Reconstruction and Amalgamation



The company wished to avoid being wound up and negotiated a scheme in which the existing shareholdings in the company would be transferred to a new company which would take over the company’s undertaking and assets as well as its debts. This was to be effected by a scheme for reconstruction which would result in the old company’s shareholders holding four per cent of the shares in the new company.

[1]Notwithstanding the heritage of schemes of arrangement which can be traced back to the United Kingdom in the 1860s, and the common origins of schemes in Australia and Singapore and an established body of legal principles, there is a notable degree of inconsistency in the line of judicial authorities on the nature of schemes of arrangements.

In particular, there is some controversy as to whether a scheme of arrangement derives its efficacy from an order of court or from the statute. Australian courts favour the former view. English courts, in contrast, take the position that a scheme of arrangement which has been approved by the requisite majority of the company’s creditors derives its efficacy from statute and therefore operates as a statutory contract.

An arrangement embraces such diverse schemes as conversion of debt into equity, subordination of secured or unsecured debt, conversion of secured claims into unsecured claims and vice versa, increase or reduction of share capital and other forms of reconstruction and amalgamation[2]  

According to Halsbury’s Laws of England: [3]

“Neither ‘reconstruction nor amalgamation’ has a precise legal meaning. Where an undertaking is being carried on by a company and is in substance transferred, not to an outsider, but to another company consisting substantially of the same shareholders with a view to its being continued by the transferee company, there is a reconstruction. It is none the less a reconstruction because all the assets do not pass to the new company, or all the shareholders of the transferor company are not shareholders in the transferee company, or the liabilities of the transferor company are not taken over by the transferee company. ‘Amalgamation’ is a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which is to carry on the blended undertakings. There may be amalgamation either by the transfer of two or more undertakings to a new company or by the transfer of one or more undertakings to existing companies.”

Mergers, Amalgamation and Demergers of Companies under the Companies Act 1956 are governed by sections 391 to 396 Companies Act 1956.

It  requires companies to make application to the court under section 391, which empowers the court to sanction the compromise or arrangement proposed by the companies. Section 392 further empowers the High Court to enforce a compromise or arrangement ordered by the court under section 391 of the Companies Act. Section 393 provides supporting provisions for compliance with the provisions or directions given by the court. Sections 395, 396 and 396A are supplementary provisions relating to amalgamation. Section 395 deals with the power to amalgamate without going through the procedure of the court.

Amendment in the Companies Act, 1956 in year 2002 gave powers to National Company Law Tribunal to review and to allow any compromise or arrangement, which is proposed between a company and its creditors or any class of them or between a company and its members or any class of them. However, because of non formation of National Company Law Tribunal, these powers still lie with High Courts and the parties concerned can make applications to  high courts.

 II.        Reconstruction and amalgamation by Voluntary Winding Up

A compromise involves a settlement of a dispute.[4] An arrangement, in contrast, is broader and has been held to be of wide import.[5] It can cover any lawful arrangement that touches or concerns the rights and obligations of the company and its shareholders or creditors,[6]Section 494 of the Companies Act 1956 , which similar to section 287 of the Companies Act 1948 givers power a company to reconstruct or amalgamate by means of voluntary liquidation wherein the liquidator transfers the assets of the company in  exchange for shares or other shares of the transferee  company.[7]

  • Effect on Shareholders

 The effect on share holders is that the resolution is valid and the arrangement is binding upon them. Nevertheless, any shareholder may, in specific circumstances, dissent from the sale or arrangement.[8]

The dissenting shareholder is required under sub section (3) of this section to give notice of his dissent to the liquidator in writing within seven days after passing of the special resolution . A legal representative of deceased shareholder is also entitled to dissent.[9] However, it is open for the liquidator to waive such notice.[10]

The share holder who neither agrees to the scheme nor challenges it but refuses to accept shares in transferee company (especially if they are not fully paid) to avoid further liability , on these shares , shall be deemed to have permtted the liquidator to sell the new shares and pay him the net proceeds. The liquidator shall recover the expenses incurred on such sale from the proceeds of that sale. If there are more than one such shareholder, net proceeds shall be distributed proportionately.

  • Effect on creditors.

 The scheme does not expressly state that any arrangement under this section is binding on the creditors yet it can be deducted from subsection (5) that the arrangement   is binding on creditors as well unless they move the court / Tribunal within one year after passing of resolution of winding up and challenge the arrangement.

Nevertheless, an arrangement sanctioned by the special resolution does not relieve the liquidator of the old company is dissolved. To leave every thing to the new company is a “gross dereliction” of duty by the liquidator.[11]

 III.        Consent of the shareholders

The Companies Act, 1956, prescribes varying requirements for decisions to attain binding force on the company and with sound and profound reasons. As is evident from a reading of sections 189 and190 of the Act, some decisions are efficacious on receiving the assent of a simple majority whilst others require that there must be not less than three times the number of votes cast in favour of a Resolution than those opposed to it. Section 391 of the Act, which deals with compromises and arrangements, contemplates the consent of three-fourths in value of the affected persons for the decision to be binding on the remainder. Chapter VI, comprising sections 397 to 409of the Act, protects the rights of persons constituting a minority, holding not less than ten per cent of the members. Section 395 of the Act is logically at the end of this spectrum, and envisages and permits, within a defined arena, the drastic dilution of the rights of a class consisting of members constituting less than ten per cent. Although this dilution has been seen and termed even as an ‘expropriation’, jural interference was nonetheless found to be unnecessary only on this ground[12]. The question that arises is whether there is any rationale in the prescribed percentages, dependent upon the gravity of theme assures to be effected. In my opinion, it is not legally odious to expect a minuscule group to fall in line with the dictates of an overwhelming majority comprising ninety per cent of the group. Usually, there is wisdom in the strength of members. There is every possibility that where nine persons are willing to accept a particular offer, the remaining single person may be standing a part from the others for motives which are not mercantile or commercial. While considering provisions analogous to section 395 of the Act, Maugham, J. had expressed the following opinion which has stood the test of time,[13] thus

“I think, however, the view of the Legislature is that where not less than nine-tenths of the shareholders in the transfer or company approve the scheme or accept the offer prima facie, at any rate, the offer must be taken to be a proper one, and in default of an application by the dissenting shareholders, which includes those who do not assent, the shares of the dissentients may be acquired on the original terms by the transferee company. Accordingly, I think it is manifest that the reasons for inducing the court to ‘order otherwise’ are reasons which must be supplied by the dissentients who take the step of making an application to the court, and that the onus is on them of giving a reason why their shares should not be acquired by the transferee company.

One conclusion which I draw from that fact is that the mere circumstance that the sale or exchange is compulsory is one which ought not to influence the court. It has been called an expropriation, but I do not regard that phrase as being very apt in the circumstances of the case. The other conclusion I draw is this, that again prima facie the court ought to regard the scheme as a fair one in as much as it seems to me impossible to suppose that the court, in the absence of very strong grounds, is to be entitled to set up its own view of the fairness of the scheme in opposition to so very large a majority of the shareholders who are concerned. Accordingly, without expressing a final opinion on the matter, because there maybe special circumstances in special cases, I am unable to see that I have any right to order otherwise in such a case as I have before me, it is affirmatively established that, notwithstanding the views of a very large majority of shareholders the scheme is unfair.”

Tek Chand, J. has in Benarsi Das Sara/ v. Dalmia Dadri Cement Ltd.[14] opined that the “principle underlying section 395 is that where a company obtains 90 per cent of the shares or class of shares under a scheme of arrangement, it can compel the dissentient minority to part with its shares. Conversely the dissenting shareholders are also entitled to compel the company to acquire their shares as well as and on the same terms. Section 395 of the Companies Act, 1956, corresponds to section 209 of the English Companies Act,1948, which reproduces with amendments section 155 of the English Act of 1929.”

A similar interpretation was also imparted to these provisions by Balakrishna Ayyar, J. in the case entitled S.Viswanathan v. East India Distilleries & Sugar Factories Ltd.[15] The learned Judge conceived that “situations may well arise when the majority consider that the minority is standing in the way of what it considers to be an advantageous arrangement and there must be some provision to resolve the deadlock that would otherwise arise and section 153B seems to be designed for that purpose. It may be that the persons who are in a minority are wiser and more farsighted, but, if they cannot convert the majority to their point of view and the deadlock persists, a way out must be provided and that is what section 153B of the old Act seeks to do. If it were to be ruled that the section is invalid and ulltra vires it may not be long before the machinery of joint stock enterprise is slowed down till it completely stops. That being so, I would be prepared to say, were it necessary to do so, that the limitation imposed by section 153B of the Act is a reasonable one and also in the public interest, to hold otherwise would be, it seems to me, to reverse the process of economic growth.”

In Navjivan Mills Co. Ltd.[16] a Single Judge of the Gujarat High Court had to pronounce upon the legal propriety of a scheme under section 391 of the Act. The complaint was, inter alia, that the Company had not complied with the requirements of sections 372, 395, 391 to 394 and 393(1) of the Act. Although it was not a case under section 395 alone, the observations extracted below are apposite and instructive. This decision was relied upon by Mr. Chidambaram in respect of the orbiter observations, with which I respectfully concur, to the effect that the transferee company is not expected to seek jural approval under section 395 of the Act.

“. . . In the case before me, the scheme is between Navjivanand its shareholders and creditors, sponsored by Kohinoor and the scheme if sanctioned would have the effect of making Navjivan a wholly-owned subsidiary company of the Kohinoor. The question in terms raised is : can such a thing be said to be a scheme of arrangement between Navjivan and its creditors and shareholders? and, secondly, whether it can be sanctioned under section 391? Second question raised by Mr. Shah will also stand answered by this decision that such a scheme would be covered by section 395 and the procedure contemplated therein should have been carried out. When the scheme in the National Bank case was being considered in the Chancery Division, a contention was in terms raised that the scheme was not one under section 206 (section 391 of our Companies Act ) but one under section 209 (section 395 of our Companies Act ). Both the contentions are answered in favour of the company proposing the scheme. Such a scheme can be said to be a scheme of arrangement between the company whose shares are being taken over and its creditors and shareholders and that such a scheme can be sanctioned under section 391 and it is not obligatory to carryout the procedure prescribed under section 395. The scheme has in fact been sanctioned. It, therefore, appears both on principle as well as on authority well settled that where by a scheme partially of compromise and partially of arrangement the shares of one company are being taken over by another company converting the first mentioned company into a wholly-owned subsidiary company of the second mentioned company, it can none-the-less be a scheme of compromise and arrangement which if found to be just, fair, legal and workable and if properly approved can be sanctioned under section 391. Even if the effect of sanctioning the scheme is take-over of the first company by the second company, it would be no answer to say that it can only be done under section 395.


The two companies may join to form a new Company but there may be absorption or blending of one by the other, both amount to amalgamation. When the two companies are merged and are so joined as to form a third Company or one is dissolved into one or blended with another; the amalgamated Company loses its identity.”And further

” The High Court was in error in holding that even after amalgamation of the two Companies, the Transferor Company did not become non-existent instead it continued its entity in blended form with the appellant-Company. The High Court’s view that on amalgamation, there is no complete destruction of corporate personality, of the Transferor Company. Instead, there is a blending of corporate personality of one with another corporate body and it continues, as such with the other is not sustainable in law. The effect and character of the amalgamation largely depends on the term of the scheme of merger but there can be any (no ?) doubt that when two companies amalgamate or merge into one, the transferor Company loses its entity as it ceases to have its business. However, the respective rights and liabilities are determined under the scheme of amalgamation but the corporate entity of the Transferor Company ceases to exist with effect from the date, the amalgamation is made effective repatriation, compromise and reconstruction and amalgamation of schemes so that the interest of several members of the company or companies and creditors-secured and unsecured are safeguarded in any scheme of reconstruction, amalgamation or compromise which is going to be approved by the court under section 394 of the Act. Ordinarily, the convening of meetings of members and creditors is a must. Discretion to waive must be under exceptional circumstances. 

“In the decision in Mazola Theatres (P.) Ltd. v. New Bank of India Ltd.[17], the court has observed as follows :”

The meeting contemplated in section 391 is analogous to an extraordinary general meeting of the company, in as much as a three-fourths majority is required to pass the required resolution. The normal rule is that the consent of the shareholders whether it is unanimous or by a three-fourths majority, must be obtained in a meeting summoned on the orders of the court under section 391. This is in accordance with the general principle that members must act in a general meeting. Inroads have, however, been made on this formal doctrine. Firstly, the consent of all or virtually all the shareholders given even outside a meeting is sufficient to comply with the requirements of a meeting. Secondly, written resolutions instead of those passed in meetings are now capable of being registered, e.g., section 192 of the Companies Act. Thirdly, the doctrine of lifting the veil of incorporation and looking at the reality of the action of the members enables the court to hold that consent of the overwhelming majority of the shareholders outside the meeting is sufficient to show that the resolution was supported by virtually all the members of the company. In these three ways substantial compliance rather than formal compliance meets the requirements of the statute. “In the said decision, it is further observed as follows :

” A third exception to the rule that all the shareholders of a company must cast their votes in a formally called meeting is made by the doctrine of acquiescence. If all the shareholders acquiesce in a certain arrangement, the question of a meeting having been called does not arise at all.  [18]

“In the backdrop of this decision as well as on proper interpretation of section 391(2) which is not mandatory, but directory and there has been substantial compliance that three-fourths value of the unsecured creditors have agreed to and approved the scheme, the contention of the objector that there was no proper compliance with the Act and that the court has no jurisdiction to sanction the scheme will have to be rejected. As already noticed, once the scheme is held to be reasonable and proper, merely because there is one objector to the approval of the scheme, who is none other than the sole dissenter, the court should not refuse to sanction the scheme. What the court could do in such circumstances is to give protection to the dissenter, by amending the scheme. The above views of mine receive support from Palmer’s Company Law, volume 1, twenty-third edition, para 79-13, which reads :”

…The court will not, however, upset a scheme for minor irregularities, as where consent of a class has been subsequently obtained, and where the necessary majority of one class was absent when the petition was presented, the court allowed a fresh petition to be presented subsequently when the necessary majority was later obtained, without requiring the other class meetings to be held again. ”

“ Creditors” in this section would also include a contingent creditor such as the government, sales tax, income tax or other tax liability which has arisen but may not have become final on account of pending appeals.[19]


  1. IV.        Conclusion

Though no protection is available to any dissenting minority shareholders on this issue, the Courts, while approving the scheme, follow a judicious approach of publishing a notice in the newspapers, inviting objections, if any, against the scheme from the stakeholders. Any interested person, including a minority shareholder may appear before the Court. 


[1] MyTravel Group Plc, Re [2004] EWHC 2741 (Ch); [2005] 1 W.L.R. 2365 (Ch D)

[2] R. Goode, Principles of Corporate Insolvency Law, 3rd edn (London: Sweet & Maxwell, 2005), p.26.

[3] 4th Edn Vol. VII:

[4] Sneath v Valley Gold Ltd [1893] 1 Ch. 477 CA. A compromise involves some element of accommodation between the parties, rather than one party totally abandoning a claim: NFU Development Trusts Ltd, Re [1972] 1 W.L.R. 1548; [1973] 1 All E.R. 135 Ch D

[5] National Bank Ltd, Re [1966] 1 W.L.R. 819 Ch D; Savoy Hotel Ltd, Re [1981] Ch. 351 Ch D; Foundation Healthcare Ltd, Re (2002) 42 A.C.S.R. 252 at [39].

[6]International Harvester Co of Australia Pty Ltd, Re [1953] V.R. 669; NRMA Ltd (No.1), Re (2000) 33 A.C.S.R. 595; Hostworks Group Ltd, Re [2008] F.C.A. 64

[7] Gopichand  Rohra , Swanmy Law House , Ed 2005 at 502

[8] Section 494(3) of the Companies Act 1956.

[9] Llewellyer v. Lasintoe Rubber estate {1914} 2 Ch 670

[10] Brailey v. Rhoesia Consolidated [1910] 2 Ch 95

[11] Puisford v. Devenish [1903] 2 Ch 625/ Argyells v. Coyester [1913] 29 TLR 355

[12] National Bank Ltd’s case (supra) at pages 637-638 and Sussex Brick Co. Ltd., In re 1960 (2) WLR 665

[13] Hoare & Co. Ltd., In re [1934] 150 L.T. 374

[14] 1958 (28) CC 435 (Punj.)

[15] 1957 (27) CC 175 (Mad.)

[16] Re [1972] 42 Cornp. Cas. 265

[17] [1975] ILR 1975 1 (Delhi)

[18] IBID

[19] Seksaria Cotton Mills Ltd. V/s A.E. Naik (1967) 37 Company Cases 656.

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