Section 230 The Companies Act, 2013

Section 230 of the Companies Act, 2013, gives companies the power to negotiate and make agreements with their creditors or members under certain circumstances. Here’s a simplified explanation:

(1) When a company needs to make a deal with its creditors or members, the Tribunal can order a meeting. This could involve restructuring the company’s shares or making other arrangements.

Explanation: Arrangement here means making changes in how the company’s shares are structured, like combining or dividing them.

(2) Whoever applies for this arrangement must provide all the necessary information about the company, including its financial status, auditor’s report, and ongoing investigations. If there’s a plan to reduce share capital, it needs to be disclosed. If there’s a debt restructuring plan agreed upon by at least 75% of secured creditors, that information needs to be shared too.

Examples: If a company owes money to different creditors, it can propose a plan to pay them back over time. Or, if the company’s shares are structured in a way that needs changing, like merging or dividing them, that can be part of the arrangement.

(3) If a meeting is ordered, the company must notify all creditors and members about it. The notice must include details of the arrangement, a valuation report, and how it affects various stakeholders. This information should also be made public on the company’s website and, for listed companies, shared with regulatory bodies.

Examples: If a company is planning to merge with another, the notice will explain how it benefits or affects creditors and members. This ensures everyone involved knows what’s happening.

(4) Those notified can vote on the arrangement within a month. However, objections can only be raised by those holding at least 10% of shares or having outstanding debt of at least 5% of the total debt.

Examples: If a majority of creditors and members agree to the arrangement, it could proceed. But if a significant portion disagrees, further discussions might be needed.

(5) The company must also inform various authorities about the arrangement, and they have 30 days to raise any concerns. A certificate from the company’s auditor confirming that the accounting treatment in the arrangement follows the prescribed accounting standards is required.

Examples: If a company’s arrangement impacts regulatory bodies or government authorities, they should be informed. The auditor’s certificate ensures that the financial aspects of the arrangement are sound.

(6) If the arrangement is approved by the Tribunal, it becomes binding on the company, creditors, members, and, if applicable, the liquidator in case of winding up. The Tribunal’s order can cover various matters, including the protection of creditors’ rights and the conversion of preference shares into equity shares.

Examples: If an arrangement involves converting certain shares into others, the shareholders should have the option to either get their dividends in cash or accept the new shares.

(7) The Tribunal’s order must be filed with the Registrar within 30 days. The Tribunal can skip calling a meeting if 90% of creditors or a class of creditors agree to the arrangement.

Examples: If almost all creditors are on board with the arrangement, the Tribunal may skip holding a meeting, making the process more efficient.

(11) Takeover offers may be included in the arrangement, with specific rules for listed companies. Any grievances regarding takeover offers can be addressed by the Tribunal.

Examples: If a larger company wants to take over a smaller one, the arrangement could include details of how this takeover will happen, especially for listed companies where there are specific regulations.

In summary, Section 230 empowers companies to negotiate and make agreements with creditors and members, with a structured process to ensure transparency, stakeholder involvement, and legal compliance.

(1) Where a compromise or arrangement is proposed—

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them,

the Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, ¹[“appointed under this Act or under the Insolvency and Bankruptcy Code, 2016, as the case may be,”] 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.

(2) The company or any other person, by whom an application is made under sub-section (1), shall disclose to the Tribunal by affidavit—

(a) 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;

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

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

(i) a creditor’s responsibility statement in the prescribed form;

(ii) safeguards for the protection of other secured and unsecured creditors;

(iii) 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;

(iv) where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India, a statement to that effect; and

(v) 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.

(3) Where a meeting is proposed to be called in pursuance of an order of the Tribunal under sub-section (1), a notice of such meeting shall be sent to all the creditors or class of creditors and to all the members or class of members and the debenture-holders of the company, individually at the address registered with the company which 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 prescribed:

Provided that 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 may be prescribed:

Provided further that 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.

(4) A notice under sub-section (3) 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.

(5) A notice under sub-section (3) 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 established under sub-section (1) of section 7 of the Competition Act, 2002, if necessary, and such other sectoral regulators or authorities which are likely to be affected by the compromise or arrangement and shall require that representations, if any, to be made by them shall be made within a period of thirty days from the date of receipt of such notice, failing which, it shall be presumed that they have no representations to make on the proposals.

(6) Where, at a meeting held in pursuance of sub-section (1), 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, ²[“appointed under this Act or under the Insolvency and Bankruptcy Code, 2016, as the case may be,”] and the contributories of the company.

(7) An order made by the Tribunal under sub-section (6) shall provide for all or any of the following matters, namely: —

(a) where the compromise or arrangement provides for conversion of preference shares into equity shares, such preference shareholders shall be given an option to either obtain arrears of dividend in cash or accept equity shares equal to the value of the dividend payable;

(b) the protection of any class of creditors;

(c) if the compromise or arrangement results in the variation of the shareholders’ rights, it shall be given effect to under the provisions of section 48;

(d) if the compromise or arrangement is agreed to by the creditors under sub-section (6), any proceedings pending before the Board for Industrial and Financial Reconstruction established under section 4 of the Sick Industrial Companies (Special Provisions) Act, 1985 shall abate;

(e) such other matters including exit offer to dissenting shareholders, if any, as are in the opinion of the Tribunal necessary to effectively implement the terms of the compromise or arrangement:

Provided that no compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the company’s auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under section 133.

(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.

(9) The Tribunal may dispense with calling of a meeting of creditor or class of creditors where such creditors or class of creditors, having at least ninety per cent. value, agree and confirm, by way of affidavit, to the scheme of compromise or arrangement.

(10) No compromise or arrangement in respect of any buy-back of securities under this section shall be sanctioned by the Tribunal unless such buy-back is in accordance with the provisions of section 68.

*(11) Any compromise or arrangement may include takeover offer made in such manner as may be prescribed:

Provided that in case of listed companies, takeover offer shall be as per the regulations framed by the Securities and Exchange Board.

*(12) An aggrieved party may make an application to the Tribunal in the event of any grievances with respect to the takeover offer of companies other than listed companies in such manner as may be prescribed and the Tribunal may, on application, pass such order as it may deem fit.

Explanation.—For the removal of doubts, it is hereby declared that the provisions of section 66 shall not apply to the reduction of share capital effected in pursuance of the order of the Tribunal under this section.

Note:

* Sub-sections (11) and (12) have been notified on 03.02.2020

Amendment

^1. (a) Inserted byInsolvency and Bankruptcy Code, 2016, Dated 15th November, 2016..

(b) The MCA Notification No. F.O. 3453(E) Dated 15th November, 2016 enforcing the related sections of Insolvency and Bankruptcy Code, 2016

^2. (a) Inserted byInsolvency and Bankruptcy Code, 2016, Dated 15th November, 2016.

(b) The MCA Notification No. F.O. 3453(E) Dated 15th November, 2016 enforcing the related sections of Insolvency and Bankruptcy Code, 2016

Exception\Modification\Adaptation

^3. In case of Government Company – In section 230 for the word “Tribunal” the words “Central Government” shall be substituted.- Notification Dated 13th June, 2017