Arrangement Compromise with Creditors (Section 230)

Section 230 of Companies Act 2013 deals with Power to Compromise or Make Arrangements with Creditors and Members. Section 230 of the Companies Act, 2013 contains the powers of the Tribunal on the filing of application for the compromise or arrangement. In our previous article, we have already provided detailed explanation on Auditor Appointment in case of Casual Vacancy under Companies Act and also Provisions of Board Meetings. This Editorial on Arrangement and Compromise with Creditors and Members has been contributed by CA Anand Mishra.

Power of Tribunal [Section 230 (Section 230(1)]:

Where a compromise or arrangement is proposed between

  1. a company and its creditors or any class of them; or
  2. a company and its members or any class of them

the Tribunal may, on the application of the Company, or Creditor or Member of the company order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs.

Explanation – For the purposes of this sub-section, arrangement includes a reorganisation of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of those methods.

Disclosures by applicant [Section 230(2)]:

The company or any other person, by whom an application is made, shall disclose to the Tribunal by affidavit –

all material facts relating to the company, such as the latest financial position of the company, the latest auditor’s report on the accounts of the company and the pendency of any investigation or proceedings against the company;

reduction of share capital of the company, if any, included in the compromise or arrangement;

any scheme of corporate debt restructuring consented to by not less than seventy five
per cent. of the secured creditors in value, including:

  1. a creditor’s responsibility statement in the prescribed form;
  2. safeguards for the protection of other secured and unsecured creditors;
  3. report by the auditor that the fund requirements of the company after the corporate debt restructuring as approved shall conform to the liquidity test based upon the estimates provided to them by the Board;
  4. where the company proposes to adopt the corporate debt restructuring guidelines
    specified by the Reserve Bank of India, a statement to that effect; and
  5. a valuation report in respect of the shares and the property and all assets, tangible
    and intangible, movable and immovable, of the company by a registered valuer.

Notice of meeting conducted on order of Tribunal [Section 230(3)]:

Where a meeting is proposed to be called in pursuance of an order of the Tribunal, a notice of such meeting shall be sent to:

  1. all the creditors or class of creditors, and
  2. to all the members or class of members,
  3. and the debenture-holders of the company,
  4. Sectoral regulators u/s 230(5)

Annexure with Notice:

Notice of meeting shall be accompanied by a statement disclosing the:

  • details of the compromise or arrangement
  • a copy of the valuation report, if any, and
  • explaining their effect on creditors, key managerial personnel, promoters
    and non-promoter members, and the debenture-holders and
  • 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 as prescribed under Rule 6 of the Companies
    (Compromises, arrangements and amalgamations) Rules, 2016.

Such notice and other documents shall also be placed on the website of the company, if any, and in case of a listed company, these documents shall be sent to the Securities and Exchange Board and stock exchange where the securities of the companies are listed, for placing on their website and shall also be published in newspapers in such manner as prescribed under Rule 7 of the Companies (Compromises, arrangements and amalgamations) Rules, 2016.

Section 230 of Companies Act 2013 deals with Power to Compromise or Make Arrangements with Creditors and Members

Time period for the receipt of the copies of the compromise or arrangement:

Where the notice for the meeting is also issued by way of an advertisement, it shall indicate the time within which copies of the compromise or arrangement shall be made available to the concerned persons free of charge from the registered office of the company.

Notices to sectoral regulators[Section 230(5)]:

A notice along with all the documents in such form as may be prescribed shall also be sent to-

  • 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

Vote to the adoption of the compromise or arrangement [Section 230 (4)]:

A notice shall provide that the persons to whom the notice is sent may vote in the meeting either themselves or through proxies or by postal ballot to the adoption of the compromise or arrangement within one month from the date of receipt of such notice:

Provided that any objection to the compromise or arrangement shall be made only by persons holding not less than ten per cent of the shareholding or having outstanding debt amounting to not less than five per cent of the total outstanding debt as per the latest audited financial statement.

Binding order of Tribunal [Section 230 (6)]:

Where, at a meeting held, majority of persons representing three-fourths in value of the creditors, or class of creditors or members or class of members, as the case may be, voting in person or by proxy or by postal ballot, agree to any compromise or arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order, the same shall be binding on the company, all the creditors, or class of creditors or members or class of members, as the case may be, or, in case of a company being wound up, on the liquidator, “appointed under this Act or under the Insolvency and Bankruptcy Code, 2016, as the case may be,” and the contributories of the company.

Filing of order of tribunal with registrar [Section 203 (8)]:

The order of the Tribunal shall be filed with the Registrar by the company within a period of thirty days of the receipt of the order.