RESTRUCTURING MADE SIMPLE: A DETAILED LOOK AT SECTION 230 OF THE COMPANIES ACT, 2013

Introduction:

Section 230 of the Companies Act, 2013 provides a legal framework for companies to propose compromises or arrangements with their creditors or shareholders. This section becomes particularly useful when a company is facing financial difficulties or needs to reorganize its operations. It facilitates the restructuring of debts, settlement of disputes, or changes in the capital structure, all under the approval and supervision of the National Company Law Tribunal (NCLT).

Key Provisions of Section 230:

1. Proposal for Compromise or Arrangement:

• Purpose: A company can propose a plan of compromise or arrangement with its creditors, shareholders, or a specific class of them. Such a plan could involve actions like reducing debts, modifying shareholding structures, or resolving financial difficulties.
• Who Can Propose:
  • - The company itself.
  • - A creditor or a member of the company.
  • - In cases where the company is in the process of being wound up, the  liquidator may also propose a plan.
• Application to Tribunal: Any of the above parties can apply to the NCLT to seek permission to convene a meeting for discussing the proposed plan.

2. Tribunal’s Role:

• Decision Making: The NCLT assesses whether to allow the meeting between the company and its creditors or shareholders.
• Disclosure Requirements: Before granting approval, the Tribunal mandates full disclosure of the company’s financial status through an affidavit, including:
  • - The latest financial position.
  • - The most recent audit report.
  • - Details of any ongoing investigations.
  • - Information about any proposed reduction in share capital.
  • - Details regarding debt restructuring, if applicable.

3. Disclosures to Stakeholders:

• Notice Requirements: A notice must be sent to all stakeholders, including creditors, shareholders, debenture holders, and relevant authorities (e.g., SEBI, RBI). This notice should include:
  • - Full details of the proposed compromise or arrangement.
  • - A valuation report, if required.
  • - Information on the impact of the proposal on creditors, key personnel,    promoters, non-promoters, and debenture holders.
  • - Effects on directors or debenture trustees.
• Listed Companies: For listed companies, this information must also be sent to stock exchanges and published in newspapers to ensure transparency.

4. Voting on the Arrangement:

• Participation: Stakeholders may participate in the meeting in person, by proxy, or through postal ballot.
• Approval Requirements: The proposed plan must be approved by a majority representing at least 75% of the creditors or shareholders by value.
• Objections: Shareholders holding at least 10% of the shares or creditors holding at least 5% of the total debt are entitled to object to the arrangement.

5. Binding Nature of Approved Arrangement:

• Legal Binding: Once the proposal is approved by the requisite majority and sanctioned by the Tribunal, it becomes legally binding on all parties, including the company, creditors, and members.

6. Role of Independent Auditors:

• Certification Requirement: An independent auditor must certify that the proposed compromise or arrangement complies with accounting standards, ensuring that the financial reporting remains fair and accurate.

7. Additional Safeguards for Creditors and Shareholders:

• Tribunal’s Safeguards: The Tribunal can impose various safeguards in its order, particularly when there are changes to the rights of creditors or shareholders. This may include:
  • - Protection for secured and unsecured creditors.
  • - Ensuring fair options for preference shareholders if their shares are              converted into equity.

8. Meeting Waiver for Certain Creditors:

• Waiver Conditions: If 90% of the creditors (by value) consent to the proposed arrangement and confirm their agreement via an affidavit, the Tribunal may waive the requirement for a meeting, expediting the process.

9. Special Cases:

• Compliance with Other Laws: Any buy-back of securities or takeover offers included in the arrangement must comply with relevant provisions of the Companies Act and SEBI regulations.
• Takeover Offers for Listed Companies: Takeover offers must adhere to SEBI’s takeover code.
• Right to Approach Tribunal: Aggrieved parties may approach the Tribunal regarding takeover offers involving non-listed companies.

10. Regulator Involvement:

• Notice to Authorities: Notices of the proposed arrangement must be sent to the Central Government, SEBI, RBI, Income Tax authorities, and other relevant bodies. These authorities have 30 days to raise objections, failing which it is assumed they have no objections.

11. Filing with Registrar:

• Post-Approval Filing: Once the Tribunal approves the arrangement, the company must file the order with the Registrar of Companies within 30 days, making it part of the public record.

Conclusion:

Section 230 of the Companies Act, 2013 offers companies a structured and legally compliant method for managing financial difficulties, restructuring operations, or implementing necessary organizational changes. It ensures that both the company and its creditors or members can negotiate and reach a fair agreement, all under the supervision of the NCLT. The Tribunal's oversight provides an additional layer of security, ensuring transparency and protecting the interests of all stakeholders involved.

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Article Compiled by:-

~Neel Lakhtariya

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.