What is the definition of Demerger?

Demerger is corporate restructuring under which a company is divided into one or more units in order to either operate it independently or to sell or liquidate the same. The term ‘Demerger’ is not defined under the Companies Act, 2013 but it is defined under section 2 (19AA) of Income Tax Act, 1961 as:

“Demerger”, in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company”

What are various advantages of demerger?

How a company can be demerged?

There are three ways by which a company can be demerged:

Here we will discuss demerger under section 391 of the Companies Act.

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Demerger under section 391 of the Companies Act with approval by the Court;

There are following major steps in the demerger of the company under Companies Act:

Step-1: Due-Diligence: To do due-diligence of company in order to check demerger clause in articles of association.

Step-2: To prepare Scheme of Arrangement: After mutual discussion between the stakeholders and interested parties, Scheme of Arrangement is prepared’ Once scheme is prepared, it needs to be approved by Board of Director who shall also determine share exchange ratio of all parties.

Step-3: Filing of an Application before High Court: Once the scheme is prepared it needs to be submitted before Hon’ble High Court of the respective state having jurisdiction along with application under Section 391 of the Companies Act. Scheme will be filed at the place where the head office of the company is situated. The Application needs to be filed in Form 33 format along with a supporting Affidavit in Form 34. The said application also need to be accompanied by supporting documents such as Extract of Board resolution approving scheme, draft notice of board meeting, statement etc., Memorandum of Association, Articles of Association, latest audited balance sheet, list of all shareholders and creditors, etc.

Step-4: Obtaining High Court’s order for holding joint meeting of stakeholders/Creditors: Once the Hon’ble court is satisfied with the facts of application filed and about the capability of scheme to be implemented, the summons will be issued by court in Form 35 of the Court Rules.

Step-5: Holding of joint of meeting of stakeholders/Creditors: Summons in form of notice be issued to the interested parties in Form 36 at least twenty one days before the date of the scheduled meeting that needs to be accompanied by the proposed scheme and other documents. This notice also need to be notified in leading national newspaper. Once the meeting is held, the chairperson of meeting is required to submit a report in Form 39.

Step-6: Filing of Demerger Petition before High Court for sanctioning the scheme of Demerger: A Demerger Petition to be filed before court in Form 40 that needs to be approved by 3/4th of members or creditors.

Step-7: Final order to be passed by Hon’ble Court’s order for sanctioning the scheme of Demerger: Once the court is satisfied with the facts of the matter, court can allow the scheme of scheme of demerger. The order of demerger of company also needs to be filed in the same leading newspaper in which notice of scheme was advertised.

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