Cometh the hour, cometh the fast-track merger

By Rudra Kumar Pandey and Vishal Nijhawan, Shardul Amarchand Mangaldas & Co
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The National Company Law Tribunal (NCLT) is clogged with cases both under the Companies Act, 2013 (act), and the Insolvency and the Bankruptcy Code, 2016 (code). Pre-covid, each bench of the NCLT had some 70 to 80 cases listed before it daily, and with the increase in the number of cases under the code, the cases under the act have been put on the backburner.

Rudra Kumar Pandey,Shardul Amarchand Mangaldas & Co
Rudra Kumar Pandey
Partner
Shardul Amarchand Mangaldas & Co

It takes at least nine to 12 months for the NCLT to sanction a scheme of merger or amalgamation under sections 230 to 232 of the act read with the Companies (Compromises, Arrangements and Amalgamation) Rules, 2016. This makes it a lengthy, time-consuming and administratively burdensome procedure. Section 233 of the act was intended to provide a fast-track procedure for mergers and amalgamations between two or more small companies, or between a holding company and its wholly-owned subsidiary company or between other prescribed classes of companies.

This fast-track procedure involves inviting objections or suggestions from the jurisdictional Registrar of Companies (RoC), the Official Liquidators (OL) and the people affected by the scheme; the approval of the scheme by the shareholders and creditors of the transferor and transferee companies, and the filing of declaration of solvency by such companies with the RoC. Once approved by the shareholders and creditors of the transferor and transferee companies, the scheme must be filed with the Regional Director (RD), the RoC and the OL. Should the RoC and the OL have no objections or suggestions to the scheme, the RD registers it and issues a confirmation order. This confirmation order is then filed with the RoC for registration of the scheme.

Vishal Nijhawan,Shardul Amarchand Mangaldas & Co,Fast-track merger
Vishal Nijhawan
Senior associate
Shardul Amarchand Mangaldas & Co

The covid-19 pandemic has left many companies facing significant liquidity issues. To address such issues, many of them are considering various group-restructuring options, including mergers with their holding companies. Companies would prefer to implement group restructuring processes in a timely manner, and it is important to permit more companies to use the fast-track merger route. It is helpful to examine the timelines for procedures in mergers and amalgamations in other jurisdictions. In Singapore, for example, a merger or amalgamation takes approximately three to six months; in the United Kingdom, a scheme of arrangement takes about four to six months, and in Australia, a scheme of arrangement takes some three to four months for completion.

A number of representations have been made to the Ministry of Corporate Affairs (MCA) that the scope of section 233 should be expanded so that it also permits mergers and amalgamations between a holding company and its subsidiary company, while leaving the other prescribed conditions unchanged. Such an amendment would help not only a wholly-owned subsidiary company, but also a subsidiary company to merge with its holding company under the fast-track merger route. This move would also be in line with the recommendations in 2005 of the Expert Committee on Company Law, chaired by JJ Irani, on the basis of which section 233 was incorporated into the act. The committee recommended that a short form of amalgamation be prescribed for mergers within a group, but not limited to the merger of a wholly-owned subsidiary company with its holding company. In addition, the threshold for the definition of a small company could be increased, so that more companies will be eligible for the purposes of a fast-track merger.

Since a merger or amalgamation under sections 230 to 232 is driven by the NCLT, and a fast-track merger is driven by the RD, these proposals would reduce the burden on the NCLTs. Alternatively, specialized benches of the NCLT could be constituted to deal with mergers and amalgamations in order to complete the whole process in a timely manner. The MCA may also consider specifying clearly the grounds on which objections may be raised by the RD to a scheme under section 233. This would help companies cope with the practical difficulties they currently face. Under the new regime, where the MCA has decriminalized various offences under the act, the RD may approve the scheme subject to the company rectifying the non-compliance and paying the prescribed penalty.

In the current difficult environment, where many companies are facing threats to their existence, it would be prudent to expand the scope of fast-track mergers under the act to facilitate such companies in implementing group restructuring in a cost-efficient, timely and less administratively burdensome manner. Such changes would also be relevant from the perspective of the ease of doing business; companies would then be able to undertake restructuring options as they deem fit.

Rudra Kumar Pandey is a partner and Vishal Nijhawan is a senior associate at Shardul Amarchand Mangaldas & Co.

Shardul Amarchand Mangaldas & Co
Nariman Point
Mumbai – 400 021Executive Chairman: Shardul Shroff
Managing Partner Mumbai: Akshay Chudasama
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