Fast Track Merger between Certain Companies
Introduction
Merger and amalgamation are restructuring tool which helps companies in expansion and diversification of their business and to achieve their underlying objectives. Merger means an arrangement whereby one or more existing companies merge their identity into another to form a new entity which may or may not be one of those existing entities. The term ‘merger’ is not defined under the Companies Act, 2013 or under the Income Tax Act, 1961 As a layman, ‘Merger’ is a combination of two or more entities into one by accumulation of assets and liabilities of two or more organizations. The possible objectives of mergers are – economies of scale, acquisition of technologies, access to varied sectors / markets, reduction in cost etc.
Under the erstwhile Companies Act, Merger and Amalgamation had required to go for a lengthy proceeding and approval of the respective jurisdictional High Courts which does not only waste the valuable time of judiciary but also take time, cost and energy of concerned parties. At the time of enactment of the new Companies Act, the need was felt to have a separate fast track mechanism for mergers and amalgamation for certain class of companies. Hence, under the new Companies Act, 2013, the powers of the approval of merger is divided between the National Company Law Tribunal (NCLT) and Regional Director (RD), MCA. Generally, in small private limited companies there are no outside shareholders and hence, there is no requirement to have a NCLT oversight on such merger. Hence, such class of merger needs to be taken care by the RD in a time bound manner for ease of doing business.
Regulatory Framework of Fast Track Merger
Section 233 of Companies Act, 2013 read with Rule 25 of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 which deals with the procedure of fast track merger of certain class of companies mentioned below. Section 233 of the Companies Act, 2013 dispenses with the cumbersome and time consuming process for mergers and lays down a simple, time bound and fast track procedure for small companies. A recent MCA Notification No. G.S.R 367(E) dated 15th May 2023 has mandated a time limit of 60 days for concluding the fast track merger application filed before the Director (RD), MCA as the intention of Section 233 is to avoid unnecessary delay and ease of doing business for small companies.
Applicability
Fast Track Merger is applicable to the following class of companies:
- two or more small companies; or
- Between a holding company and its wholly-owned subsidiary company; or
- two or more start-up companies; or
- one or more start-up company with one or more small company.
Small Company [Section 2(85) of the Companies Act, 2013]
“Small Company” means a company, other than a public company having —
i. Paid-up share capital of which does not exceed 4 Crore; and
ii. Turnover of which, as per profit and loss account for the immediately preceding financial year, does not exceed 40 Crore
Provided that nothing in this clause shall apply to—
- A holding company or a subsidiary company;
- A company registered under section 8; or
- A company or body corporate governed by any special Act;
Only private limited companies fulfilling both the above conditions are regarded as “Small Company”. However, if a company is a Public Company, Holding Company, Subsidiary Company, Section 8 Company or a Company or Body corporate governed by any special Act does not considered to be a small company irrespective of its capital and turnover.
Procedure for Fast Track Merger
1. Check whether each Transferor and Transferee Company’s Article of Association (AOA) permits for mergers and amalgamation. If not, then alter AOA first.
2. Appoint at least 2 valuers for valuation of shares of each Transferor and Transferee Companies. (Not Mandatory Requirement)
3. Prepare draft scheme of merger, exchange ratio based on valuation report.
4. Convene Board Meeting by each Transferor and Transferee Companies to get the approval of Board of Directors of each companies.
5. Notice of proposed scheme to ROC and OL
After the approval of Board of Directors of each Company, the notice of the proposed scheme inviting objections or suggestions, if any, shall be sent by each Transferor and Transferee Company in Form No. CAA-9 to their respective Registrar of Companies (ROC) and Official Liquidators (OL) where the registered office of the respective companies are situated along with a copy of the Scheme.
6. Filing Declaration of Solvency with ROC
Each of the Transferor and Transferee companies involved in merger must file a declaration of solvency, in Form No. CAA-10, with their respective ROC where the registered office of the companies are situated, before convening the meeting of members and creditors for approval of the Scheme.
7. Creditors Approval
Both Transferor and Transferee Company are required to take approval from creditors representing 9/10th in value either by way of written approval or at a meeting of creditors specifically called for these purpose.
8. Members’ Approval
The objections and suggestions received, if any are considered by the companies in their respective general meetings and the scheme is approved by the respective members or class of members at a general meeting holding at least 90% of the total number of shares. If all the shareholders give their consent in writing and no suggestions and objections received then ROC and OL, RD may dispense the need to convene physical general meeting.
9. Filing of the Scheme
The final Scheme involving merger including Form No. CAA-11 and report of each of the meetings of members and creditors, must be filled within 7 days of conclusion of meeting of members and creditors to the following:
> RD having jurisdiction of Transferee Company;
> ROC in e-Form No. GNL 1;
> OL through hand delivery or by registered post or speed post.
10. Approval of Scheme by R.D
Where there are no objections or suggestions from ROC/OL
Where no objection or suggestion is received within a period of 30 days of receipt of copy of Scheme, from the ROC and OL by the RD and the RD is of the opinion that the scheme is in the public interest or in the interest of creditors, it may, within a period of 15 days after the expiry of said 30 days, issue a confirmation order of such scheme of merger or amalgamation in Form No. CAA-12:
Where there are objections or suggestions from ROC/OL
Where objections or suggestions are received within a period of 30 days of receipt of copy of Scheme, from the ROC or OL or both by the RD and if –
> Such objections or suggestions are not sustainable and the RD is of the opinion that the scheme is in the public interest or in the interest of creditors, it may within a period of 30 days after expiry of 30 days referred to above, issue a confirmation order of such scheme of merger or amalgamation in Form No. CAA-12; or
> RD is of the opinion, whether on the basis of such objections or otherwise, that the scheme is not in the public interest or in the interest of creditors, it may within 60 days of the receipt of the scheme, file an application before the Tribunal in Form No. CAA-13 stating the objections or opinion and requesting that Tribunal may consider the Scheme under section 232 of the Act.
Deemed Approval after 60 days
If the RD does not issue a confirmation order or does not file any application to the Tribunal within a period of 60 days of the receipt of the Scheme, it shall be deemed that it has no objection to the scheme and a confirmation order shall be issued accordingly.
11. Filing of confirmation order with the ROC
A copy of the order confirming the scheme by the RD shall be filled with the ROC, within 30 days, in Form No. INC-28, having jurisdiction over the Transferor and Transferee Company and the ROC shall register the Scheme and issue a confirmation to the companies and such confirmation shall be communicated to the ROC where Transferor Company or companies were situated.
Effect of Registration of Scheme
The registration of the scheme shall have the following effects:
Dissolution of transferor Companies
Upon the registration of the Scheme, Transferor Company shall be deemed to have the effect of dissolution without process of winding-up.
Transfer of property or liabilities
Assets and Liabilities of the Transferor Company will be transferred to the Transferee Company. Any charge created on the properties of Transferor Company will be transferred to Transferee Company and Transferee Company is liable for repayment of any loans.
Legal Proceeding
Legal proceedings by or against the Transferor Company pending before any court of law shall be continued by or against the Transferee Company.
Additional Liability
Where the Scheme provides for purchase of shares held by the dissenting shareholders or settlement of debt due to dissenting creditors, such amount, to the extent it is unpaid, shall become the liability of the Transferee company.
Authorized Capital of Transferee Company
The Transferee Company shall file an application with the Registrar along with the Scheme registered, indicating the revised authorized capital and pay the prescribed fees due on revised capital. The fee paid by the Transferor Company on its authorized capital prior to its merger with the Transferee Company shall be set-off against the fees payable by the Transferee Company on its enhanced authorized capital due to merger or amalgamation.
Conclusion
The simplification of process will encourage corporate entities to undertake corporate restructuring activities and help them in achieve their underlying objectives. The time taken to complete the merger through court process and the cost involved in it is saved substantially through these fast track merger route.
About Author
CS Dhaval Gusani is a founder of DVG & Associates, Practicing Company Secretaries, Mumbai. He can be reached at dvg.pcs@gmail.com
(Republished with amendments)
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