Scope of Compromise or Arrangement in Companies Ordinance, 1984, Part 1

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Scope of Compromise or arrangement in Companies Ordinance, 1984, Part 1

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S j Tubrazy

Section 284 of the Companies Ordinance, 1984, is a compete code in itself. It provides a mechanism whereby a company in order to restructure or reorganize itself or its shares and capital or to achieve the object of amalgamation or merger with any number of companies or demerger or bifurcate its operation into two or more entities, may with the sanction of the Court, enter into any scheme of compromise or arrangement with all or any set of stakeholders or any class thereof as specified in section 284 namely:

(i) Between a company and its creditors or any class of them,

(ii) Between the company and its members or any class of them.

In case of a company being wound up, then liquidator with the sanction of Court, may enter into any scheme of compromise or arrangement with all or any set of stakeholders specified above.

Companies Ordinance, 1984 does not define compromise or arrangement as used in section 284 though extended meaning is assigned to ‘arrangement’. It appears that, the Courts have adopted progressive and dynamic approach of what should be included in the scheme of compromise or arrangement. Progressive approach was necessary to accommodate diversity of situations with flexibility to facilitate variety of compromise or arrangement ranging from a complex merger of number of business entities demerger or bifurcation of one business entity into two or several restructuring, conversion or variation of share and share capital including a re-organization of the share-capital of the company by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both those methods. Compromise or arrangement may also envisage composition either with shareholders or class of shareholders or with creditors or any class of creditors as may be conducive for the well being, survival, progress and/or to rescue the company.

Scheme of compromise or arrangement between company and creditors may envisage for debt restructuring. Whatever the nature of scheme may be, foremost and preliminary step is to make application to the Court, seeking direction to call a meeting of specified class of stakeholders or interest groups to consider and approve or otherwise the proposed scheme with or without any modification. Usually the Court, at the motion of persons interested to seek enforcement of proposed scheme, may call the meeting of specified class of persons. It is necessary that, meeting of concerned categories of stakeholders, interest group or persons and or class of persons that might be affected by the proposed scheme of reorganization, settlement, compromise, amalgamation, merger or demerger, as the case may be, is called. Applicant seeking sanction and approval of the Court has to be careful while requesting a meeting of the concerned stakeholders, interest groups or class of persons. If applicant chooses to call a meeting of a particular class of persons leaving out other class of persons whose rights or interest is affected or where joint meeting of person having diverse or conflicting interests is called to secure statutory majority, then applicant runs possible risk of rejection of petition. Commonality of interest constitutes a separate class. It is for the applicant to indicate class to which scheme is proposed. Where the classes are not properly formed, the sponsor of the scheme runs the risk of the Court refusing its sanction.

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