Section 394 – The Companies Act,1956

The Companies Act, 1956

394. Provisions for facilitating reconstruction and amalgamation of companies.

(1) Where an application is made to the 1[Tribunal] under section 391 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the 1[Tribunal]

(a)that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies; and

(b)that under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme (in this section referred to as a “transferor company”) is to be transferred to another company (in this section referred to as “the transferee company”);

the 1[Tribunal] may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the following matters:

(i)the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company;

(ii)the allotment or appropriation by the transferee company of any shares, debentures policies, or other like interests in that company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person;

(iii)the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company;

(iv)the dissolution, without winding up, of any transferor company;

(v)the provision to be made for any persons who, within such time and in such manner as the Court directs dissent from the compromise or arrangement; and

(vi)such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out:

2[Provided that no compromise or arrangement proposed for the purposes of, or in connection with, a scheme for the amalgamation of a company, which is being wound up, with any other company or companies; shall be sanctioned by the 1[Tribunal] unless the Court has received a report from 3[***] the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest:

Provided further that no order for the dissolution of any transferor company under clause (iv) shall be made by the 4[Tribunal] unless the Official Liquidator has, on scrutiny of the books and papers of the company, made a report to the 4[Tribunal] that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest.]

(2) Where an order under this section provides for the transfer of any property or liabilities, then, by virtue of the order; that property shall be transferred to and vest in and those liabilities shall be transferred to and become the liabilities of the transferee company and in the case of any property, if the order so directs, freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect.

(3) Within 5[thirty] days after the making of an order under this section, every company in relation to which the order is made shall cause a certified copy thereof to be filed with the Registrar for registration.

If default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to 6[five hundred rupees].

(4) In this section

(a)“property” includes property rights and powers of every description; and “liabilities” includes duties of every description; and

(b)“transferee company” does not include any company other than a company within the meaning of this Act; but “transferor company” includes any body corporate, whether a company within the meaning of this Act or not.

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(i) When two companies amalgamate and merge into one the transferor company looses its entity as it ceases to have its business. However their respective rights or liabilities are determined under the scheme of amalgamation but the corporate entity of the transferor company ceases to exist with effect from the date the amalgamation is made effective; Saraswati Industrial Syndicate Ltd. v. Commissioner of Income Tax, Haryana, Himachal Pradesh, Delhi-III, New Delhi, AIR 1991 SC 70.

(ii) Merely because 51 per cent. of the shares of an Indian company are being given to a foreign company the scheme of amalgamation cannot be said to be against public interest; Hindustan Lever Employees Union v. Hindustan Lever Ltd., AIR 1955 SC 470.

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1. Subs. by Act 11 of 2003, sec. 41, for “Court”.

2. Added by Act 31 of 1965, sec. 49 (w.e.f. 15-10-1965).

3. The words “the Company Law Board or” omitted by Act 11 of 2003, sec. 41.

4. Subs. by Act 11 of 2003, sec. 41, for “Court”.

5. Subs. by Act 31 of 1965, sec. 62 and Sch., for “fourteen” (w.e.f. 15-10-1965).

6. Subs. by Act 53 of 2000, sec. 176, for “fifty rupees” (w.e.f. 13-12-2000).

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