Nature of Consideration in a Scheme of Arrangement

[The following
guest post is contributed by Rushab Dhandokia, who is an associate
at a reputed law firm. Views are personal]
The Bombay High Court in re Thomas Cook Insurance Services (India) Limited[1]
has dealt with a very interesting question within the domain of Mergers &
Acquisitions (“M&A”). The case refers to the sanction of a composite
scheme of arrangement and amalgamation that was placed before the High Court
with respect to one
of the significant transactions of 2014
, being the acquisition of Sterling
Holiday (India) Resort Ltd. (“Transferor”) by Thomas Cook (India) Ltd.
(“Transferee A”) and Thomas Cook Insurance Services (India) Ltd (“Transferee
The Transaction
The transaction per se was a complex
one which, in order to achieve the desired results, was structured into many
sub-parts involving a number of internal restructurings. However, for the
purpose of obtaining approval in respect of the ‘entire scheme of arrangement’ from
the High Court, the transaction can simply be divided into the following two
Part A:

of a part of the Transferor’s undertaking pertaining to the time share and
resort business on a going concern basis from and transferring and vesting it
in Transferee B and,
Part B:
of the residual undertaking of the Transferor (i.e. exclusive of the
demerged undertaking) with Transferee A on a going concern basis.
Accordingly, it was envisaged in the
composite scheme of arrangement that in lieu of acquiring the Transferor’s businesses
in the manner stipulated above, the Transferees would discharge the
consideration for the scheme through a swap of its shares for the shares of the
Transferor in the following manner:   
Part A:
116 equity shares of Transferee A of Re.1/- fully paid up
for every 100 equity shares of the Transferor of Rs.10/- fully paid up, and
Part B:
allot 4
equity shares of Transferee A of Re. 1/- to be paid up for every 100
equity shares of the Transferor of Rs.10/-.  
Please note only the shares of Transferee A are
being swapped/issued in lieu for the entire transaction, whereas Transferee B which
is the resulting company insofar as the demerger part (Part A of the
Transaction) is concerned, is not issuing any shares/securities.
Opposition to the Scheme
The opposition to the above scheme came from the
Regional Director Western Region, Ministry of Corporate Affairs, Mumbai (“Regional
”). The scheme was objected on the grounds that it was in violation
to the provisions of the Income Tax Act, 1961 and the Companies Act, 1956. The
main reason for opposing the scheme was for the reason as noted above that
Transferee B which was the resulting company in so far as the demerger part of
the Transaction is concerned, did not issue any shares, and that only the
shares of the parent company i.e. Transferee A herein were being issued.
The Regional Director argued that the said
scheme for the reason mentioned above was not in consonance of the provisions
of the Companies Act, 1956. It argued that each of the parts of the transaction
should separately satisfy the provisions of law; hence such mechanism as
adapted was in contravention of clause (ii) of section 394(1) of the Companies
Act, 1956. The said provision involves one of the directions that the Court issue
for effecting the scheme. It states that the Court, if satisfied, can provide
for “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
Since, in the present case for that part of
the restructuring where the demerged undertaking of the Transferor was
amalgamating into Transferee B, but the shares of Transferee A were being
issued, it was contended that to this extent the scheme was in violation of the
Question of Law
The interesting question of law that the High
Court was required to adjudicate upon was given the bare provision of law, in
case of an scheme of arrangement, whether any other person or entity which is
not the transferee company in such a transaction issue its shares/securities as
consideration for effecting the scheme?
The High Court approved the present scheme without
suggesting any modification and held that it was legally permissible to
structure a transaction as in the present scheme, wherein the parent company i.e.
Transferee A, issued its shares in lieu of the demerged entity of the
Transferor which amalgamated into Transferee B.
Reasoning the same, it reiterated that the
provisions referred to in Clauses (i) to (vi) of sub-section (1) of Section
394, which the Court may make whilst sanctioning a scheme, are merely enabling provisions. Further it made an important
observation that the Company Court, while sanctioning the scheme, may or may
not make any of the directions contained in clauses (i) to (vi) thereof. It
held that the provisions referred to in clauses (i) to (vi) are not in the nature of conditions for
exercise of power of the company court under Section 394
. Accordingly
it held that such enabling provisions cannot be construed as compulsory in any
Moving to the clause (ii), on which the
present scheme rested, the High Court held that this clause provides that if
and to the extent the compromise or arrangement provides for allotment or
appropriation by the transferee
of any shares, debentures, policies or other like interests in that
company as part of the consideration of the scheme, then the company court while sanctioning the scheme may make
appropriate provision in respect of such allotment or appropriation
Accordingly, it held that it is not a compulsion under the said
clause that the consideration for transfer of an undertaking as part of a
scheme of arrangement must come in the form of an allotment of shares of a
transferee company or for that matter allotment of any shares. The
consideration for such transfer can be any legitimate consideration, which the
transferor is entitled to accept for contract of transfer
The High Court further also offered a guiding
principle that the scheme may not provide for any allotment of shares at all or
provide any other appropriate
consideration including allotment of shares of a holding company of the
transferee company
. In all, it held that as long as such consideration
is not against public interest or in any other manner illegal or inappropriate,
it is not for the company court to accept or reject such consideration.
The present judgment is a welcome one for
transactional lawyers and advisors. It makes interesting observations which can
be used to support innovation in structuring transactions. The High Court in
clear words has mentioned to say that the provisions in section 394 are
enabling provision and are not in nature of conditions which are required to be
applied literally. It permits for making deviation as long as the said
deviation is not against the public policy and that the consideration is a
valid one that the transferor company can accept.
While the High Court in the present case did
not only accept the proposition that it is perfectly legal for a parent company
to issue its shares in lieu of its subsidiary acquiring or merging with another
company, it also went ahead to say that the transferor company can accept any
form of “appropriate consideration”.
It shall be interesting to see how this observation of the Court would be utilized
by transactional lawyers in structuring their transactions.
When compared with the relevant provisions of
the Companies Act, 2013, it is interesting to note that the new legislation has
retained the similar provisions of the old one as far as this section is
concerned. Hence, viewed from this angle, the ratio of the present case can be
used even when undertaking a restructuring pursuant to the provisions of the
Companies Act, 2013. 
Rushab Dhandokia

[1] Company Scheme Petition No. 99 OF 2015 with Company
Summons for direction no. 892 of 2014. Judgment dated 2 July 2015 rendered by
S.C. Gupte, J. The judgment can be accessed via

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • REACTION: For spontaneous thoughts, intended to be shared impromptu, for the ‘common good’, attention is invited to the personal Blog @
    Pithily stated: In one's perspective, and as per own conviction based on sound and logical thinking / reasoning, this is one of those several instances of a recent origin, in which the appointed authority may be urged, -rightly so hence with success,- to have travelled beyond, and acted in excess of, his ‘vested powers’; and thereby, been the cause of a unwarranted court litigation, with no frightfully public-centrist purpose to serve, so as to ultimately prove to be for the ‘common good’.

  • Dear Sir,

    I have two questions with respect to Scheme of Arrangement:

    1. The discussed case holds that it depends on the commercial wisdom of the parties to decide what the consideration would be. Here, the transfer of shares of the transferee's holding company were taken to be a valid consideration. Going by the same logic, can we say that in a scheme of demerger, the shares may be issued to the shareholders of the demerged company's parent company and not to the shareholders of the demerged company directly as a consideration?

    2. If the assets of the transferor company which are to be transferred, are secured in favour of lenders of its parent company, will consent of such lenders (who are not creditors of either the transferor or the transferee company) ber required for the scheme?

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