Fast Track Merger- faster way of corporate restructuring

BarshaDikshit

barsha@vinodkothari.com

and

Rahul Maharshi

Corporate Law Services Group

corplaw@vinodkothari.com

12th January, 2017

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Disclaimer:

This document is intended to initiate academic debate on a pertinent question. It is not intended to be

a professional advice and should not be relied upon for real life facts.

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Introduction

The Ministry of Corporate affairs (‘MCA’) vide its commencement notification dated 7th

December, 2016, 1has notified various sections of the Companies Act, 2013 (‘Act, 2013’) to

come into force w.e.f. 15th December, 2016. By virtue of the said notification, the much

awaited section, section 233 of the Act, 2013 dealing with “Merger and amalgamation of

certain types of companies”, has also came into force whereby a scheme of merger or

amalgamation may be entered into between two or more small companies or between a

holding company and its wholly-owned subsidiary company or such other class or classes of

companies as may be prescribed without following the cumbersome restructuring

proceedings. There was no such concept under the Companies Act, 1956 and therefore all

the mergers and restructurings had to go through with the lengthy proceedings as any other

mergers. Now, under fast track merger, Central Government (the power has been delegated

to the Regional Director) has the power to approve such scheme and there is no need to

approach to the National Company Law Tribunal (‘NCLT’). Further, on the very date of

enforcement of the said sections, MCA has also introduced the Companies (Compromise,

arrangements and amalgamations) Rules, 2016 (‘CAA Rules’2) dealing with the manner of

making application for the Corporate restructuring.

Section 233 of the Act, 2013 and rule 25 of the CAA Rules provide for the entire framework

of the fast track merger.

In this write up, we have made an attempt to analyse the proceedings for Fast Track Merger.

Companies eligible to make application under Fast Track Merger:

The scheme of merger or amalgamation may be entered into:

between two or more small companies or

between a holding company and its wholly-owned subsidiary company

such other class or classes of companies as may be prescribed. (please note that other

classes of companies has not yet been prescribed)

Benefits of Fast track merger

The benefits of Fast track merger over the Traditional merger can be envisaged as follows:

1. Reduction in Administrative burden;

2. Reduction in time involved via Traditional Merger;

3. Reduction in cost for smaller companies falling below threshold limits;

1 http://www.mca.gov.in/Ministry/pdf/commencementnotif_08122016.pdf

2 http://www.mca.gov.in/Ministry/pdf/compromisesrules2016_15122016.pdf

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4. No Mandatory approval of the NCLT required;

5. Registration of scheme shall be deemed to have effect of dissolution of transferor

companies without the process of winding up.

Whether listed companies can also opt for the Fast Track Merger?

Yes. Listed companies that fulfills the criteria as mentioned in section 233 (1) can also opt

for the FTM mode. However, till the time SEBI comes up with the process to be followed

by the listed companies in line with the provision of Companies Act, 2013, listed companies

shall have to follow the SEBI’s circular dated November 30, 2015 and LODR Regulations.

Approval Required for Fast Track Merger

In terms of section 233 (2) and (3) of the Act, 2013, the Transferee Company is required to

file the scheme, after the same is approved by the shareholder and creditors, with the

following authorities as relevant for jurisdiction of the registered office of the Company:

The Central Government (power has been delegated to the Regional Director);

The Registrar of Companies; and

The Official liquidator

Can the classes of companies eligible to opt for Fast Track Merger, adopt

Traditional Merger route for approval for merger?

Yes, the classes of companies eligible to opt for Fast Track Merger may, at its own discretion,

opt for Traditional Merger route as per the provisions of section 233 (14) of the Act and rule

25 (8) of the Compromise Rules.

Dissolution of Transferor Companies under Fast Track Route:

As per the provisions of sub-section (8) of section 233 of the Act, transferor company shall

be “deemed to be dissolved” without meeting the process of winding up once the scheme

is registered pursuant to the registration and issuance of a confirmation by the Regional

Director under sub-section (3) of the Act or pursuant to the registration of the scheme by

Registrar having jurisdiction over the transferee company

Stamp Duty applicability on Fast Track Merger

Stamp Duty is a State subject and its applicability is determined on two grounds: a) the State

(s) where the Registered Office of the company is situated and b) the status of the properties

being transferred under the Scheme. Further, as per Schedule 1 of the Indian Stamp Act,

1899, every instrument, whether movable or immovable, for transfer of property, attracts

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Stamp duty. Thus, in order to create a valid charge for levy of stamp duty on conveyance,

the following ingredients must exist; i) there should be instrument of transfer, ii) the

properties, whether movable or immovable , should be transferred inter-vivos between

Parties. Government of Maharashtra, Gujrat, Chattisgarh, Karnataka, Madhaya Pradesh,

Andhra Pradesh, West Bengal and Uttar Pradesh have included the order passed on mergers

in the definition of ‘Conveyance’. Hence stamp duty is applicable on mergers.

Further, It is only where a property is involved and when the transferee intends to transfer

the same in its name comes the question of registration and therefore, payment of duty arises

at that stage. In case where a property may not be situated in the state of passing of order on

merger, the stamp schedule of the relevant State has to be seen if duty is applicable on

immoveable property registration in that state where the property is located.

Traditional Merger vs Fast Track Merger

Particulars

Traditional merger

Fast track merger

Manner of making

application

Section 230 (1) and rule 3 has

provided Form No. NCLT-1

for making application along

with an affidavit verifying

petition in Form NCLT-2,

copy of scheme and prescribed

fees before the NCLT.

The provisions of Section 233

does not require any application

to be made to the NCLT.

Approving

Authorities

Shareholders of the

Company;

Creditors’ of the

company;

All the statutory

authorities as may be

applicable, such as

RBI, RD, CCI, Stock

Exchange, SEBI ; and

Approval of the NCLT

Shareholders of the

Company;

Creditors of the

Company;

Registrar of companies;

Official Liquidator;

Regional Director

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Dispensation from

the meeting

If 90% by value of

creditors/members agree by

way of affidavit then meeting

of creditors/members can be

dispensed with by the NCLT

No need to take dispensation

from the NCLT convened

meeting.

Requirement of

declaration of

solvency

No Declaration of solvency

Required

Declaration of solvency is a

prerequisite. Both the

companies involved in the

scheme of merger shall file

declaration of solvency in Form

CAA. 10 before convening

meeting of members for

approval of the scheme.

Requirement of

valuation Report

Valuation report by an

independent merchant banker

registered with SEBI or by a

Practicing Chartered

Accountant having a minimum

experience of 10 years is

required.

No valuation report is required.

Lengthy NCLT

Proceeding

Companies involve in the

scheme of merger shall have to

follow the procedure as per

NCLT rules such as making of

application, hearing before

NCLT, filing petition,

advertisement of merger etc.

No need to follow lengthy

NCLT proceedings

Dissolution of

Transferor

Company

NCLT, after satisfying that

procedure specified in Section

232 has been complied with,

may by order make provision

for dissolution of transferor

company without winding up.

Registration of the scheme with

the Registrar shall be deemed to

have effect of dissolution of the

transferor company without

process of winding up.

Procedural compliances in detail

Power to Amalgamate

It must be ensured that the companies under amalgamation should have power in the

object clause of their Memorandum of Association to amalgamate though this may not

be an impediment, but this will make the matter smooth. Also if the transferee company

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intends to carry on the business of the transferor company, it must have the object

clause amended as per the MoA of the Transferor Company.

Board meeting for approval of the scheme

A draft scheme of amalgamation shall be prepared for getting it approved in the

Board meeting of each company.

A Board meeting shall be convened to pass the necessary resolutions for approving

the scheme and to authorize someone to do all acts and things as may be considered

necessary and expedient in relation thereto.

Submission of notice inviting objections or suggestions

A notice of the proposed scheme inviting objections or suggestions, if any, from

the Registrar (where the registered office of the transferor/transferee company is

situated) and Official Liquidator of the area where the registered office of the

transferor company is situated or persons affected by the scheme shall be sent to

them in form CAA.9 enclosed with a copy of the scheme by the companies

involved in the merger.

The objections and suggestions shall be sent by the Registrar and Official

Liquidator and persons affected by the scheme to the Regional Director and to

companies involved in the merger within 30 days from the date of the notice.

Filing of Declaration of solvency

Each of the companies involved in the merger files a declaration of solvency in

form CAA.10 along with the fees prescribed under the Companies (Registration

Office and Fees) Rules, 2014with the Registrar where the registered offices of the

companies are situated before convening the meeting of members or creditors for

approval of the scheme.

Convening General meeting of members or class of members

The notice of the meeting shall be accompanied by:

(a) A Statement disclosing the details of the compromise or

arrangement pursuant to sub-section (3) of section 230 of the act

read with sub-rule (3) of rule 6, if such details are not already

included in the said scheme;

(b) A copy of the scheme;

(c) The declaration of solvency made in pursuance of clause (c) of sub-

section (1) of section 233 of the Act in form CAA.10

The objections and suggestions received from the Registrar, Official liquidator and

persons affected by the scheme shall be considered by the companies in their

respective general meetings

The scheme shall be approved by the respective members or class of members

holding at least ninety percent of the total number of shares.

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The notice shall provide that the persons to whom the notice is sent may vote in

the meeting either by themselves or through proxies or by Postal Ballot to the

adoption of the scheme within one month from the date of receipt of such notice.

Convening meeting of creditors or class of creditors

The notice of the meeting shall be given 21 days prior to the date of meeting

accompanied by:

(a) A Statement as far as applicable, referred to in sub-section (3) of section

230 of the act read with sub-rule (3) of rule 6 hereof in relation to details

which are not included in the scheme;

(b) A copy of the scheme;

(c) The declaration of solvency made in pursuance of clause (c) of sub-

section (1) of section 233 of the Act in form CAA.10

The objections and suggestions received from the Registrar, Official liquidator and

persons affected by the scheme shall be considered by the companies

The scheme shall be approved by the majority representing nine-tenths in value of

the creditors or class of creditors of the respective companies.

Filing of Draft Scheme with Stock Exchanges

In case of a listed company involved in the merger, shall file the draft scheme with

the stock exchange prior to filing of the scheme with the court or tribunal under

section 230- 234 of the Companies Act, 2013.

A no objection certificate from stock exchange shall be obtained and the same

shall be submitted with the Regional Director, accompanied with the scheme.

Filing of copy of scheme and results of the meeting with the Regional Director

The Transferee company, within 7 days of conclusion of the meeting of members

or class of members or creditors or class of creditors, shall be required to file with

the Regional Director in form CAA.11 the following documents:

(a) copy of scheme as agreed to by members and creditors; and

(b) a report of the results of each of the meetings

Copy of scheme along with the above mentioned form CAA.11 shall also be filed

by the transferee company with :

(a) The Registrar of companies in form GNL-1 along with the prescribed

fees Companies (registration offices and fees) Rules,2014; and

(b) The official liquidator through hand delivery or by registered post or

speed post.

Approval of scheme by the Regional Director (Power has been delegated to the

Regional Director vide notification dated 19th December, 2016)

Where no objections and/or suggestions to the scheme are received from the

Registrar of Companies and the Official Liquidator or person affected by the

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scheme or the objections/suggestions are not substantial to the opinion of the

Regional Director and the Regional Director is of the opinion that the scheme is

in public interest or in the interest of the creditors the RD shall issue a confirmation

order of such scheme of merger or amalgamation in form CAA.12 which shall be

deemed to be the order sanctioning the scheme of Merger.

In case, the Regional Director is of the opinion on such objections and/or

suggestions or otherwise, that the scheme is not in public interest or in the interest

of creditors ,Regional Director may file an application before the tribunal in form

no CAA.13 within 60 days of receipt of the objections and/or suggestions for

consideration of the scheme under section 232 of the Act.

Deemed winding up of transferor company

The registration of the scheme by approval under sub-section (3) of section 233 of

the Act or an approval by filing copy of confirmation order with the Registrar

under sub-section (7) of section 233 of the Act shall be deemed to have effect of

dissolution of the Transferor company without the process of Winding-up

Effects of registration of the scheme

The registration of the scheme shall have the following effects, namely:-

o Transfer of properties or liabilities of the transferor company to

the transferee company so that the property becomes the property

of the transferee company and the liabilities become the

liabilities of the transferee company;

o the charges, if any, on the property of the transferor company shall

be applicable and enforceable as if the charges were on the

property of the transferee company;

o legal proceedings by or against the transferor company pending

before any court of law shall be continued by or against the

transferee company; and

o where the scheme provides for purchase of shares held by the

dissenting shareholders or settlement of debt due to dissenting

creditors, such amount, to the extent it is unpaid, shall become the

liability of the transferee company.

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Fast Track Merger at a glance:

Practical aspects of Fast Track Merger:

Sr. No.

Activity Section/ Rules

Relevant Forms

Tentative Timeline

1. Check the MoA of the Company 1. Amalgamation is permissible as per

object clause of Memorandum of Association of both the Companies. (the object clause of MoA of transferee company may be amended in case transferor company intends to carry on the business of transferor company)

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2. Appointed date to be decided by the BOD on mutual consent

3. Drafting the Scheme of Amalgamation 4. Sent notice of the Board meeting

(at least 7 days before the date of the meeting)

Say on x day

5. Conduct a Board Meeting to consider the following :

Scheme of Amalgamation; To take declaration of solvency

from the directors of the Company in Form CAA 10;

To approve fix date, time of the general meeting;

To authorize someone to do all acts and things as may be considered necessary and expedient in relation thereto.

x+7 day

6. Filing of Notice of proposed scheme with Registrar, Official Liquidator or persons affected by the scheme inviting objections & suggestions.

233(1)(a) of CA,2013

CAA.9 x+8 day

7. Dispatch notice of the general meeting to the members of class of them and the same shall be accompanied with:

a. Scheme of Amalgamation, b. Statement under Section 230 of

the Companies Act, 2013, c. Declaration of solvency made in

pursuance of clause (c) of sub-section (1) of section 233

(atleast 21 days before the date of the General Meeting)

233(1)(d) of CA,2013 and Rule 25 93)

x+8 day

8. Simultaneously, File Declaration of solvency alongwith the fee as prescribed in the Rules by each company involved in the scheme of merger or amalgamation

233(1)(c) of CA,2013 and Rule 25 (2)

CAA.10 x+10 day

9.

MGT-14 should be filed with ROC for Board resolution (within 30 days of passing the board resolution)

Within x+7+30 day

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10. Take NOC from the Creditors of the Company on the scheme of amalgamation (the scheme shall be approved by the majority of creditors representing 9/10th of the value )

Requisite time

11. Receipt of objections & suggestions, if any, from the Registrar, Official Liquidator or person affected by the scheme (within 30 days from the date of filing of notice)

Section 233 (1) (a)

Within x+8+30 day

12. Hold general meeting to consider the following:

To get the scheme approved by the members holding atleast 90% of the total number of shares;

To consider the suggestions received by the Registrar, OL, if any;

To take note of the NOC received from the creditors.

Section 233 (1) (b) and (d)

x+8+31 day

13. Transferee company shall file a copy of the scheme as agreed to by the members and creditors of the respective companies, along with a report of the results of each of the meetings with the Regional director (RD) in Form CAA.11, Registrar of Companies in Form GNL-2 and Official Liquidator (OL)through hand delivery or speed post of the region where the registered office of the company is situated.

Rule 25 (4)

CAA.11, GNL-1

Within x+8+31+7 day

14. Regional Director shall issue a Confirmation order for approval of the Scheme.(if no objection from Registrar or official liquidator received .

233(2) of CA,2013

CAA. 12 Say within x+8+31+7+10 day

15. The Confirmation order of the Regional Director shall be filed with the ROC by transferor and transferee company alongwith prescribed fees

Rule 25 (7)

INC-28 Within x+8+31+7+10+30 day

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Conclusion

The concept of fast track merger is a right move towards simplifying the procedural aspect of Merger and amalgamations of small companies and of holding company with its wholly owned subsidiary. As compared to the traditional merger process where NCLT approval is required, the process of Fast track merger is lesser time consuming and needs lesser costs or paper works. However, the likely time for the process of fast track merger will depend upon the authorities concerned for the timely disposal of matters.

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