MERGER OF COMPANY IN LIQUIDATION
INTRODUCTION
Amalgamation and merger are very popular terms in the present
corporate scenario. Merger is a method by which two or more
companies combines as a single company. There may be a situation in
which one company may retain its identity at the cost of other and
there may be a situation whereby all companies looses their identities
and form a new company to takeover affairs of old companies.
Amalgamation does not cover mere acquisition of share capital of
another company which remains in existence and continues its
functions, this is takeover and not merger. There are many provisions
in the Companies Act, Income Tax Act, SEBI Regulations etc which
governs the merger of companies. A company in liquidation may also
be merged with another company . In this writing we are concerned
only with merger of company in liquidation.
WHAT IS COMPANY IN LIQUIDATION
There are two terms which are mostly used, “winding up” and
“liquidation”. When it is decided to close down affairs of a company,
whether operations of company (like production, etc.) are closed down
or not, it is winding up. When the liquidator is disposing off assets and
liabilities of the company, it is liquidation, and when whole assets and
liabilities are actually disposed off, it is called dissolution. It is like a
man who has died but still given oxygen, blood etc., it is winding up, if
different organs of his body like eyes, kidney etc. are disposed off, it is
liquidation, when funeral activities are completed, it is dissolution. It is
not necessary each company goes through all the three steps explained
above. A company may not be dissolved as in case of defunct company.
From the above illustration it is also clear that a company in
liquidation should merge only with a healthy company. However it two
persons are about to die, one person can be saved by replacing his non
working organs with god organs of another by killing him.
PROVISIONS OF THE COMPANIES ACT
In Sec. 390 of the Companies Act 1956, the word used is
“arrangement” which is wide enough to include amalgamation and
merger. The Company need not have a provision fro amalgamation or
merger in its Memorandum or Association. In the merger, besides
company the other parties are its members and creditors. Members
and liquidator can apply to the court for arrangement. Members can
apply even after passing of winding up orders.
The scheme of arrangement is not alternative mode of liquidation
but an alternative to liquidation itself (STO vs Byford Ltd., (1984)55
Comp.Cas 204 (Del) . Arrangement can be for taking the company out
of winding up proceeding as held in the Vasant Investment Corporation
Ltd, in re (1982) 9 Comp Cas 229 (Chd). A composition with creditors
which makes the company solvent can not be treated as arrangement by
a company about to be wound up. Creditor is a person who is entitled
to recover specific/non specific present or future claim.
The scheme once sanctioned is binding on all parties. The court
may supervise the implementation of scheme and give any directions or
may order for winding up. The court may provide for transfer of
assets/liabilities, allotment of share/debentures, continuation of legal
proceedings against amalgamating company.
Takeover is different from merger. It is acquisition of shares of a
company and is unilateral act. SEBI has prescribed the Substantial
Acquisition of Shares and Takeover Regulations. Regulation 10 to 12
regarding acquisition of share, voting right and control does not apply
to any scheme of arrangement, merger or amalgamation.
PROCEDURAL PROVISIONS
First of all the scheme is prepared and sanctioned by the Board of
Directors of both companies. Prior approval of financial institutions is
also necessary. Stock exchange are informed about the proposed
scheme. Sec 391 of the Companies Act provides that both transferor
and transferee company shall apply to the High Court in the prescribed
form. In case of company which is being winding up, liquidator makes
application. The court gives notice of every application to the Central
Government. The court directs the company to hold and conduct a
meeting of member/creditors. The court will sanction the scheme only if
majority of member/creditors present at the meeting representing ¾ of
value passes the scheme. Both companies has to file the order of the
court with the Registrar of Companies, thereafter the scheme will be
binding on the company, its members, creditors, liquidators and
contributories.
The notice calling meeting should contain terms and conditions of
the scheme and interest of directors. The court will not sanction the
scheme unless the CLB or RoC reports that affairs of Company are not
prejudicial to interest of members. The court will not order for
dissolution without report from the official liquidator. Merger will be
effective from the date specified by the court. Books and papers of the
company which has been merged can be disposed off only with
permission of the Central Government.
ACCOUNTING STANDARD 14- ACCOUNTING FOR
AMALGAMATION
The Institute of Chartered Accountants of India has issued the
AS-14 to record merger transactions in the books of companies. This
Accounting Standard specifies following conditions :- all assets and liabilities shall be transferred,
- shareholders holding at least 90% of value of shares in transferor
company becomes shareholders of transferee company,
- consideration is paid wholly by issue of equity shares,
- transferee company carries on business of transferor company,
- no adjustment is made in book value of assets and liabilities.
The Accounting Standard prescribes the “pooling of interest”
method of accounting under which the assets and liabilities of the
transferor company are recorded at existing amount by the
transferee company. Goodwill Account and
Amalgamation Adjustment Account are not entered.
PROVISIONS OF THE INCOME TAX ACT
In case of an Indian Company, any expenditure incurred on
merger is allowed in five equal installments.
Following are not regarded as transfer and hence not charged to
capital gains under the Income Tax Act :- Transfer of assets by amalgamating company to amalgamated
Indian company
- Transfer by shareholder of share in amalgamating company in
consideration of share in amalgamated Indian company.
If in the scheme of amalgamation, the amalgamating company
transfers any machinery or plant in respect of which following
rebate has been allowed to it, the respective provisions shall apply to
the amalgamated company as it were applicable to the
amalgamating company. The rebates are as follows :- Investment allowance (Sec 32A)
- Development rebate (Sec 33)
- Development allowance (Sec 33A)
- Expenditure on acquiring patent or copyrights (Sec 35A)
- Expenditure on acquiring telecommunication license (Sec 35ABB)
The amalgamated company is eligible to set off and carry forward
losses and unabsorbed depreciation incurred by the amalgamating
company if the amalgamated company holds for five years at least 75%
of fixed assets and continues the business of amalgamating company for
five years.