Companies Act Section 230 — Power to compromise or make arrangements with creditors and members
CHAPTER XV COMPROMISES, ARRANGEMENTS AND AMALGAMATIONS
Commercial / Corporate
Summary
Sub-section (1) explains that when a compromise or arrangement is proposed between a company and its creditors, or between a company and its members, the Tribunal can order a meeting of the affected creditors or members to be called. This can happen on the application of the company, any creditor, any member, or, if the company is being wound up, the liquidator. The Tribunal decides how the meeting is to be called, held, and conducted. The explanation clarifies that an arrangement includes reorganising the company's share capital by consolidating shares of different classes, dividing shares into different classes, or both.
Sub-section (2) requires the company or the person making the application to disclose certain things to the Tribunal by affidavit. These include all material facts about the company, such as its latest financial position, the latest auditor's report, and any pending investigation or proceedings against it. It also requires disclosure of any reduction of share capital included in the compromise or arrangement, and any scheme of corporate debt restructuring consented to by at least seventy-five per cent of secured creditors in value. For such a restructuring scheme, the disclosure must include a creditor's responsibility statement, safeguards for other secured and unsecured creditors, an auditor's report on liquidity, a statement if the company adopts Reserve Bank of India guidelines, and a valuation report by a registered valuer.
Sub-section (3) states that when a meeting is ordered, a notice must be sent individually to all creditors, members, and debenture-holders at their registered addresses. The notice must be accompanied by a statement disclosing the details of the compromise or arrangement, a copy of the valuation report if any, and an explanation of its effect on creditors, key managerial personnel, promoters, non-promoter members, debenture-holders, and any material interests of directors or debenture trustees. The notice and documents must also be placed on the company's website, and for listed companies, sent to the Securities and Exchange Board and stock exchanges for their websites and published in newspapers. If the notice is issued by advertisement, it must indicate when copies of the compromise or arrangement can be obtained free of charge from the registered office.
Sub-section (4) provides that the notice must state that the persons receiving it can vote on the adoption of the compromise or arrangement either in person, through proxies, or by postal ballot, within one month from receipt of the notice. It also states that any objection to the compromise or arrangement can only be made by persons holding at least ten per cent of the shareholding or having outstanding debt of at least five per cent of the total outstanding debt as per the latest audited financial statement.
Sub-section (5) requires that the notice and all related documents also be sent to the Central Government, 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 if necessary, and other sectoral regulators or authorities likely to be affected. These authorities must make any representations within thirty days of receiving the notice, and if they do not, it is presumed they have no objections.
Sub-section (6) states that if, at a meeting held under sub-section (1), a majority representing three-fourths in value of the creditors or members voting in person, by proxy, or by postal ballot agree to the compromise or arrangement, and the Tribunal sanctions it by an order, then the compromise or arrangement becomes binding on the company, all the creditors or members, and, in the case of a winding up, on the liquidator and the contributories of the company.
Sub-section (7) lists the matters that an order made by the Tribunal under sub-section (6) must address. These include giving preference shareholders an option to receive arrears of dividend in cash or accept equity shares of equal value if preference shares are converted into equity shares, protecting any class of creditors, giving effect to any variation of shareholders' rights under section 48, abating any proceedings before the Board for Industrial and Financial Reconstruction if the creditors agree to the compromise, and such other matters as the Tribunal considers necessary, including an exit offer to dissenting shareholders. The proviso states that the Tribunal cannot sanction a compromise or arrangement unless the company's auditor has filed a certificate that the proposed accounting treatment conforms to the accounting standards prescribed under section 133.
Sub-section (8) requires the company to file the Tribunal's order with the Registrar within thirty days of receiving the order.
Sub-section (9) allows the Tribunal to dispense with calling a meeting of creditors or a class of creditors if those creditors, holding at least ninety per cent in value, agree to and confirm the scheme of compromise or arrangement by way of affidavit.
Sub-section (10) states that the Tribunal cannot sanction any compromise or arrangement involving a buy-back of securities unless the buy-back complies with the provisions of section 68.
Sub-section (11) provides that a compromise or arrangement may include a takeover offer made in such manner as may be prescribed. The proviso indicates that for listed companies, the takeover offer is subject to additional requirements, but the official text shown here is truncated and does not specify what those requirements are.
Official Text
(1) Where a compromise or arrangement is proposed—
(a) between a company and its creditors or any class of them; or
(b) 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,1[appointed under this Act or under the Insolvency and Bankruptcy Code, 2016 (31 of 2016), as the case may be,] 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.
Explanation.—For the purposes of this sub-section, arrangement includes a reorganisation of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of those methods.
(2) The company or any other person, by whom an application is made under sub-section (1), shall disclose to the Tribunal by affidavit—
(a) 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;
(b) reduction of share capital of the company, if any, included in the compromise or arrangement;
(c) any scheme of corporate debt restructuring consented to by not less than seventy-five per cent. of the secured creditors in value, including—
(i) a creditor’s responsibility statement in the prescribed form;
(ii) safeguards for the protection of other secured and unsecured creditors;
(iii) 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;
(iv) where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India, a statement to that effect; and
(v) 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.
(3) Where a meeting is proposed to be called in pursuance of an order of the Tribunal under sub-section (1), a notice of such meeting 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 a statement disclosing the details of the compromise or arrangement, a copy of the valuation report, if any, and explaining their effect on creditors, key managerial personnel, promoters and non-promoter members, and the debenture-holders and the effect of the compromise or arrangement on any material interests of the directors of the company or the debenture trustees, and such other matters as may be prescribed:
Provided that 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:
Provided further that where 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.
(4) 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:
Provided that 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.
(5) A notice under sub-section (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 (12 of 2003), 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.
(6) Where, 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 1[appointed under this act or under the Insolvency and Bankruptcy Code, 2016 (31 of 2016), as the case may be,] and the contributories of the company.
(7) An order made by the Tribunal under sub-section (6) shall provide for all or any of the following matters, namely:—
(a) 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;
(b) the protection of any class of creditors;
(c) 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;
(d) 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 (1 of 1986) shall abate;
(e) 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:
Provided that 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.
(8) 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.
(9) 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.
(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.
(11) Any compromise or arrangement may include takeover offer made in such manner as may be prescribed:
Provided that in case of listed companies, takeover offer shall be as per the regulations framed by the Securities and Exchange Board.
(12) An aggrieved party may make an application to the Tribunal in the event of any grievances with respect to the takeover offer of companies other than listed companies in such manner as may be prescribed and the Tribunal may, on application, pass such order as it may deem fit.
Explanation.—For the removal of doubts, it is hereby declared that the provisions of section 66 shall not apply to the reduction of share capital effected in pursuance of the order of the Tribunal under this section.