What is Compromise and Arrangement?
A scheme of compromise or arrangement is a court-sanctioned restructuring mechanism under the Companies Act 2013. It allows companies to reorganize their capital, debts, or structure through a binding arrangement approved by the National Company Law Tribunal (NCLT).
Key Definitions
- Compromise: Settlement of disputed claims between company and creditors/members where there is a mutual give and take
- Arrangement: Any rearrangement of rights and liabilities between company and its members or creditors, including reorganization of share capital
- Amalgamation: Merger of one or more companies with another or into a new company
- Reconstruction: Reorganization of company's structure, business or share capital
Purpose of Schemes
Restructuring Debt
Rescheduling debt payments, reducing interest rates, or converting debt to equity.
Mergers and Amalgamations
Combining businesses through court-approved mergers.
Demergers
Separating undertakings into independent entities.
Capital Restructuring
Reduction of capital, buybacks, or capital reorganization.
Legal Framework (Sections 230-232)
Section 230 - Power to Compromise or Make Arrangements
- • Company may propose scheme of compromise or arrangement
- • Between company and creditors/members
- • NCLT may order meetings of creditors/members
- • Scheme binding if approved by 3/4ths majority and sanctioned by NCLT
- • NCLT has wide powers to modify scheme
- • Objections to be considered by NCLT
Section 231 - Power of Tribunal to Enforce Compromise or Arrangement
- • NCLT may supervise implementation of scheme
- • Power to give directions for effective implementation
- • May order winding up if scheme not implemented properly
Section 232 - Merger and Amalgamation of Companies
- • NCLT may sanction amalgamation of companies
- • Application by both transferor and transferee companies
- • Transfer of assets and liabilities to transferee company
- • Allotment of shares to shareholders
- • Transfer of employees, pending proceedings
- • Dissolution without winding up (optional)
Rule 3 of Companies (Compromises, Arrangements and Amalgamations) Rules 2016
Detailed procedural requirements including:
- • Filing of draft scheme with stock exchanges (listed companies)
- • Obtaining observation letter from stock exchanges
- • Timelines for filing applications
Types of Schemes
1. Scheme of Compromise with Creditors
Used when company faces financial difficulties and needs to restructure debt:
- • Reduction of debt amount
- • Extension of repayment period
- • Reduction in interest rates
- • Conversion of debt to equity
- • One-time settlement (OTS)
2. Scheme of Arrangement with Members
Reorganization of rights of shareholders:
- • Variation of class rights
- • Capital reduction
- • Buyback arrangements
- • Share consolidation/sub-division
3. Scheme of Amalgamation
Merger of two or more companies:
- • Merger of companies within group
- • Reverse merger
- • Amalgamation with new company
4. Scheme of Demerger
Separation of undertakings:
- • Spin-off of divisions
- • Creation of separate listed entity
- • Isolation of specific business lines
5. Composite Scheme
Combination of multiple elements like amalgamation, demerger, and capital reduction in one scheme.
NCLT Process Step-by-Step
Step 1: Preliminary Preparation
- • Board approval for scheme
- • Appoint advisors (legal, financial, valuers)
- • Draft scheme of arrangement
- • Valuation reports
- • Fairness opinion
Step 2: Stock Exchange Filing (Listed Companies)
- • File draft scheme with stock exchanges
- • Obtain observation letter (no-objection)
- • Mandatory to file before NCLT application
Step 3: NCLT Application (First Motion)
- • File petition in Form NCLT-1
- • Attach draft scheme, valuation reports
- • Affidavit verifying petition
- • Consent of proposed scheme
Step 4: NCLT Directions
- • NCLT issues directions for meetings
- • Determines classes of creditors/members
- • Chairperson for meetings appointed
- • Mode of voting (physical/postal/e-voting)
Step 5: Notice and Publication
- • Individual notice to creditors/members
- • Newspaper publication (English and regional)
- • Website publication
- • Stock exchange disclosure (listed companies)
Step 6: Meetings of Creditors/Members
- • Convene separate class meetings if required
- • Explain scheme with statement
- • Voting on scheme
- • 3/4ths majority in value required
Step 7: Report to NCLT
- • Chairperson files report on voting results
- • Copies of resolutions
- • Minutes of meetings
Step 8: Second Motion Petition
- • File petition for sanction
- • Attach meeting results
- • Advertisements published
- • Any modifications proposed
Step 9: NCLT Hearing and Order
- • Hearing of objections (if any)
- • NCLT evaluates fairness
- • Sanctions or rejects scheme
- • May impose conditions
Step 10: Implementation
- • File certified copy with ROC
- • Transfer assets/liabilities
- • Allot shares
- • Compliance with NCLT conditions
Shareholder and Creditor Meetings
Class Meetings
NCLT may order separate meetings for different classes if their rights are affected differently:
- • Equity shareholders
- • Preference shareholders (different classes)
- • Secured creditors
- • Unsecured creditors
- • Debenture holders
Majority Required
Scheme must be approved by:
3/4ths majority in value of creditors/members present and voting
Chairperson
- • NCLT appoints chairperson for meetings
- • Usually an independent person (advocate/CA/CS)
- • Conducts voting and counts votes
- • Files report with NCLT on results
Voting Methods
- • Physical ballot at meeting
- • Postal ballot
- • E-voting (for listed companies)
- • Combination of above
Disclosure and Documentation
Explanatory Statement (Section 230(3))
Must disclose:
- • Material interests of directors, managing director, manager
- • Effect of scheme on their interests
- • Material contracts or arrangements
- • Any compensation or consideration to officers
Key Documents Required
- • Scheme of arrangement (comprehensive document)
- • Valuation reports (by registered valuers)
- • Fairness opinion
- • Due diligence reports
- • Auditor's certificate on accounting treatment
- • Affidavit verifying petition
- • Consent of scheme proponents
- • Newspaper advertisements
- • Notice of meetings
Contents of Scheme
- • Preamble and background
- • Definitions and interpretations
- • Transfer of assets and liabilities
- • Share exchange ratio/allotment
- • Treatment of employees
- • Pending proceedings
- • Accounting treatment
- • Tax treatment
- • Effective date
- • Conditions precedent
NCLT Sanction
NCLT Powers
Under Section 230-232, NCLT has wide powers:
- • Sanction scheme if fair and reasonable
- • Modify scheme (with consent of parties)
- • Impose terms and conditions
- • Order supervision of implementation
- • Reject scheme if not fair
Factors NCLT Considers
- • Fairness to all stakeholders
- • Compliance with statutory requirements
- • Proper disclosure made
- • Majority approval obtained fairly
- • No public interest prejudice
- • Commercial rationale
Order Contents
- • Sanction of scheme
- • Directions for implementation
- • Transfer of assets/liabilities
- • Continuation of legal proceedings
- • Dissolution (if applicable)
- • Any conditions imposed
Implementation of Scheme
Post-Sanction Compliance
- • File certified copy of NCLT order with ROC within 30 days
- • File Form INC-28
- • Transfer assets and liabilities
- • Allot shares to shareholders
- • Issue share certificates
- • Update statutory records
- • Intimate regulatory authorities
Effective Date
Scheme specifies effective date which is typically:
- • Appointed date (economic transfer)
- • Effective date (filing with ROC)
- • Or both (appointed date for accounting, effective date for legal transfer)
Transfer of Assets
- • Vesting order in NCLT sanction
- • Automatic transfer without separate conveyance
- • Third-party consents where required
- • Stamp duty implications
Fast Track Merger (Section 233)
Applicable To
- • Holding company and wholly-owned subsidiary
- • Two or more small companies
- • Startups (as notified by Central Government)
Process
- • No NCLT approval required
- • Application to Central Government (Regional Director)
- • Objection period of 30 days
- • Deemed approval if no objection
- • Much faster process (2-3 months)
Conditions
- • No pending investigation/proceeding
- • Scheme approved by 90% of members
- • Registration with Registrar maintained
- • For small companies - no creditors objection
Cross-Border Mergers
Section 234 Provisions
Cross-border mergers permitted between:
- • Indian company and foreign company (inbound)
- • Indian company and foreign company (outbound)
Additional Requirements
- • Prior RBI approval required
- • Compliance with foreign jurisdiction laws
- • Approval from competent authority in foreign country
- • FEMA compliance
- • Tax clearance certificates