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Merger of a wholly owned subsidiary (WOS) with its parent company-under fast-track provision of Companies Act, 2013

Submitted by-Roopali Singhal

1.Position under Companies Act, 1956

Merger/Amalgamation was dealt under Chapter V of Companies Act, 1956 comprised of Section 390 to 396A contains provisions on ‘Arbitration, Compromises, Arrangements and Reconstructions’. There was however, no provision on Arbitration since Section 389 which dealt with Arbitration was deleted.

The problem with the standard procedure prescribed under Companies Act, 1956 was that it was unnecessary time consuming for small companies for both courts and the applicants. There was a need to simplify and expedite the procedure for the mergers of small companies, holding-subsidiary companies and companies where the interest of third parties is not involved.  The provisions of Companies Act, 1956 dealing with mergers and amalgamations were time-consuming and costly processes, it includes clearances from many regulatory bodies and every type of company must go through this route.

2.Fast Track Merger

The Companies Act, 2013 addressed this issue by introducing Section 233 as a Merger oramalgamationof certaincompanies. These provisions are popularly termed as Fast Track Merger (FTM).

Section 233 provides for a simplified, quick and time-bound procedure in comparison to the procedure for a traditional merger, which is in line with global practices in terms of mergers and amalgamations of holding companies and its wholly-owned subsidiary companies.

FTM mechanism is available to:
(a) merger of two or more small companies.
(b) Between holding company and its wholly owned subsidiary company; and
(c) Other class of companies as may be prescribed.

3.Advantages of Fast Track Merger

Often small businessmen refrain from formation of legal entities because it involves so many formalities, FTM introduced purely with the intension to provide ease of doing business and promote the development of the small business entrepreneurs. Hence, under Section 233 of the new Act when two or more Small Companies merge, then such merger would be governed by theprovisions of Fast track merger.

4.Legal provisions

The legal framework is provided under section 233 of Companies Act, 2013 and Rule 25 of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.
The entire mechanism of FTM as provided under the ‘Act’ and ‘Rules’ is provided as self governance and regulators act only as a guide and registering authority.

The entire legal framework isproviding for:
4.1.Eligibility of Companies for FTM;
4.3.Documentation and Forms involved in FTM;

4.1 Eligibility

As per provision of Section 233(1) provides for a scheme of merger or amalgamation may be entered into between:

  1. Two or more small companies; or
  2. A holding company and its wholly-owned subsidiary company; or
  3. Such other class or classes of companies as may be prescribed.

a. Two or more small companies: The Section provides FTM mechanism is available for merger of two or more small companies, under the same group of management or other.

Small companies: Section 2(85)defined ‘small companies’ meansa company, other than a public company,—

(i) paid-up share capital of which does not exceed fifty lakh rupees or suchhigher amount as may be prescribed which shall not be more than five crorerupees; or
(ii) turnover of which as per its last profit and loss account does notexceed two crore rupees or such higher amount as may be prescribed which shallnot be more than twenty crore rupees:

Providedthat nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;

If the company breaches any one criterion for Small Company, it will not be eligible for the benefits of Small Company.

b.A holding company and its wholly-owned subsidiary company: FTM mechanism is available for merger of a holding company with its wholly owned subsidiary company, this scheme is not available for merger of two or more wholly owned companies with its holding company.

The Companies Act, 2013 defines under section 2(87) the term subsidiary company, but the term, wholly owned subsidiary company is not defined under Companies Act, 2013, it can be taken as what is defined in the term of business. It can be defined as under:

A wholly owned subsidiary is a company whose Equity Stock is 100% owned by another company, i.e., the parent company.

4.2 Procedure of FTM

The whole scheme of FTM provided under Companies Act and Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 provides that the Scheme shall be drafted by the company and submitted to jurisdictional Registrar and Official Liquidator for their primary objection or observation. On the basis of such observations the final Scheme drafted and gets approval of shareholders and creditors. The approval from members, class of members and creditors shall required by 9/10th majority. The approved scheme shall be submitted with jurisdictional Regional Director, Registrar of Companies and Official liquidator by the ‘Transferee Company’.

Once the final scheme filed with Regional Director, the concerned Registrar of Companies and Official Liquidator may file objection before the Regional Director within 30 days, if no such communication is made, it shall be presumed that he has noobjection to the scheme, and the regional director accept the final scheme.

The confirmation order of the scheme issued by the Central Government shall be filed, within thirty days of the receipt of the order of confirmation.

The Regional Director may on the basis of objection raised by Registrar of Company or Official Liquidator or suo-motu opted that the FTM mechanism will not provided to the applicant and refer the matter to NCLT and shall be deal under the normal procedure.

The FTM is an optional mechanism, the normal procedure of merger is always available to the companies eligible for FTM.

4.2.1 Drafting of Scheme
Notice of proposed scheme filed with RoC in Form CAA-9

A notice of the ‘proposed scheme’ inviting objections or suggestions to be filed by transferor Company and Transferee Company from respective jurisdictional Registrar of Companies and Official Liquidator.

Form CAA-9 shall be filed as attachment of Form GNL-1 with Registrar and with Official Liquidator it is filed with either by hand or by post.

4.2.2 Approval of finalised Scheme by members

The objections and suggestions received are considered by the companiesin their respective General Meetings and the scheme is approved by the respectivemembers or class of members at a general meeting holding at least ninety percent ofthe total number of shares;The notice send to the share holders shall contain:

  1.notice, explanatory statement;
  2.a statement

  • Disclosing the details of the compromise or arrangement,
  • Explaining theeffect of merger on creditors, key managerial personnel, promoters and non-promoter members, and the debenture-holders;
  • The effect of the compromise or arrangement on any material interests of the directors of the company or the debenture trustees, and such other matters as may be prescribed.

  3. The Declaration of Solvency made in pursuance of clause (c) of sub-section (1) of section 233 of the Act in Form No.CAA.10;
  4  Copy of the Scheme of Arrangement;
  5. Valuation Report;
  6. Objection of RoC/OL and incorporated in the scheme;

4.2.3 Declaration of Solvency

As per section 233(1)(c) each of the companyproposed to be merged under FTM  shall require to files a ‘declaration of solvency’,in the Form CAA-10, with the jurisdictional Registrar;

Declaration of solvency is a document in the form of a statement, made by Directors of the Company, lodged with the Registrar of Companies, that lists the assets and liabilities of a company under FTM to show that the company is capable of repaying its debts within one year from the date of making the declaration.

  • CCA-10 shall be filed by both Companies;
  • Filed before convening meeting of Shareholders and Creditors
  • The declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director, if any.
  • The declaration of solvency shall be annexed with
      (i) Copy of resolution
      (ii) Statement of Assets and Liability ;
      (iii) Auditors’ Report on the  Statement of Assets and Liability; Latest
       (iv) Audited Balance Sheet.
  • The Declaration of Solvency must be notarized and on the stamp paper.

4.2.4.Approval of majority of the creditors or class of creditors with 9/10 majority

The scheme is approved by majority representing nine-tenths in value ofthe creditors or class of creditors of respective companies indicated in a meetingconvened by the company by giving a notice of twenty-one days along with thescheme to its creditors for the purpose or otherwise approved in writing.

4.3 Filing of a copy of the approved scheme with the Central Government (Regional Director) By Transferee Company

The transferee company shall file a copy of the scheme so approved in themanner as may be prescribed, with the Central Government (RD), Registrar and the OfficialLiquidator where the registered office of the company is situated.

As per Rule 25(4), the transferee company shall, within seven days after the conclusion of the meeting of members or class of members or creditors or class of creditors, file a copy of the scheme as agreed to by the members and creditors, along with a report of the result of each of the meetings in Form No. CAA.11 with the jurisdictional Regional Director.

(b) Copy of the scheme shall also be filed with:

(i) the Registrar of Companies in Form No. GNL-1; and
(ii) the Official Liquidator through hand delivery or by registered post or speed post.

4.4 Procedure adopted by Regional Director on receipt of the final Scheme:

Rules 5 and 6 provided for the procedure to be adopted by Regional Director in disposing the approval of final merger scheme.

4.4.1. No objection or suggestion is received from the Registrar of Companies and Official Liquidator:

where no objection or suggestion is received to the scheme from the Registrar of Companies and Official Liquidator or where the objection or suggestion of Registrar and Official Liquidator is deemed to be not sustainable and the Central Government is of the opinion that the scheme is in the public interest or in the interest of creditors, the Central Government shall issue a confirmation order of such scheme of merger or amalgamation in Form No. CAA-12.

4.4.2. Where objection or suggestion is received from the Registrar of Companies and Official Liquidator:

Where objections or suggestions are received from the Registrar of Companies or Official Liquidator and the Central Government is of the opinion, whether on the basis of such objections or otherwise, that the scheme is not in the public interest or in the interest of creditors, it may file an application before the Tribunal in Form No. CAA.13 within sixty days of the receipt of the scheme stating its objections or opinion and requesting that Tribunal may consider the scheme under section 232 of the Act.

4.5 Registration of confirmation order of Registrar of Companies:

The confirmation order of the scheme issued by the Central Government or Tribunal under sub-section (7) of section 233 of the Act, shall be filed, within thirty days of the receipt of the order of confirmation, in Form INC-28 with the jurisdictional Registrar of Companies of the transferee and transferor companies respectively.

There are a lot to write about Fast Track Merger and legal issued involved therein, I will keep posting my articles on the topics related with Fast Track Merger in my future Articles.