Corporate Restructuring, Amalgamation & High Court Schemes

Legal Framework for Corporate Restructuring and Amalgamation

Corporate restructuring and amalgamation are pivotal strategies for business growth, consolidation, or turnaround. In Bangladesh, these processes are primarily governed by the Companies Act 1994, with specific provisions for arrangements, compromises, and amalgamations. This article delves into the legal intricacies, particularly focusing on Sections 228 and 229 of the Companies Act 1994, which empower the High Court Division to sanction such schemes.

Section 228: Power to Compromise or Make Arrangements with Creditors and Members

Section 228 of the Companies Act 1994 provides the legal basis for a company to enter into a compromise or arrangement with its creditors or members. This is a broad provision that can encompass various forms of restructuring, including debt restructuring, capital reduction, or even a precursor to amalgamation.

Procedure under Section 228:

1. Application to High Court Division: A company, or any creditor or member, or in the case of a company being wound up, the liquidator, may apply to the High Court Division for an order to convene a meeting of the creditors or members, or any class of them, to consider a proposed compromise or arrangement.
2. Court-Ordered Meeting: If the High Court Division orders a meeting, it will specify the manner in which the meeting is to be called, held, and conducted.
3. Approval by Majority: For the compromise or arrangement to be binding, it must be agreed to by a majority in number representing three-fourths in value of the creditors or members, or class of creditors or members, present and voting either in person or by proxy at the meeting.
4. High Court Sanction: The compromise or arrangement, once approved by the requisite majority, must then be sanctioned by the High Court Division. The Court, before sanctioning, will consider whether the scheme is fair and reasonable to all parties concerned.
5. Filing with RJSC: An order of the High Court Division sanctioning a compromise or arrangement shall have no effect until a certified copy of the order has been filed with the Registrar of Joint Stock Companies and Firms (RJSC).
6. Binding Effect: Once sanctioned by the High Court Division and filed with the RJSC, the compromise or arrangement becomes binding on all creditors or members, or the class of creditors or members, as the case may be, and also on the company, or, in the case of a company being wound up, on the liquidator and contributories.

Section 229: Provisions for Facilitating Reconstruction and Amalgamation of Companies

Section 229 of the Companies Act 1994 specifically deals with schemes for the reconstruction of companies or amalgamation of two or more companies. This section grants the High Court Division extensive powers to facilitate such complex transactions.

Key Powers of the High Court Division under Section 229:

Where an application is made to the High Court Division under Section 228 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Court that the compromise or arrangement has been proposed for the purposes of or in connection with a scheme for the reconstruction of any company or companies or the amalgamation of any two or more companies, the Court may, by the order sanctioning the compromise or arrangement, or by any subsequent order, make provision for all or any of the following matters:

1. Transfer of Property and Liabilities: The transfer to the transferee company of the whole or any part of the undertaking, property, and liabilities of any transferor company.
2. Allotment of Shares/Debentures: The allotment or appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which are to be allotted or appropriated to or for any person.
3. Continuation of Legal Proceedings: The continuation by or against the transferee company of any legal proceedings pending by or against any transferor company.
4. Dissolution without Winding Up: The dissolution, without winding up, of any transferor company.
5. Dissenting Shareholders: Provision for persons who, within such time and in such manner as the Court directs, dissent from the compromise or arrangement.
6. Ancillary Matters: Such incidental, consequential, and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.

The High Court Division's order under Section 229 has the effect of a deed of transfer for the assets and liabilities, eliminating the need for separate conveyances.

Tax Implications of Amalgamation

Amalgamation can have significant tax implications under the Income Tax Act 2023. While the general rule is that capital gains arising from the transfer of assets are taxable, specific exemptions may apply in the case of amalgamation, provided certain conditions are met. For instance, Section 79 of the Income Tax Act 2023 deals with capital gains arising from amalgamation of companies, often providing for tax neutrality if the amalgamation is approved by the High Court Division and certain other conditions are fulfilled, such as the shareholders of the amalgamating company becoming shareholders of the amalgamated company.

Foreign Exchange Considerations

If any of the companies involved in the restructuring or amalgamation have foreign shareholders or foreign assets/liabilities, the provisions of the Foreign Exchange Regulation Act 1947 and relevant Bangladesh Bank circulars will be applicable. Prior approval from Bangladesh Bank may be required for certain transactions, such as the issuance of shares to non-residents or the transfer of foreign currency assets.

Conclusion

Corporate restructuring and amalgamation under Sections 228 and 229 of the Companies Act 1994 are intricate legal processes requiring meticulous planning and execution. The High Court Division plays a crucial role in sanctioning these schemes, ensuring fairness and compliance with statutory requirements. Companies contemplating such actions must engage experienced legal counsel to navigate the complexities and ensure a smooth and legally sound transaction.