RECONSTRUCTION AND AMALGAMATION OF A COMPANY

THIS ARTICLE WAS WRITTEN BY ARYAN SRIVASTAVA, A STUDENT OF THE CHRIST ACADEMY INSTITUTE OF LAW, BANGALORE.

INTRODUCTION

Companies to accelerate the growth prospects of their business enterprise or undertaking often undergo the process of the reconstruction as well as amalgamation which affects the share capital of the company eventually leading to the diversification of the business activities. To initiate the process of reconstruction and amalgamation companies pursue several arrangements and compromises with different stakeholders of the company in order to make the process as clutter free as possible. They can make arrangements and compromises with the members of the company as stated under s.230 of the companies Act,2013.

RECONSTRUCTION

The term reconstruction has not been defined anywhere in the act of 2013. However, the institution of judiciary has interpreted the term through various ruling hence in Hooper v. western countries co.[1] in this case reconstruction was defined as incorporation of a new company which intends to take over the assets of the old company with the intention that new company shall carry out the same business run and manged by same person in the similar manner.

Reconstruction connotes reconstituting the financial structure of the company with or without resorting to the dissolution of the business. Reconstruction is done to achieve following objective: –

• Simplification of capital structure.
• Decreasing the fixed charge
• Adjusting the arrears in forms of dividend
• Increasing the working capital of the company
• Elimination of past losses.

Usually reconstruction becomes a necessary recourse in the situation when financial position of a company degrades. Reconstruction can be both internal as well as external.

Internal reconstruction implies alteration of share capital without effecting the transfer of the business whereas external reconstruction occurs when existing company is dissolved and new company is formed which take-over the business of existing company.

AMALGAMATION

Though the term has not been defined anywhere in the act but in the context of s232 it means merger of one company with another in order to facilitate the reconstruction of the company which is amalgamating.

In the case of somayujula v. Hope Prudhome & co. ltd.[2] observed amalgamation takes place when two or more companies are joined to form a third entity or one is absorbed in another. In Re. South African Supply Co.[3] the court interpreted amalgamation to connote “blending of two or more undertakings into one undertaking, shareholders of each blending company becoming substantially the shareholders in the company which holds the blended undertaking”.

In Marshall sons & co. v. Income Tax Officer[4] the supreme court in this case held that every amalgamation scheme has to provide a date from which it takes effect. Although tribunal under scheme can provide direction as well as dates from which it takes effect but when tribunal only provides sanction to scheme & not the date from which amalgamation takes effect in such case date of effect will become date specified in scheme and not from the date the scheme was approved by the tribunal.

OBJECTIVE OF AMALGAMATION & RECONSTRUCTION

Provisions for facilitating amalgamation & reconstruction has been given under s232 of the Act of 2013. Usually a company take recourse to such tools during following scenarios: –

• To restructure the capital as per the Act
• To diversify the activities which business can undertake
• Reorganisation of the share capital

TRANSFER OF UNDERTAKING (SECTION 232)

As per s 232 of the act the tribunal has the power to sanction the scheme of amalgamation and along with it tribunal can pass any subsequent order for following matters: –

• The transfer to the transferee company of the whole or any part thereof such as that of property liabilities or undertakings of transferor company.
• Allotment of share by transferee company under the terms of contract.
• Dissolution without the winding up of the amalgamating company
• Provision for the people who dissent from the scheme of amalgamation
• Continuation by or against the transferee company of any legal proceedings pending by or against the amalgamating company.
• Or any other matter which it deems necessary for effectuating the scheme of amalgamation.

S230 makes it obligatory for the tribunal to send in a representation to central govt. foe every application which is being made under s230 & s232 of the companies act 2013 before sanctioning any scheme of amalgamation.

In cotton agents v. vijay laxmi Trading co.[5] it was held that centre govt. will not interfere with the valuation in amalgamation unless the govt. suspects fraud or undue influence which undermines the actual valuation of companies.

NOTICE TO DISSENTING SHAREHOLDERS

Once the transferee company obtains nine- tenth majority of shareholders approval for amalgamation it gives the company the right to acquire the shares of the dissenting shareholders. Within two months rhe transferee company should send out the notice to the dissenting shareholders that company intends to acquire their shares. The transferee company is entitled to acquire the shares or bound to follow the same terms of acquisition of share which approving majority of shareholders have agreed upon.

It should be duly noted that s235 confers wide variety of power upon the tribunal to disallow the attempt to acquire the shares. The exercise of this power is based on two paramount principles-

• The scheme should be fair & conscionable
• The onus to prove unfairness lies upon the dissenting shareholders.

ADEQUATE INFORMATION TO SHAREHOLDERS

With an intention to prevent fraud and malpractices in relation to takeover offers and acquisition of share of dissenting shareholders under the scheme approved by majority, s235(3) of act 2013 requires that complete amount of information has to be disclosed in terms of offers being made to the majority and it is up to dissenting shareholders to decide whether they want to take it or not because inadequacy of information can become another ground for the tribunal to withheld the sanction of scheme of amalgamation and reconstruction.

CONCLUSION

Amalgamation and reconstruction are two facets of same coin. The process itself is very necessary for any business to flourish and help recuperate at the time of distress or falling out. They are guided by the principle laid down in s.232 of the act of 2013. Though it can be argued that there is no adequate relief given to the dissenting shareholders by the act but to prevent that from happening tribunal has taken up a proactive role before sanctioning any scheme for amalgamation and reconstruction it invites objections from the public and sends out any application made under s230 & s232 to central govt before approving any schemes. Hence it can be said tribunals have tried to strike the balance between the growth of the business activities and protection of minority shareholders.

[1] (1892) W.N. 148

[2] (1963) 2 CompLJ. 61

[3] (1904)2 Ch.268

[4] AIR 1997 SC 1763

[5] (1968) 2 CompLJ 7(Raj.)