The Advantages of Section

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176 of Companies Act 1965[1] deals with schemes of arrangement of companies facing financial difficulties or in the case of companies at the brink of winding-up. What is, “Schemes of Arrangement”, and how do these schemes assist or facilitate the companies during financial difficulties? To define in simple terms, “Schemes of Arrangement” refer to schemes that enable companies in financial difficulties to pay out to their creditors in full. Therefore, companies enter into schemes or arrangements with creditors to put into effect a compromise or a moratorium. What is a “moratorium?” A “moratorium” can be defined to 2 things :

  1. A temporary prohibition on an activity;
  2. From the legal aspect, it means an authorized delay of legal obligations or payment.[2]

Therefore, the term “moratorium” is used to show that a temporary deferment of payment by the companies in debt to their creditors is, legally allowed – by the leave of Court. A compromise scheme, however, is the type of scheme whereby the creditors agree to accept payment of less than the amount that is owed to them.[3] In other words, once the compromised amount is paid, the company is released from any further obligations or debt towards the creditors. In certain occasions, the creditors may also compromise to convert their debts into shares in the company.[4] Therefore, it is on the agreement of the companies and their creditors to determine which scheme or arrangement suits best for both parties. WHAT IS S. 176 COMPANIES ACT 1965? Now, focusing on the main issue, how does S. 176 of CA 1965 actually facilitates or assists companies which are facing financial difficulties, into entering schemes of arrangement? The answer would be because S. 176 acts as a mechanism, or as a tool which binds a formal compromise (companies may pay less than the amount owed to creditors upon agreement by both parties) or moratorium (suspension or delay or deferment of payment for a specified period of time to their creditors) between the participants as long as an agreement by the majority of the members have been achieved and, subject to approval by the court. In short, when a company and its creditors agree to enter a scheme of arrangement, S. 176 comes in to facilitate both parties by : Binding both parties once a majority vote is achieved and obtaining approval from the court to grant leave for the scheme of arrangement. S. 176 can also be read together with S. 178[5] and S. 180[6] as S. 178 sets out the orders that the court can make to put into effect a scheme for the reconstruction of any company or companies or the amalgamation of any 2 or more companies.

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