Compromises and Arrangements

In one line

Where a company proposes a compromise with its creditors or an arrangement with its members, the Tribunal may order meetings of each class; if a majority of persons representing three-fourths in value of each class agree and the Tribunal sanctions it, the scheme binds everybody, including dissentients and, in a winding up, the liquidator and contributories.

In exam wording: section 230 is the power to compromise or make arrangements, section 231 the Tribunal's power to enforce it, and section 232 its application to mergers and amalgamations.

Why the law has this at all

A company that owes more than it can pay has two ways out. It can be wound up, which sells the assets in a hurry and pays a few paise in the rupee. Or it can agree with its creditors to take less, or to take shares, or to wait, and go on trading.

The second is almost always better for everybody, and the obstacle to it is not commercial but legal: a company cannot vary a debt without the creditor's consent, so one creditor out of two hundred can refuse and defeat the arrangement, whatever the other hundred and ninety-nine think.

Section 230 removes that obstacle in a controlled way. It lets a qualified majority of each class bind the rest, but only after the Tribunal has ordered the meetings, full disclosure has been made, the regulators have been given thirty days to object, and the Tribunal has sanctioned the result. The majority's power over the minority is real, and it is fenced.

Section 231 then keeps the Tribunal in the picture after sanction, because a scheme is a thing to be carried out over years, not an order that exhausts itself when made.

And section 232 exists because the same machinery, meetings plus sanction, is the natural way to move an undertaking from one company to another, so the Act uses it for mergers and amalgamations with the additional disclosures such a scheme needs.

Some words this chapter uses

A compromise presupposes a dispute or a difficulty and settles it. An arrangement is wider, and by the Explanation to section 230(1) includes a reorganisation of the company's share capital by the consolidation of shares of different classes, or by their division into shares of different classes, or both. A class is a group whose rights are so similar that they can consult together with a common interest. Corporate debt restructuring is the rescheduling of a company's borrowings. A registered valuer is one registered under section 247. The appointed date is the date from which a scheme under section 232 takes effect.