The erstwhile Companies Act 1956 (1956 Act) prescribed a court driven procedure for compromises, arrangements and amalgamations in respect of companies (Arrangements), which was fairly cumbersome and time-consuming. This necessitated a need to bring about pragmatic reforms to the procedure for Arrangements, with an aim to make the corporate restructuring process in India smooth and efficient. Accordingly, the provisions pertaining to Arrangements under the Companies Act 2013 (2013 Act) were brought into effect from 15 December 2016.
Sections 230 to 234 of the 2013 Act prescribe the procedure for Arrangements. The power to exercise judicial oversight in respect of such Arrangements, which was earlier vested with the jurisdictional High Courts, has now been entrusted upon the newly established National Company Law Tribunal (Tribunal). One of the most striking features of the new regime for Arrangements is the option given to: (a) small companies; and (b) a holding company and its wholly owned subsidiary, to use the fast track merger process contemplated under Section 233 of the 2013 Act. The process envisages doing away with the requirement of approaching the Tribunal for seeking sanction to a scheme of Arrangement (Scheme), and instead, seeking confirmation of the Central Government (CG) with some reporting and procedural obligations cast upon the companies.
Even prior to the notification of Section 233 of the 2013 Act, the approach of Courts was inclined towards facilitating quick mergers between certain groups of companies. For example, in relation to schemes involving amalgamation of wholly owned subsidiaries with their holding companies, various High Courts have, in the past, allowed the holding company from dispensing with the requirement of initiating separate proceedings before its jurisdictional High Court, since no compromise or arrangement is proposed between the holding company and its shareholders and creditors.
The procedure for the fast track merger process is prescribed under Section 233 of the 2013 Act read with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, and broadly envisages the following steps:
Notice inviting objections and suggestions from regulatory bodies/affected persons
Each company involved in the Scheme is required to issue a notice in prescribed form for inviting objections and suggestions from the jurisdictional Registrar of Companies (ROC), the Official Liquidator (OL) and persons likely to be affected by the Scheme, within 30 days from the date of the notice.
Filing of declaration of solvency
Each company involved in the Scheme is required to file a declaration of solvency with the jurisdictional ROC.
Convening shareholders’ and creditors’ meetings
The objections/suggestions received by the regulatory bodies and affected persons are considered by the companies in their respective general meetings. The Scheme must be approved by: (i) members holding atleast 90% of the total number of shares and; (ii) majority in number representing 9/10th in value of the creditors, which should be indicated either in a creditors’ meeting or in writing.
Filing of Scheme with CG, ROC and OL
Within 7 days from conclusion of the meeting of the members and creditors (if required), the transferee company is required to file: (a) a copy of the approved Scheme and; (b) report of the result of members’ and creditors’ meetings, with the CG and the jurisdictional ROC and OL.
Registration of the Scheme by CG
(a) Non-communication/non-receipt of objections/suggestions to Scheme:
If, within 30 days of filing of Scheme, the CG does not receive any objections/suggestions to the Scheme from the ROC or OL, it is presumed that they have no objections to the Scheme, and the CG registers the Scheme by issuing a confirmation order to the companies involved.
(b) Communication of objections/suggestions to the Scheme:
If, within 30 days of filing of Scheme, the CG receives objections/suggestions to the Scheme from the ROC or OL, then there are two possible scenarios:
(i) If the CG, after receipt of objections/ suggestions from ROC/OL or for any reason is of the opinion that Scheme is not in public interest or in the interest of the creditors: then the CG may file an application to the Tribunal within 60 days of the receipt of the Scheme, stating its objections and requesting that the Tribunal may consider the Scheme under the regular procedure prescribed under Section 232 of the 2013 Act. On receipt of an application from the CG or from any person, if the Tribunal is of the opinion that the Scheme should be considered as per procedure laid down in Section 232 of the 2013 Act, it may direct accordingly or it may confirm the Scheme by passing such order as it deems fit.
(ii) if the CG does not have any objection to the Scheme or it does not file any application before the Tribunal, it shall be deemed that it has no objection to the Scheme.
Filing of order with the ROC
The confirmation order of the CG or the order of the Tribunal, as the case be, is filed by each of the companies, with the jurisdictional ROC.
Though the fast track merger regime prescribed under Section 233 of the 2013 Act attempts to facilitate the restructuring process in India, yet it is not entirely free from lacunae and as such the process remains largely untested. We have made an attempt to highlight a few of such possible issues and provide our suggestions thereon:
(i) Some ROCs have taken a view that to access the fast track merger route, the 100% shareholding of the parent company in its wholly owned subsidiary should be reflected in the annual return in respect of the immediately preceding financial year, filed by the parent company with the ROC under eform MGT-7. Until the 100% shareholding of the parent company in its wholly owned subsidiary is reflected in eform MGT-7, presently, the ROCs are not clearing any fast track merger applications. This means that in some cases, companies may have to wait for upto a year to access the fast track merger process, and in such circumstances, a Tribunal approved merger process under Sections 230- 232 of the 2013 Act may actually be faster than the fast track merger process!
(ii) Under Section 233 of the 2013 Act, creditors’ consent to the Scheme may be obtained either in a meeting or by way of writing (i.e., through consent letters objections). However, the provision is silent on whether shareholders’ consent to the Scheme can be obtained by way of writing. It appears that the purpose of convening shareholders’ meeting is for consideration of the objections/suggestions to the Scheme raised by the regulatory bodies/affected persons to whom notice is issued. Keeping in mind the spirit and intention of the legislature, it appears that obtaining shareholders’ consents in writing may not be allowed under the fast track merger regime.
(iii) The 2013 Act requires the Scheme to be approved by majority in number representing 9/10th in value of the creditors indicated in a meeting or otherwise approved in writing. The term ‘indicated in a meeting’ suggests that if the approval of the creditors by way of a meeting is sought for, then approval by the requisite number and majority of the creditors present and voting in a meeting may suffice. However, in the event approval to the Scheme is sought for by way of written consents, then approval by the requisite number and majority of the all the creditors may be required.
(iv) If the CG is of the view that the Scheme is not in public interest or in the interest of the creditors, fast track merger proceedings may be transferred to the Tribunal and be required to follow the long term merger process prescribed under Section 232 of the 2013 Act. This may make fast track mergers less attractive.
The fast track merger regime is definitely a welcome move. By doing away with the requirement of approaching the Tribunal for certain group of companies, legislature has sought to remove administrative barriers faced in Tribunal proceedings, thereby resulting in faster disposal of Schemes, reduction in burden on Tribunals and reduction in costs and resources of the companies involved. However, the success of this route primarily depends on how proactive the CG is in its approach to fast track mergers.