Companies Act Section 230

Companies Act, Section 230: Power to Compromise or Make Arrangements with Creditors and Members

Section 230 of the Companies Act, 2013 provides a comprehensive framework for companies to enter into compromises or arrangements with their creditors or members, including schemes of restructuring, corporate debt restructuring, or capital reorganisation. This section also governs the procedural and legal aspects that must be followed for such schemes to be valid and enforceable.

(1) Proposal of Compromise or Arrangement

When a compromise or an arrangement is proposed either:

between a company and its creditors or a class of creditors, or
between a company and its members or a class of members,
an application may be made to the National Company Law Tribunal (NCLT) by:

the company itself,
any creditor or member of the company, or
the liquidator, in case the company is undergoing winding up proceedings (whether under the Companies Act, 2013 or under the Insolvency and Bankruptcy Code, 2016).
Upon receipt of such application, the Tribunal may issue directions for convening a meeting of the concerned creditors or members, or their respective classes, in a manner as prescribed by the Tribunal.

Explanation: The term "arrangement" also includes any reorganisation of the company’s share capital. This may occur by:

consolidation of shares of different classes, division of shares into different classes, or a combination of both methods.
(2) Disclosure of Material Information to the Tribunal

The applicant (company or other party initiating the application) must submit an affidavit to the Tribunal that discloses all relevant and material information, including:

The latest financial position of the company.
The latest auditor's report on the company’s financial accounts.
Any pending investigations or legal proceedings against the company.
Details of any reduction of share capital proposed as part of the compromise or arrangement.
If the arrangement is part of a corporate debt restructuring (CDR) scheme approved by at least 75% of the secured creditors (in value), the applicant must also provide:
A responsibility statement from creditors.
Safeguards to protect the interests of secured and unsecured creditors.
A report from the company’s auditor confirming that the proposed funding requirements after restructuring meet the liquidity norms based on the Board’s estimates.
A declaration if the company intends to follow CDR guidelines issued by the Reserve Bank of India (RBI).
A valuation report of the company's shares and all tangible and intangible assets prepared by a registered valuer.
(3) Notice of Meeting and Disclosures

If the Tribunal directs a meeting to be held, a notice must be sent to all affected parties, including:

Creditors or a class of creditors.
Members or a class of members.
Debenture-holders.
This notice should:

Be sent individually to the registered addresses of these parties.
Include a detailed statement of the compromise or arrangement.
Be accompanied by a copy of the valuation report, if available.
Explain the implications of the arrangement on various stakeholders, including creditors, promoters, key managerial personnel (KMPs), non-promoter shareholders, directors, and debenture trustees.
Additionally:

The notice and documents must be published on the company's website (if any).
In case of listed companies, these documents must also be submitted to the Securities and Exchange Board of India (SEBI) and the relevant stock exchanges.
The notice must also be published in newspapers as prescribed.
If the notice is advertised, it must specify the time limit within which affected parties can obtain free copies of the proposed scheme from the company’s registered office.
(4) Voting and Objections

The notice must specify that affected parties may vote at the meeting:

In person,
Through proxy, or
By postal ballot.
They must cast their votes within one month from the date of receiving the notice.

Objection Criteria: Only the following may raise objections to the scheme:

Shareholders holding at least 10% of the share capital.
Creditors holding at least 5% of the total outstanding debt, as per the latest audited financials.
(5) Intimation to Authorities

A copy of the notice along with necessary documents must also be sent to various regulatory authorities including:

Central Government,
Income Tax authorities,
RBI,
SEBI,
Registrar of Companies (RoC),
Stock exchanges,
Official Liquidator,
Competition Commission of India (if applicable),
Any other sectoral regulator whose jurisdiction may be impacted.
These authorities must provide their observations or objections within 30 days of receiving the notice. If no response is received within that period, it will be presumed that they have no objections.

(6) Tribunal's Order on Compromise or Arrangement

If a majority in number representing three-fourths in value of the creditors or members (as applicable) vote in favor of the scheme, and the Tribunal sanctions the same, then:

The scheme becomes binding on the company, its creditors, members, liquidator (if under winding up), and contributories.
(7) Matters to be Included in Tribunal's Order

The Tribunal may include provisions relating to:

Preference shareholders’ options in cases of share conversion (cash for dividend arrears or equity shares of equivalent value).
Protection for specific classes of creditors.
Compliance with Section 48 if shareholders' rights are altered.
Abatement of proceedings before the Board for Industrial and Financial Reconstruction (BIFR).
Provisions for exit options for dissenting shareholders.
Other provisions needed for effective implementation of the scheme.
Accounting Compliance: No compromise or arrangement will be sanctioned unless the company submits a certificate from its auditor confirming that the proposed accounting treatment is consistent with prescribed accounting standards under Section 133.

(8) Filing of Order with Registrar

The Tribunal’s order sanctioning the compromise or arrangement must be filed with the Registrar of Companies within 30 days of receipt of the order.

(9) Exemption from Meeting

The Tribunal may waive the requirement to hold a meeting of creditors if creditors representing at least 90% in value confirm their approval of the scheme through affidavits.

(10) Restrictions on Buy-Back

No scheme involving the buy-back of securities shall be sanctioned unless the buy-back complies with Section 68 of the Companies Act.

(11) Takeover Offers

The scheme may also include a takeover offer. In the case of listed companies, such takeover offers must comply with SEBI regulations. For other companies, the takeover offer must follow prescribed rules.

(12) Grievance Redressal

Any party aggrieved by a takeover offer involving an unlisted company may approach the Tribunal with their grievance. The Tribunal may issue appropriate directions after considering the application.