The term compromise means settlement of a dispute by mutual concession. In a compromise, the parties intend to settle a dispute between them by a give and take arrangement.
Arrangement is wider in scope and includes a reorganization of the share capital of the company by the consolidation of shares of different classes or by division of shares or by both methods.
Under Section 207, a company can enter into compromise or arrangement with its creditors or members without going into liquidation and the following procedure is adopted:-
(i) Application to court.
(ii) Meeting of creditors: - The court may order a meeting of creditors or members of any class of them to be called.
(iii) Approval of the scheme:- Any compromise or arrangement shall be binding on all the creditors or members and also on the company or in the case of a company which is being wound up, on the liquidators and contributories if:-
(a) The scheme is approved by majority in number representing ¾ in value of creditors/members.
(b) The scheme is sanctioned by the court.
(iv) Copy of court’s order to be filled by the registrar.
(v) In default of the above requirements, every officer of the company shall be punishable with a fine which may extend up to Sh. 100 for each copy in respect of which default is made.
Reconstruction and Amalgamation
Reconstruction occurs when a company transfers the whole of its undertaking and property to a new company consisting substantially of the same shareholders.
The object of reconstruction is to re-organize capital and variations of the right of investors.
Amalgamation is the blending of two or more existing company so as to form a third entity or one company is absorbed into and blended with another company.
It implies creation of a new company by a complete consolidation of combining units. Under amalgamation, none of the existing company retains its entity.
A reconstruction/amalgamation may take the following forms:-
(i) By scheme of arrangement.
(ii) By sale of undertaking.
(iii) By sale of shares.
(iv) By amalgamation.
Sale of undertaking: - This involves a sale of the undertaking as a going concern. Incase of sale, some vital provisions must be addressed to facilitate reconstruction and amalgamation as follows:-
(i) The transfer of property and liabilities of a transferor company.
(ii) The allotment/appropriation by the transferee company of any shares, debentures, and so on in that company which under the compromise/arrangement are to be allotted.
(iii) The continuation by the transferee company of any legal proceedings pending against the transferor.
(iv) The provision to be made for any person who within such time and in such manner as the court directs, dissent from the compromise/arrangement
Sale of shares: - If the offer to acquire shares is made, then the shareholders have the option to approve the offer within 4 months. Approval should be made by 9/10 in value of the shares or 90% of the value of shares. These shares exclude shares already held by the transferee company or its subsidiaries.
Once 90% of majority approves for the transfer, the transferee company gets the right to acquire the shares of the dissenting shareholders within 2 months after the expiry of the above 4 months, the transferee company should give a notice to shareholders that it desires to acquire the shares within one month from the date of the notices. The dissenting shareholders may apply to the court but if no application is made to the court, the transferee company gets the final right and also becomes bound to acquire those shares on the terms on which the shares of other shareholders are to be transferred.
When an application is made to the court by a shareholder that the terms are not fair, the onus is upon the applicant to establish his allegation. The court will attach considerable weight to the fact that a large body of shareholders has accepted the offer.
Sometimes, the transferee company does not feel it necessary to serve notice on the dissenting shareholders. It is quite content that its offer has been accepted by nearly all the shareholders in the transferor company and the minority of the remaining members can do nothing to stop implementing its policies so long as it does not oppress them.