Compromise, Arrangement and Amalgamation in Company Law
Compromise, Arrangement, and Amalgamation in the context of Company Law:
1. Compromise
Definition:
A compromise is an agreement between a company and its creditors or members to settle their rights or claims. This usually happens when the company is facing financial difficulties, and it negotiates to pay less or restructure debt.
Purpose:
To avoid winding up or liquidation by restructuring obligations, usually through partial payments or delayed payments.
Example:
A company owes ₹1 crore to creditors but negotiates to pay ₹70 lakhs over a period, with creditors agreeing to write off the remaining ₹30 lakhs.
Legal Basis:
Companies Act provisions typically require approval from creditors and the court.
2. Arrangement
Definition:
An arrangement refers to an agreement between a company and its shareholders or creditors regarding the reorganization of the company’s capital, structure, or business.
Purpose:
To restructure the company's shareholding pattern, capital, or management to improve financial health, often without winding up the company.
Example:
Altering the capital structure by converting preference shares into equity shares or merging certain classes of shares.
Legal Basis:
Requires approval of a majority of shareholders/creditors and sanction by the court.
3. Amalgamation
Definition:
Amalgamation is the merging of two or more companies into a new or existing company, combining their assets, liabilities, and operations.
Purpose:
To achieve synergy, expand business operations, reduce competition, or improve financial and operational efficiency.
Types:
Amalgamation in the nature of merger: Companies are merged with mutual consent, often where the shareholders of the amalgamating companies receive shares in the new company.
Amalgamation in the nature of purchase: One company purchases the assets and liabilities of another company.
Example:
Company A and Company B merge to form Company C, transferring all assets and liabilities to Company C.
Legal Basis:
Requires approval from shareholders/creditors and sanction by the court. Compliance with specific provisions of the Companies Act is necessary.
Summary Table
| Term | Definition | Purpose | Example |
|---|---|---|---|
| Compromise | Agreement between company and creditors/members to settle claims | Restructure debts/payments | Creditors agree to take less payment |
| Arrangement | Agreement on restructuring company’s capital or structure | Reorganize capital/shareholding | Conversion of preference shares into equity shares |
| Amalgamation | Merger of two or more companies into one | Combine operations & assets | Two companies merge to form a new company |
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