Amalgamations and compromises

1. Four ways the Act lets companies continue as one

Tamarind Advisory Ltd and a second fictional company, Palm Advisory Ltd, propose to amalgamate. Section 244 allows two or more companies to amalgamate and continue as one company. That one company is either one of the companies that are amalgamating, or a new company. Inside a wholly-owned group, section 247 allows a shorter route that does not use the shareholder proposal.

Leela holds all 50 shares in Palm. Tamarind does not own Palm, and Palm does not own Tamarind. They are not in the short-form group. They use the long form.

Form	Who continues	What has to happen
Long form. One of the companies continues.	Tamarind continues. Palm comes off the register. Palm’s property and liabilities continue in Tamarind.	An amalgamation proposal. Each board certifies best interests and solvency. Shareholders of each company receive the pack at least 28 days before the proposed date and approve by special resolution. Every secured creditor receives the proposal.
Long form. A new company continues.	A new company, Grove Advisory Ltd, is the amalgamated company. Tamarind and Palm both come off the register. Grove takes the property and the liabilities.	The same proposal, certificates and shareholder approval. The Registrar issues a certificate of amalgamation and a certificate of incorporation. The name of Grove is reserved if it is a new name.
Short form. A company and a company it wholly owns.	Tamarind owns every share in Bay Advisory Ltd. They continue as Tamarind. Bay’s shares are cancelled without payment.	A board resolution of each company, a directors’ certificate, and written notice to every secured creditor at least 28 days before the proposed date. No proposal under section 245, and no shareholder approval under section 246.
Short form. Companies owned by the same owner.	Harbour Holdings Ltd owns every share in Tamarind and every share in Bay. Those two continue as one of them. The shares of the other are cancelled without payment. Harbour itself is not amalgamating.	The same short-form board resolutions, certificate and 28-day notice to secured creditors.

In practice: ask who owns the shares before you draft the papers. If someone outside the group holds even one share, the short form is not available and the long-form proposal and special resolutions are required.

Companies Act, sections 244 and 247.

2. The long-form proposal

The proposal sets out the terms. Where Tamarind is the company that continues, the proposal names Tamarind Advisory Ltd, states its registered office, and names the directors and the secretary of the continuing company, with the residential address and the service address. It states the share structure. It states how Palm’s shares are converted into shares of Tamarind, or, if they are not converted, what Leela receives instead. It states any other payment to a shareholder or a director. It includes the arrangements needed to complete the amalgamation and to run the continuing company afterwards, and a copy of the proposed constitution if there is to be one. The proposal may name the date on which the amalgamation is intended to take effect.

On these facts the proposal says that Leela’s 50 shares in Palm are converted into 10 ordinary shares in Tamarind. Meera keeps her 60 shares and Ravi keeps his 40. Leela becomes a shareholder of Tamarind when the amalgamation takes effect, because the conversion clause takes effect according to its terms.

If one of the companies already held shares in the other, the proposal would cancel those shares without payment and would not convert them into shares of the continuing company. That is not this example. Leela holds Palm for herself.

Each board certifies, and the shareholders have 28 days

The board of each company resolves that the amalgamation is in the best interests of that company, and that it is satisfied on reasonable grounds that the amalgamated company will satisfy the solvency test immediately after the amalgamation becomes effective. The directors who vote in favour sign a certificate stating that those conditions are met and the grounds for the opinion. A director who fails to sign that certificate commits an offence. The fine does not exceed Rs 100,000.

The solvency test is the two limbs used elsewhere, read for an amalgamated company. The directors look at financial statements prepared as if the amalgamation had already taken effect, and at the circumstances they know or ought to know.

Not less than 28 days before the amalgamation is proposed to take effect, each board sends every shareholder a copy of the proposal, the directors’ certificates, a summary of the principal provisions of the amalgamated company’s constitution if it will have one, a statement that a shareholder who asks will be given a copy of that constitution, a statement of the shareholders’ rights under section 108, a statement of any material interest a director has in the proposal, and any further explanation a reasonable shareholder needs. On the same 28-day clock, each board sends the proposal to every secured creditor and gives public notice that the proposal can be inspected and that a copy will be supplied free of charge on request.

The lender who holds the charge over Tamarind’s equipment is a secured creditor. The proposal goes to that lender as well as to Meera and Ravi.

The shareholders of each company approve the proposal by special resolution. The count, including a show of hands and a poll, is in the decisions chapter. Meera holds 60 of Tamarind’s 100 votes and Ravi holds 40. If both vote on a poll, 60 per cent of the votes cast is below 75 per cent, and Tamarind’s special resolution fails. Palm’s shareholders vote on Palm’s own resolution. Leela’s vote does not supply the votes Tamarind is short.

Where a special resolution alters the constitution so as to impose or remove a restriction on the business, a shareholder who cast all the votes attached to shares registered in his name against it may require the company to purchase those shares. That right is worked in the decisions chapter. Staying away from the amalgamation meeting is not that against-vote.

Nineteen days is too short

The boards sign the certificates on 1 April and want the amalgamation to take effect on 20 April. From 1 April to 20 April is 19 days. The pack has to be sent not less than 28 days before the proposed date. A proposed date of 1 May is 30 days after 1 April, so it meets the 28 days. The certificates are part of the pack the shareholders receive. A board minute that the directors who voted in favour have not signed as the certificate does not meet section 246.

Companies Act, sections 6, 105, 108, 245, 246 and 330.

3. The short form, when the group already owns every share

Tamarind later owns every share in Bay Advisory Ltd, directly. Bay is a wholly-owned subsidiary. They may amalgamate and continue as Tamarind without a proposal under section 245 and without shareholder approval under section 246. Each board resolves that Bay’s shares will be cancelled without payment or other consideration, that Tamarind’s constitution, if it has one, remains the constitution of the continuing company, and that the board is satisfied the continuing company will meet the solvency test immediately afterwards. The directors who vote in favour sign a certificate of those matters and the grounds. The same fine, not exceeding Rs 100,000, applies where a director who voted in favour does not sign that short-form certificate. The resolutions, taken together, are treated as an approved amalgamation proposal. Each board gives every secured creditor written notice at least 28 days before the proposed date.

If Tamarind owned only 80 of Bay’s 100 shares, Bay would not be wholly owned. The short form would not be available. The long-form proposal and the special resolutions would be required.

A different group uses the other short form. Harbour Holdings Ltd owns every share in Tamarind and every share in Bay. Tamarind and Bay may amalgamate and continue as one of them. The shares of the company that does not continue are cancelled without payment. The constitution of the company that continues, if it has one, remains the constitution. Each board gives the same solvency confirmation, the directors who vote in favour sign the certificate, and secured creditors receive 28 days’ written notice. Harbour is the common owner. It is not one of the amalgamating companies in this example.

Companies Act, section 247.

4. The certificate, and a compromise with creditors

The approved proposal and the certificates are delivered to the Registrar. Where Tamarind continues, the Registrar issues a certificate of amalgamation. Where Grove is a new company, the Registrar enters Grove on the register and issues a certificate of amalgamation together with a certificate of incorporation. The amalgamation takes effect on the date shown in the certificate of amalgamation. If the proposal names a date which is the day the Registrar receives the documents, or a later day, the certificates are expressed to take effect on that date.

On that date the Registrar removes every amalgamating company except the one that continues. Property, rights, powers and privileges of a company that is removed continue in the amalgamated company. The amalgamated company remains liable for the liabilities and obligations of each amalgamating company. A proceeding that was pending by or against Palm continues by or against Tamarind. The conversion of Leela’s Palm shares into 10 Tamarind shares takes effect as the proposal states.

The Rs 300,000 loan is a debt to a creditor. An agreement that the lender will accept Rs 200,000 in discharge of that Rs 300,000 is a compromise between the company and a creditor. A compromise includes cancelling all or part of a debt, varying creditors’ rights or the terms of a debt, and an alteration of the constitution that affects the likelihood of the company being able to pay a debt. A creditor includes a secured creditor. The charge registered under section 127 remains the lender’s security until the compromise, or a later instrument, deals with it. The Rs 100,000 the lender gives up is a reduction of the debt. It is a different document from the amalgamation proposal, and it is a different decision from a dividend.

Companies Act, sections 127, 248, 249, 250 and 253.

What you should now be able to explain

Tamarind and Palm, owned separately, use the long form and continue either as Tamarind or as a new company. Each board certifies solvency, shareholders and secured creditors have 28 days, and each company’s shareholders approve by special resolution. Where Tamarind already owns every share in Bay, the short form is a board resolution, cancellation of Bay’s shares without payment, and 28 days’ notice to secured creditors. The certificate is the moment the property and the liabilities continue in the one company. A creditor who accepts Rs 200,000 for a Rs 300,000 debt is in a compromise.

Next: the 50-shareholder limit, a unanimous agreement, a company limited by guarantee, a limited life, and a dormant company.