210. Power to compromise with creditors, members and holders of units of shares Flashcards
- Power to compromise with creditors, members and holders of units of shares
General overview
[210.01] Section 210 deals with schemes of arrangements, compromise or reconstruction proposed between a company and its creditors or members which will bind all creditors or members as long as the requisite voting approval is obtained. In a creditors’ compromise, a company facing impending insolvency may enter into an agreement with all its creditors to discharge its obligations in a manner where the creditors accept a smaller sum or take a “hair cut” in full discharge of the debt owing by the company upon certain terms and conditions, subject to the court’s approval. In a members’ arrangement, s 210 may be used as a route to a takeover or merger of the target company by the bidder/offeror, subject to the court’s approval. In a “reverse takeover”, the target company buys over the shares of the offeror. Where the takeover is carried out through an exchange of shares between the target and the offeror, it is in effect a merger or amalgamation. A merger or amalgamation takes place when the assets and undertaking of more than one company are brought under the ownership and control of a single company, which may be from amongst the group. The members exchange their shares in the original company for cash and/or shares in the new entity. A reconstruction is usually a transfer of the entire business undertaking of the company to a new company. The old company is put into liquidation and its members take on new shares in the new company. Other variants of such rearrangement include a “management buyout”, division, demerger or scission, where companies are split up instead of aggregated. In these situations, the directors consult with financial advisors, solicitors, accountants and valuation experts to carry out the scheme.
