Section 230 of Companies Act, 2013 (Power To Compromise or Make Arrangements with Creditors and Members)
Summary: Section 230 of the Companies Act, 2013, provides a legal framework for companies to propose compromises or arrangements with their creditors or shareholders. This section allows companies to restructure their business, financial obligations, or settle disputes, subject to the approval of the National Company Law Tribunal (NCLT). It outlines the process for calling a meeting between the company, creditors, or members to discuss the proposed scheme. The application must disclose all relevant financial information, including audit reports, capital reduction, and debt restructuring details. Notices for such meetings must be sent to creditors, shareholders, and regulatory bodies, including the RBI and SEBI. If three-fourths of the participants approve the scheme, it becomes binding on all parties. The Tribunal’s order must comply with specific conditions, including safeguards for creditors and shareholders. Section 230 also allows for corporate restructuring, conversion of shares, and buy-back provisions, and ensures compliance with SEBI regulations for listed companies. It provides a mechanism for companies facing financial distress to reorganize while balancing the interests of all stakeholders.
Introduction
Section 230 of the Companies Act, 2013, provides a framework for the compromise, arrangement, and reconstruction of a company. It allows companies, under certain conditions, to reach agreements with their creditors or shareholders to restructure their financial obligations, reorganize their business, or settle disputes. This section facilitates corporate restructuring by enabling companies to propose schemes of arrangement that can be sanctioned by the National Company Law Tribunal (NCLT). It aims to provide a legal mechanism for companies facing financial difficulties to continue their operations while addressing the interests of creditors and shareholders.
1. Where a compromise or arrangement is proposed between a company and its creditors or its members or any class of them, the Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, [appointed under this Act or under the Insolvency and Bankruptcy Code, 2016 (31 of 2016), as the case may be,] order a meeting of the creditors or of the members or class of them, as the case may be, to be called, held and conducted in such manner as the Tribunal directs.
2. The Applicant, by whom an application is made under subsection (1), shall disclose to the Tribunal by affidavit –
a) all material facts relating to the company, such as the latest financial position of the company, the latest auditors 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, included in the compromise or arrangement;
c) any scheme of corporate debt restructuring consented to by not less than seventy-five per cent. of the secured creditors in value, including—
i) a creditors responsibility statement in the prescribed form.
ii) Safeguards for the protection of other secured and unsecured creditors.
iii) Report by the auditor that the fund requirements of the company after the corporate debt restructuring as approved shall conform to the liquidity test based upon the estimates provided to them by the Board.
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.
3. A notice of such meeting (as mentioned in subsection 1) shall be sent to all the creditors or class of creditors and to all the members or class of members and the debenture-holders of the company, individually at the address registered with the company which shall be accompanied by
– a statement disclosing the details of the compromise or arrangement,
– a copy of the valuation report, if any, and explaining their effect on creditors, key managerial personnel, promoters and non-promoter members, and the debenture-holders and
– the effect of the compromise or arrangement on any material interests of the directors of the company or the debenture trustees, and such other matters as may be prescribed:
Provided that such notice and other documents shall also be placed on the website of the company, if any, and in case of a listed company, these documents shall be sent to the Securities and Exchange Board and stock exchange where the securities of the companies are listed, for placing on their website and shall also be published in newspaper:
4. A notice under sub-section (3) shall provide that the persons to whom the notice is sent may vote in the meeting either themselves or through proxies or by postal ballot to the adoption of the compromise or arrangement within one month from the date of receipt of such notice:
Provided that any objection to the compromise or arrangement shall be made only by persons holding not less than ten per cent. of the shareholding or having outstanding debt amounting to not less than five per cent. of the total outstanding debt as per the latest audited financial statement
5. A notice under sub-section (3) along with all the documents in such form as may be prescribed shall also be sent to the Central Government, the income-tax authorities, the Reserve Bank of India, the Securities and Exchange Board, the Registrar, the respective stock exchanges, the Official Liquidator, the Competition Commission of India and such other sectoral regulators or authorities which are likely to be affected by the compromise or arrangement and shall require that representations, if any, shall be made within a period of thirty days from the date of receipt of such notice, failing which, it shall be presumed that they have no representations to make on the proposals.
6. Where, at a meeting held in pursuance of sub-section (1), majority of persons representing three fourths in value, voting in person or by proxy or by postal ballot, agree to any compromise or arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order, the same shall be binding on the company, all the other parties.
7. An order made by the Tribunal shall provide for all or any of the following matters, namely:
a) where the compromise or arrangement 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 compromise or arrangement results in the variation of the shareholders rights, it shall be complied with the provisions of section 48.
d) if the compromise or arrangement is agreed to by the creditors under, any proceedings pending before the Board for Industrial and Financial Reconstruction shall abate;
e) such other matters including exit offer to dissenting shareholders, if any, as are in the opinion of the Tribunal necessary.
Provided that no compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the company’s auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under section 133
8. The order of the Tribunal shall be filed with the Registrar by the company within a period of thirty days of the receipt of the order.
9. The Tribunal may dispense with calling of a meeting of creditor or class of creditors where such creditors or class of creditors, having at least ninety per cent. value, agree and confirm, by way of affidavit, to the scheme of compromise or arrangement.
10. No compromise or arrangement in respect of any buy-back of securities under this section shall be sanctioned by the Tribunal unless such buy-back is in accordance with the provisions of section 68.
11. Any compromise or arrangement may include takeover offer made in such manner as may be prescribed:
Provided that in case of listed companies, takeover offer shall be as per the regulations framed by the Securities and Exchange Board.
12. An aggrieved party may make an application to the Tribunal in the event of any grievances with respect to the takeover offer of companies other than listed companies in such manner as may be prescribed.
Explanation:
1. For the removal of doubts, it is hereby declared that the provisions of section 66 shall not apply to the reduction of share capital effected in pursuance of the order of the Tribunal under this section.
2. Arrangement: Arrangement includes a reorganization of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of those methods.
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