Section 230 of the Companies Act, 2013, provides for a formal legal process under which an Indian company would compromise or arrange with its creditors or members. It is the most crucial clause for restructuring work as it allows companies to reorganize liabilities, debt reduction, or share capital adjustments under the control of a tribunal. This is very important by the Companies Act for a company and creditors/members interested in easy and fair resolution of financial difficulties.
Under this section, a company can make offers consisting of share consolidation or reclassification and members' wants, debt restructuring, or repurchase of them. It also entails strict compliance and full disclosure in its process, ensuring more transparency and further protection for the interests of all parties involved.
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Section 230: Power to compromise or make arrangements with creditors and members
Section 230 of the Companies Act, 2013 deals with the procedure that applies when a company wishes to go into a compromise or arrangement with its creditors or members. This section describes what needs to be sanctioned by creditors or members, disclosure requirements, and the process for the giving of notice for meetings, and then sets out how such a compromise or arrangement shall have effect as a law. Following that, it explains each subsection step-wise of Section 230:
Subsection (1): Application for Compromise or Arrangement
Proposal: This sub-section provides the form under which a compromise or arrangement may be proposed by or among a company and its creditors or members, or any class of them.
Tribunal's Role: The tribunal, most commonly the National Company Law Tribunal, NCLT, may order a meeting to discuss the proposal. An application for this order may be made by:
1. The company itself.
2. Any creditor or member.
3. Under winding up, the liquidator under the Companies Act or the Insolvency and Bankruptcy Code, 2016.
Arrangement: The term 'arrangement' encompasses the re-structuring of the share capital of a company (such as consolidation or subdivision of shares into various classes).
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Subsection (2): Disclosure Requirements
1. Affidavit: The applicant, for the purpose, that is, the company or any other person, shall make disclosure before the NCLT in an affidavit the following:
2. Financial Details: The company's financial position as of the date of the current proposal with an audit report and any pending inquiry or litigation against the company.
3. Reduction of Share Capital: The proposal for reducing share capital needs to be mentioned appropriately.
4. Corporate Debt Restructuring: If there is any proposal for debt restructuring, details of the debt restructuring done with creditors' agreement, safeguards, audit report, and liquid position of the company need to be presented.
5. Valuation Report: The report of the valuation of the assets and shares of the company by a registered valuer shall be filed.
Subsection (3): Notice of Meeting
Notice: Once the Tribunal has made an order to hold a meeting, notice shall be served on all creditors and members jointly or severally, as the case may be, at their registered addresses. The notice shall contain:
The details of the compromise or arrangement proposed.
A copy of the valuation report if applicable.
Effect of the arrangement on creditors, managerial personnel, promoters, and other persons.
The notice shall also be displayed on the website of the company, if any, and, in the case of listed companies, on the website of the Securities and Exchange Board of India (SEBI) and the stock exchange where the securities of the company are listed.
The notice shall be published in such newspapers as may be specified.
The notice, if published, shall state where copies of the documents relating to the arrangement free of charge are available.
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Subsection (4): Voting
Right to Vote: The notice shall state that persons to whom it is given shall be entitled to vote at the meeting either in person, by proxy, or by a postal ballot. The voting shall take place within one month from the date of service of the notice.
Objections to the scheme can be made by the creditors or members who hold more than 10% of the shareholding or more than 5% of the outstanding debt as reflected in the latest audited balance sheet.
Subsection (5): Notice to Authorities
Government and other Regulatory Authorities: The following authorities have also to be informed:
1. Central Government
2. Income-tax authorities
3. RBI
4. SEBI
5. Registrar of Companies (RoC)
6. Stock exchanges and other concerned regulators
7. Such authorities are permitted to present objections within a period of 30 days. Non-action on such a period deems that the concerned authorities have no objections
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Subsection (6): Majority Agreement and Tribunal's Sanction
Sanction through Majority: If a majority, three-fourths in value, of the creditors or members approves the compromise or arrangement submitted in the meeting, the tribunal is entitled to sanction the same.
Binding Nature: Once the Tribunal sanctions the arrangement, it becomes binding on the company and all its creditors or members, and if the company is in liquidation, on the liquidator.
Subsection (7): Matters Covered in the Tribunal's Order
Order Details: The order of the Tribunal sanctioning the arrangement may contain:
Conversion of preference shares into equity shares, and the preference shareholders may either be given the arrears of dividends in cash or equity shares.
Protection for certain classes of creditors.
Section 48 deals with the differential rights of shareholders.
Discharge of proceedings before the Board for Industrial and Financial Reconstruction (BIFR), if so applied.
Exit options to dissenting shareholders, if so opted.
Certificate from the auditor of the company that the accounting treatment proposed in the arrangement is in conformity with accounting standards.
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Subsection (8): Filing of the Order by the Tribunal
Filing with Registrar: The order so made by the Tribunal shall be filed with the Registrar of Companies within thirty days of the receipt.
Subsection (9): Dispensation of Meeting
Dispensation of Meeting: In case it's agreed that the compromise or arrangement is agreeable to at least 90% creditors or members in value, then the need for holding a meeting need not be discharged by the Tribunal.
Subsection (10): Compliance with Buy-back Provisions
Buy-back: In case the scheme comprises a buy-back of securities, the Tribunal shall refuse to sanction the buy-back if the buy-back is not in compliance with Section 68 of the Companies Act, 2013.
Subsection (11): Takeover Offer
Takeover Offer: The scheme can comprise of a takeover offer, especially for listed companies, under SEBI's Substantial Acquisition of Shares and Takeovers Regulations, 2011.
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Subsection (12): Aggrieved Parties
Grievances: Where any party is aggrieved by the takeover offer in companies other than listed ones, such party may apply to the Tribunal for redress. The Tribunal may pass appropriate orders on such applications.
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Explanation of Section 66
Clarification on Share Capital Reduction: It is clarified that Section 66 (reduction of share capital) is not applicable when share capital is reduced in accordance with an order made by the Tribunal under Section 230.
Key Points:
Tribunal's Power: The Tribunal has extreme powers in the approval process of compromises and arrangements.
Requirements of Disclosure: It requires full disclosure of the financial status, auditor's reports, and other material facts before it gets into any arrangement.
Majority Consent: Sanction on any arrangement requires three-fourths consent in value.
Protection for Creditors and Members: Creditors and Members Protection includes protection of the interests of creditors and members in the process of compromise or arrangement.
In a nutshell, the provisions incorporated in Section 230 of the Companies Act, 2013 provide for a comprehensive legal framework through which a company can alter its obligation towards creditors or members. As a matter of process, provisions are also made further regarding seeking approval from the concerned parties and disclosure of financial and operational details to form a binding arrangement based on such an arrangement once approved by the Tribunal.
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Conclusion
Thus, Section 230 of the Companies Act, 2013, is therefore essentially important for the restructuring and reorganization of companies in India. A fair process under Tribunal supervision protects the interests of creditors and members but simultaneously affords the company leeway in the resolution of its financial problems. Disclosure to shareholders by majority consent voting and the guidelines of the Tribunal ensure that the compromise or arrangement is fair and effective. Section 230 remains one of the central provisions companies rely on in navigating complex financial ecosystems, balancing their obligations with those of the stakeholders.
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Section 230 of the Companies Act, 2013 FAQs
Q1. What is Section 230 of the Companies Act, 2013?
Section 230 empowers a company to reshape or restructure its liabilities against its creditors or members for ease and under compromises and arrangements supervised by the Tribunal.
Q2. Who can propose a compromise or arrangement under Section 230?
A compromise or arrangement may be proposed by the company, any creditor or member, or a liquidator while the company is being wound up.
Q3. What does Section 230 hold for the role of the Tribunal?
The Tribunal exercises control over the procedure by ordering creditors' or members' meetings to be convened, sanctioning arrangements, and satisfying disclosure requirements as well as service legal processes.
Q4. What are the requirements for approval in Section 230?
The compromise or arrangement so reached shall be agreed upon by three-fourths in value of the creditors or members, which shall then be confirmed by the Tribunal and shall be binding on all parties concerned.
Q5. Does the Section 230 order contain a share capital reduction?
Arrangements under Section 230 can bring reductions of share capital only if adequate disclosure is made; the reductions are, however, required to be made subject to special provisions and to be sanctioned by the Tribunal.
