Amalgamation of two or more limited companies

Provisions Procedure Documentation

Related Provisions :

Section 391 - Power to compromise or make arrangements with creditors and members Commentary
Section 392 - Power of Tribunal to enforce compromise and arrangement Commentary
Section 393 - Information as to compromises or arrangements with creditors and members Commentary
Section 394 - Provisions for facilitating reconstruction and amalgamation of companies Commentary
Section 394A - Notice to be given to Central Government for applications under sections 391 Commentary
and 394

Procedure :

I. Procedure for Transferee Company

1. Check whether the Memorandum of Association grants power in its object clause for scheme of
amalgamation. If not, then alter the Memorandum accordingly.

2. If the power to amalgamate is granted only under the `other objects' clause of the Memorandum and
not under `main objects' or `objects incidental or ancillary to the attainment of main objects' of the
Memorandum of Association, then do the following :

(i) Pass a special resolution to authorize amalgamation

(ii) File a duly verified declaration Form No. 20A of Companies General Rules and Forms with Registrar of
Companies

(iii) File Form No. 23 of Companies General Rules and Forms within 30 days of passing of the resolution.

3. Convene a Board meeting and consider the following matters:

(i) Approval of the draft scheme of amalgamation

(ii) Authorisation of filing of application to the court for directions to convene a general meeting

(iii) Filing of petition for confirmation of the scheme by the High Court

4. Submit an application to the court for directions for convening the general meeting by way of Judge's
summons supported by an affidavit. The summons must be in Form No. 33 and the affidavit in Form No.
34 of Companies Court Rules. Ensure that the proposed scheme of amalgamation is attached to the above
mentioned affidavit.

-Attach the following documents with the summons:-

(a) certified copies of the Memorandum and Articles of Association for both the companies;

(b) a certified copy of the latest audited balance sheet and profit and loss account of the company.

5. Forward a copy of the application made to the concerned High Court to the Regional Director of the
region in which the registered office of the company is situated. Note that, usually it is sent by the
company concerned without waiting for the High Court to send it. [ Section 394A ]
6. On hearing of the summons, the order be passed by the concerned High Court in Form No. 35 of
Companies Court Rules. It will specify the following directions:

(i) Time and place of holding the meeting

(ii) Appointing chairman of the meeting

(iii) Fixing the quorum and the procedure to be followed in the meeting for voting by proxy

(iv) Notice of the meeting to be advertised

(v) Time limit for the chairman to submit report to the court with regard to the result of the meeting.

7. Send 21 days clear notice of the general meeting in writing in form No. 36 of Companies Court Rules to
the creditors and/or members individually along with a statement specifying the terms of amalgamation
and any material interests of the Directors, Managing Director or Manager, in any capacity and how the
arrangement will affect their interest.

8. Advertise the notice of the meeting which must be in Form No.38 of Companies Court Rules in such
English and Hindi newspaper as the court may direct not less than 21 clear days before the date fixed for
the meeting. The advertisement must notify a place at which and the manner in which members or
creditors entitled to attend the meeting. Every creditor or member so entitled on making an application in
the manner indicated by the notice, be furnished by the company, free of charge, with a copy of the
statement within 24hours of the requisition being made. [Section 393(3)]

- Where the amalgamation affects the rights of debenture holders of the company, the said statement
must give information and explanations respects the trustees of any deed for securing the issue of the
debentures as it is required to give as respects the company’s directors. [Section 393(2)].

9. In case of a listed company, send three copies of the general meeting along with enclosures to the
stock exchange. (Clause 31 (c) of listing agreement)

10. The Chairman appointed for the meeting or any other person directed to issue the advertisement and
the notices of the meeting must file an affidavit not less than seven days before the date of the meeting
showing that the directions regarding the issue of notices and the advertisement have been duly complied
with. [Rules75 and 76 of Companies Court Rules]

11. At the general meeting pass the following resolutions.

(i) Resolution approving the scheme of amalgamation, subject to the confirmation of the High Court, to be
passed by a majority in number representing 3/4th in value of members voting either in person or by
proxy.

(ii) Special resolution authorizing allotment of shares to persons other than existing shareholders, or an
ordinary resolution be passed subject to getting Central Government's approval for the allotment.[ Section
81 (1A)]

(iii) Resolution to empower Directors to dispose of the shares not taken up by the dissenting shareholders
at their discretion.

(iv) Ordinary or special resolution (as required in Articles) if the company's authorised share capital to
exceed due to the scheme

Ascertain the decision of the meeting only by taking a poll on resolutions.

12. The Chairman will conduct the meeting and will start the proceedings of the meeting by reading the
order of the court and the scheme of Amalgamation (it can be considered as read with the consent of the
creditors present)
- The following details will be announced by the secretary at the instance of the Chairman:

(i) Number of notices sent and amount outstanding

(ii) Number of proxies received and amount represented

(iii) Number of representatives appointed by the companies and amount represented.

- Chairman of the company will explain the rationale of amalgamation.

- Queries will be invited by the Chairman, if any, from the creditors present and the Chairman of the
company will reply to those queries.

- Creditors will have to propose and second the resolution and Chairman of the meeting will direct the
creditors to commence polling which is a statutory requirement. The resolution be deemed to have been
passed if it is voted by 75% of the creditors present either in person or by proxy. The ballot papers be
distributed to the creditors at the time of their entry.

- Scrutineers of the meeting be appointed by the Chairman who will announce the same. On completion of
the poll, the Chairman of the meeting must declare the meeting as concluded.

13. In case of a listed company, send a copy of the general meeting proceedings to the stock exchange
(Clause 31(d) of listing agreement)

14. The Chairman of the meeting must report the result of the meeting to the Court in Form No. 39 within
the time fixed by the judge or where no time has been fixed within seven days after the conclusion of the
meeting. [ Rule 78 of the Companies Court Rules]

15. File Form No. 23 of Companies General Rules and Forms with a copy of the special resolution together
with the filing fees with the Registrar of Companies within30 days of passing the resolution along with a
copy of the following documents :

(i) Resolution approving the scheme of amalgamation

(ii) special resolution passed for issue of shares to persons other than the existing shareholders.

16. For approval of the scheme of amalgamation, file a petition with the concerned High Court in Form No.
40 within seven days of the filing of the report by the Chairman. Note the provisions of Sections391 to
394A in this connection, along with Rules 79 to 87 of the Companies Court Rules.

- The High Court may be moved jointly by the transferor and transferee companies, if the registered office
of both the companies are in the same State. If the registered offices of the companies are in different
States, each company will move the petition in the respective High Court for directions. The petition must
be accompanied by an affidavit in Form No. 3 of the Companies Court Rules.

- A date for hearing the petition be fixed by the Court and advertise the notice of the same in newspapers
at least 10 days before the date of hearing.

- The scheme for amalgamation will be sanctioned by the Court on being satisfied of the following:

(i) Whether, the whole of scheme of compromise or arrangement is annexed to the notice for convening a
meeting being a mandatory provision. [Section 393].

(ii) Whether, the scheme of arrangement or amalgamation is approved by the company by means of a
3/4th majority of the members present and entitled to vote in general meeting and the creditors.
(iii) Whether, the scheme is genuine and bona fide and not against the interests of creditors, the company
and the public interest. Incase the court finds that the scheme is fraudulent, the court may reject the
scheme at the outset without calling a meeting of the creditors.

(iv) Report of Central Government (powers delegated to Regional Directors) or the Registrar of Companies
is necessary to the effect that the affairs of the company which is proposed to be wound-up have not been
conducted in a manner prejudicial to the interest to its members or to public interest, before any scheme
of compromise or arrangement is sanctioned by the court [Section 394, first proviso to sub-section (1)].

(v) Whether the report of official liquidator is there as it is necessary for the High Court to pass an order
for dissolution of transferor-company

The order of the court will be passed in Form No. 41 of Companies Court Rules.

17. File a certified copy of the court's order with the Registrar of Companies within 30 days of the order,
along with Form No. 21 of Companies General Rules and Forms.

18. Attach a copy of Court's order with every copy of the Memorandum of Association issued after the
certified copy of the order has been filed as aforesaid. [Section 391(4) ]

20. Pass a board resolution for allotment of shares to the shareholders of the transferor-company in
exchange of shares held in the transferor-company and fixes a record date for this purpose

II. Procedure for Transferor Company

1. Follow the procedure as given above with the exception that there is no need for the transferee
company to pass the special resolution for offering shares to persons other than the existing
shareholders and to file Form No. 23 of Companies General Rules landforms with the Registrar in
this regard.
Commentary LexDoc Id: 7442
Category Corporate Law

391 Power to compromise or make arrangements with creditors and

members

Act

After the commencement of Companies (Second Amendment) Act, 2002, the power of the court under this
section shall be vested in the Tribunal from such date as may be notified by the Central Government.

Scope

This section is to be read with sections 392 to 394A.

The court may sanction the scheme of compromise or arrangement under some specific section of the Act.
For example, if the compromise or arrangement involves reduction of share capital, the court may have to
pass an order under section 100. If the compromise or arrangement involves amalgamation or
reconstruction, the court may have to pass an order under section 394.

What is compromise or arrangement : Section 390(b) uses the word ‘arrangement’. This word is not
synonymous with the word compromise. The term ‘compromise’ presupposes existence of dispute
between a company and its creditors or members. This section provides a method by which compromise
agreed to by the creditors or members and the company is to be placed before the court for sanction.

The term ‘arrangement’ is of wide import and includes re-organisation of share capital and may also mean
modification of the rights. Where a rearrangement includes a reduction of capital, the procedure for
reduction of capital has also to be followed unless the court orders otherwise – T. Durairajan v. Waterfall
Estate Ltd. (1972) 42 Comp. Cas. 563 (Mad).

Meeting of creditors or of members : Under section 391(1), where a compromise or arrangement is

proposed between a company and its creditors/members, the court may on the application of a company
or any creditors or member of the company order a meeting of the creditors or class of creditors, or of
member or class of members, as the case may be, to be called, held and conducted in such manner as the
court directs.

Such an application may be made either before or after the winding up order has been passed – K.R.
Balasubramanyn v. Bellary Spg. & Wvg. Co. Ltd. (1993) 11 CLA 182 (Kar).

If a company is under winding up proceedings, an application under section 391(1) for compromise or
arrangement can be filed by the liquidator alone and not by the company or any creditor or member of the
company - RBI v. Himachal Grameen Sanchayaka Ltd. (2003) 47 SCL 181 (HP)].

Sanction of scheme by the Court : Where the proposed arrangement or compromise is approved at the
said meeting with or without modification as provided in sub-section (2) of section 391, the company or
its liquidator, as the case may be shall within 7 days of the filing of the report by the Chairman, present a
petition to the court for confirmation of the compromise or arrangement. The court after hearing the
parties concerned proceeds to sanction the compromise (rule 79 of Court Rules).

Under section 391(2), on such petition being present, it was the court who is to sanction the scheme. The
court has no jurisdiction to approve a scheme of arrangement unless it is approved by the prescribed
majority of creditors present and voting under rules 79 and 81 of the Court Rules – Hindustan
Development Corp. Ltd. v. Shaw Wallace & Co. Ltd. (2000) 38 CLA 97 (Cal).

The proviso to section 391(2) lays down that no order sanctioning any compromise or arrangement shall
be made by the court unless the court is satisfied that the company has disclosed to the court 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, the pendency of any investigation proceedings in relation to the
company under sections 235 to 251 and the like.

The expression “latest auditor’s report” used in the proviso to sub-section (2) of section 391 connotes the
report which is available or which should be normally available at the time of filing petition. It is not
compulsory that the company must get accounts audited time and again till petition comes up for hearing.
The court can ask for further details of latest financial position when there is a long gap between filing
petition and report and date of hearing – Zee Interactive Multimedia Ltd., In re. (2002) 50 CLA 20 (Bom).

Meaning of the word 'present and voting ' in section 391(2): Under section 391(2) of the Companies Act,
majority in number by which an arrangement is approved should represent 3/4th in value if creditors/
shareholders who are present and voting at meeting, either in person or by proxy and not of 'total value '
of creditors/ shareholders of company---Swift formulations (P) Ltd, in re (2004) 53 SCL 433 (P&H).

Stay of commencement or continuation of suit or proceedings against the company as contemplated in

sub section (6) of section 391: Section 391(6) provides that the court may, at any time after an
application has been made to it, stay the commencement or continuation of any suit or proceedings
against the company on such terms as the court may think fit, until the application is finally disposed of.
This provision does not apply to criminal proceedings. Directors and guarantors of the company, seeking
sanction of its reconstruction / restructuring scheme, will not be entitled to the benefit of stay of
commencement or continuation of suit or proceedings against the company as contemplated in sub
section (6) of section 391----Sharp Industries Ltd., in re (2005) 65 CLA 47 (Bom).

High court has the power to sanction the scheme of arrangement but has no power to interfere into the
decision taken by the shareholders , etc., who have already approved the scheme : If the proposed
scheme as approved by shareholders or secured creditors or unsecured creditors is in their best interest
and it is appropriate that the scheme of arrangement should be sanctioned, it is not for the High Court to
delve deep into the commercial wisdom exercised by shareholders or secured creditors or unsecured
creditors for High Court lacks such an expertise. The principle is well established that the High Court while
exercising powers under sections 391 and 394 does not sit in appeal over the decision arrived at by the
shareholders or secured creditors or unsecured creditors and minutely examine whether the proposed
scheme of arrangement as approved by shareholders or secured creditors or unsecured creditors, as the
case may be, should be sanctioned or not - T C I Industries Ltd., In re. (2004) 50 SCL 450 (AP).

Court’s order to be filed with Registrar : A scheme when sanctioned by the court has the statutory force
and shall be binding on all the creditors or class of creditors or all members or class of members. An order
made by the court shall have no effect unless a certified copy of the order has been filed with the
Registrar along with Form No. 21 of the Companies General Rules and Forms.

A copy of every such order shall be annexed to every copy of the memorandum of the company issued
after the certified copy of the order has been filed as aforesaid, or in the case of company not having a
memorandum, to every copy so issued of the instrument constituting or defining the constitution of the
company.

Offence Penalty and Compoundability

Failure to annex to the copy of memorandum, a certified copy of the court’s order sanctioning any
compromise or arrangement with the creditors and members, the company and every officer in default
shall be punishable with fine upto Rs. 100 for each copy [sub-section (5)].

Offence compoundable: The above offence punishable under sub-section (5) is compoundable under
section 621A.

Companies (CG's) General Rules and Forms, 1956

Notice of the court’s order shall be filed with Registrar of Companies in Form No. 21.

Court Rules, 1959

Procedure for compromise and arrangement under sections 391 to 394 is dealt in Rules 67-87.
Commentary LexDoc Id: 7441
Category Corporate Law

392 Power of High Court to enforce compromises and arrangements

Act

After the commencement of Companies (Second Amendment) Act, 2002, the power of court under this
section shall be vested in the Tribunal from such date as may be notified by the Central Government.

Scope

Court’s power to enforce compromise and arrangements arrived at under section 391 : This section details
the powers of the court for the enforcement of compromise and arrangement. The court has power to
modify a scheme of compromise or arrangement which has been sanctioned by it under section 391(2).
The court cannot modify a scheme which has not yet been sanctioned by it.

A scheme of compromise or arrangement may be modified :

On an application made by any person interested in the affairs of the company : Thus, any person
interested is not confined to creditor or liquidator, but also includes a person who has obtained a transfer
of shares in the company but has not yet been registered as a member – S. K. Gupta v. K. P. Jain (1979)
49 Comp. Cas. 342 (SC), reversing the decision of the Delhi High Court in normal'> K. P. Jain v. S. K.
Gupta (1978) 48 Comp. Cas. 774 (Delhi). .

By the court itself: This power can be exercised suo motu without calling a meeting of the members or
creditors – Ved Mitra (normal'> Dr.) v. Globe Motors Ltd. (1978) 48 Comp. Cas. 64 (Delhi).

The court can make addition to the scheme or omission therefrom solely for the purpose of making it
workable. If the modification consists merely of deletion of certain clauses which are extraneous to the
scheme, the demerger scheme minus the deleted clauses do not have to be resubmitted to the
shareholders for their approval – Renuka Datla v. normal'> Duphar Interfran Ltd. (2002) 46 CLA 79
(Bom).

When the winding up order can be passed : A winding up order can be passed by the court only when the
court is absolutely satisfied that the scheme, even with modification cannot be worked out – J. K.
(normal'> Bombay) Pvt. Ltd. v. normal'> New Kaiser-I-Hind Spg. & Wvg. Co. Ltd. (1970) 40 Comp. Cas.
689 (SC). Thus, before passing an order for winding up of a company, the first alternative is to modify the
scheme of compromise or arrangement for the proper working of the compromise or arrangement.

The court before making an order for winding up of the company under section 392(2) of the Act, has to
form an opinion on two essential points, namely :

1. that the company’s affairs are being conducted in a manner oppressive to any member of the
company, and

2. that to wind up the company would unfairly prejudice such member or members but that otherwise
the facts would justify the making of a winding up order on the ground that it was just and equitable, the
company should be wound up.

A scheme can be modified by the court either at the time of the order or after it is sanctioned. Only such
modifications as may be necessary for the proper, efficient and smooth working of the scheme can be
made. The modification may be made at the instance of any person who is interested in the affairs of the
company or suo motu by the court - Ind Telesoft (P.) Ltd. v. Jawad Ayaz [2003] 54 CLA 283 (Kar.).

It is imperative that the court’s opinion on these points must be formed in the affirmative before any order
could be made for winding up the company – Maharani Lalita Rajya Lakshmi v. Indian Motor Co.
(normal'> Hazaribagh) Ltd. & others AIR 1961 Cal 127.
Commentary LexDoc Id: 7440
Category Corporate Law

393 Information as to compromises or arrangements with creditors and

members

Act

This section lays down that, before considering a scheme of compromise or arrangement the court must
be satisfied that the whole scheme of compromise or arrangement is annexed to the notice for convening
a meeting under section 391. Compliance with the provisions of this section is mandatory.

The scheme annexed to the notice shall contain particulars relating to -

the terms and conditions of the scheme

effect of the scheme

Disclosure of the exchange ratio of shares should be made. The procedure by which it was worked out is
not a matter relating to the effect of the scheme and need not be disclosed in the circular. The purpose of
such disclosure is to enable the shareholders to make their objections if any, and once they have
approved the scheme there is no chance of questioning its arithmetics subsequently - Sidhpur Mills Ltd .,
In re., AIR 1962 Guj. 305 .

directors' interest, if any, must be stated in the statement accompanying the scheme [sub-section (1)(a)].

If the notice calling the meeting is given by way of advertisement, then such notice shall include either the
statement as aforesaid or a notification of the place at which and the manner in which creditors or
members entitled to attend the meeting may obtain copies of such a statement [sub-section (1)(b)].

The explanatory statement that is required under clause (a) of sub section (1) of section 393 is different
from the one required under section 173 with notice to members on a special resolution. The ratio of the
supreme Court's judgment in Hindustan Lever Employee's union v Hindustan LeverLtd (1994) 15 CLA 318
will apply in all such cases ---HCL Infosystems Ltd., in re (2004) 62 CLA 263 (Delhi).

Offence compoundable

An offence punishable under sub-section (4) or (5) is compoundable under section 621A [for details, see
Ready Reckoner - RR.8].

Companies Court Rules

Under rule 73, notice of the meeting to be given to creditors and/or members or to the creditors or
members of any class, as the case may be, shall be in Form No. 36 and shall be sent to them individually,
by post under certificate of posting to their last known address, not less than 21 clear days before the
meeting. It shall be accompanied by a copy of the proposed compromise or arrangement and of the
statement required to be furnished under section 393 and a form of proxy in Form No. 37.

Under rule 74, the notice of the meeting shall be advertised in such newspaper and in such manner as the
Court may direct, not less than 21 clear days before the date of meeting. The advertisement shall be in
form No. 38.3