually at the address registered with the company to all the creditors/class of
creditors, all the members/class of members and to all the debenture-holders of the company along with

• a copy of the valuation report, if any
• a statement explaining the effect of the compromise or arrangement on directors, depositors, creditors, employees, KMP’s, promoters and non-promoter members, and the debenture-holders
• a statement explaining the effect of the compromise or arrangement on any material interests of the directors, KMP’s and the debenture trustees.
• scheme of compromise or arrangement accompanied by a statement disclosing the following details:

(i) details of the order of the Tribunal directing the calling, convening and conducting of the meeting:

(a) date of the Order;

(b) date, time and venue of the meeting.

(ii) details of the company including:

(a) Corporate Identification Number (CIN) or Global Location Number (GLN) of the company;

(b) Permanent Account Number (PAN);

(c) Name of the company;

(d) date of incorporation;

(e) type of the company (whether public or private or one-person company);

(f) registered office address and e-mail address;

(g) summary of main object as per the MOA; and main business carried on by the company;

(h) details of change of name, registered office and objects of the company during the last 5 years;

(i) name of the stock exchange (s) where securities of the company are listed, if applicable;

(j) details of the capital structure of the company including authorized, issued, subscribed and paid up share capital; and

(k) names of the promoters and directors along with their addresses.

(iii) if the scheme of compromise or arrangement relates to more than one company, details of any relationship subsisting between such companies and who are parties to such scheme of compromise or arrangement, including holding, subsidiary or of associate companies;

(iv) the date of the board meeting at which the scheme was approved by the board of directors including the name of the directors who voted in favour of the resolution, who voted against the resolution and who did not vote or participate on such resolution;

(v) explanatory statement disclosing details of the scheme of compromise or arrangement including:

(a) parties involved in such compromise or arrangement;

(b) in case of amalgamation or merger, appointed date, effective date, share exchange ratio (if applicable) and other considerations, if any;

(c) summary of valuation report (if applicable) including basis of valuation and fairness opinion of the registered valuer, if any, and the declaration that the valuation report is available for inspection at the registered office of the company;

(d) details of capital or debt restructuring, if any;

(e) rationale for the compromise or arrangement;

(f) benefits of the compromise or arrangement as perceived by the Board of directors to the company, members, creditors and others.

(g) amount due to unsecured creditors.

(vi) investigation or proceedings, if any, pending against the company under the Act.

(vii) details of the availability of the abovementioned documents for obtaining extract from or for making or obtaining copies of or for inspection by the members and creditors.

(viii) details of approvals, sanctions or no-objection(s), if any, from regulatory or any other governmental
authorities required, received or pending for the proposed scheme of compromise or arrangement.

EXPLANATION- FOR THE PURPOSES OF THIS RULE, DISCLOSURE REQUIRED TO BE MADE BY A COMPANY SHALL BE MADE IN RESPECT OF ALL THE COMPANIES, WHICH ARE PART OF THE COMPROMISE OR ARRANGEMENT.

NOTICE TO BE PLACED ON THE WEBSITE

1. Such notice and other documents shall also be placed on the website of the company and in case of a listed company,

• these documents shall be sent to the SEBI and STX’s where the securities of the companies are listed, for publishing on their website and
• shall also be published in newspapers in Form No. CAA.2 in at least one English newspaper and one vernacular newspaper having wide circulation in the state in which registered office of the company is situated, at least 30 days before the date fixed for the meeting. Such advertisement shall also state the time within which copies of the compromise or arrangement shall be made available to the concerned persons free of charge from the registered office of the company.

2. Any objection to the compromise or arrangement shall be made only by persons holding at least 10% of the shareholding or having outstanding debt amounting to at least 5% of the total outstanding debt as per the latest audited financial statement.

3. Notice along with all the documents in Form No. CAA.3 shall also be sent immediately to CG, IT authorities, RBI, SEBI, ROC, STX’s, OL, CCI, if necessary, and such other sectoral regulators or authorities which are likely to be affected by the compromise or arrangement for seeking their representations within a period of thirty days from the date of receipt of such notice.

4. The Chairperson appointed for the meeting or the company or other person directed to issue the advertisement and the notices of the meeting shall file an affidavit before the Tribunal at least seven days before the date fixed for the meeting, stating that the directions regarding the issue of notices and the advertisement have been duly complied with

MANNER OF VOTING IN THE MEETING

1. The voting at the meeting on all resolutions shall take place by poll or by voting through electronic means.

2. In the meeting, the compromise or arrangement shall be agreed upon by majority of persons representing 75% in value of the creditors/class of creditors or members/class of members, as the case may be, either by voting in person or by proxy or by postal ballot.

REPORT OF THE RESULT OF THE MEETING

The Chairperson of the meeting shall within the time fixed by the Tribunal or where no time has been fixed, within three days after the conclusion of the meeting, submit a report to the NCLT on the result of the meeting in Form No. CAA.4 which shall state accurately the number of creditors/class of creditors or the number or members/class or members, who were present and who voted at the meeting either in person or by proxy and who voted through electronic means, their individual values and the way they voted.

PETITION FOR CONFIRMING COMPROMISE OR ARRANGEMENT

1. After the compromise or arrangement is duly agreed to in the meeting, the company shall within 7 days of the filing of the report by the Chairperson, present a petition to the Tribunal in Form No. CAA.5 for sanction of the scheme of compromise or arrangement.

2. Thereafter, NCLT shall fix a date for the hearing of the petition, and notice of the hearing shall be advertised in the same newspaper in which the notice of the meeting was advertised at least 10 days before the date fixed for the hearing.

3. The notice of hearing of the petition shall also be served by the Tribunal to the objectors and to the Central Government and other authorities who have made representation and give them a reasonable opportunity of being heard.

ORDER OF NCLT AFTER HEARING OF THE PETITION

1. To obtain the order, Company’s auditor shall file a certificate with NCLT stating that the accounting treatment proposed in the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under section 133.

2. An order made by the Tribunal upon hearing of the petition shall provide for all or any of the following matters, namely:

(a) where the scheme provides for conversion of preference shares into equity shares, such preference shareholders shall be given an option to either obtain arrears of dividend in cash or accept equity shares equal to the value of the dividend payable;

(b) the protection of any class of creditors;

(c) if the scheme results in the variation of the shareholders’ rights, it shall be given effect under the provisions of section 48 of Companies Act, 2013;

(d) if the scheme is agreed to by the creditors, any proceedings pending before the BIFR shall stand removed;

(e) such other matters including exit offer to dissenting shareholders.

3. NCLT shall not sanction any compromise or arrangement in respect of buy-back of securities unless such buy­back is in accordance with the provisions of section 68.3

4. Once the order is sanctioned by NCLT, the same shall be binding on the company, all the creditors, or class of creditors or members or class of members, as the case may be, or, in case of a company being wound up, on the liquidator and the contributories of the company.

5. The order of the Tribunal in Form CAA.6 shall be filed with the Registrar by the company within a period of 30 days of the receipt of the order.

Extract of Section 230 of Companies Act, 2013 is as follows :-