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Amity university

Project on winding up: amalgamation and reconstruction

Submitted to: Mr. Bhupendra Gautam

Submitted by: Abhinav Pandey A11911111107 Semester VI Section- B

ACKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my guide Mr. Bhupendra Gautam for his exemplary guidance, monitoring and constant encouragement throughout the course of this project. The blessing, help and guidance given by him time to time shall carry me a long way in the journey of life on which I am about to embark.I also take this opportunity to express a deep sense of gratitude to the librarian for his cordial support, valuable information and guidance, which helped me in completing this task through various stages.I am grateful for their cooperation during the period of my assignment. Lastly, I thank almighty, my parents and friends for their constant encouragement without which this assignment would not be possible.

contents

Introduction Amalgamation Reconstruction Conclusion Bibliography

Introduction

The process of selling all the assets of a business, paying off creditors, distributing any remaining assets to the principals or parent company, and then dissolving the business. Winding up can refer to such a process either for a specific business line of a corporation or to the dissolution of a corporation itself also known as liquidation. In other word The process of dissolving a corporation is much more involved than that of winding up one of its specific business lines, and generally only happens when it goes bankrupt. The negative impact to the local and regional economies of a corporation's wind up post-bankruptcy is likely to be more pronounced if the company is a large one. A large bankruptcy generally entails the layoffs of hundreds of employees, apart from having a detrimental impact on the finances and business of the company's suppliers and lenders. A particular business line may occasionally be wound up by a company because of its diminishing prospects or minimal contribution to the parent company's bottom line. The parent company may decide to wind up such a business if efforts to find a buyer for it are unsuccessful. The winding up process in this case is likely to be more orderly, and have much less of a negative impact on the economy, than a corporate winding up.

Amalgamation
Amalgamation means union of two or more companies, so as to form a third entity or one company is absorbed into another company means the company which is amalgamated into another company. transferor company is amalgamated (amalgamated company).

more undertakings combine their resources and efforts they may with combined efforts produce better results than two separate undertakings because of the savings in operating costs viz. Combined sales offices, staff, staff facilities, plant management etc. Synergy is also possible in areas of production, finance, ave benefits of tax laws and company having accumulated losses may merge with profit earning company that will shield the income from taxation. Section 72A of the Income Tax

4. Legal Procedures (Section 394 & 395) that, where, on an application under section 391, it is shown to the court that the scheme of Arrangement or Compromise has been proposed for the purpose of Amalgamation of two or more companies, and the whole or part of the undertaking, property or liabilities of one company is to be transferred to another company, the Court may, either by the order sanctioning the compromise or Arrangement or by a subsequent order, provided for all or any of the following

matters : - Transfer of the undertaking, property or liabilities of one company to another; 5. Section 394 contd.. The allotment or appropriation by the transferee company of any share continuation by or against the transferee company of any legal proceedings up, of any transferor company matters are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out. 6. Contd.. Provided that -The Court can not sanction a scheme for Amalgamation of a company which is being wound up, unless it has received a report from the Company law board or the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest. -Similarly, an order for the dissolution of the transferor company shall not be made by the Court, unless a similar report has been received from the official liquidator. -It is obligatory on the part of the Court to give notice to the Central Govt. of every application made to it under this section and take into consideration the representation made by the Govt. before passing its order on the proposed scheme of Amalgamation. (394A) 7. Contd.. -Where such an order is made, it is the duty of every company concerned, to file a certified copy thereof with the Registrar of registration within 30 days after the making of the order. If the company defaults, it along with every officer of the company who is in default, shall be punishable with fine which may extend to Rs. 500. [section 394(3)] 8. Take-over bid means an offer to acquire shares of a company with a view to obtain legal control of the company. Such offer to purchase shares may be either for cash or in exchange for the shares of the offeror company. The transferee company may make an offer to the transferor company, so that the scheme or contact may be placed before the shareholders areholders accept the offer by the

transferee company then theres no problem. If there are dissenting shareholders then the transferee company can proceed to acquire the shares of dissenting shareholders under section 395. vides for the compulsory acquisition of the shares of the dissenting minority, by the transferee company, on the terms on which the section aims to prevent a small minority from demanding an unreasonably high price for their shares. 10. Section 395 Provisions: - The offer of the transferee company to acquire the shares of any class of shares, must be placed before the shareholders of the transferor company. - The shareholders have the option to approve the offer within 4 months. Approval must be accorded by holders of atleast 90% in value of shares. (other than shares already held by the transferee company). - If the scheme is so approved, the transferee company may, within 2 months, after the expiration of the above 4 months, give notice to the dissenting shareholders. 11. Contd.. - The dissenting shareholders can within one month of receipt of notice, apply to the Court for annulling the scheme. - If the Court refuses to issue the order annulling the order or if no application is made to the Court, the transferee company shall be entitled and bound to acquire the shares of the dissenting shareholders. - The transfer of shares pursuant to the notice given by the transferee company, or after the disposal of the appeal filed by dissenting shareholders, shall be, by means of an instrument of transfer, executed on behalf of the shareholders by any person appointed by the transferee company an don its own behalf by the transferee company, and pay the amount and other consideration to the transferor company, who shall thereupon register the transferee company as the holder of these shares. - Any sums which are so received by the transferor company must be paid into a separate bank account and must be held for dissenting shareholders. 12. Amalgamation in National Interest (Sec.-396) Under section 396 of the companies act, the Central Govt. is given power to order amalgamation of 2 or more companies in public interest. - Where the Central Government is satisfied

that it is essential in the public interest that two or more companies should amalgamate, then, the Central Government may, by order notified in the Official Gazette, provide for the amalgamation of those companies into a single company with such constitution, with such property, powers, rights, interests, authorities and privileges; and with such liabilities, duties, and obligations; as may be specified in the order. - The order aforesaid may provide for the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company and may also contain such consequential, incidental and supplemental provisions as may be necessary to give effect to the amalgamation. 13. Contd.. -Every member or creditor (including a debenture holder) of each of the companies before the amalgamation continues to have the same interest in the new company resulting from the amalgamation as he had earlier in one of the amalgamating company; incase amalgamation affects his interests or rights adversely, he is entitled to compensation which shall be assessed by such authority as may be prescribed and every such assessment shall be published in the Official Gazette. The compensation so assessed shall be paid to the member made by the Central Govt. unless: a) A draft copy of the proposed order has been sent to each of the companies in order to enable such companies to file their objections and suggestions. The period of filing objections will be fixed by the Govt. which should not be less than 2 months from the date of receipt of draft copy; 14. Contd.. b) The time for preferring an appeal to Company law Board has expired or where any such appeal has been preferred, the appeal has been finally disposed of; and c) the Central Government has considered, and made such modifications, if any, in the draft order as may seem to it desirable in the light of any suggestions and objections which may be received by it from any such company, or from any class of shareholders therein, or from any creditors or any as soon as possible, be laid before both Houses of Parliament.

15. Preservation of Books and Papers of Amalgamated Companies The books and papers of a company which has been amalgamated with, or whose shares have been acquired by, another company shall not be disposed of without the prior permission of the Central Government and before granting such permission, that Government may appoint a person to examine the books and papers or any of them for the purpose of ascertaining whether they contain any evidence of the commission of an offence in connection with the promotion or formation, or the management of the affairs of the company. 16. Changes in the New Companies Bill, 2012 The Companies Bill has also proposed replacing the High Court with the National Company Law Tribunal (NCLT). All merger and de-merger schemes would now have to be filed before the NCLT for approval. Clause 230 (5) of the Companies Bill, makes it mandatory that a notice for a merger or de-merger to be sent to the: Central Government, Income tax authorities, RBI, SEBI, Registrar, Stock exchanges, CCI, official liquidator, and any other sectoral regulator. In a fast-track approval, companies need not file schemes with the NCLT. The Central Government has the power to approve the scheme. Once approved, the scheme may be filed with the Registrar of Companies within thirty days. On registration, the scheme will be effective. (Clause 233) 17. Contd.. Clause 234 of the Companies Bill permits a foreign company, subject to the prior approval of the RBI, to merge, or amalgamate into an Indian company or vice-versa. The Companies Act on the other hand, only permitted a merger of a foreign company with an Indian company.

Objectives and advantages of amalgamation:Synergistic operational advantages -Economics of Scale(scale effect) Reduction in production, administrative, selling, legal and professional expenses Benefits of integration Optimum use of capacities and factors of production Tax advantages Financial constraints for expansion strengthening financial strength Diversification Advantage of brand-equity survival competitive advantage eliminating competition Revival of weak or sick company

Merger and amalgamation are not defined under Companies Act, 1956. According to section 391 of the Companies Act, 1956, a compromise or arrangement may be proposed a) between a company and its creditors or any class of them or b) between a company and its members or a class of them. According to section 394, any such compromise of arrangement may be for the purpose of or in connection with a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies which involve the transfer of the whole or any part of the undertaking, property or liabilities of one company(transferor company) to another company(transferee company) Section 392 deals with the power of the High Court to enforce compromises and arrangements. The terms compromise, arrangement, reconstruction and amalgamation, although used in Companies Act, 1956, are not defined thereunder and has no precise legal meaning. Generally speaking, however, these terms may be regarded as describing any form of internal reorganization of the company or its affairs as well as schemes for the merger of two or more companies or for the division of one company into two or more companies. In amalgamation the undertaking comprising of property, assets and liabilities of one (or more) company (amalgamating or transferor company) are absorbed by and transferred to an existing company or a new company(amalgamated or transferee company) 2. Transferor company merges into or integrates with transferee company. The former loses its identity and is dissolved(without winding up). A foreign company may merge with an Indian company but an Indian Company cannot merge with a foreign company. In REVERSE MERGER, a healthy company merges in to a financially weak company. Companies eligible to merge under Cos Act :- Any company liable to be wound up under the Act. - Company financially sound or unsound or under winding up can merge. - A company incorporated outside India can merge with a company incorporated in India. - A newly incorporated company having no assets and business can merge. - Amalgamation involving a sick industrial company as transferor or transferee company is within the purview of the Companies Act. - A company licensed under Section 25 of the companies Act

can merge with a commercial, trading or manufacturing company. Amalgamation means two companies are joined as to form a third entity or one blended with and absorbed into another company. It signifies the transfer of all or some parts of assets & facilities of one or more than two existing companies to another existing company or of two or more existing companies to a new company. Types of Merger:- Merger by purchase of share. Merger through holding company A scheme of compromise and arrangement Section 394 of the Companies Act enables the court to provide for : 1) Transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company. 2) The allotment or appropriation by the transferee company any shares, debentures, policies or other like interests or any other consideration in that company which under the compromise or arrangement are to be allotted or appropriated by that company. 3) The continuation by or against the transferee company of any legal proceeding pending by or against any transferor company. 4) The dissolution, without winding up of any transferor company. 3. Procedure:- Check whether the Memorandum of Association of the company contains the power to amalgamate. If not, alter the objects clause of the Memorandum of Association by following the procedure laid down for the same under Companies Act. Preparation of the draft scheme of amalgamation and approve the same in the Board Meeting. Apply to the Court for directions to convene the General Meeting supported by an affidavit. to send a copy of the application made to the High court to the concerned Regional Director, Ministry of company Affairs.

the High Court shall give the direction with regard to the meeting including fixation of time, place, quorum of such meeting, appointment of chairman etc. send notice of general meeting to the members 21clear days before the meeting, setting forth, the terms of compromise or arrangement and their effect, interest of directors, MD or Manager of the company and the effect of their interest on amalgamation. where the amalgamation affects the rights of debenture holders, the said statement shall give the information and explanation as respects the Trustees of any deed for securing the issue of debentures as if it is required to give in respect of companys directors. Hold the general meeting and pass the following resolution: a) Approving the scheme of amalgamation to be passed by a majority in number and three fourth in value of the creditors or class of creditors or members or class of members as the case may be present and voting. b) increasing the authorized share capital of the company, if necessary - the notice of the meeting and the proceedings of the meeting should be forwarded to stock exchange. -The resolution with the explanatory statement should be filed with the Registrar of Companies. -Ensure that the chairman of the meeting report the resolution of the meeting to the court within the time fixed by the judge or within seven days of the conclusion of the meeting. 4. -Move the High court for approval through a petition by the directors within seven days of filing the report by the chairman and ensure compliance of Ss 394 and 395 in this regard. The High Court will be moved jointly by the transferor and transferee company. If the registered office of the companies are in different states, then the respective High Courts should be moved for direction.

-The certified true copy of the order should be filed with the ROC within 30 days of the order . -The copy of the order should be annexed to every copy of the Memorandum of Association issued after the certified copy of the court order has been filed with ROC. -Ensure implementation of the scheme of amalgamation as per court order.

Reconstruction
When a company is suffering loss for several past years and suffering from financial difficulties, it may go for reconstruction. In other words, when a company's balance sheet shows huge accumulated losses, heavy fictitious and intangible assets or is in financial difficulties or is to over capitalized, and then the process of reconstruction is restored. Reconstruction may be internal and external.

1. External reconstruction When a company is suffering losses for the past several years and facing financial crisis, the company can sell its business to another newly formed company. Actually, the new company is formed to take over the assets and liabilities of the old company. This process is called external reconstruction. In other words, external reconstruction refers to the sale of the business of existing company to another company formed for the purposed. In external reconstruction, one company is liquidated and another new company is formed. The liquidated company is called "Vendor Company" and the new company is called "Purchasing Company". Shareholders of vendor company become the shareholders of purchasing company.

2. Internal Reconstruction Internal reconstruction refers to the internal re-organization of the financial structure of a company. It is also termed as re-organization which permits the existing company to be continued. Generally, share capital is reduced to write off the past accumulated losses of the company. The accounting procedure of internal reconstruction is distinct from that of amalgamation, absorption and external reconstruction.

The situations which call for internal reconstruction of a company. The following situations are generally responsible for the internal reconstruction of a company : (i) When the capital structure of a company is complex and it is required to make it simple. (ii) When there are huge accumulated losses and it is required to write off these losses to depict a better position of the company. (iii) When a part of the capital is not represented by available tangible assets. (iv) When change is required in the face value of shares of the company so that they can become attractive for future investors.

Caselaws

The State Of Gujarat vs O.L. Of Kengold (India) Ltd. (In ... on 15 May, 2008 Mumbai - 22 vs The Official Liquidator Of M/S ... on 28 October, 2013 Imperial Chit Funds Ltd (In ... vs Income-Tax Department on 10 August, 1978 In Re: Oswal Agro Furane Ltd. (In ... vs Unknown on 14 December, 2006 Agrawal Textiles vs O.L. Of Shree Vrundavan ... on 22 December, 200

bIBLIOGRAPHY

Company law book(cs exec. Course) http://kkhsou.in/main/EVidya2/commerce/internal_reconstruction.html www.legalsolutions.in http://indiankanoon.org/doc/301194/ www.networkmagazineindia.com