India: Rules Of The Game Changed For Restructuring Under The Companies Act, 2013

Last Updated: 23 December 2016
Article by SKP  

The Ministry of Corporate Affairs (MCA) has notified the much-awaited Rules under the Companies Act, 2013 (the Act) which is called the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (vide notification dated 14 December 2016). These rules came into effect on 15 December 2016.

On 7 December 2016 MCA notified certain sections which included sections pertaining to compromises, arrangements and amalgamations. Following these notifications, it was stated that for all matters pertaining to restructuring, the National Company Law Tribunal (NCLT) would now be the sanctioning authority in place of the High Court and accordingly the NCLT will be seized of such matters.

The following is an analysis of the key restructuring sections as read with rules that were notified. The changes brought about by the Act against the erstwhile Companies Act 1956 are: 

  • Section 230 is a principal section empowering compromises or arrangements with creditors and members, Section 232 is a carved out section governing mergers and amalgamations.
  • Section 232 provides for three types of restructuring namely merger, amalgamation and division. Under section 394 of the erstwhile Companies Act, 1956, the wording 'reconstruction of any company' had a broader meaning as compared to the wording used in section 232 which states 'reconstruction of the company or companies involving a merger or an amalgamation'.
  • Section 232, for the first time, provides an explanation for mergers by way of absorption, mergers by formation of a new company and schemes involving division.
  • NCLT is empowered to dispense with the calling of a meeting of the creditors having at least 90% value agreed and confirmed by way of an affidavit. The Act and Rules are silent on dispensation of meeting of shareholders.
  • Treasury stock and holding shares in the name of transferee company are prohibited.
  • The scheme should clearly indicate an appointed date from which it shall be effective.
  • It is mandatory to file the statutory auditor's certificate stating that accounting treatment proposed in the scheme is in conformity with accounting standards prescribed under the Act.
  • A majority, representing 3/4th in value, of the creditors or members or class thereof present and voting is required to approve the scheme and the voting must be done either in person or proxy or postal ballot.

Additional procedures prescribed by the Rules

  • For restructuring, a certain set of enhanced disclosure requirements of circulations for the meeting is prescribed to enable taking an informed decision by different stakeholders.
  • An application for compromise or arrangement or amalgamation is required to be made before the NCLT and on the application, the NCLT may order for a meeting of the creditors/members or class of creditors/member as the case may be.
  • The application inter alia must disclose by affidavit:
  1. all material facts such as the latest financial position and latest auditor's report on the company, pendency of any investigation or proceedings against the company;
  2. reduction of the share capital of the company, if any, must be included in the scheme; and
  3. any scheme of corporate debt restructuring should be consented to by not less than 75% of the secured creditors in value including certain enclosures.
  • The circulation of notice is widened and accordingly notice in all cases shall also be sent to the Central Government, Income Tax Department and if required to other sectoral regulators including Reserve Bank of India (RBI), Securities Exchange Bureau of India (SEBI), Competition Commission of India (CCI), liquidator, etc.
  • The statutory authorities are supposed to make a representation within 30 days and if no representation has been made within the given time, it is presumed that they have no representation to make on the proposal.
  • Sanction of buy-back being part of the scheme can be sanctioned only if it complies with the specific provisions under the Act.
  • Any objection to the scheme of compromise or arrangement can be made only by:
  1. shareholders holding not less than 10% of the shareholding; or
  2. creditors owning not less than 5% of the total outstanding debt as per latest audited financial statement.
  • Fast track restructuring for the merger of two or more small companies or merger between holding company and its wholly-owned subsidiary could be carried out without the NCLT approval. The central government is the authority on this.

The company in respect of which the order is made is required to file a statement indicating whether the scheme is being complied with in accordance with the orders of the NCLT or not with the Registrar every year until the completion of the scheme.

SKP's comments

Although it is appreciable that these Rules are meant to simplify the procedure, the extent and manner of disclosures prescribed are numerous. Closely held companies, mid-size companies, etc. will find these requirements cumbersome. The requirement of an affidavit by 90% of creditors in value for dispensing a meeting is rigorous and consequently, convening their meeting would be a cumbersome process for the above-mentioned companies. Furthermore, there is a clear absence of dispensation of a meeting of shareholders. However, according to Rule 24, the NCLT has the liberty to dispense with any procedure in pursuit of the object of the provisions for the implementation of the scheme, except on those matters which are specifically provided in the Act. Under that empowerment, it could be fairly expected that on petitioning, the NCLT may take the liberty in dispensing with the meeting of shareholders. But, it would be difficult to expect dispensation for creditors meeting if the condition of 90% consent by affidavit is not complied with because this requirement is embodied in the Act. It will be interesting to see if the NCLT takes any divergent view on this aspect in all fairness of the case. Furthermore, the reporting requirement from the Central Government on affairs of the company is done away with. Instead, it is prescribed that on notice of application served on these statutory authorities, a representation must be made within 30 days and if no such representation is received it is a presumption that they have no representation on the proposal. This is a paradigm shift and indeed a great relief. It is likely to ease the process by removing the reporting requirement from the Central Government. The fast-track merger of certain companies is a welcome step but its success would depend on the Central Government's expeditious action.

Overall, the provisions are a welcome step but some creases must be ironed out as far as the meeting process is concerned. The formulation of the NCLT is under the pretext of a dedicated tribunal for the speedy disposal of corporate matters and it is expected that keeping this objective in mind, M&A activities will receive time-bound closure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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