Power to Compromise or Make Arrangements With Creditors & Members(Section 230) - Company Law | Company Law - B Com PDF Download

Power to Compromise or Make Arrangements with Creditors and Members (Section 230)

(a) Where a compromise or arrangement is proposed:

1. Between a company and its creditors or any class of them, or
2. Between a company and 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, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs. 

[Resolution is required to be filed in Form No. MGT-14 as per Section 117(3)(d)] 

(b) The application to the tribunal to disclose by affidavit:

1. All material facts relating to the company, such as the latest financial position of the company, the latest auditor’s report on the accounts of the company and the pendency of any investigation or proceedings against the company.
2. Reduction of share capital of the company, if any, included in the compromise or arrangement.
3. Any scheme of corporate debt restructuring consented to by not less than seventy-five per cent. of the secured creditors in value, including:
   • A creditor’s responsibility statement in the prescribed form;
   • Safeguards for the protection of other secured and unsecured creditors;
   • 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;
   • Where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India, a statement to that effect; and
   • 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.

(c) Notice of the meeting called in pursuant to the order of the tribunal 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:

1. A statement disclosing the details of the compromise or arrangement,
2. A copy of the valuation report, if any, and
3. Explaining their effect on creditors, key managerial personnel, promoters and non-promoter members, and the debenture holders, and
4. The effect of the compromise or arrangement on any material interests of the directors of the company or the debenture trustees, and
5. Such other matters as may be prescribed: 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 newspapers in such manner as may be prescribed: When the notice for the meeting is also issued by way of an advertisement, it shall indicate the time within which copies of the compromise or arrangement shall be made available to the concerned persons free of charge from the registered office of the company.

(d) Procedural aspects relating to notice under Rule 15.3 

Rule 15.3 states that the notice of the meeting pursuant to the order of the Tribunal to be given in Form No. 15.3, and shall be sent individually specifying therein,

(1) disclosure of nature and extent of interest and effect of compromise or arrangement on such interest of:

• Key managerial personnel.
• Directors.
• Promoters.
• Non-promoter members.
• Depositors.
• Creditors.
• Debenture holders.
• Deposit and debenture trustee(s).
• Promoters, directors, and key managerial personnel of holding company, subsidiary and associate companies.
• Employees of the company stating clearly that the changes, if any, in the terms and conditions of employment are not detrimental to the interest of the employees.

(2) Where there is no interest or there is no effect on such interest of any promoter, director or key managerial personnel, a statement to the effect that there is no interest or there is no effect of the scheme of compromise or arrangement on such interests of such persons. 

(3) Investigation proceedings, if any, pending against the company or against any promoter, director or key managerial personnel of such company.

(4) Details of shareholding of directors, key managerial personnel and promoters of the company as on the date of making this statement and change in their shareholding in the last six months including the date on which and price at which change took place.

(5) Details of any No-objection(s), approvals or sanctions, if already received from the concerned authorities for the compromise or arrangement.

(6) Details of the availability of the following documents for obtaining extract from or for making copies of or for inspection by the members and creditors, namely:

• Latest audited financial statements of the company including consolidated financial statements.
• Copy of the order of Tribunal in pursuance of which the meeting is to be convened.
• Copy of scheme of compromise or arrangement.
• Contracts or agreements material to the compromise or arrangement, And
• Such other information/documents as the Board/ Management believes necessary and relevant for making decision for / against the scheme.

(7) declaration to the effect that the scheme is in the best interests of the employees, creditors, debenture holders, members particularly non-promoter members and minority shareholders of the company, as detailed in the scheme.

(8) Status of approval(s) of regulatory or any other authority(ies), required, if any in connection with compromise or arrangement.

(9) The notice shall provide for the information required under sub Section (4) of Section 230 of the Act. 

(e) Notice to provide for voting by themselves or through proxy or through postal ballot Sub-Section (4) of Section 230 states that 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:

(f) 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.

(g) Notice to be sent to the regulators seeking their representations Section 230(5) states that a notice under SubSection (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 established under Sub-Section (1) of Section 7 of the Competition Act, 2002, if necessary, 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, to be made by them 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.

(h) Approval and sanction of the scheme

Section 230 (6) states that when at a meeting held in pursuance of Sub-Section (1), majority of persons representing three-fourths in value of the creditors, or class of creditors or members or class of members, as the case may be, 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 creditors, or class of creditors or members or class of members, as the case may be, or, in case of a company being wound up, on the liquidator and the contributories of the company.

(i) Order of the tribunal sanctioning the scheme to provide for the Certain matters

An order made by the Tribunal shall provide for all or any of the following matters, namely:

1. 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.
2. The protection of any class of creditors.
3. If the compromise or arrangement results in the variation of the shareholders’ rights, it shall be given effect to under the provisions of Section 48.
4. If the compromise or arrangement is agreed to by the creditors under Sub-Section (6), any proceedings pending before the Board for Industrial and Financial Reconstruction established under Section 4 of the Sick Industrial Companies (Special Provisions) Act, 1985 shall abate.
5. Such other matters including exit offer to dissenting shareholders, if any, as are in the opinion of the Tribunal necessary to effectively implement the terms of the compromise or arrangement:

(j) Compromise or arrangement is to be in conformity with the accounting standards 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.

(k) Order of tribunal to be filed with the Registrar Section 230 (8) states that 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.

(l) Tribunal may dispense with calling of meeting of creditors Section 230 (9) states that 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.

(m) Compromise in respect of buy back is to be in compliance with Section 68 As per Section 230 (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.

(n) Compromise includes takeover

Section 230 (11) states that any compromise or arrangement may include takeover offer made in such manner as may be prescribed. In case of listed companies, takeover offer shall be as per the regulations framed by the Securities and Exchange Board.

Power of the Tribunal to Enforce Compromise Or Arrangement (Section 231)

As per Section 231 (1) when the Tribunal makes an order under Section 230 sanctioning a compromise or an arrangement in respect of a company, it:

(a) shall have power to supervise the implementation of the compromise or arrangement, and

(b) may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper implementation of the compromise or arrangement.

Sub-Section (2) states that if the Tribunal is satisfied that the compromise or arrangement sanctioned under Section 230 cannot be implemented satisfactorily with or without modifications, and the company is unable to pay its debts as per the scheme, it may make an order for winding up the company and such an order shall be deemed to be an order made under Section 273.