Introduction
A highly lengthy and time-consuming court-based process for companies’ compromises, arrangements, and amalgamation was established under the previous Companies Act, 1956 (1956 Act). To make corporate restructuring in India seamless and effective, realistic adjustments in the Arrangements process are required. In light of this, the Companies Act of 2013 (2013 Act) the provisions pertaining to Arrangements were brought into force on 15 December, 2016.
The Companies Act 2013 sections from 230 to 234 outline the arrangement procedure. Previously reserved for the relevant High Court, the authority to exert judicial oversight over such agreements has been transferred to the National Company Law Tribunal (the Tribunal), a recently constituted body. The option afforded to (a) small businesses; (b) holding companies and their wholly owned subsidiaries to accept the fast-track merger procedure provided in section 233 of the 2013 Act is one of the new arrangements regime’s most important aspects. A Scheme of arrangement (scheme) would no longer need to be approved by a judge; instead, parts of the company’s reporting and procedural duties would be confirmed by the Central Government (CG). 1
HISTORY
The court’s approach tended to favour hasty mergers between certain corporate entities even prior to notice required by section 233 of the 2013 Act. For instance, in cases involving the merger of a wholly-owned subsidiary and a holding company, various high courts have in the past granted the holding company permission to forgo the requirement to initiate a separate procedure in the relevant jurisdictional high court. The holding company, the shareholders, or the creditors won’t be the subject of any compromises or agreements.
INTRODUCTION
Companies require efficient and effective strategies in an era where the corporate world is continuously changing if they are to expand and preserve their firm. Merger is one such strategic tactic, which is the process of combining two or more businesses or companies into one. In India, the Companies Act offers a shortened procedure known as “fast-track merger” as an alternative to the standard merger process. In-depth information regarding fast-track mergers under the Companies Act is provided in this article.
ELIGIBILITY CRITERIA
The fast-track merger mechanism makes it easier for the following types of businesses to merger, compromise, or arrangement:
(a) Small enterprises
(b) Holding companies and their fully owned subsidiaries
(c) Startup companies
(d) Startups and small businesses.
The Indian government recently put out a number of legal changes to widen the use of fast-track mergers, including the definition of “small business” and the inclusion of startups.
PROCEDURE FOR FAST-TRACK MERGERS
1. Prepare/draft a merger plan and present it for approval to the board of directors.
2. Notify the Registrar of Companies (RoC) and Official Liquidator of the proposed plan at the registered office of each business or individual who may be impacted by it, and ask them to submit any objection or suggestions within 30 days.
If there is a charge on the transferor company’s property, it will be applicable and enforceable as such on the transferee company.
3. Take into account the suggestions and objections made at each general meeting.
4. The following individuals must provide their approval to the scheme:
(i) At the general meeting, shareholders holding 90% of the total number of shares and
(ii) Represent 90% of the creditors or classes of creditors after giving creditors with the scheme, 21 days’ notice.
5. File a solvency declaration to the business where the registered office is situated, as necessary.
6. The Central Government will register the scheme and give a certificate to the firm upon receipt of the scheme, if there are no objections or suggestions from the RoC or Official Liquidator. Communicate to the Central Government with any objection or recommendations in writing no later than 30 days. In the absence of such communication, there will be no objection.
7. Within 60 days of receiving the plan, the central government may submit an objection with the NCLT and request national land guidelines if it considers that the scheme does not advance the public interest or creditors’ rights. The guidelines under Section 232 of the Act will be examined by the NCLT. It is assumed that there are no objections to this plan if the central government does not raise any opposition or does not file an application to the NCLT.
8. The NCLT may either (i) direct that the scheme be considered in accordance with the process outlined in Section 232 of the Act upon receiving an application from the Central Government or any other party, or (ii) approve the plan.
9. The RoC with jurisdiction over the transferee company and the parties involved must receive a copy of the order confirming the scheme.
10. The RoC registers the scheme, gives a confirmation to the business, and sends a copy of that confirmation to the ROC where the prior business/transferor business was situated.
11. The transferor firm was assumed to have been dissolved as a result of the scheme’s registration, rather than being wound up.
12. The transferee company sends a registration plan, an application, and the required fee to the RoC together with the amended authorised capital specification. The fees paid by the transferee company in relation to its authorized capital prior to the merger or amalgamation will be deducted from the fees paid by the transferee company in respect of the increase in its authorized capital due to the merger or consolidation.
13. The transferee company may not hold shares after the merger or amalgamation in its own name or in the name of a trust on behalf of itself or any subsidiary or associated business, and all such shares will be cancelled.
14. The opinions expressed by the RoC and/or the Official Liquidator must be taken into consideration by the meeting of shareholders and/or creditors.
EFFECTS OF REGISTRATION
The Registration in this scheme has the following effects:
1. Assets and liabilities are transferred from the transferor firm to the transferee company.
2. If there is a charge on the transferor company’s property, it will be applicable and enforceable as such on the transferee company.
3. The lawsuit by or against the transferor company continues by or against transferee company.
4. If the scheme calls for dissident shareholders or creditors to buy shares or pay debts, such sums, to the extent that they are unpaid, become liabilities of the transferee company. 2
It’s important to remember that the particular requirements and processes may change based on the characteristics of the merging companies and the Companies Act’s rules. In order to guarantee compliance with all legal and regulatory requirements, it is advised to refer to particular provisions of the Companies Act, obtain professional advice, and communicate with appropriate authorities while pursuing a fast-track merger.
CHALLENGES IN IMPLEMENTING FAST TRACK MERGERS WHAT MAKES PEOPLE CHOOSE FAST TRACK MERGERS?
A fast-track merger has obvious benefits. Due to these advantages, fast-track mergers are preferred. Among these advantages are:
- The first and most essential benefit is that a fast-track merger procedure makes approval by tribunals and courts easier.
- Fast-track mergers help small and medium-sized businesses and group firms with corporate reorganisation.
- There is no need for public advertising.
- In comparison to a traditional merger procedure, it is rather inexpensive.
- This method provides for speedier resolution of issues and eliminates the need for separate RBI/IT approval.
- Furthermore, The National Company Law Tribunal may mandate that a fast-track merger proceed via customary routes, such as the NCLT, if it is considered to be against the public interest.
Issues
- The problems and difficulties associated with this simplified merging process may now be discussed since we have a better understanding of what a fast-track merger is and what it delivers. Fast-track mergers were created to streamline the merger and amalgamation procedure, although it is well known that several permissions/clearances are required, the process takes a long time, and there is no place for spin-offs/demergers. There were also questions concerning the meaning and procedure of the aforementioned fast-track merger. These questions and concerns are listed below:
- The ability of Regional Directors to propose merger adjustments is a topic of intense discussion. It appears that the Regional Director will be obliged to confirm the plan without presenting his own proposal if the Registrar of Companies and the Official Liquidator do not oppose.
- It is questionable if a fast-track merger can happen between a wholly-owned subsidiary and holding company, as well as a holding into the wholly-owned subsidiary, whether it involves a holding company and a subsidiary, a small business, or a firm of a defined class.
- Section 233(12) of the Companies Act allows a compromise, arrangement, division, or transfer, and the sorts of transactions permitted vary, including demerger, substantial sale, and shareholder/creditor arrangements. However, there is an alternate opinion that Section 233 does not permit transactions other than amalgamation.
- Section 233 says, “on receipt of an application from the Central Government or from any person”. Is this to say that if the Regional Director does not submit the scheme to the NCLT, or if the scheme is accepted, all creditors or shareholders will file an application with the NCLT?
Even after we address these issues, we can see that there are certain disparities and gaps that must be resolved in order to avoid confusion as a result of the possible merger. The doubts will be addressed, but what about the challenges that occur during a fast merger?
It is said that the following problems develop during the fast-track merging process:
- The allowed capital of all companies must be combined into the newly acquired company, which is almost impossible.
- The Form INC 28 for final registration of scheme does not include the following options:
- Section 233 of the Companies Act of 2013 has its own drop-down menu.
- When the transferor company’s status changes.
- Obtaining approval from the majority of creditors of all types is very difficult. This is especially true for trade creditors.
- There is no clarity on who will be affected by the scheme to issue notices or what the impact will be if any objections are made.
- Some ROCs consider that the parent company’s 100% stake in a fully owned subsidiary must be documented in the parent company’s annual report submitted with the ROC in electronic format MGT – 7 reflecting previous financial year information in order to qualify for the fast-track merger. E-form MGT-7 must establish the parent company’s 100% ownership of the existing wholly-owned subsidiary before ROC will accept an expedited acquisition application. This implies that corporations may have to wait up to a year before beginning an expedited merger procedure in some situations, therefore in some cases, a Tribunal-approved merger process under Companies Act,2013 sections 230-232 may be speedier!
- The permission of creditors necessary for a merger may be acquired in a meeting or in writing (i.e., objection by consent) under Section 233 of the Companies Act. This clause, however, does not specify whether shareholder permission can be acquired in writing. This means that the Fast Track Merger law may not provide for shareholder written consent.
- If the Central Government determines that the merger or plan of amalgamation is not in the public or creditor interest, the fast-track merger procedures will be transferred to the NCLT, and the parties will be required to follow merger procedures that take time are prescribed under Section 232 of the Companies Act of 2013. These factors may make a rapid merger less appealing.
- If CG is of the opinion that the scheme is not in the public or creditor interest, the fast-track merger procedure may be submitted to an arbitral tribunal, and the longer-term merger procedure under section 232 Act of 2013 must be pursued. This might make a fast-track merger less appealing.
FASTER TRACK FINALLY FLOWS FROM THE FAST TRACK MERGER
The objective of boosting “ease of doing business in India” has resulted in the adoption of certain critical ideas and resulting regulatory reforms by various ministries. The introduction of Section 233 of the Companies Act, 2013, which deals “Merger and amalgamation of certain types of companies” appear in notification of 7 December, 2016, provides an alternative model for certain categories of companies to participate in merger or amalgamation, is one of the initiatives taken by the Ministry of Corporate Affairs (‘MCA’). The goal is to handle scheme of agreements involving wholly owned subsidiaries or smaller businesses in a cost-effective and timely manner. However, it was discovered during the actual implementation of this provision that the authorities were taking longer than intended to process such applications and issue confirmation orders for the scheme, causing the provision to lose its relevance. In light of this delay, an MCA vide notification dated May 15, 2023 (yet to be published in the e-Gazette) was issued under certain amendments to the Companies (Compromises, Arrangements, and Amalgamation) Rules, 2015 (‘CAA Rules’) to ensure faster processing of applications under Section 233 of the Act. The amendment goes into effect from June 15, 2023. The purpose of this article is to examine and assess the MCA’s proposed modifications.
CONTRADICTIONS IN THE PRE-AMENDMENT PROVISION CONCERNING FAST-TRACK MERGERS
A different method for establishing schemes of arrangements between two or more small businesses, a holding company and its wholly-owned subsidiaries, or two or more start-ups is provided under Section 233 of the Act and Section 25 of the CAA Rules. Obtaining objections or recommendations from the competent official liquidator, the Registrar of Companies, and any person harmed by the scheme were once requirements for companies taking part in a scheme of arrangement. Within 30 days after receiving the notification, the scheme must call a meeting of its members or class of members, creditors or class of creditors, to request approval of the proposed plan. Within seven days of receiving the required approvals from the shareholders and creditors, the transferee company must file an application under Section 233 with the Regional Director having jurisdiction over the transferee company, the Official Liquidator, and the Registrar of Companies for the transferee and transferee concerned. The Regional Director must issue a confirmation order or submit the plan for review by the Tribunal under Section 232 of the Act within 60 days after receiving an objection or recommendation from the Registrar of Companies and the Official Liquidator. The official liquidator and registrar took longer than anticipated to provide reports on the plan to regional authorities since the legislation does not outline a timeframe for their distribution. The processing of the application by the Regional Director and the issuance of the confirmation order will take longer.
SOLUTIONS PROVIDED BY MCA
The MCA has halted the approval of schemes of arrangement involving wholly-owned subsidiaries or smaller businesses because of the inordinate delays. The transferor and transferee companies will be under the supervision of an official liquidator and registrar for 30 days, during which time they can submit suggestions or objections to the regional head. It is considered that there is no objection to the idea if there is no reaction. Additionally, the Regional Director has been given a deadline of 15 days to confirm a merger or scheme of merger in the absence of objections or suggestions from the Official Liquidator and Registrar, and a deadline of 30 days in the absence of objections or suggestions from the Official Liquidator and Registrar to issue an order for consideration of the scheme under Section 232 of the Act, or until an application outlining objections or remarks is filed with the court. The change further specifies that a decision on an application made according to Section 233 must be made within 60 days of the application’s submission to the Regional Director; otherwise, the plan would be presumed to be unobjectionable and a confirmation order will be made.4.2
APPLICABILITY ON ONGOING MATTERS
The basic rule regarding the prospective/retrospective application of legislation is that amendment that attempt to create or modify the parties’ rights/obligations cannot be implemented retrospectively. Furthermore, the notification notes that the amendment will take effect on June 15, 2023. As a result, the MCA’s relief given in the notification of May 15, 2023 will apply to scheme filed after 15 days. June 2023. The notion of a fast-track merger was developed to accelerate the process, decrease the load on the tribunal, and minimise expenses by streamlining the procedure without the need to submit an application with the court for the merger or amalgamation of certain class of companies. However, these applications take much longer than intended. As a result, the MCA recommended amendments that would limit the time for regulators to submit reports and postpone the processing of applications by regional directors in order to remove hurdles inhibiting the regulations’ timely implementation.
It is worth mentioning that the regulations provide a timeframe for the disposition of applications within 60 days of their submission under Section 233. There are no clear provisions for filing applications within the above-mentioned 60-day timeframe. According to the amendment, application under section 233 must now be disposed of within 60 days of the transferee company submitting the plan, otherwise the plan would be declared authorised by the transferee business, the Regional Director who issues the confirmation order. However, it will be fascinating to watch how the amendment affects the field.
CONCLUSION AND SUGGESTIONS
Although the fast-track merger system under Section 233 of the 2013 Act aims to speed up the restructuring process in India, it is not without problems, and the process is largely untested. We attempted to highlight some of these potential concerns and make recommendations in this regard:
i. Some ROCs believe that e-Form MGT-7 must be completed and submitted with the parent company’s annual returns in order to accurately reflect the parent company’s 100% ownership position in the fully owned subsidiary. Until Spreadsheet MGT-7 shows that the parent business owns the wholly-owned subsidiary at 100%, the ROC will not accept a fast-track merger application. This implies that, in some circumstances, a business could have to wait up to a year before starting an accelerated merger process. In these circumstances, a merger procedure approved by the Tribunal under sections 230 to 232 of the 2013 Act might be quicker than a fast-track merger process can Keep track of the merger’s development and merging procedures!
ii. Creditors’ consent to the scheme may be obtained in a meeting or in writing under section 233 of the 2013 Act (i.e., opposition by consent letters). This rule, however, does not specify whether shareholder assent to the scheme must be acquired in writing. The Convening shareholders’ meeting appears to be called to examine objections/suggestions from regulators/affected people who have been notified about the scheme. Given the Legislature’s spirit and intent, a fast-track merger rule would very certainly not permit getting written permission from shareholders.
iii. The scheme must be authorised in writing or by a majority of nine-tenths value of the creditors indicated in meeting, according to the 2013 act. The phrase “indicated in meeting” implies that if creditors’ consent is to be acquired through a meeting, approval by a majority of the creditors present and voting at the meeting is sufficient. However, if scheme permission is requested by written consent, a majority of all needed creditors’ approval may be required.
iv. If CG is of the opinion that the scheme is not in the public or creditor interest, the fast-track merger procedure may be submitted to an arbitral tribunal, and the longer-term merger procedure under section 232 Act of 2013 must be pursued. This might make a fast-track merger less appealing.
Undoubtedly a good move, the fast-track merging approach. By removing the requirement that specific groups of companies submit applications to the Tribunal, the Legislature hopes to reduce administrative obstacles that arise during Tribunal proceedings. This will hasten the processing of the scheme, lessen the burden on the Tribunal, and save the participating companies money and resources. However, the CG’s strategy to fast-track mergers will decide how successful this course of action is.
Notes
1 Atul Pandey , Abhishek Sanyal and Shreya Gulati, “India: Fast Track Merger: Will It Take The Fast Track Or Derail?”,(Mondaq, 08 September 2017)<https://www.mondaq.com/india/corporate-and-company-law/627302/fast-track-merger-will-it-take-the-fast-track-or-derail> accessed on 9 September 2023.
2 Siddhart shankar, India: Notes on fast-track mergers, (dla piper, 17 october 2022) < https://www.lexology.com/library/detail.aspx?g=d979c06f-db34-48d8-b300-151fa571c211>Accessed On 12 September 2023.
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Author Name: Aastha Sahu
Name of the Institution: National Law Institute University, Bhopal
