The Companies Act, 2013 – Arrangement with Creditors
- What is mean by Arrangement with creditors?
The Word Arrangement is term of very wide importance and its meaning is not to be limited to something analogous to a compromise. The Scheme of Arrangement is a procedure under Section 230-234 of the Companies Act, 2013 for obtaining NCLT approval for compromise or arrangement between a company and its creditors or class of creditors. Essentially, a scheme can be used to bind a majority of creditors or class of creditors, as the NCLT can sanction a scheme once it has been approved by a majority in number representing 75% in value of the class of creditors in question.
- When do you need an arrangement with your creditors?
A company may have debt in the normal course of business. It may be loans-secured or unsecured and creditors for supplies of goods and services. If its cash flow is not enough to pay them in time on regular basis, than option left with the company is to bring more funds from the shareholders if they volunteer or have arrangements with creditors so that it is able to meet its regular payment liabilities post such arrangement. Creditors hassle people who they think may be “won’t payers” much harder than they do people who have shown that they are genuinely “can’t payers”.
Formal arrangements with creditors are an attractive option if you need your proposal to be legally binding on all creditors.
- Who can move Application under Section 230 of the Companies Act, 2013?
- Any Creditor
- Under what Circumstance Company or Creditor can make an Application under Section 230 of the Companies Act, 2013?
- Company – If Company is not able to pay full dues of creditor when it became due. Then company can go with Arrangement with creditors.
For e.g. The Company has to pay Rs.75 Lacs to Mr. A and Rs. 50 Lacs to Mr. B as supplier of raw material. The company does not have enough money to make payment to creditors then, the company can file application to NCLT for Arrangement with creditors to pay less amount than what is due to them or to grant more time to make payment to creditors with interest.
- Any Creditor – If any payment is become due from Company to creditors and the company is not ready to pay full amount to creditors when it became due, then Creditors can make application to NCLT to order some settlement between company and creditors.
- What type of order that can be passed by NCLT in case of arrangement with creditors?
- NCLT may order the company to make partial payment to creditor as full settlement of their dues.
- It may order the company to sell of its assets (which is free charge) and pay all dues of creditors on preferential basis.
- It may grant more time to the Company to make payment to creditors in full with interest on it as decided.
- Which are the parties involved in Arrangement with creditors?
- Company which is incorporated under Companies Act, 2013 or under previous company law including Section 25 Company.
- Creditors of the Company / Class of Creditors.
- Registrar of Companies
- Regional Director.
- Which are regulatory Bodies which regulate Arrangement with creditors?
- Companies Act, 2013 – [Sec 230-234]
- National Company Law Tribunal Rules, 2016
- The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016
- Listing Agreement, in case of listed companies
- Insolvency and bankruptcy Code
- Which Section of the Companies Act, 2013 Govern Arrangement with creditors?
Arrangement with creditors is covered under Section 230 of the Companies Act, 2013.
- As per provision of Section 230 (1) of the Companies Act, 2013
Where a compromise or arrangement is proposed—
- Between a company and its creditors or any class of them; or
the Tribunal may, on the application (in Form NCLT-1) of the company or of any creditor of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, as the case may be, to be called, held and conducted in such manner as the Tribunal directs.
- If a majority in number representing three-fourths in value of the creditors, or class of creditors, as the case may be, majority of creditors representing 3/4th in value, voting in person or by proxy or by postal ballot, agree to any compromise or arrangement.shall, if sanctioned by the NCLT, be binding on all the creditors, all the creditors of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company:
[Provided that no order sanctioning any arrangement shall be made by the NCLT unless the NCLT is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the NCLT, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor’s report on the accounts of the company, the pendency of any investigation proceedings in relation to the company, and the like.]
- any scheme of corporate debt restructuring consented to by not less than seventy-five per cent. of the secured creditors in value, including—
(i) a creditor’s responsibility statement in CAA-1;
(ii)safeguards for the protection of other secured and unsecured creditors;
(iii)report by the auditor that the fund requirements of the company after the corporate debt restructuring as approved shall conform to the liquidity test based upon the estimates provided to them by the Board;
(iv)where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India, a statement to that effect; and
(v) a valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and immovable, of the company by a registered valuer.
- An order made by the Tribunal shall provide for:
– the protection of any class of creditors;
– if the compromise or arrangement is agreed to by the creditors, any proceedings pending before the Board for Industrial and Financial Reconstruction established under section 4 of the Sick Industrial Companies (Special Provisions) Act, 1985 shall abate;
- An order made by the NCLT shall have no effect until a certified copy of the order has been filed with the Registrar in E-Form INC-28 within a period of thirty days of the receipt of the order.
- Procedure Aspect under Arrangement with creditors
Procedure will be same as in case of arrangement with shareholders, only consider Creditors in place of Members of the company.
- NCLT Rules relating to Arrangement with creditors – Link to Rule
Some Important Definition which are useful to interpret Provision are as follows:
- Who is a Creditor?
Meaning of term “Creditor” neither defined under provisions of compromise or arrangement nor defined in Act itself.
- What is meaning of the word ‘CLASS’ under section 230-234of the Companies Act, 2013?
Creditors can be classified based on security available to them, their preferential rights under the agreement or under any statute. So there are various classes of creditors such as secured creditors, debenture holders, depositors, and unsecured creditors with some preferential treatment, unsecured creditors who are also shareholders or related parties and other etc. the scheme has to be approved by the special majority of each class of creditors at their separate meetings.
- What constitute CLASS? Determination of CLASS / CLASSES OF CREDITORS
The creditors composing the different classes must have different interests. When one finds a different state of facts existing among different creditors which may differently affect their minds and their judgment, they must be divided into different classes, ‘class’ must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.
In order to constitute a class, creditors belonging to the class must form a homogeneous group with commonality of interest. If people with heterogeneous interest are combined in a class, naturally the majority having common interest may ride roughshod over the minority representing a distinct interest. The NCLT does not itself consider what class of creditors should be made parties to the scheme. This is for the Company to decide in accordance with what the scheme purports to achieve.
- What should be the basis of grouping the creditors?
A group of persons would constitute one class when it is shown that they have conveyed all interest and their claims are capable of being ascertained by any common system of valuation. The group styled as a class should ordinarily be
- Commonality of interest
- Compromise offered to them must be identical.
Broadly speaking, a group of persons would constitute one class when it is shown that they have conveyed all interest and their claims are capable of being ascertained by any common system of valuation. The group styled as a class should ordinarily be homogeneous and must have commonality of interest and the compromise offered to them must be identical.
So the conclusion can be drawn that if the creditors of the company have Divergent interests then they cannot be clubbed together into one class.
5. What are the categories of creditors for classification?
Creditors can be divided into three categories of
- Preferential creditors,
- Secured creditors and
- Unsecured creditors.
All Unsecured preferential creditors can be treated as one class, and if, as will frequently be the case, all preferential creditor are to be paid in full, they will be single class whether or not some are secured and some are unsecured. Similarly all unsecured creditors will normally form a single class, except where some of them are to be treated in a manner different from the rest and have different interests which might conflict. In such a case fresh classes will be carved out.
- In the case ofpremier motors (p) ltd. v Ashok tendon it was held that Unsecured Creditor will form a single class.
- Creditors with competing rights – Creditors with competing rights should be treated as different classes. Such scheme should be approved by separate class meetings accordingly. This having not been done, the scheme not sanctioned.
THE UK SUPREME COURT IN THE CASE OF
- Nordic Bank plc v. International HarvesterAustralia Ltd laid down “what constitute Class” – The Court does not itself consider at this point what class of creditors or members should be made parties to the scheme. The NCLT said that it should be left for the company to decide in accordance with what the scheme purports to achieve. In this case rights of ordinary shareholders are to be altered, but those of preference shares are not touched, a meeting of ordinary shareholders will be necessary but not of preference shareholders. If there are different groups within the class of interest of which are different from the rest of the class, or which are to be treated differently under the scheme, such group must be treated as separate class for the purpose of the scheme.
By studying the cases of various jurisdiction, it can be concluded that the basis for the determination of classes of Creditors for the purpose of sanctioning scheme of arrangement is that the classes shall be grouped on the basis of commonality of interest and the class formed must be homogenous group.
It is the responsibility of the company putting forward the Scheme to decide whether to summon a single meeting or more than one meeting. If the meeting or meetings are improperly constituted, objection should be taken on the application for sanction and the company bears the risk that the application will be dismissed.
Persons whose rights are so dissimilar that they cannot sensibly consult together with a view to their common interest must be given separate meetings. Persons whose rights are sufficiently similar that they can consult together with a view to their common interest should be summoned to a single meeting.
The NCLT will decline to sanction a Scheme unless it is satisfied, not only that the meetings were properly constituted and that the proposals were approved by the requisite majorities, but that the result of each meeting fairly reflected the views of the creditors concerned. To this end it may discount or disregard altogether the votes of those who, though entitled to vote at a meeting as a creditor of the class concerned, have such personal or special interests in supporting the proposals that their views cannot be regarded as fairly representative of the class in question.