Fast Track Mergers – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions
Question 1.
The Board of directors of MNM Pvt. Ltd., a small company is considering to merge with BRQ Pvt. Ltd., another small company. The Board wants the merger to be fast and seeks your opinion about the conditions to be complied in this respect. Render your opinion based on the provisions of Companies Act, 2013.
Answer:
→ Section 233 of the Companies Act, 2013 provides for mergers between small companies or between holding company and its wholly-owned subsidiary companies
→ As per these provisions, such companies can implement a scheme of merger without the cumbersome procedure of NCLT u/s 232. Hence, such mergers are known ‘fast-track’ mergers.
→ In a Fast Track Merger u/s 233 of the Companies Act, 2013 and rules made thereunder, the steps followed are as under
- Verify the Memorandum and Articles of both companies and ensure that they have the requisite authority under them to enter into a merger.
- Convene the Board meeting and prepare a draft scheme of merger or amalgamation.
- Prepare the financial statement of assets and liabilities and get an Auditor’s Report prepared.
- Get the draft scheme approved in the Board meeting.
- Both the companies need to send a notice to the Registrar of Companies (ROC) and Official Liquidator (OL) of their respective regions inviting suggestions/objections to the scheme, if any, within 30 days of issuing the notice.
- Notice to the ROC shall be in Form CAA-9
- Both the companies are required to file a Declaration of Solvency with their respective ROCs. The declaration of solvency shall be accompanied by
(a) Board Resolution,
(b) Statement of Assets and Liabilities, and
(c) Audit Report. - Sending notice for holding shareholders meeting and creditors meeting.
- Conducting share holders meeting and creditors meeting and getting the scheme approved by not less than 90% majority in value.
- Filing the results of such meeting with the Regional Director and Official Liquidator by the transferee company.
Question2.
“Under Companies Act, 1956 small companies were deterred from entering into mergers owing to the lengthy process and the Companies Act, 2013 provided a solution”. Comment.
Answer:
- Currently, mergers and amalgamations have become a regular aspect of the business world. M& A is a process of combination of two or more entities/companies through inorganic means.
- Through merger and amalgamation, either a new entity is formed or one entity may be absorbed by another. All the assets and liabilities of the amalgamating or the merging entity will transfer to the merged entity.
- The Companies Act, 1956 did not provide any simple procedure for mergers and amalgamations of small companies. The procedure in the erstwhile Act was cumbersome and time-consuming, for all companies irrespective of their size, net worth and turnover.
- This was proving to be an obstacle for small companies, in the way of their growth and expansion. This need was considered in the Companies Act, 2013, where separate provisions for merger of small companies was included.
- Section 233 of the Companies Act, 2013 has introduced the concept of fast track mergers. It exempts merger between small companies and between holding and wholly owned subsidiary companies entering into merger arrangements as per sections 230-232 of the Companies Act, 2013.
- Fast track merger provide the following benefits –
- Simplified procedure for merger
- No judicial approval is required
- Separate procedures for small companies to enable them to expand without any road blocks
- Form filings required also significantly reduced
- Fast track mergers do not require Tribunal approval for mergers. But approval needed from Regional Directors, Registrar of Companies and Official Liquidator.
- The process has been simplified to a great extent. A provision allowing the government to notify any other company in this regard has also been made
Question 3.
Brakes Pvt. Ltd., a small company manufacturing brakes proposes to merge with Lubricants Pvt. Ltd., another small company. Registrar of Companies (ROC) objected the scheme on the ground that it is not in the interest of the creditors. Comment on further steps as per Companies Act, 2013.
Answer:
→ Section 233 of the Companies Act, 2013 provides for mergers between small companies or between holding company and its wholly-owned subsidiary companies
→ As per these provisions, such companies can implement a scheme of merger without the cumbersome procedure of NCLT u/s 232. Hence, such mergers are known ‘fast-track’ mergers.
→ As per Section 233, small companies shall comply with the following conditions to implement fast track merger:
(a) Notice of the proposed scheme shall be given to Regional Director, Registrar of Companies and Official Liquidator (Form No. CAA. 9). The purpose of notice is inviting objections or suggestions, if any, within 30 days from the notice. Transferor Company and Transferee Company shall send notice to their respective RD, ROC and OL.
(b) Such objections and suggestions received are considered by the Companies in their respective General Meetings and the scheme is approved by the respective members, holding at least 90% of the total number of shares.
(c) Each Company involved in the merger files a Declaration of Solvency, in Form No. CAA. 10, with the respective ROC
(d) The scheme of merger shall be approved by 9/ 10th majority in value of the creditors or class of creditors of respective Companies. Such creditors’ meeting shall be convened by giving notice of 21 days’, along with the scheme for approval purpose.
(e) The Registrar of Companies will communicate the objections or suggestions to the scheme to the Central Government within a period of 30 days. In the absence of any such communication, it would be presumed that no objections were raised.
(f) If the Central Government after receiving the objections or suggestions or for any other reason forms the opinion that the said scheme is not in public interest or in the interest of the creditors, it can file an application before the Tribunal within a period of sixty days.
(g) After filing of such application, the Tribunal has to render its judgment. If it is of the opinion (with reasons recorded in writing) that the scheme should be considered as per the procedure laid down in section 232 of the Companies Act, 2013, it may give directions accordingly. Provided that 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.
→ Hence, the above steps ensure that a scheme of fast track merger is not oppressive to the interest of members and creditors.
Question 4.
“Small Companies can only opt for Fast Track Mergers” – Elucidate briefly for identifying small companies.
Answer:
- Section 233 of the Companies Act, 2013 has introduced the concept of fast track mergers.
- It has exempted small companies and holding-subsidiary companies entering into merger arrangements from the regular merger procedure as stipulated under sections 230-232 of the Companies Act, 2013.
- Section 233 of the Companies Act, 2013 along with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 lay down the entire legal framework of fast track mergers.
- As per section 2(85) of the Companies Act, 2013, a ‘Small Company’ means a company, other than a public company
- paid-up share capital of which does not exceed ₹ 50 lakh or such higher amount as may be prescribed which shall not be more than ₹ 10 crore; and
- turnover of which as per profit and loss account for the immediately preceding financial year does not exceed ₹ 2 crore or such higher amount as may be prescribed which shall not be more than ₹ 100 crore:
- However, this clause shall not apply to
- a holding company or a subsidiary company;
- a company registered under section 8 of the Companies Act, 2013;
- a company or body corporate governed by any special Act; and
- a public limited company, irrespective of its capital or turnover.