Sunday, September 22, 2013

Corporate Restructuring – An Over-view



Corporate Restructuring – An Over-view

Introduction

Restructuring is an important step in shareholder value creation. It creates a company that captures opportunities in the evolving Indian economy through leadership in focussed value businesses. Keeping pace with global changes, it is necessary to adapt to the change for sustenance, progress by catering to the needs of business clients. Mittal-Arceler ; Tata-Korus ; and Birla-Novelis are the recent takeover bids which have enhanced the confidence level of Indian Corporates and made known to the World over their presence. It is, therefore, imperative that Corporate Restructuring is today’s buzzword. Business restructuring is vital for survival and growth of a company in the present fast-changing competitive environment. The judiciary has been, by and large, showing a liberal and pragmatic approach towards corporate restructuring. The process involves a great degree of skill and expertise, for smooth and proper restructuring of entities, relate chiefly to Legal ; Accounting ; Taxation and Human Resource aspects. Hence in the growing realm of such transactions, it is imperative to know about various provisions under Company law relating to Internal and External Reconstructions.

Internal Reconstruction with Members & Co.

 

Section 106. Alteration of rights of holders of special classes of shares


Where the share capital of a company is divided into different classes of shares, the rights attached to the shares of any class may be varied with the consent in writing of the holders of not less than three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a separate meeting of the holders of the issued shares of that class -
(a) if provision with respect to such variation is contained in the memorandum or articles of the company, or
(b) in the absence of any such provision in the memorandum or articles, if such variation is not prohibited by the terms of issue of the shares of that class.




Meaning of “Variation of class rights”
§  To vary means to change in form, appearance, nature, substance etc.; alter; modify; to make different from one another, diversify, alter, reorganize. Variation includes addition, deletion, substitution, modification, cancellation, and abrogation of the rights. Section 2(50) of the Companies Act provides that ‘variation’ shall include abrogation; and ‘vary’ shall include ‘abrogate’. Any variation must, however, be within the limitation of the Act; otherwise it will be void under Section 9.[1] But a different view can be found in Ramiaih’s Company Law that although the term ‘variation’ includes abrogation under s.2(50) but it cannot be imported into s.106 in the context of  which it is used therein. The variation referred to is variation to the prejudice of any class of shareholders, and not any variation adding to or enhancing rights of any class. It is only where a variation involves the curtailment of the rights of any class or classes of shareholders, the consent or sanction of such class or classes will be necessary.[2]

What constitutes a class right?
§  The articles may omit to assign, expressly, shares with differing rights to different classes, but for the purposes of articles about variations of class rights and for the purpose of Ss.106-107 those shares may still belong to different classes.
§  It is necessary to constitute a class that special rights should be attached to any particular shares. They may be conferred on the persons concerned in his capacity as a member or shareholder of the company and for the purposes of this section they will also be regarded as rights attached to a class of shares.

How classes are created?
§  Special class rights may be created by the terms of issue or by a special resolution. Special class rights generally relate to dividend, voting or the distribution of assets in the winding up of the company.[3]
§  Special rights may also be provided for in the memorandum or in the articles or in a separate agreement between the company and the special class. Whenever therefore the question of variation of special rights arises it is necessary to see first whether as to where members of that class a higher degree of protection than their definition in the articles.
Some Prominent observations of Courts:
§  A variation, which merely affects the enjoyment of a right without modifying the right itself, does not come within the section.[4]
§  Alteration of rights, in order to attract this section, must relate to the rights attaching to the classes of shares as such and not to any indirect or subsidiary right or contractual right which the holders of that class may otherwise have by virtue of any agreement, contract or provision in the articles.[5]
§  In order to attract s.106, it must be shown that the alteration of rights is direct and proximate and not merely derived by its implication.[6]

Section 107. Rights of Dissentient Shareholders

(1) If, in pursuance of any provision such as is referred to in section 106, the rights attached to any such class of shares are at any time varied, the holders of not less in the aggregate than ten per cent of the issued shares of that class, being persons who did not consent to or vote in favour of the resolution for the variation, may apply to the Tribunal to have the variation cancelled, and where any such application is made, the variation shall not have effect unless and until it is confirmed by the Tribunal.
(2) An application under this section shall be made within twenty-one days after the date on which the consent was given or the resolution was passed, as the case may be, and may be made on behalf of the shareholders entitled to make the application by such one or more of their number as they may appoint in writing for the purpose.
(3) On any such application, the Tribunal after hearing the applicant and any other persons who apply to the Tribunal to be heard and appear to the Tribunal to be interested in the application, may, if it is satisfied, having regard to all the circumstances of the case, that the variation would unfairly prejudice the shareholders of the class represented by the applicant, disallow the variation; and shall, if not so satisfied, confirm the variation.
(4) The decision of the Court any such application shall be final.
(5) The company shall, within thirty days after the service on the company of any order made on any such application, forward a copy of the order to the Registrar; and if default is made in complying with this provision, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees.
Person eligible to make a petition to court to cancel the variation
§  S.107 provides a safety valve against the oppression the minority by the majority by the use of the power to vary the rights of any class of shareholders in terms of section 106.
§  The holding of 10 percent of the shares of the class affected who have not consented to the scheme, either by the petitioner or a by a group of shareholders, is a necessary prerequisite to the commencement of proceedings under section 107. If more shareholders than one make up the necessary 10 per cent they can either all join I the presentation of a petition or appoint one or more of their number in writing to make the application on their behalf.
§  Under the statute, the title to sue is derived from two alternative states of affairs. If he himself the holder of derived 10 per cent of the shares affected, he has a title to sue, but if he is not, the only way in which he can obtain a title to sue is by having the authority in the statutory for-namely, an appointment in writing-from the number of shareholders necessary to make up 10 per cent of the shareholding affected.
§  The court has got the option to confirm or disallow the variation of class rights. But it cannot amend or make it conditional.[7]

Section 78 - Application of premiums received on issue of shares

(1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account, to be called "the securities premium account"; and the provisions of this Act relating to the reduction of the securities capital of a company shall, except as provided in this section apply as if the securities premium account were paid-up securities capital of the company.
(2) The securities premium account may, notwithstanding anything in sub-section (1), be applied by the company -
(a) in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; or
(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.
(3) Where a company has, before the commencement of this Act, issued any shares at a premium, this section shall apply as if the shares had been issued after the commencement of this Act:
Provided that any part of the premiums which has been so applied that it does not at the commencement of this Act form an identifiable part of the company's reserves within the meaning of Schedule VI shall be disregarded in determining the sum to be included in the securities premium account.

Issue of shares at premium
§  This section lays down the treatment to be accorded in the books of account of the company after the shares have been issued at a premium.
§  Though this section does not deal with premium received on issue of debentures, it permits the application of securities premium for paying off the amount of the premium on redemption of debentures.

Share premium account
§  Any amount of securities premium collected by a company on issue of securities is required to be transferred to the `securities premium Account' and to be utilised for the purposes mentioned in sub-section (2). If `securities premium account' is utilised for any other purpose it would amount to reduction in share capital and the provisions in sections 100 to 104 relating to reduction of share capital shall come into force.
§  If the share premium account is to be applied to any of the purposes mentioned in sub section (2), the company need not seek approval / confirmation of the company court, however if the company desires to apply share premium account for any other purpose, it has to approach Company court for confirmation : Sub-section (1) of section 78 is in two parts. First part imposed a legal obligation for transferring the share premium to the account called share premium account. The second part says that except as provided in section 78, the provisions relating to reduction of share capital would apply. Sub-section (2) of section 78 contains a non-obstante clause. It lays down that notwithstanding sub- section (1), share premium account may be utilized for any of the purposes mentioned under sub-section (2).
§  Where a company proposes to utilise the share premium account for the purposes of writing of losses, provisions of section 100(1) is to be complied with : In view of legal fiction introduced by section 78(1) of the Act, share premium account is deemed to be paid-up share capital for the purposes of section 100 to 105. The provisions as to reduction of share capital would apply when the share premium account is to be utilized. Thus, reading section 78(1) &(2) together with sections 100, 101 and 102, it becomes clear that even when the share premium account is to be applied either for the purpose of writing off the loss (in case such course is permissible) or otherwise, the procedure under section 100(2) to 105 has to be followed.[8]

Some pertinent observations of Courts
§  Court will confirm reduction in face value of shares if such reduction is approved by special resolution: In the case of India Infoline Ltd , In re., petitioner company wanted to adjust its accumulated losses against share premium account and reduce the face value of its shares from Rs 10 to Rs 5 per share. So it convened an extraordinary general meeting where shareholders unanimously passed a special resolution approving the proposal. The company filed petition under section 78, 100 and 104 for the said purpose. The Bombay High Court held that as there was nothing illegal or against public policy pointed out or found on record, court allowed the petition.[9]
§  The annual balance sheet should disclose the amount of securities premium as a separate item and indicate how it has been utilised.
§  Premium received on the issue of shares has to be included in the paid-up capital for computing the reduction in rebate on tax, if the premium account is maintained as a separate account.[10]
§  Share (now securities) premium received by the company cannot be treated as revenue receipt but is a capital receipt as the money paid is on capital account.[11] Monies in the share (now securities) premium account cannot be treated as free reserves, as they are in the nature of capital reserve.[12]

Section 100. Special resolution for reduction of share capital

(1) Subject to confirmation by the Tribunal, a company limited by shares or a company limited by guarantee and having a share capital, may, if so authorised by its articles, by special resolution, reduce its share capital in any way; and in particular and without prejudice to the generality of the foregoing power, may -
(a) extinguish or reduce the liability on any of its shares in respect of share capital not paid up;
(b) either with or without extinguishing or reducing liability on any of its shares cancel any paid-up share capital which is lost, or unrepresented by available assets; or
(c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company; and may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly.
(2) A special resolution under this section is in this Act referred to as "a resolution for reducing share capital".

Overview
Since the Companies (Second Amendment) Act, 2002 has not yet been notified, the overview given below, is as per the existing law.

Applicability of the Section
This section applies to a company limited by shares or a company limited by guarantee having a share capital.

Parameter
This section is to be read along with the provisions of sections 101 to 105. A company may reduce its share capital in any of the manners provided in clauses (a), (b), (c) of sub-section (1) of this section, subject to authorisation by its articles, confirmation by the Court, and passing of a special resolution to that effect.

Reduction of share capital under different provisions of the Companies Act
§  Under section 100, reduction of share capital is by way of cancellation of shares. Such cancellation relate to that part of share capital which has already been subscribed, whether fully paid or not.
§  Under provisions of section 94, alteration of share capital involves reduction in authorised share capital by cancellation of shares which have not yet been taken or agreed to be taken by any person.
§  Reduction of capital is also dealt in section 394 where the Court passes an order under a scheme of compromise or arrangement, and also under section 402(c) where the Company Law Board orders purchase of its own shares by the company, resulting in reduction of share capital, on an application under section 397 or section 398.
§  It may be noted that while making an application for confirmation on reduction of share capital under sections 100 to 101, the company may make an application for grant of exemption from the provisions of section 101(2) either independently or along with amalgamation petition under section 391 to 394 of the Act. The company must specify in the petition whether the reduction in the share capital proposed is likely to affect in any manner, the interest of the creditors or not. This would enable the court to ascertain whether the power under sub-section (2) for giving specific direction should be exercised or not.
§  It is not necessary that extinguishment of shares in all cases should necessarily result in reduction of share capital. Section 101 and section 102 read with rule 85 of Companies Court Rules do not stand attracted to a scheme of amalgamation where there is no release of assets but which involves transfer of all the assets and liabilities. However the same would stand attracted only to cases of compromise or arrangement involving reduction of capital.[13]

What does not amount to reduction of capital?
§  Redemption of redeemable preference shares in accordance with the provisions of sections 80 and 80A.
§  A surrender of shares by a member to the company.
§  Forfeiture of shares for non-payment of calls.[14]
§  Where a company is dissolved, without winding up and preference shares of amalgamating company are paid out under a scheme of amalgamation, such a case is not a case of reduction of capital.[15]
§  Where a company in voluntary liquidation, repays preference and ordinary share capital and thereafter introduces fresh share capital which is less than earlier capital, it does not amount to reduction of capital.[16]
§  Where a sum of money was received for allotment of shares but allotment could not be made. Paying back that money to the depositor did not require procedure for reduction of capital even though the money was wrongly shown as a part of company's subscribed capital.[17]


External Reconstruction

Section 390(b) - Interpretation of ‘arrangement’

In sections 391 and 393, —
(b) the expression "arrangement" includes a reorganization of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or, by both those methods.

Meaning of the word “Arrangement”
§  The word ‘arrangement’ in s.390(b) is an inclusive definition and contemplates all arrangement and not only the reorganization of share capital. A scheme of arrangement modifying the rights of shareholders can be brought under this section.
§  The word ‘arrangement’ has a very wide meaning, and is wider than the word ‘compromise’. There can be no compromise unless there is first a dispute but a scheme, which is not a compromise may nonetheless be an arrangement within s.391.
§  An arrangement may involve –
-          Debenture holders giving an extension of time for payment, accepting a cash payment less than the face value of their debentures.[18]
-          Debenture holders giving up their security in whole or in part, exchanging their debentures for shares in the company[19], or in a new company.[20]
-          Debenture holders having the rights attached to their debentures varied in some other respect.[21]
-          Preference shareholders giving up their rights to arrears of dividends.[22]
-          Preference shareholders agreeing to accept a reduced rate of dividend in the future or have their class rights otherwise varied.[23]
-          Members of a company in liquidation agreeing with the company to seek or not to oppose a stay of the winding up, whereunder the members will give up their existing right to have all the proceeds of the company’s assets distributed among them and instead be remitted to their contractual rights under the articles.[24]
-          Shareholders transferring their shares to another company.[25]
-          Modifying the rights of shareholders.[26]
-          Buy-back of shares held in small lots in physical form.[27]
-          Severance of holding-subsidiary connection by transferring by the holding company, its shareholding in the subsidiary to another company and allotment of shares by it to the shareholders of the holding company.[28]
§  Reduction of capital, reorganization of capital, reverse merger, reorganization of quasi capital all forms part of scheme of compromise or arrangement.

Amalgamation

Meaning of ‘Amalgamation’
The terms ‘reconstruction’ and ‘amalgamation’ are referred in section 394, which indicates that reconstruction or amalgamation is essentially a kind of a compromise or arrangement proposed between a company and its members or creditors of any company or companies.
For the purposes of the Act, the terms ‘merger’ and ‘amalgamation’ are synonymous. Merger means the fusion or absorption of one company by another, latter retaining its own name and identity and acquiring assets, liabilities, franchises and powers of former, and absorbed company ceasing to exist as separate entity.
Amalgamation is used where two or more companies are amalgamated or where one is merged with another. There may be amalgamation either by transfer of two or more undertakings to a new company formed for the purpose, or by the transfer of one or more undertakings to an existing company or by the acquisition of controlling interest in the share capital of one by the other.

Parameter of Section 394
§  This section when read with section 391, construes that any recons-truction or amalgamation should involve compromise or arrangement between the company and its creditors or members. For facilitating reconstruction or amalgamation of companies, the court may either sanction the compromise or arrangement, or by a subsequent order, make provision for all or any of the following matters:
(i) for transfer of property or liabilities of transferor-company to the transferee-company.
(ii) for allotment of shares, debentures, policies or other like interest, by the transferee-company.
(iii) the continuity of legal proceedings pending by or against any transferor-company.
(iv) dissolution of any transferor-company without following the procedure of winding up.
(v) to make provision for persons who dissent from the compromise or arrangement.
(vi) general directions for such incidental, consequential and supplemental matters as are necessary to secure the effective implementation of reconstruction or amalgamation.
§  It may be noted that the court shall not sanction any scheme of compromise or arrangement proposed for the purposes of, or in connection with, a scheme for the amalgamation unless it has received report from the Registrar to the effect that the affairs of the company have not been conducted in a manner prejudicial to the interest of its members or to public interest.

Some prominent observations of courts on ‘Amalgamation’
§  Amalgamation is a right given by the statute and its validity does not depend upon the constitution as contained in the memorandum of association. Absence of power in the memorandum for making an application for amalgamation does not invalidate the scheme of amalgamation.[29]
§  Thus absence of any such express provision in the memorandum of association authorising amalgamation, cannot affect the power of the court to permit amalgamation.[30]
§  Date of Amalgamation: Where the court specifies a date, such date would be the date of amalgamation/date of transfer. But where the court does not prescribe any specific date but merely sanctions the scheme prescribed to it, the date of amalgamation/date of transfer is the date specified in the scheme as `the transfer date'. It cannot be otherwise. It must be remembered that before applying to the court under section 391(1), a scheme has to be framed and such scheme has to contain a date of amalgamation/transfer.[31]
§  There cannot be different dates of amalgamation for different authorities. It cannot be said that for the purposes of the Companies Act, a company looses its corporate personality from a particular date and for the purposes of the Bombay Sales Tax Act, the company looses its corporate personality from another date. Once the court declares that that a company stands destroyed from a particular date, the corporate personality of that company is destroyed from that date completely.[32]
§  Joint petition by transferor and transferee-company seeking approval of a scheme of amalgamation is maintainable: Neither the Companies Act nor the Company Court Rules prohibit filing of a joint petition by the two companies where the subject-matter is the same and common question of fact and law would arise for decision.[33]
§  There can be no legal bar for entering into a scheme of arrangement for amalgamation between an Indian company and a foreign company but such a scheme shall be subject to laws of both the countries: Sub-section (4) of section 394 specifically says that the transferee-company shall be a company as defined under the Act and the transferor-company can be a body corporate, which includes a foreign company[34].
§  Merger of Holding and subsidiary: The transferee company need not obtain approval under section 391, when the transferor company is a wholly owned subsidiary.[35]
§  Role of Courts: Where members and creditors have approved compromise and arrangement, court has to only consider whether scheme is fair, just and reasonable: Apex court in Miheer H. Mafatlal v. Mafatlal Industries Ltd.[36] laid down that the court cannot act as an appellate authority and minutely scrutinise the arrangement and arrive at an independent conclusion as to whether the arrangement should be permitted to go through or not when the majority of creditors or members have approved the scheme as required by section 391(2). All that the court has to consider is whether the scheme is fair, just and reasonable and ensure that it does not run contrary to any provisions of law and it does not violate public policy.

De-merger

Meaning of De-merger
§  De-merger is an opposite of merger a statutory disintegration or separation of two or more companies by the transfer of the properties to one surviving company. Demerger can be defined as ‘the separation of a large company into two or more smaller organizations. However, this term is used also to describe the act or process of ‘spin-off’ or ‘hiving off’ of a unit or division or a business out of two or more of them by sale without any change in the shareholding of the selling company or issue by it of new shares to the buyer company or its shareholders.
§  This is described in s.293 (1)(a) of the Act as ‘sell, lease or otherwise disposing of the whole, of substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole or substantially the whole, of any of such undertaking.
§  Sometimes de-merger takes the shape of –
-          ‘Spit-off, a process of reorganizing a corporate structure whereby the capital stock of a division or subsidiary of a corporation or of a newly affiliated company is transferred to the stockholders of the parent corporation in exchange for part of the stock of the latter; or
-          ‘Split-up’ a process of reorganising a corporate structure whereby all the capital stock and assets are exchanged for those of two or more newly established companies, resulting in the liquidation of the parent corporation
§  The Companies Act does not contain the concept of ‘de-merger’ as such, but it does indirectly recognize it in –
(a)    Section 391 / 394 (as a scheme of compromise, arrangement or reconstruction) and
(b)   Section 293(1)(a) (sale, lease or otherwise dispose of –
The whole of the undertaking of the company; or
Substantially the whole of the undertaking of the company; or
If the company owns more than one undertaking, of the whole or substantially the whole, of any of such undertaking.





[1] Dr. Chandratre, K.R., Corporate Restructuring, 1st Edn., Bharat Law House, New Delhi (2005)
[2] Ramaiah, A, Guide to companies Act, Part 1, 16th Edn., Wadhwa Publications, Nagpur (2004).
[3] Old Silk Stone Collieries Ltd., Re, (1954) 1 All ER 68
[4] In re, Hindustan General Electric Corporation, (1959) 29 Com Cases 144: AIR 1959 cal 679; See also Girish Kumar v. Industrial Forge & Engineering Co. Ltd. (2000) 38 CLA 126
[5] State of Karnataka v. Mysore Coffee Curing Works Ltd., (1984) 55 Com Cases 70 (Kar)
[6] Saltdean Fstate Ltd., In re (1968) 3 All ER 829
[7] Wedgewood Coal & Iron Company (1877) 6 Ch D 627
[8] Global Trust Bank Ltd., In re. (2004) 63 CLA 323 (AP)
[9] (2004) 53 SCL 396 (Bom)
[10] CIT, West Bengal v. Allahabad Bank Ltd. AIR 1969 SC 1058.
[11] Additional Commissioner of Income-tax, Delhi v. Om Oil Seeds Exchange Limited (1985) 51 Comp. Cas. (Del).
[12] Circular No. 3/77, dated 15th April, 1976.
[13] Asian Investment Ltd., In re. (1992) 73 Comp. Cas. 517 (Mad).
[14] Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. (1971) 41 Comp. Cas. 51 (SC).
[15] T Durairajan v. Waterfall Estates Ltd. (1972) 42 Comp. Cas. 563 (Mad).
[16] Mcleod & Co. v. S. K. Ganguly (1975) 45 Comp. Cas. 563 (Cal).
[17] Rupak Ltd. v. ROC (1984) 56 Comp. Cas. 206 (Pat).
[18] The Philadelphia Securities Co v. The Realisation etc., Corp. of Scotland Ltd (1903) 11 SLT 217
[19] Gillies v. Dawson (1893) 20 R 1119
[20] Empire Mining Co In re (1890) 44 Ch D 402
[21] Wright & Greig Ltd In re (1911) 1 SLT 353
[22] Balmenach-Glenliver Distillery Ltd 1916 SC 639
[23] City,etc., Trust Corpn. Ltd. 1951 SC 570
[24] Calgary & Edmonton Land Co Ltd (1975) WLR 355
[25] NFU Development Trust (1972) WLR 1548
[26] Investment Corporation of India Ltd. (1987) 61 Comp Cas 92 (Bom)
[27] Gujarat Ambuja Exports Ltd., In re (2004) 118 Comp Cas 265 (Guj)
[28] Nicholas piramal (India) Ltd., In re (2004) 58 CLA 165
[29] Associated Hotel of India Ltd., In re. (1968) 2 Comp. LJ 292 (Cal).
[30] Willcox Buckwell India Ltd., In re. (1972) 2 ILR 598 (Delhi).
[31] Marshall Sons & Co. v. Income Tax Officer (1997) 24 CLA 1 (SC).
[32] National Organic Chemical Industries Ltd v. State of Maharashtra (2004) 59 CLA 136 (Bom)
[33] Mohan Exports India Limited v. Tarun Overseas (P) Ltd. (1999) 95 Comp. Cas. 53 (Del).
[34] Moschip Semiconductor Technology, In re., (2004) 50 SCL 405 (AP).
[35] Sharat Hardware Industries Pvt. Ltd. (1978) 48 Com Cases 23 (Del)
[36] AIR 1997 SC 506

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