Home Companies Act Section 230 of Companies Act, 2013

Companies Act

Section 230 of Companies Act, 2013

April 5, 2023

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This article has been written by Mahesh P Sudhakaran. The article deals with key aspects pertaining to Section 230 of the Companies Act, 2013 which is concerned with making compromises and arrangements in order to restructure the debt of a company.

It has been published by Rachit Garg.

Table of Contents

Introduction

It’s normal for any business to gain profits and accrue losses during its functioning, as long as there is a balance between the both in a manner wherein the stakeholders or creditors are protected and the company is financially sound to move forward with its functioning. However, when this balance is forsaken and the company incurs debt to a substantial extent, essentially weakening its financial position and threatening its very existence. In such a scenario, the company looks for other means to protect itself without being completely buried in debt. One such means resorted to by companies is by restructuring their debts with a view to improving their financial position. In simple terms, debt restructuring is a method or process by which a borrower who is incapable of paying off their debts restructures or reorganizes their debt in a way that makes it much more feasible for them to pay their debts. Debt restructuring can be carried out in a number of ways including reducing the rate of interest, adjusting the principal value or the term of the debt etc. Section 230 of the Companies Act, 2013 (“the Act”) is one such provision that enables a company can restructure its debt.

Applicability of Section 230

This provision can be invoked when a company is facing financial difficulties and is incurring debt to a point wherein the very survival of the company is in question. This provision enables the company to restructure its debts by providing the company with a legal framework to make compromises or arrangements with its creditors in order to resolve its financial issues. When a company isn’t able to pay off its debts or is on the brink of insolvency, it may propose a scheme of compromise or a mechanism with its creditors which can involve altering the terms of repayment or reducing the amount of debt to ensure repayment. The applicability of this provision is wide as it covers all companies registered under the Companies Act, 2013, including both private and public companies. Any company by virtue of this Act can invoke this section provided it has the approval of NCLT which is the regulatory authority empowered to monitor the corporate sector in India.

A detailed explanation of Section 230

Section 230 of the Act is concerned with the power to compromise or make arrangements with creditors and members when the company aims to restructure or reorganize its debt in order to resolve a financial crisis. As per this Section, a company can propose a scheme or a mode for compromise or arrangement with its creditors or its members, or both. Such a scheme must be approved by at least three-fourths of the creditors or members, or classes of them who are present and voting either in person or by proxy at a meeting convened for the purpose by the tribunal. The scheme has to be mandatorily sanctioned by the National Company Law Tribunal (NCLT), which is empowered to oversee and approve the proposed scheme. The NCLT can also order meetings of creditors or members to be held and may give directions as to the procedure to be adhered to during such meetings. If the compromise or arrangement is approved by the prescribed majority of creditors or members and is sanctioned by the NCLT, it becomes binding on the company and all its creditors or members. The scheme may then be executed by the company in compliance with the provisions. To sum up, Section 230 provides companies with a system to restructure or reorganize their debts with a view to avoiding bankruptcy or insolvency, while also securing the interests of creditors and members of the company. Let’s examine each sub-section in detail:

Section 230(1): Application to be submitted

As per this sub-section, when a compromise or an arrangement is proposed between a company and its members or creditors, an application can be submitted to the tribunal by the company, its members, its creditors or liquidators (in case the company is being wound up, the liquidator, in this case, is appointed under the purview of this Act or The Bankruptcy Code, 2016). Upon the receipt of such an application, the tribunal sets up a meeting between all the creditors or class of creditors, or members or class of creditors and such a meeting is conducted as per the tribunal’s directions. It is important to note that arrangement in this section includes reorganising a company’s share capital by means of consolidation of shares within different classes or through the division of shares within different classes or by both these modes.

Section 230(2): Affidavit to be disclosed

This provision is concerned with the contents of the affidavit to be disclosed along with an application made by the company or any other person mentioned in sub-section(1). The following are to be included:

All information pertaining to the company like the latest financial position, auditor’s report or any information regarding any proceedings against the company etc.
Information regarding the reduction of share capital in case the compromise or arrangement is concerned with the reduction of share capital.
If the compromise or arrangement includes any scheme of corporate restructuring, then such scheme should have the consent of at least 75% of the secured creditors. It should further include-

Creditor’s Responsibility Statement in the form prescribed.
Safeguards that ensure the interests of other creditors are protected.
Auditor’s report which states that the fund requirements of the company after the restructuring will be consistent with the liquidity test which is based on the estimates provided by the board.
A statement that signifies the adoption of any guidelines prescribed by the Reserve Bank of India provided any such guidelines are implemented.
Valuation report by a registered valuer that accommodates the value of the shares, property and all assets irrespective of whether they are tangible or intangible and irrespective of whether they are movable or immovable.

Section 230(3): Notice to the creditors and members

As per this sub-section, a notice has to be sent to all the creditors or class of creditors, debenture holders of the company and to the members of the company individually to the address registered with the company and such notice should accompany the following:

A statement that contains information on the arrangement or compromise decided upon.
A copy of the Valuation report, if any.
Information that explains the potential effects of the arrangement or compromise for restructuring on the directors or trustees.
Any other information if need be

Also,

The above-mentioned notice is to be displayed on the company’s website
In case the company is a listed company then such information must also be sent to the Securities and Exchange Board and the stock exchange where the company is listed for placing a notice on their website.
Such a notice can also be published in a newspaper.
If the notice needs to be published for the purpose of advertisement, then it should specify the time frame within which the information on the compromise or arrangement shall be made accessible to the persons concerned free of charge from the registered office of the company.

Section 230(4): Objections

As per this sub-section, the notice sent under Section 230(3) of the Act should state that the persons holding the notice can vote in the meetings either by themselves or by proxies or through postal ballot with regard to the implementation of the compromise or arrangement within a month of receiving the notice.
Any objection to the proposed compromise or arrangement can only be made by persons who hold at least 10% of the shares or by persons who have an outstanding debt of at least 5% of the total debt that is outstanding as per the latest audited financial statement.

Section 230(5): Recipients of notice

A notice under sub-section (3) shall also be sent to the following authorities (if need be):

The Central Government
The income tax authorities
The Reserve Bank of India
The Securities and Exchange Board
The Registrar
The respective stock exchanges
The official liquidator
The Competition Commission of India
Other sectoral regulators are likely to be affected by the arrangement or compromise made.

Any representations if needed have to be made within 30 days of receiving the notice and in case of any failure to do so, it shall be presumed that there aren’t any representations or objections.

Section 230(6): Majority required for a binding resolution

As per this sub-section the compromise or the arrangement shall become binding on the company if:

Majority of persons who are required to vote constitute three-fourths of the creditors voting by any medium assent to the resolution/compromise/arrangement.
The particular compromise or arrangement should also be sanctioned by the Tribunal through an order.

Section 230(7): Order by the tribunal

This sub-section is concerned with the contents of the order by the tribunal with regard to the compromise or the arrangement. Such an order will have the following:

When the compromise or the arrangement involves the conversion of preference shares into equity shares then the preference shareholders are given the option to obtain arrears of dividend in cash or they can accept equity shares equivalent to the dividend.
Protecting any class of creditors.
Section 48 of the Act will be invoked in case the mode of restructuring has any bearing upon the rights of the shareholders.
Any proceedings pending before the Board for Industrial and Financial Reconstruction shall stand void if the arrangement or compromise is approved by the creditors.
In case there are dissenting shareholders or creditors matters relating to their exit offers are to be also mentioned.
However, it is important to also note that a compromise or arrangement involving account treatment cannot be sanctioned by the tribunal unless the auditor of the company submits their report to the tribunal stating that such accounting treatment is in coherence with accounting standards under the ambit of Section 133.

Section 230(8): Filing the Order

The company should file the order by the Tribunal with the registrar within 30 days of receiving such an order.

Section 230(9): Affidavit by creditors

As per this sub-section when the compromise or arrangement entered into has the assent of at least 90% of the creditors or class of creditors, then in such a scenario the meeting required can be dispensed with. However, such assent must be expressed through an affidavit by such creditors or class of creditors.

Section 230(10): Buyback of securities

As per this sub-section, in case the compromise or the arrangement involves a resolution that contains a buy-back of securities, such a compromise or arrangement has to comply with Section 68 of the Act. If it fails to do so the tribunal cannot sanction the compromise or arrangement.

Section 230(11)

This sub-section was added by a notification in 2020 and it provides an option to include takeover offers in compliance with Securities and Exchange Board regulations as a mode of restructuring or arrangements in the case of listed companies.

Section 230(12)

This sub-section was also added by the notification in 2020 and states that in case of any grievances, the aggrieved party is entitled to make an application to the tribunal concerning any takeover offer of companies other than listed companies.

Interplay between Section 230 and IBC

Section 230 of the Companies Act, 2013, and the IBC are both pertinent legislations that have bearing on insolvency, restructuring and other corporate matters. On paper both serve different purposes but the underlying essence of both remains similar to some extent.
As we critically examine the jurisprudence behind Section 230 of the Companies Act, 2013 it is key to note that this provision is concerned with companies registered under the Act deriving a mechanism to restructure the debt through negotiations and compromises with its creditors or members which must be agreed about by a certain majority of creditors or members as mentioned above, Section 230 is more or less a voluntary mechanism initiated by the company itself attempting to resolve its debt through negotiating and compromising.
On the contrary, the IBC provides a legal framework through which individuals, partnership firms and companies attempt to efficiently resolve debt through the appointment of an insolvency resolution professional, preparation and approval of a resolution plan and implementation of the same.
Both these provisions as we discussed earlier vary from one another in terms of scope and process; however, the common element concerning both is the end goal of providing companies with a range of tools to restructure their operations and avoid bankruptcy while also ensuring that the interests of all the stakeholders are preserved. Thus, the essence remains similar to a certain extent.

When the IBC was introduced it did not have specific provisions to deal with persons who were attempting to take advantage of the IBC. Section 29A of the IBC was incorporated in 2018 to curtail wilful defaulters and persons connected to Non-Performing Assets from partaking in the resolution process.
However, Section 230 does not specify any restriction with regard to eligibility and through the course of many judicial decisions, this position or contradiction was clarified. The Apex Court in the Arun Kumar case set forth that even if such regulation did not exist at that time the provisions were to be interpreted harmoniously and that section 230 should be interpreted with respect to the underlying purpose or object of the IBC, hence persons deemed ineligible by virtue of IBC cannot be allowed to propose resolutions under section 230.
Liquidation Regulations were amended on January 06, 2020, thereby introducing another amendment in the form of a proviso inserted to Regulation 2B (1) wherein it was specifically concluded that a party barred by the IBC could not be allowed to make proposals under the ambit of section 230.
As per Section 53 of the IBC is concerned with the distribution of assets at the time of liquidation. There provision establishes a link between section 230 of the Companies Act, 2013, and the IBC as in case a company isn’t able to resolve its debt crisis through restructuring under Section 230 then such company goes to liquidation and the distribution of assets at the time of liquidation is covered under section 35 of IBC. As per this provision, the assets of the company will be dealt with in accordance with the order of priority as per the IBC.

Power of NCLT in respect of compromise and arrangement – Section 231

Section 231

As per Section 231 of the Companies Act, 2013 when the tribunal makes an order by virtue of Section 230 of the Act, pertaining to permitting a particular arrangement or compromise it has the following powers:

Enforcement: The tribunal shall have the power to exercise its supervision to ensure the implementation or execution of the compromise or arrangement.
Modification: The tribunal also has the power to give its input with regard to the compromise or arrangement arrived at and the tribunal can also modify the compromise or arrangement if it deems it necessary to ensure enforcement of the compromise or arrangement.
Order for winding up: if the tribunal has reason to believe that the resolution derived post invocation of Section 231 cannot be implemented with or without modifications then in such a scenario the tribunal can set forth an order for the winding up of the company. In simpler terms, if the tribunal is satisfied that the restructuring of debt by terms proposed under the aforementioned section will not bring the company out of debt then it can initiate proceedings under Section 273 of the Act for winding up of the company.

It is also paramount to note that the provisions of this act also shall apply to companies registered before this act was enacted i.e. they apply retrospectively.

NCLAT and Section 231

There is no question regarding the NCLT’s power to determine whether or not a particular compromise or arrangement should be sanctioned in lieu of debt recovery however, the NCLAT wields certain inherent powers under the ambit of Rule 11 of the NCLAT Rules, 2016, which empowers the NCLAT to “make such orders or give such directions as may be necessary for meeting the end of justice or to prevent abuse of the process of the Appellate Tribunal”. Therefore, does the exercise of powers under Rule 11 empower NCLAT to modify compromises or arrangements denied by the NCLT? There was a significant debate with regard to the same and the NCLAT clarified its position on the same in the case of Rama Investment Company Private Limited v. Ankit Mittal, wherein the NCLAT held that the appellate tribunal cannot use its inherent powers under Rule 11 to modify an arrangement or compromise under the ambit of section 231 which isn’t sanctioned by the NCLT under Section 230.

Section 232

Section 232 of the Companies Act, 2013 empowers the NCLT to call meetings of creditors or members, with regard to the merger or amalgamation of companies. Here are some important aspects of this aforementioned provision:

The provision is concerned with the restructuring of companies by a merger or amalgamation of companies through a compromise or arrangement proposed by a company with other parties.
The primary objective of such a compromise or arrangement is the reconstruction of a company or the amalgamation of two or more companies.
The provision provides the Tribunal with the power to order a meeting of creditors or other members, which will be conducted as per the directions of NCLT.
The companies that merge are required to ensure the circulation of the draft proposal with regard to the scheme, a report that explains the effect of such compromise, a valuation report by an expert with regard to valuation, and accounting statements as per requirements.
If the Tribunal is satisfied that the procedure laid down has been complied with, then the compromise or arrangement will be sanctioned by the tribunal and it will make provisions for various key aspects.(Such provisions may include matters like transfer of property, liabilities, share allotment, dissolution etc)
The provision also mandates the filing of a certificate by the auditor of the company in order to signify that if any accounting treatment is proposed within the scheme it is in accordance with the accounting standards prescribed under section 133
The provision also includes provisions regarding punishment due to non-compliance.

To conclude, Section 232 of the Companies Act, 2013 empowers the NCLT to call for meetings of creditors or other members for the proposal of a scheme of merger or amalgamation of companies. The Section sets forth the procedure that the NCLT has to comply with when calling for such meetings. The provision aims to ensure that the interests of all stakeholders are secured and lays down a mechanism for the resolution of disputes.

Judicial pronouncements

Rama Investment Company Private Limited v. Ankit Mittal

In this case, Rama investment company(RICPL) and other respondents entered into amalgamation, such amalgamation was approved by the NCLT. However, an appeal against the same was filed with the NCLAT and the NCLAT held that the scheme herein was unjust and reversed NCLT’s orders. Aggrieved by this order RICPL filed an appeal invoking Rule 11 of NCLAT rules to modify its order. The question herein was whether Rule 11 could be invoked in the instant case and the NCLAT held that powers under the ambit of Rule 11 cannot be exercised in the instant case.

Arun Kumar Jagatramka v. Jindal Steel

In this case, the question regarding the eligibility of promoters for proposing schemes under the purview of section 230 was discussed. Section 29A of IBC expressly barred certain ineligible persons from participating however no such restriction was persistent under Section 230. The Supreme Court herein held that promoters deemed ineligible under section 29A would also be barred from filing applications under section 230 based on harmonious construction.

Hindustan Lever v. State of Maharashtra

In this case, the Apex Court held that NCLT could not pass an order of injunction under the ambit of section 230 against functions that are statutory in nature. The court stated that an injunction could not be passed under this provision in the course of discharging statutory functions.

Reserve Bank of India vs. SREI Equipment Finance Limited

In this case, the NCLAT discussed the Scope of powers of the NCLT under the purview of Section 230 of the Companies Act, 2013. The NCLAT herein set aside a direction by the NCLT Kolkata which was passed with an application for conducting a meeting for restructuring, the direction herein that was set aside allowed the creditors and regulatory authorities to maintain their current status with regard to accounts of the applicant companies.

Conclusion

Chapter XV of the Companies Act, 2013, that is Section 230-240 contains provisions regarding compromises, arrangements, mergers or amalgamations etc. One of the major functions of this part is providing relief to companies on the brink of insolvency through the restructuring of debts using various mechanisms. Section 230 in particular paves the way to debt restructuring by deriving compromises or arrangements taking into consensus the general will of the company as a whole and is indeed an effective medium of reviving a company from any colossal financial crisis.

Frequently Asked Questions (FAQs)

Who can initiate proceedings under the ambit of Section 230 of the Act?

The tribunal can set forth a meeting based on the application filed by the company or of any creditor or member of the company, or the liquidator.

Who can object to a scheme under section 230 of the Act?

Any person who is holding not less than 10 per cent of the shares or a person having not less than 5 per cent of the total outstanding debt as per the latest audit report or statement.

References

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