Merger & Amalgamation of Companies(Section 232) - Company Law B Com Notes | EduRev

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B Com : Merger & Amalgamation of Companies(Section 232) - Company Law B Com Notes | EduRev

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Merger and Amalgamation of Companies (Section 232)

(a) Tribunal’s power to call meeting of creditors or members, with respect to merger or amalgamation of companies Section 232 (1) states that when an application is made to the Tribunal under Section 230 for the sanctioning of a compromise or an arrangement proposed between a company and any such persons as are mentioned in that Section, and it is shown to the Tribunal:

  • that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of the company or companies involving merger or the amalgamation of any two or more companies, and
  • that under the scheme, the whole or any part of the undertaking, property or liabilities of any company (hereinafter referred to as the transferor company) is required to be transferred to another company (hereinafter referred to as the transferee company), or is proposed to be divided among and transferred to two or more companies, the Tribunal may on such application, order a meeting of the creditors or class of creditors or the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal may direct and the provisions of Sub-Sections (3) to (6) of Section 230 shall apply mutatis mutandis.

(b) Circulation of documents for members/creditors meeting Section 232 (2) states that when an order has been made by the Tribunal under Sub-Section (1), merging companies or the companies in respect of which a division is proposed, shall also be required to circulate the following for the meeting so ordered by the Tribunal, namely: 

  1. the draft of the proposed terms of the scheme drawn up and adopted by the directors of the merging company.
  2. confirmation that a copy of the draft scheme has been filed with the Registrar.
  3. a report adopted by the directors of the merging companies explaining effect of compromise on each class of shareholders, key managerial personnel, promoters and non-promoter shareholders laying out in particular the share exchange ratio, specifying any special valuation difficulties.
  4. the report of the expert with regard to valuation, if any.
  5. a supplementary accounting statement if the last annual accounts of any of the merging company relate to a financial year ending more than six months before the first meeting of the company summoned for the purposes of approving the scheme.

(c) Sanctioning of scheme by tribunal: 

Section 232 (3) states that the Tribunal, after satisfying itself that the procedure specified in Sub-Sections (1) and (2) has been complied with, may, by order, sanction the compromise or arrangement or by a subsequent order, make provision for the following matters, namely:

  1. the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of the transferor company from a date to be determined by the parties unless the Tribunal, for reasons to be recorded by it in writing, decides otherwise.
  2. the allotment or appropriation by the transferee company of any shares, debentures, policies or other like instruments in the company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person: No transferee company can hold shares in its own name or under any trust. A transferee company shall not, as a result of the compromise or arrangement, hold any shares in its own name or in the name of any trust whether on its behalf or on behalf of any of its subsidiary or associate companies and any such shares shall be cancelled or extinguished.
  3. the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company on the date of transfer.
  4. dissolution, without winding-up, of any transferor company.
  5. the provision to be made for any persons who, within such time and in such manner as the Tribunal directs, dissent from the compromise or arrangement.
  6. where share capital is held by any non-resident shareholder under the foreign direct investment norms or guidelines specified by the Central Government or in accordance with any law for the time being in force, the allotment of shares of the transferee company to such shareholder shall be in the manner specified in the order.
  7. the transfer of the employees of the transferor company to the transferee company.
  8. when the transferor company is a listed company and the transferee company is an unlisted company:
    • the transferee company shall remain an unlisted company until it becomes a listed company.
    • if shareholders of the transferor company decide to opt out of the transferee company, provision shall be made for payment of the value of shares held by them and other benefits in accordance with a predetermined price formula or after a valuation is made, and the arrangements under this provision may be made by the Tribunal:
  9. The amount of payment or valuation under this clause for any share shall not be less than what has been specified by the Securities and Exchange Board under any regulations framed by it.
  10. where the transferor company is dissolved, the fee, if any, paid by the transferor company on its authorised capital shall be set-off against any fees payable by the transferee company on its authorised capital subsequent to the amalgamation, and
  11. such incidental, consequential and supplemental matters as are deemed necessary to secure that the merger or amalgamation is fully and effectively carried out:

(d) Auditor’s certificate as to conformity with accounting standard 

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.

(e) Transfer of property or liabilities

Sub-Section (4) stares that an order under this Section provides for the transfer of any property or liabilities, then, by virtue of the order, that property shall be transferred to the transferee company and the liabilities shall e transferred to and become the liabilities of the transferee company and any property may, if the order so directs, be freed from any charge which shall by virtue of the compromise or arrangement, cease to have effect.

(f) Certified copy of the order to be filed with the registrar Section 232(5) states that every company in relation to which the order is made shall cause a certified copy of the order to be filed with the Registrar for registration within thirty days of the receipt of certified copy of the order.

(g) Effective date of the scheme

Section 232 (6) states that the scheme under this Section shall clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date.

(h) Annual statement certified by CA/CS/CWA to be filed with registrar every year until the completion of the scheme

Section 232 (7) states that every company in relation to which the order is made shall, until the completion of the scheme, file a statement in such form and within such time as may be prescribed with the Registrar every year duly certified by a chartered accountant or a cost accountant or a company secretary in practice indicating whether the scheme is being complied with in accordance with the orders of the Tribunal or not.

(i) Punishment

Section 232 (8) states that if a transferor company or a transferee company contravenes the provisions of this Section, the transferor company or the transferee company, as the case may be, shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees and every officer of such transferor or transferee company who is in default, shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.

(j) Compromise or arrangement includes ‘demerger’

(1) Rule 15.31 of the Rules made under Chapter XV states that For the purpose of Chapter XV of the Act, ‘demerger’ in relation to companies means transfer, pursuant to scheme of arrangement by a ‘demerged company’ of its one or more undertakings to any ‘resulting company’ in such a manner as provided in Section 2 (19AA) of the Income Tax Act, 1961, subject to fulfilling the conditions stipulated in Section 2 (19AA) of the Income Tax Act and shares have been allotted by the ‘resulting company’ to the share holders of the .demerged company’ against the transfer of assets and liabilities.

(2) For the purpose of the compromise in the nature of ‘demerger’ till the Accounting Standards is prescribed for the purpose of ‘demerger’, the Accounting Treatment shall be in accordance with the conditions stipulated in Section 2 (19AA) of the Income Tax Act, 1961 and

a) in the books of the ‘demerged company’:

  1. Assets and liabilities shall be transferred at the same value appearing in the books, without considering any revaluation or writing off of assets carried out during the preceding two financial years, and
  2. The difference between the value of assets and liabilities shall be credited to capital reserve or debited to good will.

b) In the books of ‘resulting company: 

  1. Assets and liabilities of ‘demerged company’ transferred shall be recorded at the same value appearing in the books of the ‘demerged company’ without considering any revaluation or writing off of assets carried out during the preceding two financial years.
  2. Shares issued shall be credited to the share capital account, and
  3. The excess or deficit, if any, remaining after recording the aforesaid entries shall be credited to capital reserve or debited to good will as the case may be.

A certificate from a Chartered Accountant is to be submitted to the Tribunal to the effect that both ‘demerged company’ and ‘resulting company’ have complied with conditions as above and accounting treatment prescribed in this rule.

Merger and Amalgamation of Certain Companies (Section 233) 

Section 233 prescribes simplified procedure for Merger or amalgamation of

  • two or more small companies or
  • between a holding company and its wholly-owned subsidiary company or
  • such other class or classes of companies as may be prescribed.

What is a holding company?

As per Section 2 (46) 'holding company', in relation to one or more other companies, means a company of which such companies are subsidiary companies

What is a small company?

As per Section 2 (85) ‘‘small company’’ means a company, other than a public company:

  • paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees, or
  • turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this clause shall apply to:

  1. a holding company or a subsidiary company.
  2. a company registered under Section 8. or
  3. a company or body corporate governed by any special Act. 

What is a subsidiary company? 

As per 2 (87) 'subsidiary company' or 'subsidiary', in relation to any other company (that is to say the holding company), means a company in which the holding company:

(a) controls the composition of the Board of Directors, or

(b) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

Explanation: For the purposes of this clause:

(1) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause:

  • or sub-clause
  • is of another subsidiary company of the holding company.

(2) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors. 

(3) the expression 'company' includes any body corporate.

(4) 'layer' in relation to a holding company means its subsidiary or subsidiaries.

Merger of small companies/holding and subsidiary companies [Section 233]

Accordingly Sub-Section (1) of Section 233 states that notwithstanding the provisions of Section 230 and Section 232, a scheme of merger or amalgamation may be entered into between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be prescribed, subject to the following, namely:

  • a notice of the proposed scheme inviting objections or suggestions, if any, from the Registrar and Official Liquidators where registered office of the respective companies are situated or persons affected by the scheme within thirty days is issued by the transferor company or companies and the transferee company;
  • the objections and suggestions received are considered by the companies in their respective general meetings and the scheme is approved by the respective members or class of members at a general meeting holding at least ninety per cent. of the total number of shares;
  • each of the companies involved in the merger files a declaration of solvency, in the prescribed form, with the Registrar of the place where the registered office of the company is situated; and
  • the scheme is approved by majority representing nine-tenths in value of the creditors or class of creditors of respective companies indicated in a meeting convened by the company by giving a notice of twenty-one days along with the scheme to its creditors for the purpose or otherwise approved in writing.

Rule 15.25 states as follows with respect to Section 233(1) 

(a) For the purposes of Sub-Section (1) of Section 233, a company shall be deemed to be 'wholly owned subsidiary' only if hundred per cent of share capital is held by the holding company except the shares held by the nominee or nominees to ensure that the number of members of subsidiary company is not reduced below the statutory limit as provided in Section 187.

(b) For the purposes of clause (c) of Sub-Section (1) of Section 233, the declaration of solvency shall be filed by the each of the companies involved in a scheme of compromise or arrangement involving merger in Form No. 15.12 along with such fee as provided in Annexure ‘B ‘before convening the meeting of members and creditors for approval of the scheme.

(c) For the purposes of clause (b) and (d) of Sub-Section (1) of Section 233, the notice of the meeting to the members and creditors shall be accompanied by:

  1. a statement, as far as applicable, referred to in Sub-Section (3) of Section 230.
  2. the declaration of solvency made in pursuance of clause (c) of Sub-Section (1) of Section 233.
  3. a copy of the scheme.

Transferee Company to file a copy of scheme approved 

Section 233 (2) states that the transferee company shall file a copy of the scheme so approved in the manner as may be prescribed, with the Central Government, Registrar and the Official Liquidator where the registered office of the company is situated.

Central Government to issue confirmation order, where there are no objections or suggestions from registrar or official liquidator

Section 233 (3) states that on the receipt of the scheme, if the Registrar or the Official Liquidator has no objections or suggestions to the scheme, the Central Government shall register the same and issue a confirmation thereof to the companies.

Objections if any by the registrar or official liquidator to be communicated to the central government

Section 233 (4) states that if the Registrar or Official Liquidator has any objections or suggestions, he may communicate the same in writing to the Central Government within a period of thirty days. If no such communication is made, it shall be presumed that he has no objection to the scheme.

Application by Central Government to the Tribunal

Section 233 (5) states that if the Central Government after receiving the objections or suggestions or for any reason is of the opinion that such a scheme is not in public interest or in the interest of the creditors, it may file an application before the Tribunal within a period of sixty days of the receipt of the scheme under SubSection (2) stating its objections and requesting that the Tribunal may consider the scheme under Section 232.

Tribunal’s Action to Central Government’s application

Section 233 (6) states that on receipt of an application from the Central Government or from any person, if the Tribunal, for reasons to be recorded in writing, is of the opinion that the scheme should be considered as per the procedure laid down in Section 232, the Tribunal may direct accordingly or it may confirm the scheme by passing such order as it deems fit: If the Central Government does not have any objection to the scheme or it does not file any application under this Section before the Tribunal, it shall be deemed that it has no objection to the scheme.

Registrar having jurisdiction over transferee company has to be communicated

Section 233 (7) states that a copy of the order under Sub-Section (6) confirming the scheme shall be communicated to the Registrar having jurisdiction over the transferee company and the persons concerned and the Registrar shall register the scheme and issue a confirmation thereof to the companies and such confirmation shall be communicated to the Registrars where transferor company or companies were situated.

Effect of registration of the scheme

Section (8) states that the registration of the scheme under subSection (3) or Sub-Section (7) shall be deemed to have the effect of dissolution of the transferor company without process of winding up.

Section 233 (9) states that the registration of the scheme shall have the following effects, namely:

  • transfer of property or liabilities of the transferor company to the transferee company so that the property becomes the property of the transferee company and the liabilities become the liabilities of the transferee company.
  • the charges, if any, on the property of the transferor company shall be applicable and enforceable as if the charges were on the property of the transferee company.
  • legal proceedings by or against the transferor company pending before any court of law shall be continued by or against the transferee company, and
  • where the scheme provides for purchase of shares held by the dissenting shareholders or settlement of debt due to dissenting creditors, such amount, to the extent it is unpaid, shall become the liability of the transferee company.

Transferee Company not to hold any share in its own name or trust and all such shares are to be cancelled or extinguished 

Section 233 (10) states that a transferee company shall not on merger or amalgamation, hold any shares in its own name or in the name of any trust either on its behalf or on behalf of any of its subsidiary or associate company and all such shares shall be cancelled or extinguished on the merger or amalgamation.

Transferee Company to file an application with Registrar along with the scheme registered

Section 233 (11) The transferee company shall file an application with the Registrar along with the scheme registered, indicating the revised authorised capital and pay the prescribed fees due on revised capital. The fee, if any, paid by the transferor company on its authorised capital prior to its merger or amalgamation with the transferee company shall be set-off against the fees payable by the transferee company on its authorised capital enhanced by the merger or amalgamation.

Merger or Amalgamation of a Company with a Foreign Company (Section 234)

Section 234 (2) Subject to the provisions of any other law for the time being in force, a foreign company, may with the prior approval of the Reserve Bank of India, merge into a company registered under this Act or vice versa and the terms and conditions of the scheme of merger may provide, among other things, for the payment of consideration to the shareholders of the merging company in cash, or in Depository Receipts, or partly in cash and partly in Depository Receipts, as the case may be, as per the scheme to be drawn up for the purpose.

For the purposes of Sub-Section (2), the expression 'foreign company' means any company or body corporate incorporated outside India whether having a place of business in India or not. Section 234 (1) states that the provisions of this Chapter unless otherwise provided under any other law for the time being in force, shall apply mutatis mutandis to schemes of mergers and amalgamations between companies registered under this Act and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government. The Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and amalgamations provided under this Section.

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